January 23, 2003
Why We Need a Better Press Corps

I was cited in a Washington Post profile of CEA Chair R. Glenn Hubbard yesterday:

washingtonpost.com: An Economist On a Mission: ...Princeton University economist Paul R. Krugman, also a New York Times columnist, and J. Bradford DeLong, a Clinton administration Treasury official now at the University of California at Berkeley, accuse Hubbard of sacrificing his sterling academic reputation with politically motivated but nonsensical economic utterances. "This is a delicate game," DeLong wrote on his Web site. "You need to retain political credibility as a team player while preserving enough analytical distance to tell the president what he needs to hear. . . . I think Glenn Hubbard played the game well for his first 20 months at the CEA. But now I think he's lost his balance and fallen off the tightrope."

Notice that this Washington Post reporter tells his readers absolutely nothing of why Paul and I are annoyed with Glenn. It's an outsiders-critical-of-administration-official story--which, in the context of Washington, is dog-bites-man: not news at all.

Think of how much better--how more informative to the readers--the story would have been had it spent a few words on why Paul and I are annoyed:

...Princeton University economist Paul R. Krugman, also a New York Times columnist, and J. Bradford DeLong, a Clinton administration Treasury official now at the University of California at Berkeley, accuse Hubbard of sacrificing his sterling academic reputation with politically motivated but nonsensical economic utterances. "This is a delicate game," DeLong wrote on his Web site. "You need to retain political credibility as a team player while preserving enough analytical distance to tell the president what he needs to hear. . . . I think Glenn Hubbard played the game well for his first 20 months at the CEA. But now I think he's lost his balance and fallen off the tightrope."

Today Glenn Hubbard tells reporters that there is no evidence that bigger deficits in the U.S. cause higher interest rates. But last year when he published the fourth edition of his Money and Banking textbook he talked about how the rising budget deficits of the Reagan years put upward pressure on interest rates, and how the emerging surpluses of the late 1990s put downward pressure on interest rates. You cannot, DeLong argues, do your job as CEA Chair if you are fall into the trap of changing your advice from what you believe--that we can see the pressure put on interest rates in the 1980s and 1990s by the Reagan deficits and the Rubin surpluses--to whatever White House Media Affairs currently wishes were true--that there's no evidence that U.S. interest rates are linked to U.S. deficits.

Now it is not that the Washington Post's reporter had no space to talk about the substance of policies and criticisms. He has space to tell his readers that Glenn Hubbard is "owlish," that Larry Lindsey's shirttail often hangs out, that Glenn Hubbard writes meticulous handouts and gives crisp Powerpoint presentations. He is simply not very interested in the substance of policy--no matter whether it favors Democrats or Republicans.

This is not a partisan point. The article is at least as unfair to Glenn Hubbard as it is to me. It says that Glenn believes that cutting taxes on dividends is a step "toward a more fundamental reform of the tax system -- no taxation of capital investment. A tax system based on consumption rather than savings and investment would remove a primary impediment to economic growth." But it doesn't say why Glenn believes that the social costs of capital taxation are high. it doesn't say why Glenn believes--as he does--that the benefits from this small step in the reform of taxes on capital income outweigh the costs of the expanded deficit. A reader knows no more about why Glenn believes that reductions in dividend taxes are a very good thing after reading the article than she did before she started reading it.

And so from Glenn's point of view as well as from my own, the article is a loss: it is a failed chance to educate Americans about what kinds of taxes are good and what kinds of taxes are bad, as well as a failed chance to educate Americans about why it would be much better to be running budget surpluses than budget deficits.

There are other negative consequences of this journalistic neglect-of-substance. What kinds of people flourish in such an environment? The final quote in the article comes from Kevin "Dow 36000: The New Way of Profiting from the Coming Rise in the Stock Market" Hassett:

Such words [as DeLong's and Krugman's] send Hubbard's defenders to the barricades. "Economists who have accused Glenn of being a liar and sacrificing his academic credentials have gone way beyond the standards of their discipline and should be punished by their fellow economists," Hassett fumed.

