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 highlighting the latest Beat the Press posts.

Please also consider supporting the blog on Patreon.

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

The Washington Post had a major front page article announcing in the headline "Group of top CEOs says maximizing shareholder profits no longer can be the primary goal of corporations." The piece refers to a statement by the Business Roundtable, a group comprising many of the country's largest companies, which argues for an alleged shift in direction.

The problem with the statement and the piece is that that there is little evidence companies have been maximizing shareholder profits in the last two decades. The average real return to shareholders since December of 1997 is 4.8 percent. This compares to a longer term average of more than 7.0 percent. (I went back to 1997 instead of taking the more natural 20-year average to avoid distortions created by the stock bubble. The twenty year return has been just 3.6 percent.) These relatively low returns are especially striking since corporations have gotten so much assistance from government tax cuts over this period.

Rather than maximizing shareholder returns, it seems more plausible that CEOs have been maximizing CEO pay, which has risen 940 percent since 1978. Excessive CEO pay, which comes at the expense of the corporation, is far more pernicious than returns to shareholders. While shareholders include middle class people with 401(k)s and pension funds, every dollar that goes to CEOs goes to someone in the 0.01 percent of the income distribution.

More importantly excessive CEO pay distorts pay structures in the economy as a whole. If the CEO is earning $15 million, the rest of the top five corporate executives likely earn close to $10 million and even the third tier likely earn well over $1 million. This affects pay structures elsewhere. Presidents at universities and large non-profits now routinely make over $1 million a year and government cabinet secretaries whine about the sacrifice of public service where they make $211,000 a year.

It would be much better if our top CEOs started bringing their pay down to earth than change a focus that they don't in any obvious way now have.

Add a comment

Paul Krugman already jumped on this New York Times piece, but the paper really deserves a thrashing for it. The story is that Germany's economy had been driving the euro zone economy. It now appears on the edge of recession, having shrunk at a 0.4 percent annual rate in the second quarter. The article then asks whether the rest of the euro zone will now be able to support Germany's economy and restore it to growth.

The problem with this story, as Paul points out, is that Germany has been running massive current account surpluses. This means that rather than being a source of demand for its trading partners, it has been a net drain of demand. The items that Italy, Spain, Greece and other euro zone countries import from Germany more than outweigh the demand created by their exports to Germany. The other euro zone countries have been effectively supporting demand in Germany rather than the other way around. 

It's also worth pointing out here that Germany directly made life worse for the other euro zone countries by using its power in the European Union to force austerity on them when they should have been running large deficits to boost their economies. That continues to be the case today, which is why there are negative interest rates on the long-term debt of Germany and several other euro zone countries.

There is a small point in the piece's favor, Germany's current account surplus has been falling somewhat in the last four years. It peaked at 8.9 percent of GDP in 2015 and is projected to be 7.1 percent of GDP in 2019. This drop in the trade surplus would be providing a boost to Germany's trading partners, but it is a relatively new development. The rapid increase in Germany's current account surplus in the years from 2009 to 2015 was a serious impediment to recovery in the euro zone.

As a side bar, it worth mentioning that this piece reports the growth rate of Germany and other countries mentioned in the piece at quarterly rates. While it is standard practice in Europe to report quarterly growth figures at quarterly rates, it is never done in the United States where they are always reported at annual rates. Since the point of a news article is to convey information to readers, it would be helpful if the paper would convert the quarterly growth rates into annual rates.

This is a very simple process. For low growth rates like those discussed in this piece, multiplying by four will usually be adequate for converting a quarterly growth rate into an annual rate. To be more precise, it is only necessary to take the growth rate to the fourth power. Presumably the NYT has people capable of doing this calculation.

Add a comment

The stock market enjoys a mythological place not only among mainstream media types, but also among many progressives. For some reason this measure of expected future corporate profits is taken as a measure of economic well-being.

