Eastern Panhandle Independent Community (EPIC) Radio:The Are You Crazy Show Goes Crazy, Then Straight

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Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: The Are You Crazy Show Goes Crazy, Then Straight
Link: http://www.enlightenradio.org/2017/01/the-are-you-crazy-show-goes-crazy-then.html

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30 Percent Of W.Va. Families On Medicaid [feedly]

30 Percent Of W.Va. Families On Medicaid
http://www.wvpolicy.org/30-percent-of-w-va-families-on-medicaid/

WHEELING — Only six states have a higher percentage of residents on Medicaid than West Virginia, according to a national nonprofit health policy group.

More than 554,000 Mountain State residents — more than three of every 10 — are enrolled in the program, according to the Henry J. Kaiser Family Foundation. That's well above the national average of 23.4 percent — meaning a potential repeal of the federal Affordable Care Act under which West Virginia's Medicaid program was expanded could have a disproportionate impact on the state's residents.

The percentage of West Virginians on Medicaid comes as little surprise to incoming state Senate Majority Leader Ryan Ferns, R-Ohio.

"What it says about our state is we have the lowest workforce participation rate in the country and the highest number of people on welfare," Ferns said. "Over half our population is receiving financial assistance, and that is not sustainable."

New Mexico has the nation's highest percentage of residents covered by Medicaid, at 40.4 percent. Next is Arkansas, at 39.6 percent, followed by California, 34 percent; New York, 33.7 percent; Vermont, 33.2 percent; Louisiana, 31.2 percent; and West Virginia, 30.2 percent. Rounding out the top 10 are Massachusetts, at 29.9 percent; Kentucky, at 28.9 percent; and Oregon, at 27.2 percent.

The District of Columbia also has a higher rate than West Virginia, with 36.6 percent of residents enrolled in the program.

Under the Affordable Care Act, the federal government currently is paying 95 percent of the cost of the Medicaid expansion. But if the GOP-led Congress is successful in repealing the Affordable Care Act under a Donald Trump presidency, the 32 states — including West Virginia and Ohio — that opted to expand Medicaid under the health care law could be forced to bear the entire cost of the expansion or revert back to pre-Affordable Care Act eligibility requirements for the program.

Jeremiah Samples, deputy secretary for public health and insurance with the West Virginia Department of Health and Human Resources, acknowledged Mountain State residents have seen "significantly varying" impacts from the Affordable Care Act — but he pointed out the state has reduced its uninsured rate from 17 percent to 5 percent due to coverage expansions under the law.

"There are more than 175,000 citizens on the Medicaid expansion and more than 35,000 who have received coverage on the health insurance exchange. The vast majority of these individuals are working or are transitioning between jobs," Samples said. "It would be devastating for families, the state's workforce and the state's economy if these West Virginians lost their health insurance."

Although the Kaiser Family Foundation report points out any loss of Medicaid coverage would "depend on the specifics of the repeal and any replacement plan as well as actions by individual states," Ferns said there's no way West Virginia can afford to pay for all the new enrollees made possible by the 2014 expansion.

"It likely would go back to the way it was before Obamacare," Ferns said of West Virginia's Medicaid program if the Affordable Care Act is repealed.

That's why Wheeling Health Right Executive Director Kathie Brown, even though she believes the Affordable Care Act has serious flaws, doesn't want to see the law repealed without a workable replacement. The free clinic on 29th Street began accepting Medicaid patients in 2014.

"What it will mean for free clinics across the country is we will be slammed with patients who don't have any other access," Brown said of a potential Affordable Care Act repeal. "I pray there's enough intelligent people working on this to see that you can't just completely throw it out without something else in place. … We need to fix it, but I certainly hope we don't throw the baby out with the bath water."

Brown said she's grateful for the support Health Right receives from the community, but with the decline of state funding for free clinics she isn't sure her facility would be able to handle the influx of patients she'd expect to see if the health care law is repealed and not replaced.

"All we can do is the best we can do. … The people who can't get in here or other free clinics in the state will go to the (emergency room), and it will get back to episodic care rather than primary care," she said.

Although the federal government to this point has paid most of the tab for the Medicaid expansion, West Virginia still has seen its costs under the program increase by almost 25 percent since 2012. The state spent $809.7 million on Medicaid in fiscal year 2012; $901.2 million in 2013; $932 million in 2014; $961 million in 2015; and $985.9 million in 2016, according to a joint report from the West Virginia Center on Budget and Policy and West Virginians for Affordable Health Care.

While the total figure continues increasing, Samples said the state has reduced its per-capita Medicaid costs over the last three years, from $8,914 to $7,154.

Still, as the federal share of the Medicaid expansion cost under the health care law decreases each year, Mountain State lawmakers who will grapple with a potential $400 million fiscal 2018 budget deficit during their upcoming session will have to find an estimated $40.8 million in additional funding for Medicaid.

The report from the West Virginia Center on Budget and Policy and West Virginians for Affordable Health Care suggests ways to increase revenue to fund Medicaid, including additional increases to the tobacco tax, or increasing taxes on beer, wine and distilled spirits and "sugar sweetened beverages."

