Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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Alan Reynolds had a column insisting that the U.S. need not fear trade agreements impact on the United States labor market. The context is an argument that the presidential candidates are wrong to oppose the Trans-Pacific Partnership. The piece argues that trade agreements have not led to increased trade deficits and that imports from China really have not had much impact on the manufacturing sector in the U.S. His argument doesn't quite fit the data.

The piece lays out the basic argument in its subhead:

"If trade agreements are so lousy, why are our largest deficits with countries that lack a U.S. trade deal?"

It then notes that the United States largest trade deficits are with China and Japan and that we have trade deals with neither. This might be a good rhetorical point at the Wall Street Journal, but it has nothing to do with the issue at hand. The question is the direction of change following an agreement. While the data on this point is not entirely conclusive, there is evidence that deficits have generally increased with countries following the implementation of trade deals.

To take some prominent examples, the U.S. went from a modest trade surplus with Mexico in 1993, before NAFTA went into effect, to a deficit of more than $60 billion in 2015. It went from a trade deficit of $13.2 billion with South Korea in 2011, the year before a trade deal went into effect, to a deficit of $28.3 billion in 2015.

It is also important to note that the composition of trade is likely to shift against U.S. manufacturing as a result of trade deals. These deals are quite explicitly designed to increase payments from other countries licensing fees and royalties to U.S. pharmaceutical, entertainment, and software companies. The more these countries are forced to pay Pfizer for drugs and Disney for Mickey Mouse, the less money they have to spend on U.S. manufactured goods. In other words, the gains for these companies from trade deals imply larger trade deficits in other areas like manufactured goods.

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The Social Security scare story is a long established Washington ritual. Bloomberg news decided to bring it out again in time for Halloween. The basic story is that the Social Security trust fund is projected to face a shortfall in less than two decades. This means that unless Congress appropriates additional revenue, the program is projected to only be able to pay a bit more than 80 percent of scheduled benefits.

This much is not really in dispute. The question is how much should we be worried about this projected shortfall and what should we do about it. Bloomberg's answer to the first question is that we should be very worried. It goes through the list of potential fixes and implies that all would be difficult or impossible.

I will just take one potential fix, which is raising the payroll tax by 2.58 percentage points to cover the projected shortfall. Bloomberg tells us:

"’s doubtful that the American public would accept such jarring changes."

That's an interesting political assessment. It would be worth knowing the basis for this assertion. We had comparably jarring changes in the form of Social Security tax increases in the decades of 40s, 50s, 60s, 70s, and 80s. There was no massive tax revolt against any of these tax increases; what has convinced Bloomberg that we can never again have a comparable increase in the payroll tax?

A piece of evidence suggesting that tax increases necessary to support Social Security might be politically viable is the fact that few people even noticed the 2.0 percentage point increase in the payroll tax at the start of 2013 when the payroll tax holiday ended. This was at a time when the labor market was still very weak from the recession and wages had been stagnant for more than a decade. (A survey conducted for the National Academy for Social Insurance also found that people were willing to pay higher taxes to support the scheduled level of Social Security benefits.)

Given this history and evidence, Bloomberg's claim that the public won't tolerate the sort of tax increases necessary to fully fund Social Security looks like an unsupported assertion.

The other point on this topic is that economists usually believe that workers care first and foremost about their after-tax wage, not the tax rate. The Social Security trustees project that real before-tax wages will rise on average by more than 50 percent over the next three decades. By comparison, the tax increase needed to fully fund Social Security seems relatively small, as shown below.

wage projection 29243 image002

Source: Social Security trustees report, 2015 and author's calculations.

Most workers have not seen their wages increase as much as the average wage over the last four decades since a disproportionate share went to those at top. These are people like CEOs, Wall Street traders, and doctors and other highly paid professionals. Workers stand to lose much more in terms of after-tax income if this upward redistribution continues over the next three decades than they would from the "jarring" Social Security tax increase that Bloomberg feels the need to warn us about.

So, of course people could get really worried about Social Security, as Bloomberg wants, or they can focus on the upward redistribution which will have far more impact on their well-being and that of their children. (Yes, this is the topic of my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, which can be downloaded for free.)

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The New York Times had a major adventure in fantasy land when it ran a front page article asserting that the problem with the health care exchanges under the Affordable Care Act is that the penalties have not been large enough to coerce people into getting health care insurance. The begins by telling readers:

"The architects of the Affordable Care Act thought they had a blunt instrument to force people — even young and healthy ones — to buy insurance through the law’s online marketplaces: a tax penalty for those who remain uninsured.

