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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Yes, there is an insatiable market for writings claiming there has been no rise in inequality in the United States, with Robert Samuelson being one of the main actors in this group. His latest column reports on new data on income distribution from the Congressional Budget Office (CBO).

Samuelson gives us the good news:

"The poorest fifth of Americans (a fifth is known as a “quintile”) enjoyed a roughly 80 percent post-tax income increase since 1979. The richest quintile — those just below the top 1 percent — had a similar gain of nearly 80 percent. The middle three quintiles achieved less, about a 50 percent rise in post-tax incomes. ...

He then gives us a table showing a rise in income between 2000 and 2015 of 32 percent for the bottom quintile, and 17, 15, and 16 percent for the next three quintiles respectively. Should we all be happy?

Let's take a look at another table in the CBO report (Supplemental data, Table 5). This table gives market income before tax and transfers.

Here's what I get:

            Percent Change
    Income in Thousands of 2015 dollars    
Quintile           1979-'15 2000-'15
Bottom    9.9 14.2 15.7   58.6% 10.6%
Second   30.5 34.5 32.2   5.6% -6.7%
Third   52.1 58.4 58.5   12.3% 0.2%
Fourth   73 90.5 95.5   30.8% 5.5%
Fifth   141.7 250.7 281.2   98.4% 12.2%
Top 1%   551.7 1669.4 1844.7   234.4% 10.5%

 Source: Congressional Budget Office.

Before noting the difference between the income gains that Samuelson presents and this table, it is worth making a couple of points on the income gains shown here.

First, much of the income gain reported for the longer period is due to more work per household, primarily due to more women working. Some of the deniers jump on those of us who make this point by saying that we don't think women should work. In fact, what we think is that when women work, they should get paid. If a household has two earners rather than one, it should have a higher income to reflect this fact. The gains for the second and third quintiles don't show much. It is of course also the case that a household with two earners has higher work-related expenses, like transportation and child care.

The other point is that the bulk of the income gain is prior to 2000. From 2000 to 2015, income for the fourth quintile rose by just 5.5 percent, for the third quintile 0.2 percent, and for the second quintile it fell by 6.7 percent. This is the bad story of stagnating income that the non-Samuelson world has been talking about.

So how can Samuelson show a much better picture for both the longer period and the period since 2000? The answer is that the value of transfers from the government have risen, most importantly the increased availability and cost of health care provided through Medicaid, subsidies on the health care exchanges, and CHIP.

The government's increased responsibility for health care is a good thing in my book, but people can be forgiven for not recognizing this as an increase in their income. First, much of the increased expenditure is due to the higher fees charged by providers. Most people probably don't feel richer because Medicaid is now paying more money to drug companies and surgeons.

The other point is that most people actually don't have high health care expenses. The government's payments are mostly for the 5-10 percent of the population that does have large health care expenses. The rest of us now have better insurance that our expenses will be covered if we fall into this group, which is good and valuable, but if we are reasonably healthy, then we are not seeing direct benefit from this government expenditure.

So, if we want to accurately describe the story for the last fifteen years we can say incomes have stagnated and the government has substantially increased its share of health care spending. That's the reality, but the Washington Post probably is not interested in running that story.

 

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In an article pointing out that China has more income mobility than the United States, the New York Times seriously understated China's per capita income. The article told readers:

"Today, the economic output per capita in China is $12,000, compared with $3,500 a decade ago. The number is far higher in the United States, $53,000."

Actually, using a purchasing power parity measure of income (which applies a common set of prices to all goods and services, regardless of the country), China has a per capita GDP of $16,100 in 2018, according to the I.M.F. This is still less than a third of $55,500 measure for the U.S., but getting close to the richest countries in Latin America and the poorest countries in Europe. Mexico's per capita GDP for 2018 is $18,300 and Bulgaria's is $20,600. The I.M.F's projections show per capita GDP in China passing Mexico's by 2022.

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You really have to wonder if there is a ban on columnists and reporters mentioning wanton violation of the copyrights and patents of U.S. companies as a potential weapon for China in its trade war with the United States. Incredibly, as aspects of the trade war get highlighted and debated, wholesale violations of copyrights and patents held by U.S. companies never gets mentioned.

The latest conspicuous ignorer is Nicholas Kristof. In a column that warns Trump of all the non-trade measures China could pursue, he never once mentions patents and copyrights. 