But Governor-elect Jim Justice has said he plans to propose a fiscal 2018 budget with no tax increases, something incoming Senate President Mitch Carmichael said he supports.

"The people of West Virginia are struggling financially and cannot endure additional tax burdens to prop up government. Just as each family is faced with difficult financial choices when money is scarce, our state government must do the same," Carmichael, R-Jackson, said in a press release.

Although the U.S. Department of Health and Human Services says more than 20 million Americans have gained health insurance because of the Affordable Care Act, Ferns said he doesn't believe the health care law accomplished what it was intended to accomplish. That, he said, is because many people who have purchased coverage through the marketplace have annual deductibles as high as $7,000.

"Now you've got all these people who are supposedly insured who have deductibles they can't afford. … They have an insurance card, but do they have access to health care? In my view, they certainly don't," said Ferns, a licensed physical therapist who owns a business in Benwood.

Ferns said the state needs to turn its economy around to reduce the number of people who need Medicaid, and he believes the best way to do that is for lawmakers to create an environment in which businesses can thrive.

Samples agrees that the best solution to reducing the state's Medicaid enrollment is to focus on the economy and "empower individuals to obtain higher paying jobs."

"As the West Virginia economy improves, less citizens will need Medicaid services as they buy insurance on their own or it is provided through their employer. That said, there will always be some individuals who need support from the Medicaid program," Samples said. "The DHHR is committed to ensuring that these individuals are provided quality care in the most efficient manner possible."

 -- via my feedly newsfeed

Bernstein: Paul Krugman goes all “crowd out” on us. Is he right? [feedly]

Paul Krugman goes all "crowd out" on us. Is he right?
http://jaredbernsteinblog.com/paul-krugman-goes-all-crowd-out-on-us-is-he-right/

Progressives' Keynesian economist in chief, Paul Krugman, has been second to none in calling out policymakers' focus on reducing budget deficits when economies were still weak (also known as "austerity"). Given that record, his oped in today's NYT may surprise some readers. He argued that, as the economy closes in on full employment, fiscal budget deficits could crowd out private borrowing, pushing up interest rates and slowing growth.

Paul's argument in the oped shouldn't actually be surprising; he has long depended on a very simple and, as the record shows, very insightful, application of the ISLM model, a diagram of how interest rates and output interact in key markets in the macroeconomy. See here for his useful discussion of how the model ticks.

But is Paul right? Despite the fact that he invariably turns out to be so–i.e., correct–I'm not nearly so worried about interest-rate crowd-out resulting from the big, wasteful tax cut team  Trump and his Congressional allies will pass, I fear, sometime later this year. What I'm worried out is what their raid on the coffers of the US Treasury will do to the programs we increasingly need to meet the many challenges we face.

Let me explain.

Here at OTE, we maintain that all economic models are wrong but some are sometimes useful. For years, at the end of the ISLM section of economics courses, there's been this little section that shows how the model changes in a particular type of recession when two things happen: demand significantly contracts and interest rates fall to around zero (the dreaded liquidity trap). At that point you get the diagram Paul put in his link above (ignore for a moment the "IS Now" line, which I plugged in there, as did Paul in a post today).

Source: Paul Krugman

The point of the ISLM-in-recession model is that policy makers can do a lot to boost demand without worrying about crowding out private investment, inflation, or push-back from the Fed. So let the fiscal stimulus rip. The question in such moments shifts from "is the deficit too large?" to "is the deficit large enough?!"

But according to the model, you should only let it rip up until the point when the IS curve shifts enough to the right ("IS Now") that the economy is back in a place where increased demand will invoke those negative outcomes just noted.

One implication Paul draws from these dynamics is that Republicans, motivated not by improving the economy but by bashing Obama and the D's, inveighed against deficits when we needed them and are about to shift to not caring about them when deficits – again, according to the model – could actually do some harm.

But how reliable is this crowd-out hypothesis? It's actually pretty hard to find a correlation between larger budget deficits and higher interest rates in the data.

There are some obvious reasons why that's the case. Oftentimes, like in the Great Recession, a large budget deficit corresponds with demand contraction and very low rates, so that messes up the predicted correlation. The budget deficit got to -10% of GDP in 2009 and interest rates were stuck around zero. That also implies rates can't fall as deficits have become less negative.

To see if anything jumps out, the figure plots real rates on the 10-year bond against the deficit from 1990 to 2007, years chosen because the deficit moved around a lot in those years, including into surplus at the end of the 1990s, and the Fed wasn't nearly as much in the interest-rate setting mix as they've been since then. But it's just pretty much a random plot (if you plot changes in the variables, it still looks random; same with nominal rates; same with corp bonds, etc.).

Source: BEA, Fed

The raw data miss a potentially important expectations component often in play regarding movements in rates. Very recently, investors' expectations of Trump-induced fiscal expansion, along with the Fed's plans to hike rates, have pushed up inflation and interest rate expectations. But it's not at all clear how much of that relates to the expectation that deficits will crowd out private borrowing.