"It has not worked all that well, and that is at least partly to blame for soaring premiums next year on some of the health law’s insurance exchanges."

The piece then explains that many people are opting not to buy insurance and instead pay the penalty.

The problem with this line of argument for fans of reality is that the number of uninsured has actually fallen by more than had been projected at the time the law was passed. This is in spite of the fact that many states were allowed to opt out of the Medicare expansion by a 2012 Supreme Court decision making expansion optional. (It was mandatory in the law passed by Congress.)

It is not difficult to find the evidence that the number of uninsured has fallen more than projected. In March of 2012, the Congressional Budget Office and the Joint Tax Committee projected that there would be 32 million uninsured non-elderly people in 2015. Estimates from the Kaiser Family Foundation put the actual number at just under 29 million. In other words, three million more people were getting insured as of last year (our most recent data) than had been projected before most of the ACA took effect.

So, if more people are getting insured than had been expected, how could the penalties have been a failure? I leave that one for the folks at the NYT responsible for this front page story.

I will add one other item in this story worth correcting. The piece includes a quote from Joseph J. Thorndike, the director of the tax history project at Tax Analysts, telling readers:

“If it [the mandate] were effective, we would have higher enrollment, and the population buying policies in the insurance exchange would be healthier and younger."

While we do care whether the people in the exchanges are healthy, it doesn't matter if they are young. In fact, healthy older people are far more profitable to insurers than healthy young people since their premiums are on average three times as high. There is a slight skewing against the young in the structure of premiums, but this has little consequence for the costs of the system.

As a practical matter, the people signing up on the exchanges are probably somewhat less healthy than had been expected, but this is largely because more people are getting insurance through employers than had been expected. The people who get insurance through their employers are more healthy than the population as a whole, since for the most part they are healthy enough to be working full-time jobs.

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The coverage of the new law in New York state, which would prohibit the short-term renting of whole apartments in New York City, has been difficult to understand. It presents as competing claims that it would increase the supply of affordable housing in New York City and that it will allow hotels to raise their fees. (This Washington Post piece is an excellent example.) Actually, it will likely do both.

The basic story is that the city has a large number of units that are subject to some form of rent control. The purpose is to keep these units affordable for people who don't work on Wall Street. This purpose is defeated if it is possible for either the landlord or tenant to rent out the unit through a service like Airbnb. If the landord is going the Airbnb route then it removes a unit of otherwise affordable housing from the market. If the tenant is going the Airbnb route then they are taking advantage of rent control to make a profit on arbitrage.

This is also bad news for the hotel industry, since people who might have otherwise stayed in hotels will instead stay in Airbnb units, thereby lowering occupancy rates and putting downward pressure on hotel prices. Therefore, there is absolutely nothing contradictory about the argument this measure will both increase the supply of affordable housing and benefit the hotel industry.

The long-run story may be somewhat different. In the long-run the construction of hotels is responsive to demand. If there is a high vacancy rate in the city's hotels, there will be fewer hotels built in future years. This will leave more land for the construction of apartments and other uses. In that case, the restriction on Airbnb rentals may not ultimately lead to an increase in the number of affordable housing units in the city (a financial transactions tax would be more effective), but is perfectly reasonable to believe that in the short-term this restriction on Airbnb rentals will both increase the supply of affordable housing units and benefit the hotel industry.                                        

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The usually excellent radio show This American Life may have misled listeners in its discussion of NAFTA and trade this week. The piece misrepresents both some of the key issues on trade and also economists' attitudes towards trade deals.

On the key issues, the piece notes that deals like NAFTA have led to job losses. It uses the figure of 700,000 jobs. It then compares this to the gains to the economy that are projected from lower tariff barriers and therefore lower priced goods.

What this discussion leaves out of the picture is the fact that the jobs lost are disproportionately for non-college educated workers. This puts downward pressure on the wages of non-college educated workers more generally as the displaced workers crowd into retail, services, and other sectors of the economy. So it is not just the 700,000 displaced workers who suffer as a result of this pattern of trade, it is non-college educated workers more generally who see their wages fall as a result of the deal.

