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).
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 straightforward, 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.
Source: Social Security Trustees Report and Author's Calculations.Add a comment
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.Add a comment
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.Add a comment
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 run away 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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment
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:
Add a comment
"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."
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!Add a comment
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.
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.Add a comment
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.Add a comment
That's right, Friedman is actually supporting measures that would help to reverse the upward redistribution of the last four decades. In his column today Friedman identifies himself as a citizen "who believes that America needs a healthy center-right party that offers more market-based solutions to problems; keeps the pressure on for deregulation, freer trade and smaller government."
Of course, reducing the length and strength of patent and copyright monopolies would be a big step towards freer trade. If we paid free market prices for prescription drugs instead of today's protected prices, we would save in the neighborhood of $360 billion a year (@ 2.0 percent of GDP).
Currently, doctors have to complete a residency program in the United States to practice medicine here. If we replaced this requirement with one designed to ensure that doctors practicing in the United States were competent, it could save us around $100 billion annually in medical expenses.
As can be seen, there are enormous potential gains to the public from freer trade. It's good to see Friedman's interest in turning policy in that direction. It would be nice if people in positions of political power shared his point of view.Add a comment
Given his history of promoting racism, xenophobia, sexism and his recently exposed boasts about sexual assaults, not many people want to be associated with Donald Trump. However, that doesn’t mean everything that comes out of his mouth is wrong.
In the debate on Sunday Donald Trump made a comment to the effect that because of Nafta and other trade deals, “we lost our jobs.” The NYT was quick to say this was wrong.
“Employment in the United States has increased steadily over the last seven years, one of the longest periods of economic growth in American history. There are about 10 million more working Americans today than when President Obama took office.
“David Autor, an economist at M.I.T., estimated in a famous paper that increased trade with China did eliminate roughly one million factory jobs in the United States between 2000 and 2007. However, an important implication of his findings is that such job losses largely ended almost a decade ago.
“And there’s no evidence the North American Free Trade Agreement caused similar job losses.
“The Congressional Research Service concluded in 2015 that the ‘net overall effect of Nafta on the U.S. economy appears to have been relatively modest.’”
There are a few things to sort out here. First, the basic point in the first paragraph is absolutely true, although it’s not clear that it’s relevant to the trade debate. The United States economy typically grows and adds jobs, around 1.6 million a year for the last quarter century. So any claim that trade has kept the U.S. from creating jobs is absurd on its face. The actual issue is the rate of job creation and the quality of the jobs.Add a comment
By Dean Baker and Lara Merling
There have been several efforts by the media and various organizations funded by the Peter G. Peterson Foundation to highlight projected shortfalls in the Social Security trust fund in the context of the presidential campaign. They have argued that candidates should be proposing plans to deal with these shortfalls and in particular that these plans should include cuts to Social Security. Implicitly, or sometimes explicitly, they have argued that the projected tax increases needed to maintain full funding for the program would be too large a burden on taxpayers and the economy.
In this context, it is worth remembering that the economy’s output has fallen sharply relative to the levels projected before the downturn in 2008–2009. If the economy had grown as was projected by the Congressional Budget Office in 2008, it would be more than 10.5 percent larger (almost $2 trillion) than it is today. This lost output comes to more than $6,200 per person for every man, women, and child in the country.
The exact cause of this loss in output is not easy to determine. Usually the economy bounces back from a recession and more or less returns to its trend path of growth. That didn’t happen with this recession. A main reason it didn’t bounce back is that there was no source of demand to replace the demand generated by the housing bubble. The bubble led to a massive boom in construction. It also caused consumption to jump as people spent based on their bubble generated housing wealth.
The NYT had its second major article in less than a month on the alleged mistreatment of a small public pension fund by the California Public Employee Retirement System (Calpers). The focus of this piece is the bill that the small California town of Loyalton faces from terminating its pension plan for four retirees and converting to a 401(k) system. According to the piece, the city council apparently did not understand the information Calpers gave it on termination costs when it voted in 2012 to end its pension with Calpers. This is unfortunate, but it is not clear that the council's confusion is an appropriate topic for a major NYT piece.
