The New York Times and Dave Leonhardt's Upshot section made a big splash a few days ago by reporting on a study showing that the Canadian middle class had caught the US middle class in median income and likely surpassed it since. The study is based on an effort to measure median income per capita after taxes, and its results are presented as something truly significant.
However, I think the study is biased in that in median income per capita after taxes, it selected the wrong measure. What is needed is a measure of income or affluence that takes account of the value of cross-national variations in Government benefits delivered to the middle classes. Since the United States has lower taxes than most comparable nations, but delivers much less in safety net and entitlement benefits, it's pretty clear that the measure used in the study reported on by The Times overestimates the real median income of the US middle class in comparison with the middle classes of other comparable nations and provides a misleading impression of the relative affluence of the American middle class. Read more about Did Canada's Middle Class Just Get More Affluent Than the US's, or Did that Happen Long Ago?
We keep hearing bad news about where the US stands on various social and economic indicators. The US's ranking in math capability is 27th in the world. Our health care system is ranked 37th. Our 2011 life expectancy is 51st in the world. Our estimated 2012 infant mortality rate is 49th in the world. So we're pretty far down in a number of international statistical comparisons of performance. Some here point to better performance on economic indicators. For example, GDP per capita is often cited as an area where the US performs much better. But even here the latest CIA world handbook estimate shows the US ranked 19th on this measure at $48,400. Read more about We're No. 24! We're No. 24!
This is the third and last installment of a critical review of Dean Baker's second reaction to the debate kicked off by the WaPo's piece on Modern Monetary Theory, written by Dylan Matthews. Read more about The WaPo MMT Post Explosion: Dean Baker's Second Try On MMT (3)
This is the second installment of a critical review of Dean Baker's second reaction to the debate kicked off by the WaPo's piece on Modern Monetary Theory, written by Dylan Matthews. The first installment discussed Dean's views on using the monetary channel to boost aggregate demand, and began criticism on his views on devaluing the currency and increasing exports. This post continues that critique, and later takes up his views on work sharing.
Expanding US Exports at the Expense of Decreasing Real Wealth? (continued)
Dean goes on:
”To see this point, imagine a more extreme case. Suppose that we had a trade deficit equal to 50 percent of GDP. If the countries who were buying up dollar assets then decided that they had enough, so we could no longer rely on imports to meet half of our domestic demand, does anyone believe that the U.S. economy could quickly and painlessly replace our imports with domestic production?”
No, of course not! But, why do economists like Dean and Paul Krugman insist on relying on far-fetched scenarios to try to argue against simple truths that may apply today? The current account balance will probably be around 4-5% of GDP this year. As the economy recovers it will probably rise to 6% of GDP again, which represents a very real benefit to the United States. But there's no reason to expect that this growth would continue indefinitely or ever reach 50% of GDP. Why should it? What are the dynamics that would drive things this way, and make other nations value the dollar so much, that they will keep their own populations barefoot?
China, India, and Japan are all under pressure domestically to change their policies and make more of their production available to their own people. Europe may also abandon austerity soon, as they experience its ravages.
The long-term trend in the current account balance won't be up, It will be down, gradually down, for reasons I mentioned above. It just doesn't make sense for foreign nations to continue giving more than they're getting from the US. So, the 50% GDP scenario is just ridiculous. Why even bother suggesting it? What does the thought experiment prove, except that Dean Baker isn't thinking through a realistic model of the forces accounting for the international trade patterns we see?
In fact, Dean isn't even really serious about suggesting that this scenario somehow corresponds to a result of MMT economics. He says:
”I would not attribute this view to the MMTers, but then the question becomes one of a degree. Perhaps a trade deficit of 6 percent of GDP is okay, but presumably somewhere between 6 percent and 50 percent we get into a problem. It seems the question then has to be how quickly the U.S. economy could adjust to a much lower trade deficit and what is the risk that foreign countries will slow or stop their purchases of U.S. assets? We may differ on the answer to these questions, but they are the questions that must be asked.”
I think these are important questions. We should ask them. But, has Dean answered them? And do his answers indicate any serious problems for the United States economy? And if so, how does that relate to MMT? If these changes could possibly produce cost-push inflation in the United States, then MMT has some answers for that kind of problem. On the other hand, if other nations stop exporting so much to the US, then that may create less demand leakage for our economy. In which case, MMT predicts that we will get closer to full employment and also that we will have to moderate deficit spending as full employment is approached.
Dean continues with more scenarios about what would happen if foreign nations began to charge us more from imports. I won't reproduce each of these here or critique them. But, invariably, there is a general pattern to them. Read more about The WaPo MMT Post Explosion: Dean Baker's Second Try On MMT (2)
Matthew Yglesias posting in Slate, also gave us a few words on Dylan Matthews's post about Modern Monetary Theory (MMT). He starts with this thought: Read more about The WaPo MMT Post Explosion: Matthew Yglesias's Reaction to MMT
Kevin Drum, posting in Mother Jones, also threw his hat into the ring of discussion about Dylan Matthews's post about Modern Monetary Theory (MMT). Kevin begins by characterizing MMT as “. . . . Read more about The WaPo MMT Post Explosion: Kevin Drum's Take on MMT
I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
After stating his general approval for Dylan Matthews's, MMT post on Ezra Klein's blog, and his agreement with MMT on the issue of solvency, a big point that MMT's been trying to get across to the mainstream for years, Jared brought forth a number of points of disagreement, which I'll reply to based on my interpretation of the MMT perspective.
Tax Cuts Hard to Unwind? Not If You Legislate Properly! Read more about The WaPo MMT Post Explosion: Jared Bernstein's Cool Up To a Point
This post concludes my critical evaluation of Dylan Matthews's, post published on Ezra Klein's blog called “You know the deficit hawks. Now meet the deficit owls.” Read more about WaPo Covers MMT, But Does Its Usual Bad Job: Part Four, The Victory
This post continues my critical evaluation of Dylan Matthews's, post published on Ezra Klein's blog called “You know the deficit hawks. Now meet the deficit owls.”
Here's the next exchange envisioned by Dylan: Read more about WaPo Covers MMT, But Does Its Usual Bad Job: Part Three, Banking, and Default vs. “Hyperinflation”
This post continues the critical evaluation of Dylan Matthews's, post published on Ezra Klein's blog called “You know the deficit hawks. Now meet the deficit owls.”
The Inflation/Hyperinflation Bogeyman Read more about WaPo Covers MMT, But Does Its Usual Bad Job: Part Two, Inflation/Hyperinflation
It was very welcome to see The Washington Post cover MMT with a reasonably favorable post by Dylan Matthews, published on Ezra Klein's blog called “You know the deficit hawks. Read more about WaPo Covers MMT, But Does Its Usual Bad Job: Part One, Some Basics and Solvency