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.

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It is amazing how reporters and many economists feel the need to deceive the public about the reason for the loss of manufacturing jobs in the last decade. The number of manufacturing jobs was little changed from 1970 to 2000. From 2000 to the end of 2007 (before the Great Recession) we lost 3.4 milllion manufacturing jobs as the trade deficit exploded.

Fans of logic and arithmetic might think there is a connenction there, the AP's Fact Checker apparently does not. It tells readers:

"On trade

ELIZABETH WARREN: “The data show that we’ve had a lot of problems with losing jobs, but the principal reason has been bad trade policy. The principal reason has been a bunch of corporations, giant multinational corporations who’ve been calling the shots on trade.”

THE FACTS: Economists mostly blame those job losses on automation and robots, not trade deals.

So the Massachusetts senator is off."

Here's the picture as of a few years ago (sorry, I'm too lazy to update it).

baker buffie blue collar 2016 02 21 1

Apart from the huge falloff in the years from 2000 to 2007, which continued with the Great Recession, it is also interesting to note that manufacturing employment stabilized, and has risen modestly in the years since the Great Recession. So the economists AP relies on as sources much believe that robots and automation stopped displacing workers in manufacturing some time in 2010. Alternatively, we might note that the trade deficit has stabilized in the last nine years.

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(This piece first appeared on my Patreon page.)

Last month, the Washington Post reported that Joe Biden is considering including a financial transactions tax (FTT) as part of his campaign for the Democratic nomination. For those of us who have long advocated such a tax, this is very good news.

On this issue, Bernie Sanders has taken the lead among presidential candidates, including an FTT as part of his plan for free college tuition free. Several other candidates also support an FTT, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.

It may be somewhat surprising, but Senator Warren is not among those supporting an FTT. This is certainly not due to a reluctance to challenge the interests of the wealthy. Warren has proposed a wide variety of measures that would directly challenge the interests of the rich and powerful.

The most ambitious item on this agenda is a wealth tax. Her tax would tax wealth above $50 million at the rate of 2.0 percent a year and wealth above $1 billion at the rate of 3.0 percent a year. (Sanders has an even larger wealth tax.) While there are good reasons for wanting to tax the very rich, an FTT is almost certainly a better economic policy and would have much better political prospects.  

We can see the economics of an FTT are superior when we consider the motivation for taxation by the federal government. As the proponents of Modern Monetary Theory remind us, the federal government doesn’t need revenue to spend, it prints money. The purpose of taxation by the federal government is to reduce consumption, so as to create the economic space for spending. The argument is that if the government spent a large amount of money, and didn’t have any taxes, it is likely to create too much demand in the economy, thereby generating inflation.

To see this point, imagine that the federal government was to spend another $1 trillion next year on Green New Deal policies (a bit more than 20 percent of current federal spending), such as clean energy and mass transit subsidies. If there were no increase in taxes, we would expect to see a huge surge in demand in the economy, likely leading to inflation. (Assume that the Federal Reserve Board simply prints more money so that interest rates are little changed.)

Now suppose we had another big Republican-style tax cut where we handed $1 trillion annually to the very richest people in the country. Also assume that we have no offsetting reduction in spending or increase in other taxes.

In this case, we almost certainly don’t have to worry about inflation. Jeff Bezos, Bill Gates, and other multi-billionaires already have pretty much all the money they can possibly spend. This government handout will fatten their stock portfolios but will have little effect on demand in the economy. And for that reason it is not likely to lead to inflation.

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I was struck by a New York Times article on the disruptions within the corporate hierarchy at Nissan, the huge Japanese automaker. The article begins:

"An outside law firm investigating problems at Nissan, the troubled Japanese automaker, this summer discovered some potentially explosive information.

"Hari Nada, a powerful Nissan insider who was behind the ouster last year of Nissan’s chairman, Carlos Ghosn, over compensation issues, had been improperly overpaid himself, the firm found. A second insider involved in the corporate coup was responsible, the firm said, and had briefed Mr. Nada on what he had done."

Reading on we discover:

"Mr. Nada, the head of Nissan’s legal department and security office, had in 2017 received about $280,000 in 'unjust enrichment,' the firm found."

It also turns out that Hiroto Saikawa, the successor to Ghosn as CEO, had gotten $440,000 in compensation to which he was not entitled.

It is hard not to be struck by the small size of the payments that form the basis of this scandal. To be clear, this is real money, and in any case, top executives should not be stealing from the companies they manage.

But for comparison, consider the case of John Stumpf, the CEO of Wells Fargo. Mr. Stumpf was at the center of a fake account scandal where the bank created millions of fake accounts, presumably as part of an effort to boost its stock price. In spite of being the person overseeing this massive scandal, Stumpf walked away with $130 million, an amount that is almost 300 times the size of the improper payments that got Mr. Saikawa fired and more than 400 times the payments to Mr. Nada.

Clearly there are some differences between the United States and Japan on the accountability of CEOs and top management. 

 

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The NYT had a piece on U.S. Internet regulations, and efforts to apply them to other countries, that may have left some readers confused. The piece focused on Section 230 of the Communications Decency Act, which protects Internet intermediaries from many of the liabilities faced by conventional publishers.

Perhaps the most important one of these liabilities is exposure to libel law. In the case of standard publishers, if a publisher helps to spread a third party's libelous claim, then they can be sued for libel. For example, if Rudy Giuliani writes a column in the NYT saying that Joe Biden killed his neighbor, it can be held responsible if Biden presents it with clear evidence that he didn't kill his neighbor and it makes no effort to correct the libelous information.

By contrast, under Section 230, if Giuliani makes and spreads this claim through Facebook, Biden has no ability to sue Mark Zuckerberg, even if he introduces Zuckerberg to his still living neighbor. It is not clear why an Internet intermediary should enjoy immunity for spreading libelous claims that neither a print nor broadcast outlet have.