In the proper context, where it is clear that the problem is that what Glenn Hubbard tells reporters this year about the evidence on the relationship between deficits and interest rates is in flat contradiction to what the textbook he published last year told students about the relationship between deficits and interest rates, Kevin Hassett would look like... well, like an idiot. But since the context is missing, I think Kevin comes off rather well. And thus the quality of the debate over economic policy reported in the newspapers is further degraded.

How do we create a press corps that will think that its business is to inform readers about economic policies and their effects rather than about the owlish visage, crisp Powerpoint presentations, and untucked shirttails of economic advisors? How do we create a press corps that will raise the level of the debate over economic policy in this country, rather than lower it?

God only knows. I certainly don't.

Posted by DeLong at January 23, 2003 02:34 PM | Trackback

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You can try sending your criticism to the reporter who wrote that article (every little bit helps):

Jonathan Weisman: weismanj@washpost.com
Financial staff writer/economics

Posted by: Mike L on January 23, 2003 04:18 PM

There are other negative consequences of this journalistic neglect-of-substance. What kinds of people flourish in such an environment?

Precisely the type of people who have flourished over the last generation in our national and state capitols.

How do we create a press corps that will raise the level of the debate over economic policy in this country, rather than lower it?

You are aiming too low, Brad.

The reporter fills the space the way his editor wants. The editor, under guidance from "management", determines the tone and content level of his pages.

The reporter has lots of latitude, but not as much as you seem to think. Your [quite valid] criticism is best aimed higher up the newspaper organization food chain.

How do we create a press corps that will raise the level of the debate over economic policy in this country, rather than lower it?

The breathtaking dumbing down of the education system, and the seemingly systematic exclusion of real world economics from both pedagogy and mass culture generally, is self reinforcing and depressing. The blogosphere is a breath of oxygen for interested, knowledgable folks like us. The mass of the populace, apparently, could care less.

And publishers don't want bored readers.

Posted by: Bucky Dent on January 23, 2003 05:04 PM

here is the letter i sent yesterday (wednesday) to both the wa post "letters to the editor" and to the "ombudsman" regarding these very points:

Would it really be asking too much that jonathan weisman do some real
homework before writing his article on glen hubbard?

There are 3 critical flaws in his write-up, all of which could have been
avoided by real research, which would have taken all of an hour or two.

The first flaw regards the removal of the double-taxation on dividends. It
is easy to find economists who agree that providing a tax deduction to
corporations on dividends, in order to remove the tax code bias towards
corporate debt, which is deductible, is a good idea. What's hard to find are
eocnomists who think the bass-ackwards Hubbard/Bush approach of not taxing the
individual who receives dividends is the efficent way to achieve this
outcome. in fact, as every sensible observer of this proposal has pointed out,
it increases the complexity of the tax code without significantly changing
corporate incentives.

Second, on what basis does weisman suggest that economists would find a
problem with tax simplification or some of the other reforms that he writes
about in the last paragraph? Most economists do and would support such
reforms. The Weisman implication - that as a result of political disagreements,
economists would oppose things that they, aggregately, support - is just
plain foolish.

Third, what Weisman misses is the basis for the real criticism that has
been directed at Hubbard: his pretending that deficits don't matter and that
showing concern about deficits is merely nostalgia for what Hubbard
insultingly calls "rubinomics." Since Hubbard's own textbook, published in 2002,
shows that deficits do matter, this is actual, legitimate criticism of a
lack of intellectual honesty, not political criticism of the distributive
outcome of the way hubbard has proposed structuring ending the double-taxation
of dividends.

P.S. A really careful analysis would have pointed out that, in fact, the
Hubbard/Bush proposal doesn't end double-taxation on dividends - it only
ends it in select situations. For instance, it doesn't end double taxation on
any retirement funds, the way that many people own dividend-producing
stocks.

Surely you can do better than this.

Posted by: howard on January 23, 2003 05:55 PM

here is the letter i sent yesterday (wednesday) to both the wa post "letters to the editor" and to the "ombudsman" regarding these very points:

Would it really be asking too much that jonathan weisman do some real
homework before writing his article on glen hubbard?

There are 3 critical flaws in his write-up, all of which could have been
avoided by real research, which would have taken all of an hour or two.