This issue of wage inequality is important to remember when the segment tells listeners:

"In fact, there's this survey that the University of Chicago did where they asked all these economists all across the political spectrum, are Americans better off, on average, because of NAFTA?  95% said yes. 5% said they were unsure."

This might be taken as meaning that nearly all economists think that NAFTA benefited the country. Whether or not this is true, that is not the question they answered. This question asks the economists whether American "on average" are better off because of NAFTA. The question does not ask about distribution. This means that if NAFTA gave Bill Gates $100 billion and cost the rest of the country $99 billion, then the correct answer to this question is that NAFTA made the country on average better off. Even economists who think NAFTA was bad policy might think that it led to gains on average.

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Just kidding. Actually, insurance costs have slowed sharply in the years since the Affordable Care Act was passed, but it is unlikely many readers of the NYT would know this. Instead, it has focused on the large increase (not levels) in premium costs for the relatively small segment of the population insured on the exchanges. In keeping with this pattern, it gives us a front page piece telling readers about the 25 percent average increase in premiums facing people on the exchange this year. There are two points to keep in mind on this issue.

First, the focus on premiums is exclusively on the relatively small segment of the population getting insurance through the exchanges and specifically through the exchanges managed through the federal government. According to the latest numbers, 12.7 million people are now getting insurance through the exchanges (roughly 4.0 percent of the total population). This article refers to the premiums being paid by the 9.6 million people insured through the federally managed exchange (3.0 percent of the total population). Many states, such as California, have well run exchanges that have been more successful in keeping cost increases down.

There are two reasons that costs on the exchanges have been rising rapidly. The first is that insurers probably priced their policies too low initially. Even with the increases this year premium prices are still lower than had been expected in 2010 when the law was passed. In fact, there has been a sharp slowing in the pace of health care cost growth in the last six years. While not all of this was due to the ACA, it was undoubtedly a factor in this slowdown. In the years from 1999 to 2010, health care costs per insured person rose at an average annual rate of 5.7 percent. In the years from 2010 to 2015 costs per insured person rose at an average rate of just 2.3 percent.

HCsoendinginsuredperson1999 1016

Source: Bureau of Economic Analysis and author's calculations.

The other reason that premiums on the exchanges have risen rapidly is that more people are stiill getting insurance through employers than had been expected. The people who get insurance through employers tend to be healthier on average than the population as a whole. The Obama administration expected that more employers would stop providing insurance, sending their workers to get insurance on the exchanges. Since they have continued to provide insurance, the mix of people getting insurance through the exchanges is less healthy than had been expected.

Note that this has nothing to do with the "young invincible" story that had been widely touted in the years leading up to the ACA. The problem is not that healthy young people are not signing up. The problem is simply that healthy people of all ages are getting their insurance elsewhere. The overall percentage of the population getting insured is higher than projected, not lower as the young invincible silliness would imply.



Robert Salzberg reminds me that the vast majority of people buying insurance in the exchanges get subsidies. For most people these subsidies will fully cover these cost increases. Even after the increases noted in this NYT article, almost 80 percent of the people buying insurance in the exchanges will be able to get a plan for less than $100 per month.

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We continue to see a steady drumbeat of news stories and opinion pieces about the problem of men, and especially less-educated men, in the modern economy. The pieces always start with the fact that large numbers of prime-age men (ages 25–54) have dropped out of the labor force. The latest entry is a NYT column by Susan Chira that highlighted recent research showing that a large percentage of men who are not in the labor force are in poor health and frequent users of pain medication.

While this is interesting and useful research, it is unlikely that it explains the decline in employment among prime-age men. The reason, as I (along with Jared Bernstein) continually point out, is that there has been a similar drop in the employment rates of prime-age women since 2000.

The issue here should be straightforward. If we see drops in employment rates for both prime-age men and women, then it is not likely that they will be explained by problems that are unique to men. More likely, the problems stem from the overall state of the economy. In other words, the problem is with the people who design policy, not with the men who have dropped out of the workforce.

This doesn't mean that non-employed men are not facing real problems. Undoubtedly many are, although the extent to which these problems are the result of their unemployment or a cause will often not be clear. Nonetheless, steps that can improve public health will be a good thing, but the better place to look to solve the problem of unemployment is Washington.

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Yes, that is what he advocated in this column calling on people to vote for Hillary Clinton and Republican members of Congress. The Republicans are a party of climate deniers. Perhaps Samuelson doesn't know this, but who cares. He urged the readers of his column to support a party that denies well-established science on climate change.

