Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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Ruchir Shamir again used a New York Times column to complain about plans put forward by Elizabeth Warren and Donald Trump (more the former than the latter) to lower the value of the dollar to make U.S. goods and services more competitive in the world economy. While he raises a number of geopolitical arguments, the gist of his economic argument is that the U.S. is able to run large and persistent trade deficits because the dollar is the leading reserve currency in the world. (Hence the "exorbitant privilege.")

This ability to run large trade deficits could be a good thing, if we had an economy that was generally near full employment. In that case, the deficit on trade allows us to consume and invest more than would otherwise be possible. However, few serious economists would argue that we have been at or near full employment in the last decade.

Many, if not most, mainstream economists have embraced the idea of "secular stagnation." This is a more complicated way of saying insufficient demand. In other words, the U.S. economy has not been at or near full employment for the last decade because it has not had enough demand.

A big part of the "not enough demand" story is the trade deficit. If we had balanced trade instead of a deficit of 3.0 percent of GDP, it would have roughly the same impact on aggregate demand as a $600 billion annual stimulus program, all of it in the form of government spending. In other words, the "exorbitant privilege" has been the privilege of having an economy that has been operating well below full employment, with lots of excess capacity.

But wait, there's more. Because manufacturing goods account for the overwhelming majority of traded items, the large trade deficit translates into a loss of millions of manufacturing jobs. Since manufacturing jobs have historically been a source of relatively high-paying employment for workers without college degrees, the trade deficit has been a big factor in the rise in inequality, especially in the last two decades as the over-valued dollar caused it to explode.

So, "exorbitant privilege" translates into secular stagnation and increased inequality. And Elizabeth Warren wants to jeopardize this with her plans to lower the value of the dollar.

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That would have been a useful piece of information to include in a Washington Post article on couples taking on debt to pay for the costs of their weddings. The piece told readers:

"Demand among Americans, who are already holding record levels of debt, for help financing weddings are giving rise to an industry of personal loans marketed specifically to brides and grooms."

While debt is at record levels, so is income levels and asset levels. It is pretty meaningless to tell readers that debt is at a record level without any context. The most relevant measure is the ratio of debt service, the cost of bearing the debt, relative to household income.

The ratio of debt service, or a broader measure that includes rent, is actually near its lowest point in the last forty years according to data from the Federal Reserve Board. This doesn't quite fit the story of a nation drowning in debt, although there are undoubtedly many households facing serious difficulties paying off their debts.

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That's what the Washington Post told readers in reference to the drug BCG, a treatment for early stage bladder cancer. According to the Post article, there is now a worldwide shortage of BCG. The reason is that the manufacturer, Merck, is producing at the capacity of its manufacturing facility, but the current price does not justify the expenditures associated with building a new facility. The piece tells us that Merck doesn't want to raise the price because it is worried that it will be seen like Martin Shkreli, who raised the price on single source generic drugs by more than 5000 percent. (BCG is now off patent and available as a generic.)

While it is possible that Merck really fears that its public relations people are so incredibly inept that they would not be able to make the distinction between price increases to cover manufacturing costs and price increases to gouge consumers, it is also possible that Merck thought it would be good to create a shortage of a drug needed to treat a potentially fatal disease in order to support the case for higher drug prices.

The Post article doesn't give us a basis for assessing this alternative explanation. In fact, it never mentions the alternative explanation. This suggests that if the alternative explanation is in fact the true one (i.e. Merck wanted to create a shortage to create more public support for high drug prices), then Merck has been effective in advancing its goals.

 

 

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In talking about learning lessons from the collapse of the housing bubble and Great Recession, E.J. Dionne and leaders of the Wall Street funded Third Way group both showed they have not learned any lessons. Dionne approvingly quotes Matt Bennet, Third Way's executive vice-president for public affairs:

"We need to be working to tame capitalism at this moment, because it is not functioning well, ..."

The quote implies that upward redistribution of the last four decades is simply the result of untamed capitalism. That may be a convenient view for the beneficiaries of this upward redistribution (hey, it was just the natural workings of the market), but it is 180 degrees at odds with reality.

The longer and stronger and patent and copyright protection of the last four decades, which transfers many hundreds of billions of dollars upward each year (and is the reason prescription drugs are expensive) had nothing to do with an untamed market.This was the result of deliberately structuring of the market by Bennet's political allies.