The first flaw regards the removal of the double-taxation on dividends. It
is easy to find economists who agree that providing a tax deduction to
corporations on dividends, in order to remove the tax code bias towards
corporate debt, which is deductible, is a good idea. What's hard to find are
eocnomists who think the bass-ackwards Hubbard/Bush approach of not taxing the
individual who receives dividends is the efficent way to achieve this
outcome. in fact, as every sensible observer of this proposal has pointed out,
it increases the complexity of the tax code without significantly changing
corporate incentives.

Second, on what basis does weisman suggest that economists would find a
problem with tax simplification or some of the other reforms that he writes
about in the last paragraph? Most economists do and would support such
reforms. The Weisman implication - that as a result of political disagreements,
economists would oppose things that they, aggregately, support - is just
plain foolish.

Third, what Weisman misses is the basis for the real criticism that has
been directed at Hubbard: his pretending that deficits don't matter and that
showing concern about deficits is merely nostalgia for what Hubbard
insultingly calls "rubinomics." Since Hubbard's own textbook, published in 2002,
shows that deficits do matter, this is actual, legitimate criticism of a
lack of intellectual honesty, not political criticism of the distributive
outcome of the way hubbard has proposed structuring ending the double-taxation
of dividends.

P.S. A really careful analysis would have pointed out that, in fact, the
Hubbard/Bush proposal doesn't end double-taxation on dividends - it only
ends it in select situations. For instance, it doesn't end double taxation on
any retirement funds, the way that many people own dividend-producing
stocks.

Surely you can do better than this.

Posted by: howard on January 23, 2003 05:56 PM

here is the letter i sent yesterday (wednesday) to both the wa post "letters to the editor" and to the "ombudsman" regarding these very points:

Would it really be asking too much that jonathan weisman do some real
homework before writing his article on glen hubbard?

There are 3 critical flaws in his write-up, all of which could have been
avoided by real research, which would have taken all of an hour or two.

The first flaw regards the removal of the double-taxation on dividends. It
is easy to find economists who agree that providing a tax deduction to
corporations on dividends, in order to remove the tax code bias towards
corporate debt, which is deductible, is a good idea. What's hard to find are
eocnomists who think the bass-ackwards Hubbard/Bush approach of not taxing the
individual who receives dividends is the efficent way to achieve this
outcome. in fact, as every sensible observer of this proposal has pointed out,
it increases the complexity of the tax code without significantly changing
corporate incentives.

Second, on what basis does weisman suggest that economists would find a
problem with tax simplification or some of the other reforms that he writes
about in the last paragraph? Most economists do and would support such
reforms. The Weisman implication - that as a result of political disagreements,
economists would oppose things that they, aggregately, support - is just
plain foolish.

Third, what Weisman misses is the basis for the real criticism that has
been directed at Hubbard: his pretending that deficits don't matter and that
showing concern about deficits is merely nostalgia for what Hubbard
insultingly calls "rubinomics." Since Hubbard's own textbook, published in 2002,
shows that deficits do matter, this is actual, legitimate criticism of a
lack of intellectual honesty, not political criticism of the distributive
outcome of the way hubbard has proposed structuring ending the double-taxation
of dividends.

P.S. A really careful analysis would have pointed out that, in fact, the
Hubbard/Bush proposal doesn't end double-taxation on dividends - it only
ends it in select situations. For instance, it doesn't end double taxation on
any retirement funds, the way that many people own dividend-producing
stocks.

Surely you can do better than this.

Posted by: howard on January 23, 2003 05:56 PM

the journalist holy grail of objectivity. one the one hand blah, on the other hand, bleh. that seems to be your gripe. when we get down to facts, we're more likely to end up with someone who's right and someone who's wrong- or at least closer to that point. but strict he said, she said belies that possibility. It's a real perversion of objective... but it's all over the place. alas, what to do indeed.

Posted by: Brendan on January 23, 2003 07:03 PM

On linkages between fiscal deficits and upward pressure on interest rates, I came upon this testimony to the Senate Budget Committee in October 2001, by Kevin Hassett of AEI:

"On the contrary, almost every recent study that has been published on this topic has failed to find any link between moderate increases in deficits and rises in interest rates. As Professor Paul Evans of Ohio State University pointed out in his careful studies of links between deficits and interests in several countries, even the large deficits produced by wartime spending had no discernible effect on long-term interest rates. Other studies published since Evans’ papers on this topic have reached similar conclusions. As Elmendorf and Mankiw conclude: 'this literature has typically supported the Ricardian view that budget deficits have no effect on interest rates.'