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By Lara Merling and Dean Baker

The Peter Peterson-Washington Post deficit hawk gang keep trying to scare us in cutting Social Security and Medicare. If we don't cut these programs now, then at some point in the future we might have to cut these program or RAISE TAXES.

There are many good reasons not to take the advice of the deficit hawks, but the most immediate one is that our economy is suffering from a deficit that is too small, not too large. The point is straight forward, the economy needs more demand, which we could get from larger budget deficits. More demand would lead to more output and employment. It would also cause firms to invest more, which would make us richer in the future.

The flip side in this story is that because we have not been investing as much as we would in a fully employed economy, our potential level of output is lower today than if we had remained near full employment since the downturn in 2008. The Congressional Budget Office estimates that potential GDP in 2016 is down by 10.5 percent (almost $2.0 trillion) from the level it had projected for 2016 back in 2008, before the downturn.

This is real money, over $6,200 per person. But if we want to have a little fun, we can use a tactic developed by the deficit hawks. We can calculate the cost of austerity over the infinite horizon. This is a simple story. We just assume that we will never get back the potential GDP lost as a result of the weak growth of the last eight years. Carrying this the lost 10.5 percent of GDP out to the infinite future and using a 2.9 percent real discount rate gives us $172.94 trillion in lost output. This is the size of the austerity tax for all future time. It comes to more than $500,000 for every person in the country. 

By comparison, we can look at the projected Social Security shortfall for the infinite horizon. According to the most recent Social Security Trustees Report, this comes to $32.1 trillion. (Almost two thirds of this occurs after the 75-year projection period.) Undoubtedly, many deficit hawks hope that people would be scared by this number. But compared to the austerity tax imposed by the deficit hawks, it doesn't look like a big deal.

austerity tax infinite hor 14645 image001

Source: Social Security Trustees Report and Author's Calculations.

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Former Federal Reserve Board Chair Paul Volcker and private equity billionaire Peter Peterson had a NYT column this morning complaining that not enough attention is being paid to the national debt. The piece uses wrong-headed economics and xenophobia to try to scare readers into backing their austerity agenda.

On the economic side, it implies that the prospect of a rising debt to GDP ratio implies an imminent crisis.

"Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.

"Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140 percent of G.D.P., far above that in any previous era, even in times of war."

There are several points to be made here. First the ratio of debt service to GDP is currently just 0.8 percent. (This is net of interest payments rebated by the Federal Reserve Board.) This is near a post-war low. By comparison the ratio was over 3.0 percent in the early and mid-1990s. In other words, the reality is the exact opposite of what Volcker and Peterson claim, the burden of the debt on the economy is unusually low.

Second, if interest rates rise precipitously, which they imply will happen for unexplained reasons, we can always buy back the debt at large discounts, thereby reducing the debt-to-GDP ratio. This would be an absolutely pointless move, but if distinguished people who can get columns in the NYT think the debt-to-GDP ratio is important, it can be done to humor them.

Finally, the widely respected Congressional Budget Office (CBO) has repeatedly been wrong in predicting that interest rates will rise. (They also seriously over-estimated the cost of the Affordable Care Act and health care more generally.) Ever since 2010 CBO has projected that interest rates will bounce back to pre-recession levels. Each time they have been shown wrong as interest rates remained low.

The reason for the low rates is the weak level of demand in the economy. In this context, the deficit is a good thing and a bigger deficit would be better. It would generate more demand, output, and employment. It would also make us richer in the future since at higher levels of output firms invest more. Also, many workers who are out of the workforce for long periods of time can end up permanently unemployable.

As a result of the low deficits and weak demand in the post-recession years the widely respected Congressional Budget Office estimates that the economy's potential GDP in 2016 is almost 10 percent smaller (almost $2 trillion) than the potential it had projected for 2016 before the crash in 2008. This "austerity tax" is costing the country $6,200 per person in lost output. For some reason, Volcker and Peterson would have us ignore this huge and growing burden that the country now faces as a result of a sustained period of weak demand and instead concern ourselves with the improbable scenario they paint in their piece.

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The Washington Post had an interesting piece about Iclusig, a cancer drug that now sells for almost $200,000 a year. The piece discussed the pricing pattern for cancer drugs. It noted that the pricing of Iclusig did not follow the normal pattern, with the price soaring as its range of approved uses was limited by the Food and Drug Administration.