The fact that the media obsesses over the stock market hardly needs to be mentioned. If there is one item about the economy that we can be sure will be repeated every day, it is the movement in the Dow or the S&P 500. And, needless to say, an upward movement is good news and a downward movement is bad news.

But the view that the stock market is telling us something about the well-being of the economy goes far beyond just ill-informed media types. In the lead up to the 2016 election, Justin Wolfers, a University of Michigan economics professor, and a fellow at the Peterson Institute for International Economics, had several New York Times pieces arguing that the wise investors in the stock market recognized that Trump would be bad news for the country. He pointed to sharp declines in the market in response to events making a Trump win more likely.

The Wolfers hypothesis suffered a serious setback in the weeks and months immediately following the election. The S&P 500 was up more than 5 percent in the first month after Trump’s victory. It continued to rise throughout 2017, hitting a peak in January of 2018 that was more than a third higher than its value on the eve of the election.

Wolfers was far from the only one taking stock market movements as a measure of economic well-being under Trump. When the market slumped last fall, there were many Trump critics who seized on this as evidence of Trump’s failings as a manager of the economy.

This view that the stock market is a measure of economic well-being is bizarre, because it is so completely at odds with what the stock market is. The stock market is a measure of the expectations of future profits of companies that are listed in the exchange: full stop.

Add a comment

It was big news when the interest rate on the 10-year Treasury bond fell below the interest rate on a 2-year note earlier this week. This interest rate inversion has generally signaled a recession in the near future. While I am skeptical of the causality here, the bond markets do have good reason to expect a weaker economy in the immediate future, which will presumably mean future rate cuts by the Fed.

The Washington Post noted the extraordinarily low interest rate environment, beginning by highlighting a Danish bank that has a negative nominal interest rate on mortgages. This means the bank is paying people to take out a mortgage loan.

The piece goes on to discuss a strange world of negative interest rates. It then gives a bizarre quote from Carl Weinberg, an economist at High Frequency Economics:

"This is a credit crunch. And a credit crunch is a known economy-killer."

Actually, this is 180 degrees at odds with a credit crunch. A credit crunch is when credit is either extremely expensive or unavailable altogether. In the current situation, credit is incredibly plentiful. Banks are paying people to take it, as the article points out. It is not clear what point Mr. Weinberg was trying to make, but what he said did not make any sense.

Add a comment

I am a big fan of expanding the welfare state but I am also a big fan of reality-based analysis. For this reason, it’s hard not to be upset over yet another column telling us that the robots are taking all the jobs and that this will lead to massive inequality.

The first part is more than a little annoying just because it is so completely and unambiguously at odds with reality. Productivity growth, which is the measure of the rate at which robots and other technologies are taking jobs, has been extremely slow in recent years. It has averaged just 1.3 percent annually since 2005. That compares to an annual rate of 3.0 percent from 1995 to 2005 and in the long Golden Age from 1947 to 1973.

In addition, all the official projections from places like the Congressional Budget Office and Social Security Administration assume that productivity growth will remain slow. That could prove wrong, but the people projecting a massive pick up of productivity growth are certainly against the tide here.

But the other part of the story is even more annoying. No, technology does not generate inequality. Our policy on technology generates inequality. We have rules (patent and copyright monopolies) that allow people to own technology.

Bill Gates is incredibly rich because the government will arrest anyone who mass produces copies of Microsoft software without his permission. If anyone could freely reproduce Windows and other software, without even sending a thank you note, Bill Gates would still be working for a living.

The same applies to prescription drugs, medical equipment, and other tech sectors where some people are getting very rich. In all of these cases, these items would be cheap without patent, copyrights, or related monopolies, and no one would be getting hugely rich.

At this point, there are undoubtedly people jumping up and down yelling “without patent and copyright monopolies people would have no incentive to innovate.” This yelling is very helpful in making the point. If we have structured these incentives in ways that lead to great inequality and not very much innovation (as measured by productivity growth) then we should probably be looking to alter our structure of incentives. (Yes this is the topic of chapter of 5 of Rigged [it’s free].)  