If this sounds obscure, let me be as specific as possible. Suppose China announces that it is working with a large domestic computer manufacturer to make tens or even hundreds of millions of computers, using Windows and other Microsoft software, which will be sold not only in China but exported to any country interested in getting low cost computers. Microsoft will not get a dime in royalty payments.

It also announces that all the latest Hollywood movies will be available on websites hosted in China for instant downloads at zero cost. Like Bill Gates, the boys and girls in Hollywood get zero. China also announces plans to get in the generic drug business in a huge way, mass producing versions of Pfizer, Merck, and other big U.S. drug companies drugs without regard to patents and related intellectual property claims. As with computers, these generic drugs will be sold not in only in China, but to any country in the world that would prefer low cost drugs.

Perhaps this form of retaliation has never occurred to Mr. Kristof and other folks who write on trade in U.S. news outlets, but I can guarantee the leadership in China is not so stupid. I'm sure they recognize this step would be the equivalent of going nuclear, but if they feel the need to take stronger measures in response to Trump, it is inconceivable that this one is not on the list.

And, as a sidebar, it would be a great thing for both China and the world. And at the end of the day, it would also be a great thing for the United States.

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Jeff Stein's Wonkblog piece told Post readers the good news that the vast majority of Senator Kamala Harris' proposed $2.8 trillion tax cut would go to the non-rich, according to an analysis from the Tax Policy Center. What the piece did not do is give readers any sense of how much money is involved.

I will go out on a limb here and suggest that the vast majority of Post readers really don't have much idea of how much money $2.8 trillion is over the decade from 2019 to 2028. It is not that difficult to give readers some context. For example, the piece could have told readers that is a bit less than 1.2 percent of the projected $255.4 trillion in GDP projected for this period. Or, it could have indicated that it is 6.3 percent of the projected $44.2 trillion in total federal spending over the decade.

There are other, and possibly better, comparisons that could have been used, but it would be worth trying to use some reference point for the 99 plus percent of readers who don't have their head buried in budget projections.

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(I originally posted this piece on my Patreon page.)

The right would like us to believe that the inequality we see in the United States, and increasingly in other countries, is a natural outcome of market processes. Unfortunately, many on the left seem to largely share this view, with the proviso that they would like the government to alter market outcomes, either with tax and transfer policy, or with interventions like a higher minimum wage.

While redistributive tax and transfer policies are desirable, as is a decent minimum wage, it is an incredible mistake to not recognize that the upward redistribution of the last four decades was brought about by conscious policy, not any sort of natural process of globalization and technology. Not recognizing this fact is an enormous mistake from both the standpoint of policy and politics. 

From the policy standpoint, we give up a huge amount by not examining the policies that have caused before-tax income to be redistributed upward. As a practical matter, it is much easier to prevent all the money from going to the top in the first place than trying to tax it back after the fact.

On the political side, we should never have our argument be that somehow the big problem is that the Bill Gates of the world were too successful. The big problem is that we have badly structured the rules of the market so that we gave Bill Gates too much money. With different rules, he would not be one of the world’s richest people even if he had worked just as hard.

Since we’re on the topic of Bill Gates, patent and copyright rules are a good place to start. For some reason, it is difficult to get people to accept an obvious truth: there is a huge amount of money at stake with these rules. By my calculations, patent and copyright monopolies could well direct more than $1 trillion a year, a sum that is more than 60 percent of after-tax corporate profits.   

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The folks who remain determinedly ignorant about the financial crisis and Great Recession continue to look for another crisis where it isn't. Much of the latest effort focuses on corporate debt. There are four big reasons why corporate debt does not pose anything like the same sort of problem that mortgage debt did during the housing bubble years.

First, many companies took on large amounts of debt for a simple reason, it was very cheap. The debt was not a necessity for them, but the opportunity to borrow for thirty or even fifty years at very low interest rates looked too good to pass up. As a result, many entirely healthy companies have large amounts of long-term debt on which they have very low interest payments. The ratio of corporate debt service payments to after-tax profits is at a relatively low (as in the opposite of high) level.

Second, the crisis mongers apparently missed it, but stock prices are very high right now. This means that most companies have the opportunity to raise more money by selling stock if they feel the need. Of course, the stock market could always plunge by 50 percent, but this one doesn't factor into most crisis mongers' predictions. As long as the market stays high, or even if it falls 20 percent, most companies would be able to sell shares to raise capital if they were facing trouble meeting their debt service payments.

