Archive for April, 2006

CSI: Trade Deficit

April 24, 2006

 April 24, 2006

By: Paul Krugman

Forensics are in. If you turn on the TV during prime time, you're likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.

That's more or less what's going on right now among international finance experts. The crime in question is the U.S. trade deficit, which according to the broadest measure reached an amazing $805 billion last year. The mystery is how we've been able to run huge deficits, year after year, with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.

Here's the puzzle: the trade deficit means that America is living beyond its means, spending far more than it earns. (In 2005, the United States exported only 53 cents' worth of goods for every dollar it spent on imports.) To pay for the excess of imports over exports, the United States has to sell stocks, bonds and businesses to foreigners. In fact, we've borrowed more than $3 trillion just since 1999.

By rights, then, the investment income — interest payments, stock dividends and so on — that Americans pay to foreigners should be a lot larger than the investment income foreigners pay to Americans. But according to official statistics, the United States still has a slightly positive balance on investment income.

How is this possible? The answer, almost certainly, is that there's something wrong with the numbers. (Laypeople tend to treat official statistics as gospel; professional economists know that putting these numbers together involves a lot of educated guesswork — and sometimes the guesses are wrong.) But depending on exactly what's wrong, the U.S. economy either has hidden strengths, or it's in even worse shape than it seems.

In one corner are economists who think the official statistics miss invisible U.S. exports — exports not of goods and services, but of intangibles like knowledge and brand-name recognition, which allow U.S. companies to earn high rates of return on their foreign investments. Proponents of this view claim that if we counted these invisible exports, which they call "dark matter," much of the U.S. trade deficit would disappear.

The dark matter hypothesis has been eagerly taken up by some journalists, who like its upbeat message. It seems to say that the U.S. economy is, as a cover article in Business Week put it, "much stronger than you think."

But there's a problem: U.S. companies operating abroad don't, in fact, seem to earn especially high rates of return. Why, then, doesn't the United States seem to be paying a price for all its borrowing? Because according to the official data, foreign companies operating in the United States are remarkably unprofitable, earning an average return of only 2.2 percent a year.

There's something wrong with this picture. As Daniel Gros of the Center for European Policy Studies puts it, it's hard to believe that foreigners would continue investing in the United States "if they were really being constantly taken to the cleaners."

In a new paper, Mr. Gros argues — compellingly, in my view — that what's really happening is that foreign companies are understating the profits of their U.S. subsidiaries, probably to avoid taxes, and that official data are, in particular, failing to pick up foreign profits that are reinvested in U.S. operations.

If Mr. Gros is right, the true position of the U.S. economy isn't as bad as you think — it's worse. The true trade deficit, including unreported profits that accrue to foreign companies, isn't $800 billion — it's more than $900 billion. And America's foreign debt, including the value of foreign-owned businesses, is at least $1 trillion bigger than the official numbers say.

Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? And they point out that those predicting problems from the trade deficit have been wrong so far. But I have two words for those who place their faith in the judgment of investors, and believe that a few good years are enough to prove the skeptics wrong: Nasdaq 5,000.

Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, "Why haven't we paid a price for our trade deficit?" is, just you wait.

The Great Revulsion

April 21, 2006

 


 

 April 21, 2006

 

By: Paul Krugman 

"I have a vision — maybe just a hope — of a great revulsion: a moment in which the American people look at what is happening, realize how their good will and patriotism have been abused, and put a stop to this drive to destroy much of what is best in our country."

I wrote those words three years ago in the introduction to my column collection, "The Great Unraveling." It seemed a remote prospect at the time: Baghdad had just fallen to U.S. troops, and President Bush had a 70 percent approval rating.

Now the great revulsion has arrived. The latest Fox News poll puts Mr. Bush's approval at only 33 percent. According to the polling firm Survey USA, there are only four states in which significantly more people approve of Mr. Bush's performance than disapprove: Utah, Idaho, Wyoming and Nebraska. If we define red states as states where the public supports Mr. Bush, Red America now has a smaller population than New York City.

The proximate causes of Mr. Bush's plunge in the polls are familiar: the heck of a job he did responding to Katrina, the prescription drug debacle and, above all, the quagmire in Iraq.

But focusing too much on these proximate causes makes Mr. Bush's political fall from grace seem like an accident, or the result of specific missteps. That gets things backward. In fact, Mr. Bush's temporarily sky-high approval ratings were the aberration; the public never supported his real policy agenda.