So is Paul making a mistake to continue to depend on the model that has heretofore served him—and anyone else willing to listen—so well? My guess is that deficit crowd-out is not likely to be a big problem, as in posing a measurable threat to growth, anytime soon, even if deficits, which are headed up anyway according to CBO, were to rise more than expected.

The global supply of loanable funds is robust and, in recent years, rising rates have drawn in more capital (pushing out the LM curve). Larger firms have enjoyed many years of profitability without a ton of investment so they could use retained earnings (the fact of unimpressive investment at very low rates presents another challenge to this broad model). And most importantly, while we're surely closer to full employment, there are still a lot of prime-age workers who could be drawn in to the job market if demand really did accelerate.

(This, by the way, is the only part of Paul's rap today that I found a bit confusing. He's a strong advocate of the secular stagnation hypothesis, wherein secular forces suppress demand and hold rates down, even in mature recoveries. His prediction today seems at odds with that view.)

And yet, I'm still really worried—profoundly so—about crowd-out, just not the interest-rate type that Paul's worried about. What keeps me up at night is that if Republicans are able to waste a bunch of money on deficit-inducing tax cuts that go mostly to rich people, there will be too few resources to support the safety net, public goods, health care, and possibly even social insurance.

This, I've long maintained, is the true target of trickle-down tax cuts: force the government to shrink by cutting off its revenue oxygen. And this is a particularly damaging time to be cutting revenues; our demographics alone mean we're going to need more, not less, revenues in coming years. And I'm not even talking about what we'll need to address the challenges posed by climate change, inequality, poverty, our infrastructure needs, geopolitics, and Buddha-knows what else.

So I stand firmly against big, dumb wasteful tax cuts. Not because I think they're going to raise interest rates that much (though I could be wrong and PK is typically right), but because they're going to shut down the federal government's ability to do what needs to be done.

 -- via my feedly newsfeed

Eastern Panhandle Independent Community (EPIC) Radio:Occupy West Virginia: the fascist threat and how to stop it.

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Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Occupy West Virginia: the fascist threat and how to stop it.
Link: http://www.enlightenradio.org/2017/01/occupy-west-virginia-fascist-threat-and.html

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Piketty:Of productivity in France and in Germany

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Of productivity in France and in Germany

Thomas Piketty

At the start of 2017, with the elections in France in the Spring and then in Germany in the Autumn, it may prove useful to return to one of the fundamental issues which plagues discussion at European level, that is the alleged economic asymmetry between Germany with its reputation as prosperous and France which is described as on the decline. I use the term 'alleged' because, as we shall see, the level of productivity of the German and French economies – as measured in terms of GDP per hour worked, which is by far most relevant indicator of economic performance – is almost identical. Furthermore it is at the highest world level, demonstrating incidentally that the European social model has a bright future, despite what the Brexiters and Trumpers of every hue might think. This will also enable me to return to several of the issues addressed in this blog in 2016 (in particular concerning the long European recession and the reconstruction of Europe) as well as in my December 2016 article « Basic income or fair wage?« .

Let's start with the most striking fact. If we calculate the average labour productivity by dividing the GDP (the Gross Domestic Product, that is the total value of goods and services produced in a country in one year) by the total number of hours worked (by both salaried and non-salaried employees), we then find that France is at practically the same level as the United States and Germany, with an average productivity of approximately 55 Euros per hour worked in 2015, or more than 25% higher than the United Kingdom or Italy (roughly 42 Euros) and almost three times higher than in 1970 (less than the equivalent of 20 Euros in 2015; all figures are expressed in purchasing power parity and in 2015 Euros, that is after taking into account inflation and price levels in the different countries).

Let us state at the outset that the data at our disposal to measure the number of hours worked is not perfect and that the accuracy of these figures should not be exaggerated. Furthermore, the very concept of 'GDP per hour worked' is in itself somewhat abstract and simplistic. In reality in these comparisons it is the totality of the economic system and the organisation of labour and production in each country which comes into play, with a wide range of variations between sectors and firms; and it is somewhat unrealistic to claim to resume the totality in a single indicator. But if productivity between countries has to be compared (an exercise which has its utility as long as we recognise its limits; it may enable us to go beyond nationalist prejudices and to set a few orders of magnitude) then the GDP per hour worked is the most meaningful concept.

We should also state that the figures for hours worked which we use here are taken from the series in the OECD data base. The file with all the details of the series and the calculations is available at the end of this article. International series for hours worked are also established by the BLS (the American Federal Government Bureau of Labor Statistics) and the details of the findings obtained by the BLS are also available below. Apart from slight differences between series, all the sources available – in particular those of the OECD and the BLS – confirm that the number of hours worked is roughly at the same level in France, in Germany and in the United States (with differences between these three countries which are so minimal that it is doubtless impossible to make a distinct separation, given the inaccuracy of this measurement), and that countries like the United Kingdom, Italy or Japan are approximately 20-25% lower. In the present state of the data available, these orders of magnitude can be considered valid.

It should also be noted that no country in the world significantly exceeds the level of labour productivity observed in France, Germany and the United States, or at least no country of comparable size and economic structure. We do find significantly higher levels of GDP per hours worked in small countries based on very specific economic structures, for example oil-producing countries (the Emirates or Norway) or tax havens (Luxembourg) but these are the outcome of very different rationales.