"To economists, these facts are not very surprising for several reasons. First, as Harvard’s Robert Barro has pointed out for decades (and as the great classical economist, David Ricardo, was first to note), forward-looking taxpayers should (at least partly) offset government deficits with private savings if they anticipate increases in future taxes to repay the new debt. Perhaps more importantly, when open international capital markets allow countries to draw on each other’s savings, small increases in the amount of one country’s debt will be offset by savings pulled into that country from abroad, leaving interest rates little changed."
From: http://www.aei.org/ct/cthass102501.pdf

If so, this is a revealing insight into America's new foreign policy.

A larger fiscal deficit won't necessarily put upward pressure on interest rates because: "open international capital markets allow countries to draw on each other’s savings, small increases in the amount of one country’s debt will be offset by savings pulled into that country from abroad."

The economic implications are stark. By general consensus, the very rich in America will benefit most and hugely so from the tax cuts but that won't necessarily push up interest rates because the ensuing increase in the fiscal deficit can draw on savings from the rest of the world. But by the standard neo-classical growth model that means investment in the rest of the world will be somewhat lower and so therefore will output per head and in countries that almost universally have lower output per head than America.

Is this really the administration's new foreign policy: Rip off the rest of the world in order to finance tax cuts for the very rich in America? I think we should know.

Posted by: Bob Briant on January 24, 2003 04:23 AM

Regardless of the particular issues at stake here, as a foreigner who fairly regularly peruses online editions of the major US papers, I have to agree that the standard of US reportage is woeful - even compared to that in my own country's (Australia).

As a generalisation, your reporters' prose is very good (much better than the Australians' and at least as good as the Brits). But your press corps seems to have an obsession with 'human interest' angles, rather than with the issues that matter. I'm not sure whether we should blame the reporters or their readers - but it does explains how your politicians regularly get away with awful boondoggles and swindles.

Posted by: derrida derider on January 24, 2003 05:13 AM

your press corps seems to have an obsession with 'human interest' angles, rather than with the issues that matter. I'm not sure whether we should blame the reporters or their readers

Americans, as Bibi Netanyahu famously observed, have a "historical perspective that goes all the way back to breakfast".

Georgraphy and history have conspired to make many Americans apathetic to all save those things that tickle the fancy. I say that as an ex-journo myself, with a lot of experience studying readership, editorial policiies, etc.

Comparing the circulation/content of the Economist with Time and Newsweek is as good an exercise here as anything.

Posted by: Bucky Dent on January 24, 2003 05:31 AM

I am not an expert on inter'l econ, but I wonder about AEI's claim that foreign money is "pulled in" to the US and thus nullifies the money shortage--the money is "pulled in" because of higher interest rates. Also, aren't foreign investors reluctant to lend in countries with big gov't deficits, thereby further increasing the cost of their money, to offset the perceived risk?

Posted by: Rich Phillips on January 24, 2003 06:32 AM

I am not an expert on inter'l econ, but I wonder about AEI's claim that foreign money is "pulled in" to the US and thus nullifies the money shortage--the money is "pulled in" because of higher interest rates. Also, aren't foreign investors reluctant to lend in countries with big gov't deficits, thereby further increasing the cost of their money, to offset the perceived risk?

Posted by: Rich Phillips on January 24, 2003 06:34 AM

Another example of major journalists covering all events like football games. One side versus
the other, winners and losers, and "in-depth"
meaning a look at the special teams and coaching strategy. "Our Guys have a better coach, but Their Guys have a bigger front line..."

MINOR journalists can only manage events as if they were boxing matches. Man to man, head to
head and toe to toe opposition.

The nuances among several comparably good (or bad) ideas/candidates/approaches to problems --
modeling news as a horse race -- seems to be beyond the ability of reporters and commentators alike.

Sadly, even here. "Why are we governed by these guys?" being a recurring example. The top ten answers to that particular query requiring reference to Ross Perot, Colin Powell, Ralph Nader, etc. Must every disussion begin under the
assumption that polarized Demo/Repub Bush/Gore
North/South Black/White Urban/Rural Heaven/Hell
Slave/Free models are even remotely valuable?