Remember, in 2000 Mr. Bush got within hanging-chad and felon-purge distance of the White House only by pretending to be a moderate. In 2004 he ran on fear and smear, plus the pretense that victory in Iraq was just around the corner. (I've always thought that the turning point of the 2004 campaign was the September 2004 visit of the Iraqi prime minister, Ayad Allawi, a figurehead appointed by the Bush administration who rewarded his sponsors by presenting a falsely optimistic picture of the situation in Iraq.)

The real test of the conservative agenda came after the 2004 election, when Mr. Bush tried to sell the partial privatization of Social Security.

Social Security was for economic conservatives what Iraq was for the neocons, a soft target that they thought would pave the way for bigger conquests. And there couldn't have been a more favorable moment for privatization than the winter of 2004-2005: Mr. Bush loved to assert that he had a "mandate" from the election; Republicans held solid, disciplined majorities in both houses of Congress; and many prominent political pundits were in favor of private accounts.

Yet Mr. Bush's drive on Social Security ran into a solid wall of public opposition, and collapsed within a few months. And if Social Security couldn't be partly privatized under those conditions, the conservative dream of dismantling the welfare state is nothing but a fantasy.

So what's left of the conservative agenda? Not much.

That's not a prediction for the midterm elections. The Democrats will almost surely make gains, but the electoral system is rigged against them. The fewer than eight million residents of what's left of Red America are represented by eight U.S. senators; the more than eight million residents of New York City have to share two senators with the rest of New York State.

Meanwhile, a combination of accident and design has left likely Democratic voters bunched together — I'm tempted to say ghettoized — in a minority of Congressional districts, while likely Republican voters are more widely spread out. As a result, Democrats would need a landslide in the popular vote — something like an advantage of 8 to 10 percentage points over Republicans — to take control of the House of Representatives. That's a real possibility, given the current polls, but by no means a certainty.

And there is also, of course, the real prospect that Mr. Bush will change the subject by bombing Iran.

Still, in the long run it may not matter that much. If the Democrats do gain control of either house of Congress, and with it the ability to issue subpoenas, a succession of scandals will be revealed in the final years of the Bush administration. But even if the Republicans hang on to their ability to stonewall, it's hard to see how they can resurrect their agenda.

In retrospect, then, the 2004 election looks like the high-water mark of a conservative tide that is now receding.

Enemy of the Planet

April 18, 2006

     

April 17, 2006 

By: Paul Krugman 

Lee Raymond, the former chief executive of Exxon Mobil, was paid $686 million over 13 years. But that's not a reason to single him out for special excoriation. Executive compensation is out of control in corporate America as a whole, and unlike other grossly overpaid business leaders, Mr. Raymond can at least claim to have made money for his stockholders.

There's a better reason to excoriate Mr. Raymond: for the sake of his company's bottom line, and perhaps his own personal enrichment, he turned Exxon Mobil into an enemy of the planet.

To understand why Exxon Mobil is a worse environmental villain than other big oil companies, you need to know a bit about how the science and politics of climate change have shifted over the years.

Global warming emerged as a major public issue in the late 1980's. But at first there was considerable scientific uncertainty.

Over time, the accumulation of evidence removed much of that uncertainty. Climate experts still aren't sure how much hotter the world will get, and how fast. But there's now an overwhelming scientific consensus that the world is getting warmer, and that human activity is the cause. In 2004, an article in the journal Science that surveyed 928 papers on climate change published in peer-reviewed scientific journals found that "none of the papers disagreed with the consensus position."

To dismiss this consensus, you have to believe in a vast conspiracy to misinform the public that somehow embraces thousands of scientists around the world. That sort of thing is the stuff of bad novels. Sure enough, the novelist Michael Crichton, whose past work includes warnings about the imminent Japanese takeover of the world economy and murderous talking apes inhabiting the lost city of Zinj, has become perhaps the most prominent global-warming skeptic. (Mr. Crichton was invited to the White House to brief President Bush.)

So how have corporate interests responded? In the early years, when the science was still somewhat in doubt, many companies from the oil industry, the auto industry and other sectors were members of a group called the Global Climate Coalition, whose de facto purpose was to oppose curbs on greenhouse gases. But as the scientific evidence became clearer, many members — including oil companies like BP and Shell — left the organization and conceded the need to do something about global warming.