While it presented this as evidence of this not being a normal market, the piece never made the obvious point: the drug market is certainly not normal because the government grants patent monopolies and other forms of protection. Without these government granted monopolies almost all drugs would be cheap. Certainly none would sell for anything close to $200,000. While it is necessary to pay for research, they are other mechanisms that would almost certainly be more efficient and less prone to corruption than patent monopolies.

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At the debate last night, moderator Chris Wallace challenged both candidates on the question of cutting Social Security and Medicare. The implication is that the country is threatened by the prospect of out of control government deficits. The question was misguided on several grounds.

First, as a matter of law the Social Security program can only spend money that is in the trust fund. This means that, unless Congress changes the law, the program can never be a cause of runaway deficits.

Second, it is important to note that the size of the projected shortfall in the Medicare Part A program (the portion funded by its own tax) has fallen sharply in the Obama years. The shortfall for the 75-year planning horizon was projected at 3.53 percentage points of payroll in 2009, the first year of the Obama presidency. It has now fallen by 80 percent to just 0.73 percent of payroll. This reduction is due to a sharp slowdown in the projected growth of health care costs. Some of this predates the Affordable Care Act (ACA), but some of the slowdown is undoubtedly attributable to the impact of the ACA.

Anyhow, the implication of Wallace's question, that these programs are somehow out of control and require some near term fix, is not supported by the data. We will have to make changes to maintain full funding for Social Security, but there is no urgency to this issue.

On the more general point of deficits, the country's problem since the crash in 2008 has been deficits that are too small, not too large. The main factor holding back the economy has been a lack of demand, not a lack of supply. Deficits create more demand, either directly through government spending or indirectly through increased consumption. If we had larger deficits in recent years we would have seen more GDP, more jobs, and, due to a tighter labor market, higher wages.

The problem of too small deficits is not just a short-term issue. A smaller economy means less investment in new plant and equipment and research. This reduces the economy's capacity in the future. In the same vein, high rates of unemployment cause people to permanently drop out of the labor force, reducing our future labor supply if these people become unemployable. (Having unemployed parents is also very bad news for the kids who will have worse life prospects.)

The Congressional Budget Office now puts potential GDP at about 10 percent lower for 2016 than its projection from 2008, before the recession. Much of this drop is due the decision to run smaller deficits and prevent the economy from reaching its potential level of output. We can think of this loss of potential output as a "austerity tax." It currently is at close to $2 trillion a year or more than $6,000 for every person in the country.

It is unfortunate that Wallace chose to devote valuable debate time to a non-problem while ignoring the huge problem of needless unemployment and lost output due to government deficits that are too small.

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Binyamin Appelbaum had an interesting interview in the NYT with Boston Fed bank president Eric Rosengren. In the interview he argued that it was important to keep the unemployment rate from falling too low. In a response to Appelbaum saying "low unemployment sounds like a good thing," Rosengren said:

"During periods when the unemployment rate has gotten to the low 4s, we haven’t stayed there for a real long time. And that’s because we do start seeing wages picking up, and we do see prices start picking up, and we do see asset prices picking up. In that environment we start to tighten and when we tighten we’re not so good at getting it exactly right.

"The problem is the dynamics of how firms and individuals start thinking about the tightening process. Those dynamics make it very hard to calibrate the monetary policy process. People understand tightening. But convincing them of how much you’re going to tighten and that you’re going to hit it exactly right — particularly given that you haven’t hit it exactly right in the past, it’s pretty tough to convince people of that. Not surprisingly, they start worrying about: “Well, they’re starting to tighten, they may tighten too much. What do I do? I start pulling in in terms of my own spending.” Firms start pulling in, saying, “We want to be prepared in case they don’t get this quite right.” Those kinds of actions — which are very hard to predict, and individually everyone behaves a little differently — in aggregate, cause a problem where we sometimes slow down the economy more than we intend.

"So you don’t see instances where we go from 4.2 percent to 4.7 or 5 percent and level off. What you actually see is when we start tightening we end up with a recession."

Actually, we have very little experience of the unemployment rate falling to the low fours in the last 45 years. The one time it did fall that low was in the late 1990s. In that period, the unemployment rate fell to 4.3 percent in April of 1998. The economy experienced almost three years subsequent years of solid growth, with almost no uptick in inflation, until the collapse of the stock bubble threw it into recession in March of 2001.