At the sight of the figure of an average production of 55 Euros per hour worked in France today, some readers will perhaps be tempted to go straight to their manager to ask for a rise in pay. Yet others, rather more in number, will question the meaning of this figure. We would like to state clearly that this is an average: the average production of goods and services per hour worked may be between 10 and 20 Euros is some sectors and jobs and between 100 and 200 Euros per hour in others (not necessarily the most arduous). It may also obviously happen that in the interaction and balance of forces in wage negotiations, some workers may appropriate a share of the production of others. This average production figure of 55 Euros per hour worked tells us nothing about these subtleties.

We should also specify that the concept of 'gross domestic product' (GDP) poses a number of problems. In particular, it would be preferable for statistical institutes to concentrate on the 'net domestic product', that is after deduction of the consumption of fixed capital, which corresponds to the depreciation of capital and equipment (repair of buildings and machinery, replacement of computers, etc.). This capital depreciation does not constitute income for anyone, be they wage earners or shareholders and furthermore, it tends to rise over time. The consumption of fixed capital represented about 10% of GDP in advanced economies in the 1970s; today it exceeds 15% of GDP (a sign of the acceleration in the obsolescence of equipment). This means that a (small) proportion of the growth in labour productivity measured above is an illusion. Similarly, if the consumption of natural capital were to be taken into account correctly, then a proportion of the growth in world GDP would disappear (the annual extraction of natural resources is close to the world growth in GDP, or roughly 3% per annum at the moment and tends to rise over time, depending on how this is valued). But there again this would not affect the comparisons between countries on which we focus here.

Another way of expressing the findings outlined above consists in measuring the productivity of each country by comparison with the productivity observed in the United States which has long been far in advance of others. We then obtain the following findings:

In summary: in 1970 productivity in France and Germany was in the range of 65-70% of the American level; both countries caught up with the United States in 1970–1980 and since 1990 were at the same level as the United States (slightly above until the crisis in 2008 and since then, a little below but with relatively small differences. Moreover it is permissible to hope that the Euro zone will succeed in recovering from the crisis better than it has done to date).

If we were to go back to the immediate post World War Two period, when Franco-German productivity was barely 50% of the American level, the catch-up effect would be even more striking. It must also be borne in mind that the European disparity in terms of productivity was of much longer standing (it was already very considerable in the 19th century and at the beginning of the 20th, on the eve of World War One and was amplified by the wars). The classic explanation is the relative disparity in educational level. The small American population was fully literate as from the beginning of the 19th century, whereas a similar level was not achieved in France until the end of the century, by which time the United States had already progressed to the following stage (mass secondary education, then higher education). It was the investment in education in the Trente Glorieuses (the thirty years' post-war boom) which enabled France and Germany to catch up with the United States between 1950 and 1990. The real issue today is to maintain and extend this evolution.

In contrast, the persistent backwardness in British productivity, which never reached the American level, is usually attributed to the historical weaknesses in the educational system. Similarly, according to a recent study, the slower rate in Italy since the mid-1990s can in part be explained by the lack of investment in education made by the Italian public authorities (engulfed in the repayment of an interminable public debt which France and Germany had got rid of through inflation and post-war debt cancellations).

We should also stress that the high level of American activity at the moment is accompanied by considerable inequality. The United States were more egalitarian than old Europe in the 19th century and until the mid-20th century, but in recent decades they have become much less egalitarian. In particular in the educational sector there is a glaring contrast between the excellent, top-ranking universities (unfortunately reserved to the higher incomes) on one hand, and on the other a somewhat mediocre secondary and higher educational system accessible to the greatest number. This largely explains why the incomes of the 50% of the less well-off Americans have not risen since 1980, whereas the incomes of the highest 10% have risen considerably (see this recent study).

While there is no need to boast (particularly as the challenges to be met are numerous, with the demographic evolution in Germany and the modernisation of the fiscal-social system in France), we do have to admit that the social, educational and economic model constructed in France and Germany is more satisfactory. These two countries have achieved the highest level of productivity in the world, as high as that in America, but with a much more egalitarian form of distribution.

Let's now examine the GDP per capita. We see that it is approximately 35,000 Euros per annum ( just below 3,000 Euros per month) in Europe – a little higher in Germany, a little lower in France and the United Kingdom – or approximately 25% lower than in the United States (roughly 45,000 Euros per annum):

But the important point is that this higher GDP per capita in the United States comes uniquely from a higher of number of hours worked and not from a higher level of productivity than in France and in Germany. Similarly, the United Kingdom succeeds in compensating for its lower productivity and raising itself to the same level of GDP per capita as France it is uniquely as a result of working longer hours:

For a better understanding of these discrepancies in hours worked, a distinction has to be made between what comes under number of hours worked per job and what comes under number of jobs per capita. Let's begin with the number of hours worked per job.