Exxon, headed by Mr. Raymond, chose a different course of action: it decided to fight the science.

A leaked memo from a 1998 meeting at the American Petroleum Institute, in which Exxon (which hadn't yet merged with Mobil) was a participant, describes a strategy of providing "logistical and moral support" to climate change dissenters, "thereby raising questions about and undercutting the 'prevailing scientific wisdom.' " And that's just what Exxon Mobil has done: lavish grants have supported a sort of alternative intellectual universe of global warming skeptics.

The people and institutions Exxon Mobil supports aren't actually engaged in climate research. They're the real-world equivalents of the Academy of Tobacco Studies in the movie "Thank You for Smoking," whose purpose is to fail to find evidence of harmful effects.

But the fake research works for its sponsors, partly because it gets picked up by right-wing pundits, but mainly because it plays perfectly into the he-said-she-said conventions of "balanced" journalism. A 2003 study, by Maxwell Boykoff and Jules Boykoff, of reporting on global warming in major newspapers found that a majority of reports gave the skeptics — a few dozen people, many if not most receiving direct or indirect financial support from Exxon Mobil — roughly the same amount of attention as the scientific consensus, supported by thousands of independent researchers.

Has Exxon Mobil's war on climate science actually changed policy for the worse? Maybe not. Although most governments have done little to curb greenhouse gases, and the Bush administration has done nothing, it's not clear that policies would have been any better even if Exxon Mobil had acted more responsibly.

But the fact is that whatever small chance there was of action to limit global warming became even smaller because Exxon Mobil chose to protect its profits by trashing good science. And that, not the paycheck, is the real scandal of Mr. Raymond's reign as Exxon Mobil's chief executive.

Weapons of Math Destruction

April 14, 2006

 

 April 14, 2006 

By: Paul Krugman 

Now it can be told: President Bush and Vice President Dick Cheney based their re-election campaign on lies, damned lies and statistics.

The lies included Mr. Cheney's assertion, more than three months after intelligence analysts determined that the famous Iraqi trailers weren't bioweapons labs, that we were in possession of two "mobile biological facilities that can be used to produce anthrax or smallpox."

The damned lies included Mr. Bush's declaration, in his "Mission Accomplished" speech, that "we have removed an ally of Al Qaeda."

The statistics included Mr. Bush's claim, during his debates with John Kerry, that "most of the tax cuts went to low- and middle-income Americans."

Compared with the deceptions that led us to war, deceptions about taxes can seem like a minor issue. But it's all of a piece. In fact, my early sense that we were being misled into war came mainly from the resemblance between the administration's sales pitch for the Iraq war — with its evasions, innuendo and constantly changing rationale — and the selling of the Bush tax cuts.

Moreover, the hysterical attacks the administration and its defenders launch against anyone who tries to do the math on tax cuts suggest that this is a very sensitive topic. For example, Senator Charles Grassley of Iowa once compared people who say that 40 percent of the Bush tax cuts will go to the richest 1 percent of the population to, yes, Adolf Hitler.

And just as administration officials continued to insist that the trailers were weapons labs long after their own intelligence analysts had concluded otherwise, officials continue to claim that most of the tax cuts went to the middle class even though their own tax analysts know better.

How do I know what the administration's tax analysts know? The facts are there, if you know how to look for them, hidden in one of the administration's propaganda releases.

The Treasury Department has put out an exercise in spin called the "Tax Relief Kit," which tries to create the impression that most of the tax cuts went to low- and middle-income families. Conspicuously missing from the document are any actual numbers about how the tax cuts were distributed among different income classes. Yet Treasury analysts have calculated those numbers, and there's enough information in the "kit" to figure out what they discovered.

An explanation of how to extract the administration's estimates of the distribution of tax cuts from the "Tax Relief Kit" is here. Here's the bottom line: about 32 percent of the tax cuts went to the richest 1 percent of Americans, people whose income this year will be at least $341,773. About 53 percent of the tax cuts went to the top 10 percent of the population. Remember, these are the administration's own numbers — numbers that it refuses to release to the public.