The unemployment rate was in the mid-fours in 2007, hitting 4.4 percent in March and May of that year. There was little increase in the inflation rate, but a collapse of the housing bubble did throw the economy into a recession at the end of the year.

In short, there is little evidence of wage price inflation associated with low unemployment rates that Rosengren mentions. There is an issue of asset price inflation (i.e. bubbles) but this has little direct relationship with the unemployment rate. In the case of the housing bubble, prices peaked in the summer of 2006 and were already falling rapidly by the spring of 2007 when unemployment hit its low. The bubble began to form as early was 1996 and with prices rising rapidly in 2002 and 2003, when the unemployment rate was at its recession peak and the economy was still shedding jobs.

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The Washington Post keeps pushing the "hard to get good help" line, this time in reference to China. It told readers how the country is ending its one-child policy, but that many families are likely to still decide not to have more than one kid. The piece then told readers:

"That’s a problem for China. The people born in Mao’s era are growing old, and there will be far fewer people of working age to bear the economic burden."

Actually, the declining ratio of workers to retirees is likely to have relatively little impact on China's economy since the impact of even modest rates of productivity growth swamps the impact of demographics as third grade arithmetic students everywhere know.

It is striking to see the fears of running out of workers co-exist with the regular stories in the media about robots taking all the jobs. This shows the unbelievable bankruptcy of economic debate in the United States that these two directly opposing concerns exist side by side among people who consider themselves knowledgeable about economic policy.


Note: correction made, thanks heropass.

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Yes, what else is new? Today's column highlights the growth in debt-to-GDP ratios in both the public and private sectors in the last decade. There are three points worth making on this issue.

The first one is that Samuelson's concern, as noted in the headline, is that the growth of debt will leave us open to another financial crisis. The problem here is that it goes along with the myth that the financial crisis was something that sneaked up on us that no one could detect. In fact, the financial crisis, was a crisis because a bubble was moving the real economy. The housing bubble was driving well over $1 trillion in demand through its impact on residential construction (which was a record high as a share of GDP) and consumption, as people spent based on bubble generated housing equity.

The surge in both areas was easy to see for anyone who looks at the data. It was an astounding failure of policy makers (think Alan Greenspan and the Fed) that they somehow either didn't see the bubble or didn't realize the importance of its collapse to the economy.

This matters because it is wrong to imagine that a potential economy wrecking bubble can grow without any sentient beings seeing it. The policymakers and economists who totally missed the housing bubble have a stake in pretending that it was all very difficult, but their story is not true. It was simple, they just chose not to look at the data and think for themselves.

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The NYT had an editorial highlighting new work by Alan Krueger that examined prime-age men (ages 25–54) who are not working or looking for work. The work shows that 40 percent of the men who have dropped out of the labor force report feeling pain that keeps them from taking jobs. It reports that 44 percent report taking pain medication the previous day. Both Krueger and the editorial make it clear that the causation could go in both directions.

While this is interesting work, implying that the problem of people dropping out of the labor force is a story about men is seriously misleading. Both prime-age men and women have been increasingly dropping out of the labor force in the last 15 years. The falloff since the peak year of 2000 is somewhat sharper for men than women, but it is important to note that labor force participation rates had been rising for women prior to 2000 and were almost universally projected to continue to rise. The employment rate for prime-age men fell by 4.1 percentage points from 2000 to 2015, while the employment rate for prime-age women fell by 3.2 percentage points. (Employment rates are a cleaner measure, since the decision to look for work, and therefore stay in the labor force, is affected by eligibility for unemployment benefits.)

The reason this matters is that clearly the employment rate is dropping for reasons not related to any behavior or conditions unique to men since the drop has occurred for women as well. The more obvious source of the problem lies with the people (disproportionately men) designing economic policy.

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Many people are aware of the increase the number of people insured as a result of the Affordable Care Act. Some also know about the slower rate of growth of health care costs. (Yes folks, that is slower growth in costs, not a decline — no one promised a miracle.) Anyhow, it is worth putting these two together to see the pattern in health care costs per insured person under Obamacare. Here's the picture.


Source: Bureau of Economic Analysis and Centers for Disease Control and Prevention.

As can be seen, there is a sharp slowing in the rate of growth of health care costs per person in 2010, just as the Affordable Care Act is passed into law. In the years from 1999 to 2010, health care costs per insured person rose at an average annual rate of 5.7 percent. In the years from 2010 to 2015 costs per insured person rose at an average rate of just 2.3 percent.