Similarly, the financial system has been structured to allow some people to get enormously rich while contributing nothing to economy. This has included things like rewriting bankruptcy rules on home mortgages and derivatives to facilitate trading. It also means allowing private equity partners to ripoff public pension funds. And, it means that big banks enjoy too big to fail insurance.

And we structured our trade deals to put downward pressure on the wages of the 70 percent of the workforce without college degrees while protecting the most highly paid professionals, such as doctors and dentists. Also, beginning with Robert Rubin in the 1990s, we pushed for an over-valued dollar that put more downward pressure on the pay of less-educated workers.

It is absurd to pretend that the massive upward redistribution of the last four decades was just capitalism running wild. This upward redistribution was the deliberate design of the leadership of both political parties. (Yes, this is the topic of Rigged [it's free].)

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(This post first appeared on my Patreon site.)

A theme often repeated in the media is that Japan is suffering terribly because of its low birth rates and shrinking population. This has meant slow growth, labor shortages, and an enormous government debt.

Like many items that are now popular wisdom, the story is pretty much nonsense. Let’s start at the most basic measure, per capita GDP growth. Yeah, I said per capita GDP growth because insofar as we care about growth it is on a per person basis, not total growth. After all, Bangladesh has a GDP that is more than twice as large as Denmark’s, but would anyone in their right mind say that the people of Bangladesh enjoy a higher standard of living? (Denmark’s GDP is more than twelve times as high on a per capita basis.)

On a per capita basis, Japan’s economy has grown at an average annual rate of 1.4 percent since the collapse of its stock and real estate in 1990. That’s somewhat less than the 2.3 percent rate of the U.S. economy, but hardly seems like a disaster. By comparison, per capita growth has averaged just 0.8 percent annually since the collapse of the housing bubble in 2007 in the United States.

But per capita income is just the beginning of any story of comparative well-being. There are many other factors that are as important in determining people’s living standards. To take an obvious one that gets far too little attention, the length of the average work year has declined far more over this period in Japan than in the United States.

According to the OECD, the length of the average work year has declined by almost 16 percent between 1990 and 2017 (the last year for which data are available). By comparison, the length of the average work year in the United States has declined by less than 3 percent over this period. This is a really big deal in terms of peoples’ lives.

If we use a start point of a 40-hour workweek, for 50 weeks a year, a 16 percent reduction in hours would be equivalent to 8 weeks a year of additional vacation. Alternatively, it would mean a 6.4 hour reduction in the length of the average workweek, meaning that people would be working 33.6 hours a week rather than 40 hours. My guess is that most people in the United States would be very happy to see the same sort of reduction in work hours as in disaster Japan.

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That point would have been worth mentioning in a NYT article on the fact that most new manufacturing jobs have been in prosperous areas of the country rather than in areas that lost numbers of manufacturing jobs in the last decade. While the economy has been adding a moderate number of manufacturing jobs since 2011, the number of union members in the industry has continued to fall. 

According to the Bureau of Labor Statistics, there were 84,000 fewer union members employed in manufacturing in 2018 than in 2011. While there has been a modest increase in union employees in the last two years, the 2018 number was still 29,000 below the 2015 figure.

The decline in union membership is likely one of the main reasons that wage growth in manufacturing has lagged pay growth in the rest of the economy. The average hourly wage in manufacturing rose by just 2.2 percent over the last year compared to a 3.1 percent rate of increase for the overall average. In the prior twelve months, the average manufacturing wage increased by just 1.7 percent.

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An otherwise useful NYT article on the ending of Mario Draghi's tenure as the president of the European Central Bank (ECB) included the bizarre assertion that restraining inflation is "traditionally a central bank’s only task." This is not at all true, as central banks around the world have often acted to increase employment and maintain financial stability. In fact, the Federal Reserve Board quite explicitly has a dual mandate for price stability and high employment.

The piece is correct in asserting that the ECB charter makes price stability the bank's only goal, but the ECB is an outlier in this respect. It also is worth remembering that the ECB is a relatively new institution, just coming into existence in 1998, so it was not long able to stick to the single goal of price stability laid out in its charter. (In one of the great absurd moments in history Jean Claude Trichet, Draghi's predecessor, praised himself at his retirement event for keeping inflation under the ECB's 2.0 percent target. At the time, the euro was on the edge of collapse, with Greece, Italy, and Spain on the verge of being forced out of the euro.) 