The third reason corporate debt does not pose the same problem as mortgage debt is that even in a bankruptcy, debtors usually collect the bulk of their debt. It's rare for a company facing bankruptcy not to still own valuable assets, such as a profitable subsidiary or land and buildings that can be resold. As a result, debtors might have to accept 70 or 80 cents on a dollar, which is a substantial loss, but far more than zero.

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Mortgage applications have been falling all through the fall, they are now down 22 percent from year-ago levels, with purchase applications down 3 percent. This matters because if people aren't taking out mortgages they are not buying homes. Residential construction has been a drag on GDP in the last three quarters. Also, when people buy a new home they typically buy appliances and other items associated with moving. This means less consumption spending as well.

The decline in refinancing will also affect consumption. Typically people refinance a mortgage to get a lower interest rate, which frees up money for other spending. With interest rates up by a percentage point from pre-tax cut levels, few people can save money by refinancing.

This should be worth a bit of news coverage, but both the NYT and WaPo didn't mention the new or recent data on mortgage applications. To be clear, this is not recession stuff, but with the stimulus from the tax cut fading, and our trading partners showing unexpected weakness, we are likely to see substantially weaker growth in the near future. That should warrant a bit of attention.

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(I wrote this as a column for an outlet that chose not to use it, so I am sharing it here.)

While the Democrats won an impressive victory this month, it is still distressing so that many people were willing to vote for openly racist xenophobic Republicans. Furthermore, Donald Trump’s bizarre stunt of hyping a “caravan” of asylum seekers walking up through Mexico from Central America apparently worked. Millions of people rushed to the polls to vote Republican, thinking that Donald Trump was the only force to protect our country from this invasion.

Apparently, there are tens of millions of people who believe any idiocy that Trump puts out and is then repeated and amplified on Fox News. These people either do not pay attention to other news sources or consider them all to be “FAKE NEWS.”

It is difficult to reach these people through normal channels. They either will not listen at all to arguments from non-believers or they will view them as lies, like global warming, cooked up as part some grand conspiracy to deceive them.

If we can’t reach these people through reasoned argument, we can try a different route. We can try to reach them through their pocketbook.

Suppose we got a progressive millionaire or billionaire to offer “caravan insurance.” For a modest sum, say $300 a year, caravan insurance would compensate people for damage to their property or any physical harm they or their family suffered from any people on the refugee caravan that entered the country.

Given the enormous fear that Trump and his friends at Fox have built up around the caravan, this should sound like a very attractive offer. After all, being protected from an “invasion” for just a few hundred dollars sounds pretty good.

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Austin Frakt had an interesting Upshot piece in the NYT saying that drug spending in the US began to sharply diverge from other countries in the 1990s. This actually is not very clear, since the comparison group dating back to the 1980s is small. I am actually more struck by the explosion in spending in the 1980s, with it nearly doubling as a share of GDP over the course of the decade. Note that drug spending had not been increasing at all as a share of GDP over the prior two decades.

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Source: Bureau of Economic Analysis.

The obvious villain here is the passage of the Bayh-Dole Act in 1980, which allowed private corporations to get patent rights to government-funded research. This undoubtedly led to more investment in research and development, but it also led to a huge increase in spending the difference between the current 2.2 percent of GDP that we spend on drugs and the 0.4 percent we spent in 1980 is equal to $360 billion a year, roughly five times annual spending on food stamps.

 

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The New York Times ran a very confusing piece on the difficulties that many people in China are facing in getting access to drugs. The piece does not clearly distinguish between the problem of drugs not being legally available because they have not been licensed by China's drug safety agency and drugs being expensive in China due to patent monopolies.

These are very different issues. The first can be readily solved by making the licensing agency more efficient and possibly also relying on approvals by other agencies. (The piece indicates this has recently become the practice.)

The issue of drugs being expensive due to patent monopolies is more complicated. China has to make a decision as to whether it wants to rely on patent monopolies as a mechanism to finance research or whether it instead depends more on a pre-funding mechanism that would allow new drugs to be sold in a free market at generic prices.

This is a huge issue and China's policy in this area will have enormous implications for the rest of the world. If it decides to make new drugs widely available at their free market price, it will be difficult for the US and European companies to charge prices that are often more than 100 times as much, both in their own markets and in the developing world.

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