Undoubtedly, the ACA is not the full explanation for the slowdown in cost growth, but it certainly contributed to the slowdown. Furthermore, as a political matter, does anyone doubt for a second that if cost growth had accelerated that the ACA would be given the blame even if there was no evidence that it was a major factor?

Anyhow, this is a good story. It doesn't mean anyone should be happy with our health care system as it is now. We pay ridiculous sums for prescription drugs that would be cheap in a free market. Our doctors are paid twice as much as their counterparts in other wealthy countries. And, the insurance industry is a major source of needless waste. But the health care system is much better today than it was when President Obama took office, and that is a big deal. 


Note: I realize that some folks are getting the wrong graph with this post. The correct one (which shows up on my computers) is an index of health care costs per insured person with 1999 set equal to 100. I have no idea where the other graph came from, but we will investigate.

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I respect Jason Furman, the chair of President Obama's Council of Economic Advisers. I think he is doing a great job in this position. He has called attention to many of the ways in which the government intervenes in the market, like professional licensing (think doctors), intellectual property rules (patents and copyrights), and other restrictions are acting to redistribute income upward. He has also attacked silly myths, like the idea that workers in the U.S. are dropping out of the labor market because of our generous disability program and other benefits. (In a recent report, Jason noted that the U.S. has among the least generous welfare supports of any OECD country, yet it ranks near the bottom in labor force participation rates for prime-age [ages 25–54] men.)

Anyhow, in spite of my respect, I feel the need to call him out on trying to pull the wool over folks' eyes in a recent column. The column touts many of the positive measures (in my view) to help people at the middle and the bottom under the Obama administration, such as expansion of the earned income tax credit, the child tax credit, and most importantly the Affordable Care Act which has extended health insurance coverage to 20 million people and allows people with serious health conditions to get insurance at the same price as every one else. These measures have been paid for by higher taxes on the wealthy. This is all very positive and the Obama administration deserves credit for these measures, even if I would have liked to see it go much further.

However, the reason my BS detector went off is that Furman tried to claim we had turned the corner in some big way on the upward redistribution of income from the last four decades. He tells readers:

"Partly as a result of these policy changes, the top 1 percent’s share of income after taxes was 12 percent in 2013 (the most recent year for which data are available), well below its 2007 peak and roughly equal to its share in 1997."

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Bloomberg decided to get into the Halloween spirit by warning our kids about the national debt. The piece is headlined "a child born today comes into the world with more debt than you." Bloomberg was going to headline the piece, "kids worried that universe is closer to destruction than when parents were born," but they decided it would be too scary.

The highlight of the piece is a graph showing the rise in the amount of debt per person over the last three and half decades along with the money graph:

"Under current law, U.S. inflation-adjusted debt per person is expected to reach the $66,000 milestone by April 2026, based on Bloomberg calculations of Congressional Budget Office and Census Bureau data."

It adds that the debt would be considerably larger as a result of Donald Trump's tax cuts and slightly larger as a result of Hillary Clinton's tax and spending programs. 

Okay folks, you should be able to guess why this Bloomberg piece is a silly joke.

That's right, it only takes the debt side of the ledger. It's almost impossible to exaggerate how absurd this is. It is an absurdity that no business would ever engage in. I suspect that Microsoft has much more debt than the restaurant down my street. If Bloomberg business coverage was like this piece it would be highlighting Microsoft's massive debt. Furthermore it would be warning that Microsoft's debt is likely to be even larger in a decade. Fortunately Bloomberg doesn't report on Microsoft this way because it has serious business reporters. They would report on Microsoft's debt in relation to its assets and its debt service in relation to its revenue or profits.

Bloomberg could report on the government debt in this way, but it wouldn't have the same effect for Halloween. If it reported on debt in this way, then it would be pretty obvious and totally non-scary that our per capita debt rises through time. Our per capita income rises through time. So what?

And, if Bloomberg cared about actually providing information on the burden of the debt it would be reported on the ratio of debt service to GDP. Currently this is around 0.8 percent of GDP (net of money refunded by the Fed to the Treasury), which is near a post-war low. By comparison, debt service was over 3.0 percent of GDP in the early 1990s when the parents of today's kids were born.