The issue of the federal deficit was the core of the Ross Perot candidacy/phenonema of 1992. Recognition of how that fiscal concern led directly to the Gingrich "Contract With America"
spin on line-item veto, constitutional amendments requiring balanced budget, and welfare reform. Perotistas coming into the Republican camp in 1994 led to Clinton's triangulation and "ten-year plan" to eliminate deficits. Aggressive response by Repubs to bring expenses down faster did in fact held the economy, to a degree which sustained Clinton even through scandal and Bosnia/Kosovo adventures.

But in 2000, Ross Perot was tired. Colin Powell declined to lead a ticket. Ralph Nadar divided the left in exactly the fashion, if not to the same degree, that Perot had previously divided the right. And politically, the federal deficit was as viable an issue as "infrastructure" or "malaise" -- yesterday's problem. (The total federal debt, and in particular the obligations of the Social Security Administration to baby boomers, was trotted out with a metaphor -- "lockbox" -- that held more humor than utility and the Perot lessons about actually using barcharts and line charts during a campaign speech were forgotten or ignored.)

Anyhow, I wander from topic.

But if you could get the track touts who construct the racing forms and betting lines interested in covering political action --
up to eight contenders, the weight carried by each, the condition of the field, whose money is backing which horse... then you MIGHT have some hope of more intelligent in-depth journalism.

Don't hold your breath.

Posted by: Melcher on January 24, 2003 08:49 AM

brad,

this is not news, at least not to me. the blogosphere has been doing a superb job of pointing out the complete idiocy that passes for the washington press corps. bob somerby has done a terrific job at his website pointing this out for the past few *years*.

Posted by: Suresh Krishnamoorthy on January 24, 2003 09:36 AM

oops, don't know what happened there, but somerby's site is www.dailyhowler.com

Posted by: Suresh Krishnamoorthy on January 24, 2003 09:46 AM

Well, on the economic commentary side of print media, space is dominated by folks ranging from Krugman to Samuelson.

Kudlow's perch at the Washington Times is, by comparison, pretty low profile.

Posted by: BuckyDent on January 24, 2003 10:11 AM

Bucky:
"Well, on the economic commentary side of print media, space is dominated by folks ranging from Krugman to Samuelson.

Kudlow's perch at the Washington Times is, by comparison, pretty low profile."

The counter argument is Kudlow's perch at the Wall Street Journal is as high profile as you can get. So what is your point Bucky.

Posted by: George Stebbins on January 24, 2003 12:08 PM

An historical perspective that goes all the way back to breakfast . . . . . hmmmm, so I should be able to remember what I had for breakfast?

Unhappily, it's not just Econ reporting that's superficial, almost everything seems to be reported superficially these days. In the narrow sector of the world where I have direct knowledge occasionally, the reporting is almost always so superficial it's wrong.

Here's a quick example from the NY Times today:

"Oil Teams Recall Kuwait and Fear Iraq May Be Worse"
By NEELA BANERJEE

http://www.nytimes.com/2003/01/24/business/24OIL.html?pagewanted=1

The story is primarly about how bad conditions were fighting oil well fires in Kuwait after the first Gulf War, and emphasizes how much worse Iraq is likely to be . . . . . . .

At least they mentioned the punchline:

"Experts initially estimated that it would take four or five years to extinguish the fires. Instead, the job was completed in nine months. The firefighting companies, executives said, had some good luck and a great deal of help — both of which could be hard to find in Iraq."

Kuwait was a mess - but to the extent there's a story about Kuwait, it should be about how quickly American experts and ingenuity won out over Iraqi destructiveness. And there's very little information in the story about why Iraq should be worse than Kuwait - Kuwait's oil fields were booby trapped, there were unexploded cluster bombs all over the place and for the first few months, the smoke was so thick visibility was terrible.

One key point they could have mentioned but didn't is that to forestall an amphibious attack, Saddam took a page from Churchill's book and ran pipelines from the Kuwaiti oil fields down to the Gulph. The strategy was never employed, however, the pipes came in handy as a source of water for firefighting - engineers just pumped seawater out of the gulf through the pipes and into the oilfield . . . .