The prior piece discussed problems involving pensions for six workers for Citrus Pest Control District No. 2. They discovered that there would be substantial costs associated with terminating their participation in Calpers and switching to a 401(k) pension. While that piece, like this one, implied that Calpers has been doing something improper; in fact, the system has provided all the appropriate information to its participants.
It is certainly plausible that these very small systems with no professional administrators may not understand the information given to them by Calpers. In this case, the problem is a lack of sophistication on the part of the people managing these small funds, not Calpers.
Of course, this is the argument as to why a defined benefit system like Calpers is better than a 401(k) type system where individuals have to make their own investment decisions. Most people are not financially sophisticated. As a result they often make bad choices in managing their money. This is especially likely when people pushing various funds are in a position to make large fees by promoting bad choices.
It is striking that the NYT has now devoted a large amount of space to the problems facing a total of ten workers in the California Public Employees Retirement System. It might be appropriate for it to shift its focus to the tens of millions of workers without adequate retirement plans.Add a comment
We can always count on Robert Samuelson to give us some economic misinformation on Monday morning and he didn't let us down this week. In a very balanced column (yes, many tons of sarcasm here) decrying the economic proposals of both Donald Trump and Hillary Clinton he told readers:
"The United States runs chronic trade deficits because the dollar serves as the main global currency. This raises its exchange rate, putting U.S. manufacturers at a disadvantage."
This is wrong at just about every level. First, there are multiple reserve currencies, not just dollars. And, they trade frequently against each other, so there is a limit to how much the dollar will rise relative to the euro, yen, or pound because it is the main reserve currency. So, that is not the biggest part of the story of the trade deficit.
The more important part of the story is that countries are holding much larger reserves relative to their GDP now than they did in the years prior to the East Asian financial crisis in 1997. This is due to the harsh terms of the bailout imposed by the Clinton administration through the I.M.F. As a result of these terms, virtually every country in the developing world in a position to do so began accumulating massive amounts of foreign reserves. This was to avoid ever having to be in the same situation as the East Asian countries and have to rely on the I.M.F. for help.
The result was that instead of being net importers of capital from rich countries and running trade deficits, as standard economic theory would predict, developing countries became large exporters of capital running trade surpluses with rich countries. This was the origin of the "global savings glut" and secular stagnation that many prominent economists have complained about in recent years.
This is all worth mentioning in the context of the rest of Samuelson's piece since he seems obsessed with the idea that we face inadequate supply when the economy's problem is quite obviously one of inadequate demand. In other words, he is recommending that someone on the edge of starvation go on a diet.
His complaint about Hillary Clinton's proposals to expand Social Security and pay for college tuition for poor and middle-class children is that we don't have enough money. The whole story of secular stagnation is that we aren't spending enough money.Add a comment
The line that large numbers of people are out of work or seeing declining wages due to the wonders of new technology is really popular among pundits and elite-types. If technology is the culprit then we can all wring our hands and say how unfortunate it is that we have these losers, but it means that the folks on top are not to blame. After all, we aren't going to blame the Steve Jobs or Elon Musks of the world for their great innovations.
For this reason, it is understandable that news outlets owned by rich people would endlessly promote this line even though it is utter nonsense with no basis in reality. Yet one more piece in this genre is a column by Ryan Avent in the Guardian. The column is taken from his new book, "The Wealth of Humans", which touts the great developments in technology in recent years. The column sees large numbers of workers being displaced by technology, leading to wide-scale unemployment.
The obvious problem with this argument for those in the reality-based community is that it is a story of massive unemployment due to rapid productivity growth. But we haven't seen rapid productivity growth in recent years. In fact, productivity growth has averaged just 1.0 percent annually over the last decade. That compares to a rate of almost 3.0 percent in the decade from 1995 and 2005 and the quarter century from 1947–1973.