It's also worth noting the absurdity that in the Bloomberg Halloween debt story our children would be better off if we eliminated public schools and funding for their education altogether. After all, this way we could reduce their debt. In fact, they would be even better off if we stopped spending to maintain and improve infrastructure. Hey, who needs airports, roads, bridges, access to the Internet? Let's get the debt down!

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The reason for asking is that the Congressional Budget Office (CBO) has recently put out some very pessimistic projections for Social Security. These projections got some attention from the media because they were considerably more pessimistic than the projections from the Social Security Trustees, implying a somewhat larger gap between projected benefit payments and projected revenue.

While most of the attention was on the differences in the program's finances, what actually would mean more to most people is the difference in projected wage growth between the two programs. The CBO projections show a considerably slower path of wage growth than the Social Security trustees projections.

The main reason for this difference is that CBO projects that wage income will be further redistributed upward over the next decade, while the trustees project a small reversal of some of the upward redistribution of the last three decades. While the share of wage income that went over the taxable cap (currently $118,500) was just 10 percent in 1980, this had risen to 18 percent by 2015. This is one of the main reasons that Social Security's finances look worse now than had been projected three decades ago.

CBO projects that the share of wage income going to those earning above the cap (@ 6.0 percent of workers) will increase to more than 22 percent by 2026. This worsens the finances of the program, since it is not collected taxes on this money, but more importantly it means that most workers will see little wage growth over the next decade. The figure below shows average real wage growth projected by CBO for the next decade (Figure 2-9 from the Budget and Economic Outlook) and the average for the bottom 94 percent of wage earners.

Book4 13873 image001 Source: Congressional Budget Office and author's calculations.

The CBO projections imply that real wages will rise by an average of 9.0 percent over the next decade for bottom 94 percent of workers. The upward redistribution projected by CBO would cost the typical worker just over 4.4 percent of their wages. This means that for a worker who would otherwise be earning $50,000 in 2026 (in 2016 dollars), the upward redistribution projected by CBO will mean a loss of wages of $2,200, so that they would only be earning $47,800.

As a practical matter, most workers are likely to do considerably worse under the CBO scenario. If past trends continue, the workers closer to the taxable cap (e.g. the 90th percentile worker) are likely to see somewhat higher wage growth than workers near the middle and bottom of the wage distribution. In other words, the CBO projections imply that most workers will see little or no wage growth over the next decade as the overwhelming majority of wage gains go to those at the top of the income distribution.

This should be of great concern to Hillary Clinton since she has committed herself to pushing through an agenda that ensures most workers share in the benefits of wage growth. The CBO projections imply that this is clearly not the case and the projected upward redistribution of income will matter much more to workers' living standards than any conceivable increase in Social Security taxes — even if the media will do their best to ensure that the public only hears about the taxes.

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Most sectors within manufacturing have seen serious downsizing and restructuring over the last four decades. Many have gone bankrupt. Much of this story was not pretty for the workers directly affected. Many lost the only good-paying jobs they ever held. Some also lost pensions and health care benefits.

Nonetheless, the conventional wisdom among economists was that this process was good. It was associated with growing efficiency in the manufacturing sector as the least productive firms went out of business, other firms became more productive in order to survive. The net effect was that we are able to buy a wide range of manufactured goods for much lower prices than would be the case if the manufacturing sector had not gone through this period of downsizing and transition.

With this as background, it was striking to see the Wall Street Journal bemoaning what appears to be a comparable period of adjustment in the banking industry. The central point is that the banking industry appears to be less profitable than it was before the crisis. Apparently tighter regulations are playing a major role in this decline in profitability.

This drop in profitability is presented as a bad thing, but it is hard to see why those of us outside of the banking industry should see it that way. If the sector had become badly bloated prior to the crisis then we should want to see it downsized. The workers who lose their jobs can be redeployed to sectors where they will be more productive. (The same argument that economists gave for manufacturing firms.) Declining profitability is a necessary part of this story.

Maybe the banks will also stop paying their CEOs tens of millions of dollars to issue phony accounts to customers. Lower pay for CEOs and other top executives will leave more money for shareholders. 

There is a risk that the bankruptcy of a major bank could cause a serious disruption to the economy. Of course, that would imply that we still need to be concerned about "too big to fail" banks, in spite of the endless assurances to the contrary. If we have in fact fixed the too big to fail problem, then the rest of us should be celebrating the downsizing of the banking industry as the market working its magic. Too bad the WSJ doesn't like the market.

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