In any case, this is the point. The inequality that results from technology is the result of our policies on technology, not the technology itself. Maybe one day the New York Times will allow a columnist to state this obvious truth in its opinion section.

Add a comment

The New York Times has created an absurd dilemma for Democrats; "how to be tougher on trade than Trump." This framing of the trade issue is utterly bizarre and bears no resemblance to reality.

While Trump has often framed the trade issue as China, Mexico, and other trading partners gaining at the expense of the United States because of "stupid" trade negotiators, this has little to do with trade policy over the last three decades. The United States negotiated trade deals to benefit U.S. corporations. The point of deals like NAFTA was to facilitate outsourcing, so U.S. corporations could take advantage of lower-cost labor in Mexico.

The same was true with admitting China to the W.T.O. This allowed U.S. corporations to move operations to China and also made it possible for retailers like Walmart to set up low-cost supply chains to undercut their competitors. The job loss and trade deficits that resulted from these deals were not accidental outcomes, they were the point of these deals.

U.S. negotiators have also made longer and stronger patent and related protections (which are 180 degrees at odds with "free trade") central components of recent trade deals. While these provisions mean larger profits for drug companies and the software and entertainment industries, they do not help ordinary workers. In fact, by forcing our trading partners to pay more money for the products from these sectors, they leave them with less money for other exports.

Anyhow, given the reality of our trade policy over the last three decades it is hard to know what being "tough on trade" means. In the Trumpian universe (and apparently at the NYT) this could make sense, but not in the real world. The question is whether our trade policy is designed to help ordinary workers or to increase corporate profits, "tough" is beside the point.

Add a comment

Last month’s GDP report also included revisions to previously reported profit data for the last three years. The earlier reports showed a slight increase in the profit share in 2018; the revised data showed that the profit share of corporate income had fallen by 0.4 percentage points from the prior year. This is important both because it means that workers are now clearly getting their share of the gains from growth and also because of what it tells us about the structure of the economy.

On the first point, we have seen four decades during which the wages of the typical worker have not kept pace with productivity growth.[1] While productivity growth has not been great over much of this period, it was slow from 1979 to 1995 and again in the years since 2005, the median wage has generally lagged annual productivity growth over most of this period.[2] 

The one exception was the years of low unemployment from 1996 to 2001, when the wages of the typical worker rose in line with productivity growth. With unemployment again falling to relatively low levels in the last four years, many of us expected that wages would again be keeping pace with productivity growth.

The earlier data on profits suggested that this might not be the case. It showed a small increase in the profit share of corporate income, suggesting that corporations were able to increase their share of income at the expense of labor, even with an unemployment rate below 4.0 percent. 

The revised data indicate this is not the case. The low unemployment rate is creating an environment in which workers have enough bargaining power to get their share of productivity growth and even gain back some of the income share lost in the Great Recession. In the last few years, wage growth has exceeded the rate of inflation by roughly one percentage point annually. This is not spectacular wage growth, but it is in line with, if not slightly above the rate of productivity growth.[3]

Add a comment

There is a conventional wisdom on China’s currency that gets repeated almost everywhere and never seems to be challenged in the media. The basic story is that in the bad old days China ‘manipulated” its currency, but that stopped years ago. At present, its currency controls are actually keeping the value of its currency up, not down. As much as I hate to differ with the conventional wisdom, there are a few issues here that deserve closer examination.

First, it’s great see that everyone now agrees that China managed its currency in the last decade. (I prefer the term “manage” to “manipulate,” since the latter implies something sneaky and hidden. There was nothing sneaky about China’s undervalued currency. It had an official exchange rate that it bought trillions of dollars of foreign reserves to maintain.) Unfortunately, almost none of these people acknowledged China’s actions at the time, when the under-valuation of China’s currency was costing the United States millions of manufacturing jobs. Oh well, it wasn’t like the Wall Street bankers were losing their jobs.