Year over Year Change in Productivity
Source: Bureau of Labor Statistics.
So what we are seeing here is a continuing effort to misrepresent the nature of the problem of unemployment with something which clearly cannot offer a plausible explanation. If productivity growth is very slow then it doesn't make sense to argue that people are losing their jobs because of rapid productivity growth.Add a comment
The Brexit vote was a case where the elites were clearly aligned against the U.K. leaving the European Union. While they had many good arguments on their side, and much of what the pro-Brexit crew was saying was nonsense, some of the elite gloating now also falls into the nonsense category.
In particular, the fall in the British pound is being taken as evidence that Brexit was a mistake. Actually, this is not really evidence of anything. The pound had become seriously over-valued in recent years causing the U.K. to run a current account deficit that is projected to be almost 6.0 percent of GDP for 2016. This is almost certainly not sustainable. The current account deficit also leads to a large gap in demand, which at the moment appears to be filled primarily by demand generated by a housing bubble.
Note that this is an economic quagmire created by the British elite: the establishment folks running the Bank of England and the Treasury Department. The Brexiters had nothing to do with it.
The correction for an excessive current account deficit is a fall in the value of the currency, which the U.K. is seeing now. Rather than being a negative for the economy, this is a positive development. It is the only plausible mechanism through which the U.K. can get closer to balanced trade. While the decline has undoubtedly been hastened by fears over Brexit, the bigger problem was letting the pound get so over-valued in the first place.
It is also worth noting that if the value of the pound is measured relative to the euro rather than the dollar, which is arguably the more appropriate yardstick, the pound has not fallen that sharply. It is still well above the lows it hit relative to the euro in 2008 and 2009.
As the U.K. loses part of its financial industry in the fallout from Brexit, it will need increased output in other areas to fill the gap created. A lower-valued pound would be an important part of this story. A lower-valued pound will make a wide range of U.K. produced goods and services more competitive internationally, reducing the size of the country's trade deficit.
The long and short is that anyone who thinks the falling pound is the best evidence of the foolishness of Brexit doesn't have a very good argument for their position.Add a comment
The NYT printed a column by Arthur Brooks which beautifully displayed how political elites misunderstand the appeal of Donald Trump. The piece, which is titled "those who don't understand Trump are doomed to repeat them," complained that many people see Trump's rise as meaning, "that mainstream positions on issues such as trade and immigration must be fundamentally rethought."
Brooks goes on to assert:
"The real issue is weak, unevenly shared growth. If we addressed this issue, and if people felt their lives improving, the appetite for invective on secondary issues such as trade and immigration would dissipate. So walking away from free enterprise principles on trade and immigration is not the solution."
While the real issue is in fact unevenly shared growth, the fact is that we have not been following "free enterprise" principles on trade and immigration. Longer and stronger patent and copyright protections, which are the equivalent of tariffs of several thousand percent, are not "free enterprise." Nor is a licensing system which prevents foreign trained doctors from practicing in the United States unless they complete a residency program in the United States part of most definitions of "free enterprise." (Dentists have to complete a dental school in the U.S., although recently graduates of Canadian schools were also allowed to practice here.)
As a result of patent and related protections for prescription drugs we will pay more than $440 billion for drugs that would likely sell for around 10 percent of this price in a free market. The difference of close to $400 billion a year is more than five times the amount that we spend on food stamps and twenty times the amount that we spend on TANF. The "doctor tax" that we pay as a result of protectionism is close $100 billion annually. This is the difference between what we pay for doctors in the U.S. and what we would spend if our doctors were paid the same as doctors in Germany, Canada, or other wealthy countries.
These and other forms of protectionism are responsible for "unevenly shared growth." The Trumpites will thrive both as long as such protections persist and even more so as long as our elites pretend that they are just the free market. This is of course the point of my new book, Rigged: How Globalization and the Rules of the Market Economy Were Structured to Make the Rich Richer.Add a comment