We observe that the annual average hours worked per job is lower in Germany than in France (the consequence of a higher rate of part-time work, which is not always a choice, but which may be more satisfactory than no employment). Beyond this gap, there again we observe a degree of proximity between the trajectories of France and of Germany: these two countries have chosen to use the very high growth rate of the Trente Glorieuses to appreciably reduce the length of the working day since the 1960s, going from an average length of almost 2,000 hours per year in 1970 (which roughly corresponds to 42 hours per week for 48 weeks per year) to less than 1,500 hours per year today (or almost 35 hours per week for 44 weeks per year). In contrast, the United States and the United Kingdom have barely reduced the amount of time worked; as a result, the weeks have remained very long and the paid leave very short (often restricted to two weeks, in addition to public holidays).

Obviously I am not attempting to claim that it is always preferable to reduce the working day and to lengthen the vacations and the question of the rhythm at which the time worked should be reduced is an extremely complex and sensitive problem. But it does appear to be clear that one of the aims of the growth in productivity in the long term is to enable the benefit of more time for private and family life, and cultural and recreational activities, and that the trajectories of France and Germany seem to give more consideration to this aim than those of the United States and the United Kingdom.

Now let us turn to what is much less successful, beginning with the low rate of employment in France where the difference with the rate of employment in Germany was relatively low in 2005 (only 2 points difference: 42 jobs per 100 inhabitants in France, 44 in Germany) and has considerably increased since the crisis (more than seven points difference, with an employment rate of 42% in France as compared with over 49% in Germany).

If we break down these developments into age groups, we see that the employment rate for the 25-54 years group has always been around 80% in France, as in other countries, and that it is amongst the 15-24 years group and the 55-64 years group that the discrepancy has been more marked in recent years, contemporary with the rise in unemployment.

I will not return here to the multiple reasons for this weakness in employment in France. The very poor budgetary policies adopted in the Euro zone are partly responsible for provoking a ridiculous fall in economic activity in 2011-2013 from which we are only just recovering (the fault is primarily due to the successive French and German governments who concluded an ill-conceived budgetary treaty which should be reformed).

But there are other specifically French factors: less promising industrial specialisations than in Germany, where in particular use has been made of a greater investment of employees in the governance and strategies of firms, and where there is a much better system of vocational training which France could well try to match. In France, the system of financing social protection falls too heavily on the wage bill of the private sector; an overall reform of the taxation system would be required but this is constantly postponed (instead, stopgap measures have been adopted, such as the CICE (Crédit d'impôt compétitivité emploi). This has only added a further layer of complexity to a fiscal-social system which was already incomprehensible. It is also time to consolidate and unify the retirement system which is complex and split between too many regimes. In particular this would reassure the younger generations (at the moment our retirement system is well financed – it is the second most expensive in Europe, the Italians being in the lead – while at the same time it is so opaque that nobody understands anything about their future rights).

Here, I wish simply to stress two elements. On one hand, the present weakness of employment in France implies that the estimates of productivity indicated above are doubtless over-optimistic because the people excluded from the labour market are often the least well qualified. In fact, if we correct the series for productivity by assuming that the number of hours worked have followed the same trend as in Germany since 2005, and by assuming that these new jobs would have had a rate of productivity 30% lower on average than that of the present jobs, then we obtain the following findings:

 

In other words, we observe a tendency for French productivity to fall between 2000 and 2015. Of course, we are still far from the decline in productivity in Italy, and whatever the hypotheses adopted to account for the under-employment, French productivity remains distinctly above the British figures and very close to Germany and the United States. The fact remains that this trend is potentially worrying and must be countered if France wishes to maintain the momentum achieved in the decades 1950-1990.

From this point of view, the main shortcoming of the five-year term now ending is the weakness in educational investment. This is in particular applicable to the budgets allocated to universities and other higher education institutions, which have stagnated since 2012 (with microscopic, nominal growth barely equivalent to inflation), whereas the number of students has risen by almost 10%. In other words, the real investment in education per student distinctly fell in France between 2012 and 2017, even although all the talk is of the economics of innovation, of the knowledge society, etc. Instead of losing time in poorly conducted and poorly prepared discussions about labour flexibility, the government would have done better to bear in mind that long-term economic performance is primarily determined by investment in training.

The second point on which I would like to insist is the following. Too frequently the economic debate about France and Germany is focussed on the difference in 'competitivity' between the two countries, that is to say, on the gap between the French trade deficit and the German trade surplus. Now the correct concept for the evaluation of the economic performance of a country is its productivity and not its 'competitivity', which is a fairly nebulous concept. Different countries with similar levels of productivity may temporarily find themselves in totally different situations in terms of balance of trade, for a host of voluntary or involuntary reasons. For example, some countries may choose to export more than they import, in order to have reserves for the future in the form of assets held abroad. This may be justified for an aging country which anticipates a fall in active population and this classical explanation is often used to explain a part of the trade surplus observed in aging countries such as Germany or Japan, in comparison with younger countries like the United States, the United Kingdom or France. These may require to consume and invest more within their territory which may give rise to trade deficits. But the important point is that these situations of trade surplus or trade deficit can only last for a limited length of time and must be compensated for in the long run. In particular, there is no point in having a permanent trade surplus (this would amount to eternally producing for the benefit of the rest of the world, which is of no interest).