I'm sure that this column will provoke a furious counterattack from the administration, an all-out attempt to discredit my math. Yet if I'm wrong, there's an easy way to prove it: just release the raw data used to construct the table titled "Projected Share of Individual Income Taxes and Income in 2006." Memo to reporters: if the administration doesn't release those numbers, that's in effect a confession of guilt, an implicit admission that the data contradict the administration's spin.

And what about the people Senator Grassley compared to Hitler, those who say that the wealthiest 1 percent of Americans will receive 40 percent of the tax cuts? Although the "Tax Relief Kit" asserts that "nearly all of the tax cut provisions" are already in effect, that's not true: one crucial piece of the Bush tax cuts, elimination of the estate tax, hasn't taken effect yet. Since only estates bigger than $2 million, or $4 million for a married couple, face taxation, the great bulk of the gains from estate tax repeal will go to the wealthiest 1 percent. This will raise their share of the overall tax cuts to, you guessed it, about 40 percent.

Again, the point isn't merely that the Bush administration has squandered the budget surplus it inherited on tax cuts for the wealthy. It's the fact that the administration has spent its entire term in office lying about the nature of those tax cuts. And all the world now knows what I suspected from the start: an administration that lies about taxes will also lie about other, graver matters.

Yes He Would

April 10, 2006

 

April 10, 2006

By: Paul Krugman 

"But he wouldn't do that." That sentiment is what made it possible for President Bush to stampede America into the Iraq war and to fend off hard questions about the reasons for that war until after the 2004 election. Many people just didn't want to believe that an American president would deliberately mislead the nation on matters of war and peace.

Now people with contacts in the administration and the military warn that Mr. Bush may be planning another war. The most alarming of the warnings come from Seymour Hersh, the veteran investigative journalist who broke the Abu Ghraib scandal. Writing in The New Yorker, Mr. Hersh suggests that administration officials believe that a bombing campaign could lead to desirable regime change in Iran — and that they refuse to rule out the use of tactical nuclear weapons.

"But he wouldn't do that," say people who think they're being sensible. Given what we now know about the origins of the Iraq war, however, discounting the possibility that Mr. Bush will start another ill-conceived and unnecessary war isn't sensible. It's wishful thinking.

As it happens, rumors of a new war coincide with the emergence of evidence that appears to confirm our worst suspicions about the war we're already in.

First, it's clearer than ever that Mr. Bush, who still claims that war with Iraq was a last resort, was actually spoiling for a fight. The New York Times has confirmed the authenticity of a British government memo reporting on a prewar discussion between Mr. Bush and Tony Blair. In that conversation, Mr. Bush told Mr. Blair that he was determined to invade Iraq even if U.N. inspectors came up empty-handed.

Second, it's becoming increasingly clear that Mr. Bush knew that the case he was presenting for war — a case that depended crucially on visions of mushroom clouds — rested on suspect evidence. For example, in the 2003 State of the Union address Mr. Bush cited Iraq's purchase of aluminum tubes as clear evidence that Saddam was trying to acquire a nuclear arsenal. Yet Murray Waas of the National Journal reports that Mr. Bush had been warned that many intelligence analysts disagreed with that assessment.

Was the difference between Mr. Bush's public portrayal of the Iraqi threat and the actual intelligence he saw large enough to validate claims that he deliberately misled the nation into war? Karl Rove apparently thought so. According to Mr. Waas, Mr. Rove "cautioned other White House aides in the summer of 2003 that Bush's 2004 re-election prospects would be severely damaged" if the contents of an October 2002 "President's Summary" containing dissents about the significance of the aluminum tubes became public.

Now there are rumors of plans to attack Iran. Most strategic analysts think that a bombing campaign would be a disastrous mistake. But that doesn't mean it won't happen: Mr. Bush ignored similar warnings, including those of his own father, about the risks involved in invading Iraq.

As Joseph Cirincione of the Carnegie Endowment for International Peace recently pointed out, the administration seems to be following exactly the same script on Iran that it used on Iraq: "The vice president of the United States gives a major speech focused on the threat from an oil-rich nation in the Middle East. The U.S. secretary of state tells Congress that the same nation is our most serious global challenge. The secretary of defense calls that nation the leading supporter of global terrorism. The president blames it for attacks on U.S. troops."

Why might Mr. Bush want another war? For one thing, Mr. Bush, whose presidency is increasingly defined by the quagmire in Iraq, may believe that he can redeem himself with a new Mission Accomplished moment.