Posted by: Anarchus on January 24, 2003 12:17 PM

- A larger fiscal deficit won't necessarily put upward pressure on interest rates because: "open international capital markets allow countries to draw on each other’s savings, small increases in the amount of one country’s debt will be offset by savings pulled into that country from abroad." -

Exchange rates go up and go down. For a country in which debts are denominated in domestic currency as America or UK or Japan, what is the problem with a gradual inflow or outflow of international investment? If American investment opportunities are significant there will be an inflow of investment funds from abroad. Fine. Where is the problem? We are not draining funds from UK or Japan and they are not draining funds from America.

Friends from Hong Kong just bought an office building here. Should the Chinese fret?

Posted by: anne on January 24, 2003 12:17 PM

AFAIK Kudlow isn't a regular contributor to the WSJ.

My point is that while the news pages of the mainstream press are pretty dumbed down when it comes to the economy, much of the op-ed material would seem to approach Dr. Delong's requirements for substantiveness.

Posted by: Bucky Dent on January 24, 2003 12:18 PM

What should bother readers here is that the Glenn Hubbard piece was in the Business (serious) section while the Krugman piece was in the Style (not so serious) section.

Still, I enjoyed the Krugman piece because it was about him personally. I can always read what he writes.

Posted by: Jim Harris on January 24, 2003 01:47 PM

>Exchange rates go up and go down. For a country in which debts are denominated in domestic currency as America or UK or Japan, what is the problem with a gradual inflow or outflow of international investment? If American investment opportunities are significant there will be an inflow of investment funds from abroad. Fine. Where is the problem?

The counter-part of a continuing capital account net inflow into the US economy is a continuing current account deficit.

Several implications follow: (1) the US becomes an increasing international net debtor to the rest of the world - fine if the US can get away with it but such situations are apt to adjust with a bump; (2) real resources are being transferred from the rest of the world to the US, which already has one of the highest living standards in the world; (3) capital formation in the rest of the world will be lower than otherwise and therefore the profile through time of output per head in the rest of the world.

As it is, through most of the 1990s net Foreign Direct Investment by the US in the rest of the world was less than by Germany, Japan, the UK, France, Netherlands, Switzerland and Italy - see: http://www1.oecd.org/publications/e-book/92-2001-04-1-2987/PDF/C31.pdf


Posted by: Bob Briant on January 24, 2003 04:55 PM

(3) capital formation in the rest of the world will be lower than otherwise and therefore the profile through time of output per head in the rest of the world.

I thought China was developing like a house a'fire, despite being on the other side of a chunk of our trade/capital imbalance.

Posted by: Bucky Dent on January 24, 2003 05:11 PM

>I thought China was developing like a house a'fire

China is - because of huge inflows of inward investment by Taiwanese and Japanese companies.

Posted by: Bob Briant on January 24, 2003 05:55 PM

So then the Taiwanese and Japanese economies should be seeing a decline in capital formation? Japan saw *negative* interest rates on Friday, wholly unrelated to the US deficit issue. And, based on Bloomberg data, which I don't know how to export, Taiwan's economy seems to be holding its own.

Posted by: Bucky Dent on January 24, 2003 06:18 PM

"Today Glenn Hubbard tells reporters that there is no evidence that bigger deficits in the U.S. cause higher interest rates. But last year when he published the fourth edition of his Money and Banking textbook he talked about how the rising budget deficits of the Reagan years put upward pressure on interest rates..."

I'd be delighted to hear Hubbard rationalize his contradiction. Has anyone seen that he has done so? Or is he hoping this is just going to stay underneath the radar and go away?

Why is Harvey Pitt still running the SEC?

Posted by: jcalas on January 24, 2003 07:16 PM

I thought China was developing like a house a'fire, despite being on the other side of a chunk of our trade/capital imbalance.

Maybe not; if they're growing like gangbusters, they've apparently figured out how to do it while *reducing* energy consumption. Their numbers are probably made up. Off topic, so I'm risking Ye Wrath O' Delong, but I think worth it.