Let us see what happens in practice:

At the outset, we see that the overall level of exports and imports (expressed as a percentage of GDP) has risen significantly since the 1970s (this is the well-known phenomenon of intensification of international trade and corporate globalisation) and that it is much higher in France and in Germany than in the United States or in Japan. This expresses the fact that European economies are smaller in size and are much less strongly integrated with one another, in particular in matters of trade.

We also observe that the phases of trade surplus and trade deficit tend to even out over time. For example, Japan had a trade surplus in the 1990s and the years 2000 (usually between 1% and 2% of GDP per annum), and has experienced considerable deficits since 2011 (-3% of GDP at the moment). France had a trade surplus every year from 1992 to 2004 (usually 1%-2% of GDP) and has had a deficit since 2005 (-1.4% of GDP in 2015). If we take the average over the period 1980-2015, France has an almost perfect balance in trade: -0.2% of GDP (+0.1% for 1990-2015). For Japan, we observe that the dominant trend is a trade surplus (+1.0% in the period 1980-2015, +0.6% in the period 1990-2015), which explains why Japan has accumulated comfortable financial reserves abroad, on which it is drawing at the moment.

However there are situations which are less balanced. For example, the United States is in an almost permanent trade deficit with an average of -2.6% of GDP over the period 1980-2015 (-2.9% in the period 1990-2015). The country's situation of external financial indebtedness is however less distinctly negative than that which the accumulation of trade deficits should have produced because the United States pays a low return on their debts (due to the confidence in their currency and political regime) and obtains a high yield on their investments (thanks in particular to their investment system and merchant banks).

An even more extreme case of imbalance, and in the opposite direction, is that of Germany, which was in an almost break-even trade balance situation similar to France until 2000 and then had an average trade surplus of +5.0% of GNP over the period 2000-2015 (+3.2% in the period 1990-2015, +1.7% in the period 1980-2015, while we note an average trade deficit of -0.9% from 1980-2000, as compared with +0.2% in France). The German trade surplus has risen to over 6% of GDP since 2012 and rose to almost 8% of GDP in 2015.

In plain terms this means that a very significant share of goods and services produced in Germany are neither consumed nor invested in Germany: they are consumed and invested in the rest of the world. Another – perfectly equivalent – way of representing the extent of the imbalance consists in calculating what the domestic consumption and investment would represent (that is pursued on the territory of the country considered) as a percentage of gross domestic product (that is of the total production of goods and services manufactured on this same territory):

A ratio above 100% means that a country consumes and invests more than it produces, in other words, it has a trade deficit. In contrast, a ratio below 100% is simply the counterpart of a trade surplus. For most countries, this ratio is on average very close to 100%. In Germany, on the contrary, this ratio fell to 92% in 2015 which is totally unprecedented in economic history.

In summary: France and Germany have similar productivities, but they use their high rates of productivity in very different ways. In recent years, when France produced 100 units of goods and services, it consumed and invested 101 and 102 units on its territory. On the contrary, when Germany produces 100 units it only consumes and invests 92 units. The gap may seem narrow but when it occurs every year it leads to financial and social imbalances of considerable size, which today threaten to undermine Europe.

How has this happened and what can be done? In the first instance, we should point out that while the aging of the population and the demographic decline in Germany may explain a certain amount of trade surplus by the need to constitute reserves for the future, this is not sufficient to rationally account for such huge surpluses. The truth is that this trade surplus is not really a choice: it is the outcome of decentralised decisions made by millions of economic actors and in the absence of an adequate mechanism for correction. To put it simply: there is no pilot in the plane, or at least the pilots available are not very accurate.

After unification, the German governments were very afraid of a drop-off in the competitiveness of the 'German production site'. They adopted wage-freeze policies to increase productivity and they probably went too far in this direction. At the same time, the entry of Central and Eastern European countries into the European Union enabled German firms to achieve an increased and highly advantageous integration with these new countries. This can be seen in particular with the explosion of the general level of imports and exports, which were very similar to the level in France in 2000 (close to 25%-30% of GDP) and which in 2015 rose to 40%-45% of GDP in Germany (as compared with 30% in France; see the graph above).

This all led to a trade surplus which was doubtless not entirely foreseeable and is in large part due to contingent factors. In its own way, it is an illustration of the strength of the economic forces at play in globalisation which public authorities have not yet learnt to regulate correctly.

We must also stress the fact that there is quite simply no example in economic history (at least not since the beginning of trade statistics, that is, since the beginning of the 19th century) of a country of this size which has experienced a comparable level of trade surplus on a long-term basis (not even China or Japan which in most instances have not risen above 2%-3% in trade surplus). The only examples of countries experiencing trade surpluses in the region of 10% of GDP are oil-producing countries with a relatively small population and with a GDP much lower than that of Germany.

Another indication of the fact that the German surpluses are objectively excessive is due to the poor foreign investments made by firms and the financial system; in contrast to the United States the financial assets accumulated by Germany in the rest of the world are much lower than the amount which the addition of the trade surpluses should have produced.

