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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The NYT had a piece on how drug companies fear that if the Democrats retake the House, they make work together with Donald Trump to lower drug prices. At one point the piece tells readers;

"The Democrats’ proposal for the government to negotiate drug prices for millions of Medicare patients is their preferred solution. But it would also face the most opposition, from drug makers and Republicans who see it as a step toward price controls."

It's great we have NYT reporters who can read the minds of Republican members of Congress, so that they can tell us they oppose negotiated drug prices because they "see it as a step toward price controls." Those of who can't read minds might have thought that Republicans in Congress oppose negotiated drug prices because it would lower the profits of the drug companies who contribute to their campaigns.

Since this piece discusses a number of mechanisms for containing drug prices, it also would have been worth mentioning a proposal that got the support of 17 Democratic senators (lead sponsors Bernie Sanders and Elizabeth Warren), which would replace government-granted patent monopolies as a mechanism for financing research with direct government funding. This would allow new drugs to be immediately sold at free market prices.

Of course the drug companies would probably kill to prevent such legislation from passing, since they are strongly opposed to a free market in prescription drugs.

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We're still in financial crisis mania, as the business press eagerly tries to tell us how little they learned from the last crisis by trying to identify the source of the next one. The NYT's latest contribution to the effort is a piece on C.L.O.s, or collateralized loan obligations.

The piece tells us that these are like the C.D.O.s of the last decade, debt instruments in which banks bundled many loans of questionable quality and sold them off to unsuspecting buyers. It warns that banks have little incentive to ensure their quality, since they don't hold a stake, and therefore there is a risk of large-scale defaults.

There are two big problems with the scare story here. First, the growth in these risky instruments is not quite what the piece might have readers believe. The piece includes a chart which shows the amount of junk bonds and C.L.O.s outstanding since 2014. While the point of the chart is to show that volume C.L.O.s has passed the volume of outstanding junk bond debt, a more serious analysis would combine the two together to get a gage of the amount of high-risk corporate debt in the economy.

This combined measure does not tell much of a story. Eyeballing the chart, we go from a combined total of roughly $1.95 trillion in 2014 to $2.5 trillion in the middle of 2018. Since this is a period in which the economy has grown by roughly 20 percent in nominal terms, this indicates only a modest rise in the ratio of risky corporate debt to GDP. This is not the sort of stuff that need keep us awake at night.

But the more important point is that the 2008 crisis was caused by the collapse of a bubble that was driving the economy. This was easy to see for people familiar with Econ 101. Residential construction hit a record share of GDP far above its average in prior decades. Housing wealth lead to a consumption boom, with savings rates hitting record lows.

What is the component of GDP that is driven by loans in C.L.O.s? Investment is at very modest levels as a share of GDP. It's hard to envision it falling very much if this market tanked tomorrow. Suppose the holders of this debt took a huge hit, losing 50 percent of their investment. That would be a loss of $650 billion in wealth, bad news for them, but hardly close to enough to sink an economy with $90 trillion. In fact, the impact would likely be trivial in terms of overall GDP growth.

In other words, for the folks looking for the next crisis, you'll have to do better.

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I don't especially want to defend nationalism, given the folks who wave this flag these days, but Matt Yglesias gets a few things wrong in criticizing John Judis' NYT piece earlier this week.

To start with he quotes Judis:

"As long as corporations are free to roam the globe in search of lower wages and taxes, and as long as the United States opens its borders to millions of unskilled immigrants, liberals will not able to create bountiful, equitable societies, where people are free from basic anxieties about obtaining health care, education and housing.”

...and then tells us "this is flatly untrue."

Okay, let's take a step back. Is Yglesias really arguing that if we had open borders, so that literally hundreds of millions of people from the poorest countries on the planet could come to the US, that it would not mean a decline in living standards for the workers already here? That seems more than a bit far-fetched.

Of course, we did not have open borders, so the real question is did the levels of immigration we had prevent us from having a generous welfare state? Here Yglesias would be on solid ground in saying no. Most research indicates that immigration of the level we have seen has not hurt the wages of native-born workers, although it does depress the wages of earlier immigrants, making the catch-up process longer than it otherwise would be.

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Yes, they are at it again. Expressing the usual journalistic need to waste words, the Post twice referred to trade deals that Donald Trump is attempting to negotiate as "free-trade" deals. While these deals are likely to reduce barriers in some areas (not for foreign physicians who want to practice in the US), they will almost certainly include longer and stronger patent and copyright protections.

We understand that the Post likes to see money going from the rest of us to Pfizer, Microsoft, and Disney, but that doesn't make these forms of protectionism free trade. It would be nice if the paper could just give the facts and spare us the propaganda.

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There are a lot of people who are so stupid that they think foreign aid is a major part of the federal budget. Ever wonder why people could be so stupid?