The "capital flows from abroad" possibility can result in no change in interest rates, yes. However, it has the same net effect as higher interest rates - lower growth. Increased foreigner claims on US assets pretty much have to result in lower future US income.

Posted by: Jason McCullough on January 24, 2003 09:46 PM

>So then the Taiwanese and Japanese economies should be seeing a decline in capital formation?

That doesn't necessarily follow since either economy will likely import and well as export capital.

The central point here is that by the end of the 1990s, the US economy had already become a net recipient of Foreign Direct Investment as Table 1 in this OECD report shows: http://webnet1.oecd.org/pdf/M00031000/M00031855.pdf

The net inward FDI or the net inflow on the US balance of payments capital account show the rest of the world is exporting savings and capital to the US. From the standard neo-classical growth model, it follows that investment in the rest of the world will be lower and so will the profile through time of output per head in the rest of the world where it is already almost universally lower.

Unless there is a compensating increase in private saving, a larger US fiscal deficit will cause the deficit on the US balance of payments on current account to deteriorate further. Failing a corresponding intended (= ex ante, for economists) inflows of capital funds to finance the larger current account deficit, the Dollar exchange rate will depreciate.

Please correct my errors, if any, but that is mainstream analysis as some contributors here are much better placed to rebut or confirm.

Posted by: Bob Briant on January 25, 2003 06:05 AM

the same net effect as higher interest rates - lower growth.

Actually, rates themselves don't make or break growth. The Economist ran an interesting piece a couple of years ago, demonstrating that (IIRC) ~3% real rates proved an economy enjoyed a healthy demand for capital balanced by an appropriate level of savings.

Again, Japan's experience is instructive too.

Posted by: Bucky Dent on January 25, 2003 07:06 AM

We're exiting my zone of expertise now, but I'll add the following.

Savings rates are notoriously difficult to measure, particularly those overseas where cultural and govt safety net structures differ. Also, there was an enormous amount of capital shifted from Europe to the US during the 90s bubble because the owners of that capital felt it would be better deployed here than there. And given the ongoing nonsense in Brussels, that was a quite rational decision. If growth in Europe suffered, was it because of US deficits? Or because European actors made local investment unappealing? There's a chicken/egg element here, of course.

Posted by: Bucky Dent on January 25, 2003 07:17 AM

The unwashed masses prefer to read about sports, astrology, and the sex life of Brittany Spears. The so-called serious stuff is a loss leader. The corporations owning these media outlets therefore have little financial motivation to spend significant money to improve in this area. Sigh, perhaps we can generate some interest by spreading a rumor that Paul Krugman, Brad DeLong, and Glenn Hubbard are going to a wild party with Ms. Spears!

Posted by: David Thomson on January 25, 2003 08:09 AM

if they're growing like gangbusters, they've apparently figured out how to do it while *reducing* energy consumption. Their numbers are probably made up.

I'm glad we agree on something. I personally refuse to believe any numbers out of China, because I have no faith in their honesty.

I do believe they are growing economically, however, based on an overwhelming supply of indirect evidence and measures.

A thought on the energy angle: Modern SE Asian pirates reportedly (Economist) operate as a kind of contract energy supply arm of regional Chinese bureaucracies, seizing oil tankers on the open seas, and offloading their cargo in "black ports" along the Chinese coast. I would guess those BTUs go unreported. :)

Posted by: Bucky Dent on January 25, 2003 06:47 PM

As an aside, I spent some time at Carleton University, in Canada. It is famous for its journalism school which awards, among other things, a BA in journalism. The courses included such topics as "current affairs for journalists" and "history for jounalists".

Perhaps taking the real courses in the real faculties might have been wiser? Maybe not. But I found most journalism students unable to discuss much in any depth. They did learn a lot of technique, mind you.

The way to be a journalist, imho, is to first learn something, then learn the craft. In the old days they offered a one year degree to anyone who already had a Bachelors of some variety. But they got rid of that, and added a two year. Weren't making enough money I suppose.

Posted by: Ian Welsh on January 25, 2003 11:37 PM

Actually, rates themselves don't make or break growth.

True, but that doesn't change the general argument. It's also very difficult to argue that the US is investing too much at this point in time (ignoring the current recession).

Posted by: Jason McCullough on January 26, 2003 04:39 PM
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