The solution today would of course be to boost wages, consumption and investment in Germany, both in the educational system as well as the infrastructures. Unfortunately this is being implemented too slowly. The German leaders have an enormous responsibility here; they have other qualities (in particular in their reception policies for migrants) but on this basic point, they have not explained the issues to their public opinion and have even tended to present the trade surplus as a subject for national pride, even a proof of German virtue, which is quite simply beside the point. The German tendency to lecture the rest of Europe and to explain that everything would be fine if everyone copied Germany is logically absurd. If every country in the Euro zone had a trade surplus of 8% GDP, there would be nobody in the world to absorb a surplus of this type (simply because there is on the planet no country of the size of the euro zone that is ready to have a trade deficit of 8%). This irrational tendency is unfortunately one of the risks of globalisation and the heightened competition between countries; we all try first to find a refuge and then to survive.

Fortunately, there are other forces in play, in particular the attachment to the European idea. If the other countries, beginning with France, Italy and Spain (or a total of 50% of the population and the GDP of the Euro zone, as compared with 27% for Germany) were to decide democratically in a joint parliamentary chamber on the formulation of a detailed proposal for a democratic re-foundation of the Euro Zone, including a spur to economic growth and a moratorium on public debts, I am convinced that a compromise can still be found. But it is unlikely that any solution will come from Germany and the transition may be far from smooth. Considerable wrangling will doubtless be required. All that we can hope for is that the clashes will not be too violent; after Brexit, nobody can claim to be unaware of how far this might go.

I would like to end on a positive note. If we compare France and Germany with the United States, the United Kingdom and other, still further, parts of the globe, then they have much in common.  In the decades following the self-destructive behaviour of the years 1914-1945, these two countries have succeeded in constructing institutions and policies which have enabled the development of the most social and the most productive economies in the world. France and Germany still have major tasks to accomplish together to promote a model of fair and sustainable development. But they must not get lost in mistaken comparisons which prevent them from advancing towards the future and accepting the idea that they each have a lot to learn from the other and from history.

(The complete data series on duration of work, GDP and the trade balances used to make the calculations presented in this article are taken from the OECD data base and are available here; the series on hours of work compiled by the BLS (Bureau of Labor Statistics, American Federal Government) lead to similar productivity comparisons between countries and are available here).

--

John Case
Harpers Ferry, WV

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Roberr Shiller, Tim Taylor: Narrative Economics and the Laffer Curve [feedly]

Narrative Economics and the Laffer Curve
http://economistsview.typepad.com/economistsview/2017/01/narrative-economics-and-the-laffer-curve.html

Tim Taylor:

Narrative Economics and the Laffer Curve: Robert Shiller delivered the Presidential Address for the American Economic Association on the subject of "Narrative Economics" in Chicago on January 7, 2017. A preliminary version of the underlying paper, together with slides from the presentation, is available here.

Shiller's broad point was that the key distinguishing trait of human beings may be that we  organize what we know in the form of stories.  He argues:

"Some have suggested that it is stories that most distinguish us from animals, and even that our species be called Homo narrans (Fisher 1984) or Homo narrator (Gould 1994) or Homo narrativus (Ferrand and Weil 2001) depending on whose Latin we use.  Might this be a more accurate description than Homo sapiens, i.e., wise man? Or might we say "narrative is intelligence" (Lo, 2007), with all of its limitations? It is more flattering to think of ourselves as Homo sapiens, but not necessarily more accurate."

Shiller goes on to make a case that narratives play a role in economic activity: for example, the way people act during the steep recession of 1920-21 and the Great Depression, as well as in the Great Recession and the most recent election. To me, one of his themes is that economist should seek to bring the narratives of these times that economic actors were telling themselves into their actual analysis by applying epidemiology models to examine actual spread of narratives, rather than bewailing narratives as a sort of unfair complication for the purity of our economic models.

Near the start, Shiller offers the Laffer Curve as an example of a narrative that had some lasting force. For those not familiar with the story, here's how Shiller tells it (footnotes omitted):

Let us consider as an example the narrative epidemic associated with the Laffer curve, a diagram created by economist Arthur Laffer ... The story of the Laffer curve did not go viral in 1974, the reputed date when Laffer first introduced it. Its contagion is explained by a literary innovation that was first published in a 1978 article in National Affairs by Jude Wanniski, an editorial writer for the Wall Street Journal. Wanniski wrote the colorful story about Laffer sharing a steak dinner at the Two Continents [restaurant] in Washington D.C. in 1974 with top White House powers Dick Cheney [at the time, a Deputy Assistant to President Ford, later to be Vice President] and Donald Rumsfeld (at the time Chief of Staff to President Ford, later to be Secretary of Defense]. Laffer drew his curve on a napkin at the restaurant table.  When news about the "curve drawn on a napkin" came out, with Wanniski's help, the story surprisingly went viral, so much that it is now commemorated. A napkin with the Laffer curve can be seen at the National Museum of American History ... 

Why did this story go viral? Laffer himself said after the Wanniski story exploded that he himself could not remember the event, which had taken place four years earlier. But Wanniski was a journalist who sensed that he had the elements of a good story. The key idea as Wanniski presented it is, indeed, punchy: At a zero-percent tax rate, the government collects no revenue. At a 100% tax rate the government would also collect no revenue, because people will not work if all the income is taken. Between the two extremes, the curve, relating tax revenue to tax rate, must have an inverted U shape. ...