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People may not have gotten that immediately picked this up from Ruchir Sharma's column complaining that not enough companies are going bankrupt, but this is the gist of the argument. Sharma complains that because of continuing fiscal stimulus (large budget deficits) and low-interest rates from central banks, too many zombie companies are able to survive.

He tells us:

"The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans.

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s."

Then we get to the meat of his argument:

"Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials, and labor."

Okay, so the argument is that healthy companies are being prevented from growing because they have to pay too much for capital, materials, and labor due to the zombie companies. Well, we can quickly dismiss the claim on capital and materials.

The cost of capital has never been lower, precisely because of low interest rates from central banks. In the United States, the interest rate on high yield bonds is just over 6.0 percent at present, compared to the rate of close to 9.0 percent in the boom years of the late 1990s.

Sharma's story is that if the Fed and other central banks raised interest rates, the interest rate for more marginal borrowers would fall? That might pass muster in the opinion pages of the NYT, but probably not anywhere else.

The same story applies to materials. What materials does Sharma think are excessively priced? Most major commodities are not above their inflation-adjusted prices from pre-recession levels. In the case of an important one, oil, the inflation-adjusted price is considerably lower than it was in 2007.

This just leaves labor. Certainly, if Sharma's zombies, comprising 16 percent of exchange-listed companies, went out of business we would have higher unemployment, which would in fact put downward pressure on wages. It is a bit hard to believe that this would lead to a surge of investment and productivity growth, but this is effectively Sharma's argument. Anyhow, most workers in the United States will likely be happier if no one in a policy position decides to test Sharma's argument.

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We know that because of the way it presented the results of a study of the impact of rent control in New York City. The article showed the average savings on rent-controlled units by borough, by income quartiles, and by race and ethnic group. It showed that the average savings were by far the largest on rent-controlled units in Manhattan, renters in the top quartile had the largest average savings, and that white beneficiaries of rent control saved far more on average than black, Hispanic, or Asian beneficiaries. It also showed that older tenants had higher average savings than younger ones.

While this makes rent control in New York City look like a bonanza for rich renters, and a nothing for everyone else, we actually cannot conclude this from the data the WSJ presented. The big problem is that it doesn't tell us the numbers in each group.

Suppose that a grand total of three white people, all high income and living in Manhattan, benefit from rent control. Everyone else is more moderate income and either black, Hispanic, or Asian. The results shown in the article would be entirely consistent with this picture, even if 1 million non-white, mostly low and moderate income people benefited from rent control.

While the number of wealthy white people who benefit from rent control is surely much more than 3, the WSJ chose not to tell us how many relatively well-to-do white people benefit from rent control, even though it has this data from its study. That could have been an oversight by the paper, or alternatively, it may have decided not to tell us how many wealthy white people benefited, relative to non-whites because the number was not very large.

In any case, without knowing the relative size of the groups, we have no basis for saying that wealthy whites are the main beneficiaries of rent control, as the piece implies. We do know that the ones living in rent-controlled units benefited most. However, the piece does tell us that people in the bottom quartile living in rent-controlled units saved an average of $2,400 a year on their rent and people living in the next quartile saved more than $2,700 a year. This is not a trivial sum to low and moderate-income households.

 

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Either that, or everyone else is. The centerpiece of Yang’s campaign is that technology is rapidly displacing labor, creating the prospect of mass unemployment in the not distant future.

As a factual matter, this is wrong about the present and recent past. Productivity growth, which measures the rate at which technology is displacing human labor, has averaged just 1.3 percent annually since 2005, the slowest pace on record. This compares to an annual growth rate of 3.0 percent in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. Furthermore, official projections, like those from the Congressional Budget Office and the Social Security Administration, show that productivity growth rates will remain slow for the indefinite future.

While it is possible that these projections will prove wrong, and that productivity growth will accelerate rapidly Yang is going against the overwhelming majority of economists with his view. It is also worth noting that the periods of rapid productivity growth, especially the Golden Age, were periods of low unemployment and rapid increases in wages. So, even if productivity growth did accelerate rapidly, there is little reason to believe it will lead to the sort of mass unemployment that Yang warns against.

It would have been worth some mention of these facts in this lengthy piece on Yang since it is likely that many Washington Post readers were unaware of them.

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