Well, the NYT tells us at least part of the reason in a news article on a new agency established by Donald Trump to provide loans and loan guarantees as a way to help developing countries and extend US. influence. The article tells us that the bill that established the new agency, the United States International Development Finance Corporation [USIDFC], "gave it authority to provide $60 billion in loans, loan guarantees and insurance to companies willing to do business in developing nations."

Okay, $60 billion is a lot of money, more than almost anyone other than Bill Gates and Jeff Bezos will see in a lifetime, but how much does it matter to our budget? My guess is that almost no NYT readers have a clue. Yeah, I know the NYT has a very well-educated readership, but very few of them have their heads in the federal budget.

To get a rough idea, we need to remember that this is $60 billion in loans and guarantees, it is not actual spending. And, it is a stock figure, it is a level of commitment, not an annual flow.

So let's say that the subsidy component of the loan and guarantee averages 5 percent of the value. (That is probably high, it would mean for example that a loan that should carry a 10 percent interest rate would instead carry a 5 percent interest rate.) In this case, the subsidies coming from the USIDFC would be equal to $3 billion.

But again this is a stock figure. That would mean we hit this level of subsidy once the USIDFC has reached its $60 billion liability limit. Let's say that takes five years, so the USIDFC is lending at its limits by 2023. At that point, the federal budget is projected to be $5.5 trillion.

This means that Trump's new foreign aid program will be costing us a bit more than 0.05 percent of federal spending. Alternatively, we can put it at dollars per person and say that this program will be costing us a bit less than $9 per person.

This would have been useful information for the NYT to provide its readers. It would likely be very helpful the next time some right-wing politician wants to eliminate waste in the budget by cutting foreign aid.

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The New York Times had a piece on Scott Walker's campaign for reelection as governor of Wisconsin may have mistakenly given the impression that Wisconsin's economy had performed exceptionally well under Walker. It notes that the unemployment rate is currently 3.0 percent and that the average hourly wage has risen by 5.0 percent over the last year.

While these are both good numbers, a little context would be helpful. The current unemployment rate in neighboring Minnesota is 2.9 percent. Minnesota has been governed by liberal Democrats for the last eight years. In contrast to Walker, who cut taxes, Minnesota raised taxes to improve its education and infrastructure. While these investments will take a longer period of time to pay off, it doesn't seem that the state has suffered even in the short-run.

While Wisconsin's year-over-year wage growth of 5.0 percent is impressive, it is important to recognize that these numbers are extremely erratic. The data actually show nominal wages falling for several months back in 2014.

Year over Year Change in Average Hourly Wage in Wisconsin

Wis wages

Source: Bureau of Labor Statistics.

Over the last eight years, wage growth has actually been a hair slower in Wisconsin than in Minnesota, with cumulative growth of 24.7 percent in Wisconsin compared with 24.9 percent in Minnesota. While this difference is trivial, it is hard to make the case that the data somehow show Wisconsin's tax-cutting path has paid larger dividends than Minnesota's public investment path.



Jake in Wisconsin adds a very important qualification to Wisconsin's low unemployment rate. Unlike neighboring Minnesota, Scott Walker's trick for getting a low unemployment rate was reducing the size of the labor force. The state has had much slower job growth than its western neighbor but is able to have a low unemployment rate as a result of people either dropping out of the labor force or leaving the state.

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Roger Lowenstein has a very good piece in the Post about GE's hiring of a new CEO after the prior one served less than a year. According to Lowenstein, the new CEO's contract will give him incentives worth $300 million over the next four years if he does well by the shareholders. He will walk away with $75 million if he does poorly. This follows the hiring of an inept CEO who was dumped in less than a year and long-term CEO Jeffrey Immelt, who pocketed hundreds of millions of dollars during his tenure while giving shareholders returns averaging 1.0 percent annually, according to Lowenstein.

This raises an obvious question, what the f**k is wrong with GE's board? I haven't looked at their forms, but I am quite certain these people get paid well over $100k a year and quite possibly over $200k for a job that requires perhaps 200 to 300 hours a year of work. Their primary responsibility is picking top management and making sure that they don't rip off the shareholders.

How could you possibly fail worse than GE's board? This speaks to the incredible corruption of corporate governance. We have a system that allows CEOs and other top management to rip off shareholders. I have written about this one before (e.g. here and chapter 6 of Rigged), but this is another striking example.

Look, I know the distribution of share ownership as well as anyone, but there are far more non-rich people who benefit from owning shares than from high CEO pay. More importantly, outlandish CEO pay has a huge impact on the overall pay structure. Think of what the labor market would look like if the CEO of GE was looking at pay of $2–3 million instead of $200 to $300 million?