Here is a notion of economic efficiency easy enough for anyone to understand. Wanniski suggested, without any data, that we are on the inefficient side of the Laffer curve. Laffer's genius was in narratives, not data collection. The drawing of the Laffer curve seems to suggest that cutting tax rates would produce a huge windfall in national  income. To most quantitatively-inclined people unfamiliar with economics, this explanation of economic inefficiency was a striking concept, contagious enough to go viral, even though economists, even though economists protested that we are not actually on the inefficient side of the Laffer Curve (Mirowski 1982). It is apparently impossible to capture why it is doubtful that we are on the inefficient side of the Laffer curve in so punch a manner that it has the ability to stifle the epidemic. Years later Laffer did refer broadly to the apparent effects of historic tax cuts (Laffer 2004); but in 1978 the narrative dominated. To tell the story really well one must set the scene at the fancy restaurant, with powerful Washington people and the napkin.

Here an image of what must be one of history's best-known napkins from the National Museum of American History, which reports that the exhibit was "made" on September 14, 1974, and measures 38.1 cm x 38.1 cm x .3175 cm, and was a gift from Patricia Koyce Wanniski:

Did Laffer really pull out a pen and start writing on a cloth napkin at a fancy restaurant, so that Jude Wanniski could take the napkin away with him? The website of the Laffer Center at the Pacific Research Institute describes it this way:

"As to Wanniski's recollection of the story, Dr. Laffer has said that he cannot remember the details, but he does recall that the restaurant where they ate used cloth napkins and his mother had taught him not to desecrate nice things. He notes, however, that it could well be true because he used the so-called Laffer Curve all the time in classroom lectures and to anyone else who would listen." 

In the mid-1980s, when I was working as an editorial writer for the San Jose Mercury News in California, I interviewed Laffer when he was running for a US Senate seat.  He was energy personified and talked a blue streak, and I can easily imagine him writing on cloth napkins in a restaurant. When remembering the event 40 years later in 2014, Dick Cheney said:

It was late afternoon, sort of the-end-of-the-day kind of thing. As I recall, it was a round table. I remember a white tablecloth and white linen napkins because that's what [Laffer] drew the curve on. It was just one of those events that stuck in my mind, because it's not every day you see somebody whip out a Sharpie and mark up the cloth napkin at the dinner table. I remember it well, because I can't recall anybody else drawing on a cloth napkin.

The point of Shiller's talk is that while a homo sapiens discussion of the empirical evidence behind the Laffer curve can be interesting in its own way, understanding the political and cultural impulse behind tax-cutting from the late 1970s up to the present requires genuine intellectual opennees to a homo narrativus explanation--that is, an understanding of what narratives have force at certain times, how such narratives come into being, why the narratives are powerful, and how the narratives affect various forms of economic behavior.

My own sense is that homo sapiens can be a slippery character in drawing conclusions. Homo sapiens likes to protest that all conclusions come from a dispassionate consideration of the evidence. But again and again, you will observe that when a certain homo sapiens agrees with the main thrust of a certain narrative, the supposedly dispassionate consideration of evidence involves compiling every factoid and theory in support, as well as denigrating those who believe otherwise as liars and fools; conversely, when a different homo sapiens disagrees with the main thrust of certain narrative, the supposedly dispassionate consideration of the evidence involves compiling every factoid and theory in opposition, and again denigrating those who believe otherwise as liars and fools. Homo sapiens often brandishes facts and theories as a nearly transparent cover for the homo narrativus within.

 -- via my feedly newsfeed

Paul Krugman: Deficits Matter Again [feedly]

Paul Krugman: Deficits Matter Again
http://economistsview.typepad.com/economistsview/2017/01/paul-krugman-deficits-matter-again.html

Republicans are planning to "blow up the deficit mainly by cutting taxes on the wealthy":

Deficits Matter Again, by Paul Krugman, NY Times: Not long ago prominent Republicans like Paul Ryan ... liked to warn in apocalyptic terms about the dangers of budget deficits, declaring that a Greek-style crisis was just around the corner. But ... tax cuts ... would, according to their own estimates, add $9 trillion in debt over the next decade. Hey, no problem. ...

All that posturing about the deficit was obvious flimflam, whose purpose was to hobble a Democratic president... But running big deficits is no longer harmless, let alone desirable.

The way it was: Eight years ago, with the economy in free fall, I wrote that we had entered an era of "depression economics," in which the usual rules of economic policy no longer applied... In particular, deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

This diagnosis ... was ... always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored. ...

What changes once we're close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and "crowds out" private investment.

Now, government borrowing can still be justified if it serves an important purpose..., infrastructure is still a very good idea... But while candidate Trump talked about increasing public investment, there's no sign at all that congressional Republicans are going to make such investment a priority.

No, they're going to blow up the deficit mainly by cutting taxes on the wealthy. And that won't do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention. ...

But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.

 -- via my feedly newsfeed