And it's not just Mr. Bush's legacy that's at risk. Current polls suggest that the Democrats could take one or both houses of Congress this November, acquiring the ability to launch investigations backed by subpoena power. This could blow the lid off multiple Bush administration scandals. Political analysts openly suggest that an attack on Iran offers Mr. Bush a way to head off this danger, that an appropriately timed military strike could change the domestic political dynamics.

Does this sound far-fetched? It shouldn't. Given the combination of recklessness and dishonesty Mr. Bush displayed in launching the Iraq war, why should we assume that he wouldn't do it again?

John and Jerry

April 3, 2006

PK out 

April 3, 2006 

By: Paul Krugman 

Well, I'll be damned. At least, that's what the Rev. Jerry Falwell says. Last month Mr. Falwell issued a statement explaining that, in his view, Jews can't go to heaven unless they convert to Christianity. And what Mr. Falwell says matters — maybe not in heaven, but here on earth. After all, he's a kingmaker in today's Republican Party.

Senator John McCain obviously believes that he can't get the Republican presidential nomination without Mr. Falwell's approval. During the 2000 campaign, Mr. McCain denounced Mr. Falwell and the Rev. Pat Robertson as "agents of intolerance." But next month Mr. McCain will be a commencement speaker at Liberty University, which Mr. Falwell founded.

On "Meet the Press" yesterday, Mr. McCain was asked to explain his apparent flip-flop. "I believe," he replied, "that the Christian right has a major role to play in the Republican Party. One reason is because they're so active and their followers are. And I believe they have a right to be a part of our party."

So what has happened since the 2000 campaign to convince Mr. McCain that Mr. Falwell is not, in fact, an agent of intolerance?

Maybe it was Mr. Falwell's TV appearance with Mr. Robertson on Sept. 13, 2001, during which the two religious leaders agreed that the terrorist attack two days earlier was divine punishment for American immorality. "God continues to lift the curtain and allow the enemies of America to give us probably what we deserve," said Mr. Falwell, who also declared, "I really believe that the pagans, and the abortionists, and the feminists, and the gays and the lesbians who are actively trying to make that an alternative lifestyle, the A.C.L.U., People for the American Way — all of them who have tried to secularize America — I point the finger in their face and say, 'You helped this happen.' "

Or maybe it was Mr. Falwell's appearance on "60 Minutes" in October 2002, when he declared, "I think Muhammad was a terrorist." Muhammad, he said, was "a violent man" — unlike Mr. Falwell, I guess, who said of terrorists that we should "blow them all away in the name of the Lord."

After each of these incidents, by the way, Mr. Falwell issued what were described as "apologies." But they weren't apologies — they were statements along the lines of, "I'm sorry that some people were upset by what I said." It's clear that in each case Mr. Falwell's offensive remarks were not a slip of the tongue; they reflected his deeply held beliefs.

And that's why it's important to hold someone like Mr. McCain — who is still widely regarded as a moderate, in spite of his extremely conservative voting record — accountable when he cozies up to Mr. Falwell. Nobody thinks that Mr. McCain shares all of Mr. Falwell's views. But when Mr. McCain said that the Christian right had a right to be part of the Republican Party, he was in effect saying that Mr. Falwell's statements were within the realm of acceptable political discourse.

Just to be clear: this is a free country, and Mr. Falwell has a right to say what he thinks, even if his views include the belief that other people, by saying what they think, brought down God's wrath on America. By the same token, any political party has a right to include Mr. Falwell and his supporters, just as any politician has a right to make a political alliance with Mr. Falwell.

But if you choose to make common cause with religious extremists, you are accepting some responsibility for their extremism. By welcoming Mr. Falwell and people like him as members of their party, Republicans are saying that it's O.K. — not necessarily correct, but O.K. — to declare that 9/11 was America's punishment for its tolerance of abortion and homosexuality, that Islam is a terrorist religion, and that Jews can't go to heaven. And voters should judge the Republican Party accordingly.

As for Mr. McCain: his denunciation of Mr. Falwell and Mr. Robertson six years ago helped give him a reputation as a moderate on social issues. Now that he has made up with Mr. Falwell and endorsed South Dakota's ban on abortion even in the case of rape or incest, only two conclusions are possible: either he isn't a social moderate after all, or he's a cynical political opportunist.