Progressives should be worried about excessive CEO pay, and yes, rich shareholders are an ally in this story.

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There is a popular line in elite DC circles that political figures are not supposed to talk about the Federal Reserve Board's monetary policy. This was the theme of Catherine Rampell's Washington Post column in today's paper. The piece complained about Donald Trump's criticisms of the Fed's interest rate hikes and said that countries where monetary policy is controlled by politicians end up with hyperinflation.

While there is a list of countries where political control of the central bank has led to hyperinflation, there are also many examples of countries where political control did not lead to hyperinflation, starting with the United Kingdom. The Bank of England had been under the control of the finance minister until Tony Blair made it independent in May of 1997. The United Kingdom did not have any bouts of hyperinflation that I can recall.

The law gives the Fed a large degree of independence. It's seven governors are appointed by the president and approved by Congress. They serve 14-year terms, which means they don't have to worry about losing their jobs if they anger a politician. There are also twelve presidents of the regional Feds who sit on the Fed's Open Market Committee that determines monetary policy. (Only five have votes at any point in time.) These bank presidents largely owe their job to the banks in the region.

Its structure gives the financial industry a disproportionate voice in setting monetary policy. This means that the Fed has a tendency to be overly concerned about limiting inflation, a main concern of the financial industry, and much less concerned about the full employment part of its mandate.

In this context, it is perfectly reasonable for politicians to criticize the conduct of monetary policy. We can view the Fed as being like the Food and Drug Administration (FDA). While we would not want members of Congress or the president deciding which drugs get approved, it would be very reasonable for them to complain if, for example, the FDA went three years without approving any drugs, or alternatively was rapidly approving drugs that were causing people to die. Similarly, political figures have every right in the world to complain if the Fed is being overly concerned about inflation at the cost of slower growth and higher unemployment.

It is questionable whether Trump has adopted the most effective route in pressing this sort of criticism. Rather than saying he does not like the policy that the Fed chair he picked is following, it might have been more useful to have his Council of Economic Advisers produce evidence that the economy does not face a serious risk of inflation right now.

He might also choose to withdraw the nomination of Marvin Goodfriend for one of the open governor positions. Goodfriend has long been an inflation hawk who has argued for higher interest rates for many years. If Trump really doesn't want the Fed to raise interest rates, it doesn't make sense to appoint someone to the Board of Governors who is very committed to raising rates. 

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As we mark the 10th anniversary of the peak of the financial crisis, news outlets continue to feature pieces how another one, possibly worse, is just around the corner. This mostly shows that the folks who control these outlets learned absolutely nothing from the last crisis. As I have pointed out endlessly, the story was the collapse of the housing bubble that had been driving the economy. The financial crisis was an entertaining sideshow.

There is one story in the coming crisis picture that features prominently — the corporate debt burden, as discussed here. (This Bloomberg piece is actually well-reasoned.) The basic story is a simple one: corporate debt has risen rapidly in the recovery. This is true both in absolute terms, but even in relation to corporate profits.

The question is whether this is anything that should worry us. My answer is "no."

The key point is that we should be looking at debt service burdens, not debt, relative to after-tax corporate profits. This ratio was was 23.1 percent in 2017, before Congress approved a big corporate tax cut. By comparison, the ratio stood at more than 25 percent in the boom years of the late 1990s, not a time when people generally expressed much concern over corporate debt levels.

It is true that the burden can rise if interest rates continue to go up, but this would be a very gradual process. The vast majority of corporate debt is long-term. In fact, many companies took on large amounts of debt precisely because it was so cheap, in some cases issuing billions of dollars worth of 30-year or even 50-year bonds. These companies will not be affected by a rise in interest rates any time soon.

But clearly, there are some companies that did get in over their heads with debt. There are two points to be made here.

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The overall and core CPI both rose just 0.1 percent in September. Over the last year, the increases in the two indexes have been 2.3 and 2.2 percent, respectively. The core index excluding shelter has risen just 1.4 percent over the last year.

Rather than accelerating, it appears that inflation is actually slowing slightly. The annualized rate of inflation in the core index comparing the last three months (July, August, September) with the prior three (April, May, June) is just 2.0 percent.

This pattern might be a good reason for the Fed to hold off on further rate hikes. If it is actually targeting 2.0 percent as an average inflation rate (in the PCE deflator, which is about 0.2 percentage points lower, on average), then it should want the inflation rate to rise somewhat above 2.0 percent when we are approaching the peak in the cycle.

While growth was strong in the second quarter and is likely to be strong again in the third quarter, recent weakness in housing and car sales indicate the economy may slow substantially in the fourth quarter. There seems little downside risk if the Fed were to delay further rate hikes since inflation remains well under control. The potential benefits in terms of employment and growth are substantial.

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