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Donald Trump is bravely carrying on a trade war, not just with the bad guys with China, but with longtime allies like Canada and the European Union. Incredibly, the media just don’t seem that interested in reporting on the ongoing progress.

Last week the Commerce Department released trade data for August, and it got almost no attention whatsoever. The report showed that the trade deficit increased modestly from $54.0 billion in July to $54.9 billion in August. This is virtually identical to the deficit from August of 2018, so comparing these two months year over year, at least the trade deficit is not expanding.

Looking at a slightly bigger picture, in 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019.

There are many factors behind the rise in the trade deficit. Growth in the U.S. has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise pre-dates Trump. But putting these aside, if Trump’s goal was to bring the trade deficit closer to balance, he’s been going the wrong way in the first two and half years of his administration.

If we look at his major nemeses in the international arena, there are not many signs of Trumpian success. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion.[1] This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to just over $260.0 billion last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.

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The Wall Street Journal ran a lengthy piece on how bond rating agencies are again giving inflated ratings, in this case to collateralized loan obligations that include tranches of a variety of bonds and loans. Inflated ratings were a major problem in the housing bubble years, with the major rating agencies giving investment-grade ratings to mortgage-backed securities that were filled with subprime mortgages.

The piece notes the basic incentive problem that the issuer pays the rating agency. This gives rating agencies an incentive to give higher ratings as a way to attract business.

There actually is a simple solution to this incentive problem: have a third party pick the rating agency. Senator Al Franken proposed an amendment to the Dodd-Frank bill that would have had the Securities and Exchange Commission (SEC) pick rating agencies rather than issuers. The amendment passed the Senate with 65 votes, getting strong bi-partisan support.

Under this provision, if JP Morgan wanted to have a new issue rated, instead of calling Moody's or Standard and Poor, it would call the SEC, which would then decide which agency should do the rating. This means that rating agencies would have no incentive to inflate ratings to gain customers.

In spite of the strong bipartisan support in the Senate, then-Treasury Secretary Timothy Geithner did not want the provision to be included in the bill. As he boasts in his autobiography, he arranged to have it killed in the House-Senate conference. 

So, when we see the problem of inflated bond ratings re-emerging, we should all be saying "Thank you, Secretary Geithner."

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The NYT neglected to mention this fact in this piece talking about Japan's economy. While the piece noted that Japan's debt to GDP ratio is close to 250 percent, the highest for any wealthy country, it didn't point out that the debt service burden is virtually zero.

In fact, because much of Japan's debt carries a negative nominal interest rate, the I.M.F. projects that its burden will actually be negative as of 2021. This means that people will on net be paying Japan to lend it money so that the debt is a source of revenue.

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This is an important point to mention in reference to Bernie Sanders' plan to tax corporations with large gaps between CEO pay and the pay of an average worker. High CEO pay is not based on their contribution to corporate profits or returns to shareholders, rather it is a result of their ability to control the corporate boards who set their pay. 

This means that the most likely response of companies to a tax on excessive pay gaps between the average and the median worker is to find ways to game the system. For example, they can contract out to other companies the lower-paying work that brings down the average or median pay (it is not clear which would be the reference point from this piece). If shareholders (or workers) had more control of corporations, they would have a strong incentive for reducing CEO pay, since it is coming at the expense of corporate profit and/or the pay of the typical worker.

In this context is important to remember that the excessive pay of CEOs is not just a question of the individual CEO's salary, it also leads to a bloated pay structure for top executives across the board. This excessive pay for top executives is typically a substantial share (around 10 percent) of corporate profits.

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The Washington Post seems more than a bit out of touch with reality in this piece on China's celebration of the 70th anniversary of the Communist revolution there. The article tells readers:

"China is now the world’s second-largest economy and could overtake the United States for top spot as soon as next year."

According to the I.M.F., China's economy passed the United States to become the world's largest in 2015 and is now more than 25 percent larger than the U.S. economy.

The piece also gets China's per capita income wrong, putting it at $10,000 a year. The I.M.F puts it at just over $17,000 a year in 2011 dollars, which would translate into more than $19,000 a year in 2019 dollars. While it is still much poorer than the United States on a per capita basis, it is now near the top of the middle income countries.

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For most people, the country’s national debt and annual deficit are not major concerns. However, for a substantial portion of the policy types who make, write, and talk about economic and budget policy, debt and deficits are really big deals. And, the fact that our budget deficit and debt are both large by historic standards, and growing rapidly, is an especially big deal.

The list of people in this category is lengthy. It starts with the Peter J. Peterson Foundation (which displays the debt in big numbers right on its home page) and the many groups funded by them. The most important is the Committee for a Responsible Federal Budget, which is virtually guaranteed prominent placement in stories on the budget by major news outlets.

The Washington Post (both its news and opinion sections) has a high standing in deficit hawk circles. House Speaker Nancy Pelosi and other members of the Democratic leadership have at least one foot in the deficit hawk camp. And, of course, Republicans are big deficit hawks when a Democrat is in the White House.

In order to make these deficit hawks happy, I have a proposal – we’ll call it the “Baker Budget Fix” – that can eliminate debts and deficits forever. It’s fun, simple, and can give us balanced budgets for all eternity.

The basic point is that the government can sell off all sorts of patent and copyright monopolies and collect massive amounts of revenue. Regular readers know that I am not a big fan of patents and copyrights, but since I’ve made little headway in getting these policies questioned in public debate, why not just embrace them? After all, since everyone who matters seems to be just fine with ever longer and stronger patent and copyright protection, let’s use them to raise a ton of money for the government and make the deficit hawks happy.

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