The second point is that there is a common assertion that only the buying, not the holding, of reserves affects currency prices. It is easy to show that China is not currently buying large amounts of reserves. In fact, it has been selling some in recent years to keep its currency from falling.

Okay, let’s take a step back. The Federal Reserve Board bought more than $3 trillion in assets to try to boost the economy following the Great Recession. This was done to directly reduce long-term interest rates by increasing the demand for bonds. While it stopped buying assets several years ago, it still holds more than $3 trillion in assets.

Virtually all economists agree that by holding these assets, the Fed is keeping down long-term interest rates. If this additional $3 trillion in assets were on the market, then long-term interest rates would be higher. (The size of the impact is debated, but not the direction.)

If the holding (not buying) of assets has an impact on interest rates, why does China’s holding of more than $3 trillion in foreign reserves not have an impact on the price of the dollar and other reserve currencies relative to the RMB? (It would actually be well over $4 trillion if we add in the trillion plus dollars held in China’s sovereign wealth fund.)

Add a comment

The New York Times ran a piece on China's devaluation of its currency, which warned that the move could hurt China because commodities like oil, which are priced in dollars, will become more expensive for companies in China. While it is true that the devaluation will make imported goods more expensive, the fact that some are priced in dollars is irrelevant.

Suppose oil was priced in yen. Other things equal, the decision to devalue against the dollar would also mean that the Chinese yuan is devalued against the yen. This would lead to the same increase in the price of oil as if oil were priced in dollars. The pricing in dollars is simply a convention, there is no special importance to it in international trade.

The piece also raises the prospect that the drop in the value of the yuan, "could spur wealthy Chinese to take their money out of the country." While it could have this effect, it may also have the opposite effect. Once the yuan has dropped in value the question is whether it is likely to fall further. This drop may lead many investors to believe that a further decline is unlikely, just as if the stock market fell by 20 percent, investors may come to believe that further decline is unlikely and therefore may be anxious to buy into the market.

It is also important to put the drop of the yuan in some context. The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.

 

Add a comment

Marketplace radio did a piece last week that was essentially just giving the argument of the supporters of the new NAFTA. I will give a few thoughts on the other side.

First, the fact that NAFTA played a substantial role in reducing the power of unions and lowering wages of workers without college degrees doesn't mean that we can reverse these effects by eliminating NAFTA.

The new NAFTA certainly does not eliminate the incentive to outsource jobs to Mexico to take advantage of lower-cost labor, but it does reduce it if we can count on its rules being enforced. However, this is not going to have more than a marginal effect on manufacturing employment and wages in the United States.

The jobs that are gone with few exceptions, are not coming back. There is also little reason to believe that manufacturing jobs that are saved through the new NAFTA will necessarily be high paying jobs. In 1994, when NAFTA went into effect, the average hourly wage for production and non-supervisory employees in manufacturing was 6.6 percent above the average for the private sector as a whole. In the most recent data, the average wage for manufacturing workers is 5.5 percent below. A fuller analysis that factors in health care and other benefits may still show a premium for manufacturing workers, but there is no doubt that it is much smaller than it was a quarter of a century ago.

Against the prospect of a small gain in manufacturing jobs, we have rules that lock in higher drug prices for the indefinite future. These rules could easily mean that patients in the United States and Canada and Mexico will pay tens of billions annually in higher drug prices. Just doing the math, we could easily be paying $2 or $3 million annually per manufacturing job saved. And, this is before even considering possible job loss in manufacturing due to the drain in purchasing power from higher drug prices.

In addition, the agreement locks in rules on the Internet that were designed to protect Facebook, Google, and other tech giants. I doubt anyone is satisfied that our current rules on Internet privacy and liability for spreading false information are adequate. How can it make sense to sign a treaty that could impair the ability of all three countries to adjust their rules? And, as with the rules on prescription drugs, the goal is to apply these rules to trade deals with other countries. 

These are the main reasons I view the new NAFTA as a net negative. It makes a bad deal worse.

 

Add a comment