Paul Krugman used most of his column this morning to take some well-aimed shots at the Republican presidential contenders and congressional leadership. He points to their hostility to the Federal Reserve Board’s efforts to boost the economy because of fears of hyper-inflation. These fears have been shown to be completely ungrounded, as inflation continues to be far lower than the Fed’s target of 2.0 percent.
However, Krugman also takes a shot at Senator Bernie Sanders for supporting a bill to audit the Federal Reserve Board’s conduct of monetary policy. There are two points worth making here.
First, an outcome of an earlier version of this bill was an amendment to Dodd-Frank which required the Fed to disclose the beneficiaries of the loans from the special lending facilities it created at the peak of the crisis. At the time, the Fed was insisting that beneficiaries and the terms of the loans had to be kept secret.
While there is certainly a rationale for not disclosing a bank’s need for money in the middle of a crisis, surely at some point after the fact, one month, three months, or six months, it must be possible to reveal the loans. After all, the Fed lent trillions of dollars at below market interest rates to banks and other financial institutions (also some non-financial corporations), the public should have a right to know what happened with its money.
To my view, Sanders should be applauded for his actions on this front. It was a bipartisan effort that gave us more information about what went on the crisis and the extent to which specific banks benefited from access to the Fed’s money.
The other point has to do with political pressure on the Fed. Krugman rightly worries about Republican efforts to prevent the Fed from using its monetary tools to boost the economy, but his line of protection is to appeal to the independence of the Fed. This is even after he acknowledged that the Fed is unduly influenced by the bankers with whom it has regular contact. In fact, the banks actually control five of the twelve voting seats on the Federal Reserve Board’s Open Market Committee that sets monetary policy. (Since two of the governors’ seats are currently vacant due to inaction by Congress, five of the 10 voting members essentially are representatives of the banks.)
While the reaction of most Democrats is to insist that we just have to trust the Fed anyhow, there is an alternative of trying to build up political pressure for a Fed that actively supports full employment policy. This is the thrust of the Fed Up Campaign which involves labor unions, community groups, and other grassroots organizations across the country. There are obvious risks in making the direction of monetary policy a topic of political debate, but it is arguably a better long-run path than leaving in place a process where the banks have a very big thumb on the scale in setting policy.
David Brooks used his column today to tell readers how Bernie Sanders program would destroy the dynamism of the U.S. economy. I don’t have time to go through the whole story, but it is important to make one point.
Brooks complains that Sanders agenda would raise total spending at all levels of government from the current 36.0 percent to 47.5 percent. He argues this would require higher taxes on most people thereby depriving them of the freedom to spend their own money as they see fit.
It is worth noting that the bulk of this increased spending would be due to his health care program, which would make the government responsible for the overwhelming majority of health care costs. Clearly some of this additional cost would have to come out of the pockets of ordinary (i.e. non-rich) people, but it would be more than offset in most cases by reduced payments for insurance and out-of-pocket health care spending. In many cases, this would simply mean that the premium that a worker’s employer is now paying to an insurance company would instead go the government. It’s not clear that many people would see this as a loss of economic freedom.
The other point worth noting is that when Brooks lists the U.S. companies that have been dynamos of innovation, the first company on the list is Bell Labs. While Bell Labs was indeed a dynamo of innovation, it was the result of a government regulated monopoly (AT&T). This may not be a good example to support his argument that a large government will stifle innovation.
Morning Edition had a good piece this morning on Senator Bernie Sanders’ proposal for a financial transactions tax (FTT). There are a couple of additional points worth making.
First, while the piece noted a wide range of estimates of the amount that could be raised through such a tax, we do have some real world experience. As was noted, the United Kingdom has had a transactions tax on stock trades since the 17th century. This tax raises an amount equal to roughly 0.2 percent of GDP, which would be $36 billion annually in the current U.S. economy or roughly $400 billion over a 10-year budget horizon. This tax applies only to stocks, which allows traders to avoid it through options and other derivative instruments.
By contrast, Japan had a more broadly based financial transaction, which it eliminated in the 1990s. At its peak in 1990, the tax raised more than 1.0 percent of GDP, which would be $180 billion in today’s economy or roughly $2 trillion over a 10-year budget horizon. These experiences should provide some basis for projecting how much a broadly based tax in the United States could raise.
The other issue, which was touched on in the piece, is who bears the cost of the tax. The piece suggested that the tax would be passed on to pension funds and individuals with retirement accounts. There is an important point here that may not have been clear. While it is likely that the tax will be passed on in the cost of individual trades, pension funds and individuals with retirement accounts care about the total cost of trading, not the cost of individual trades.
This matters, because everyone agrees that there will be a large reduction in trading volume in response to the tax. If the percentage reduction in trading volume is larger than the percentage increase in trade costs due to the tax, people would actually be paying less money for their trading after the tax was imposed than before the tax. For example, if the tax raised trading costs by 25 percent, but trading volume falls by 30 percent, then people will be spending less in total on trading each year.
In that case, the financial industry bears the full burden of the tax in the form of reduced revenue from savers. This effectively is the assumption in the Tax Policy Center’s analysis of the impact of the tax, where they assumed that trading volume would fall by 1.5 times the increase in trading costs due to the tax.
In this case, there is only a cost to anyone outside the industry if the reduced trading volume somehow leads to a less well-functioning economy. In other words, the question is if we believe that reducing trading volume to its levels of 20 or 25 years ago would lead to a worse allocation of capital and more bad investment decisions by firms.
That seems implausible, but this is what those who argue a FTT would hurt the economy have to claim. If in fact, most trades are a zero sum game (one person profits by the trade, the other one loses) then the economy will not suffer from a reduction in trading volume. In that case, only the financial industry will be hurt by an FTT. The tax will effectively reallocate resources to more productive sectors of the economy.
Yesterday the Congressional Budget Office (CBO) corrected an error that it made in projecting the share of earnings that will be replaced by Social Security for those nearing retirement. In a report published last fall, CBO projected that for people born in the 1960s, the annual Social Security benefit for those retiring at age 65, would be 60 percent of their earnings for middle income retirees and 95 percent of earnings for those in the bottom quintile. The correction showed that benefits would replace 41 percent of earnings for middle income retirees and 60 percent of earnings for those in the bottom quintile.
This mattered a great deal because the originally published numbers were quickly seized upon by those advocating cuts in Social Security benefits. For example, Andrew Biggs, who served in the Social Security Administration under President George W. Bush, used the projections as a basis for a column in the Wall Street Journal with the headline “new evidence on the phony retirement income crisis.” The piece argued that benefits were overly generous and should be cut back, at least for better off retirees. (To his credit, Biggs quickly retracted the piece after CBO acknowledged the mistake.)
While this was a serious error, unfortunately it was not the first time that CBO had made a major error in an authoritative publication. In 2010, in its annual long-term budget projections it grossly overstated the negative effect on the economy of budget deficits. The 2010 long-term projections showed a modest increase in future deficits relative to the 2009 projections, yet the impact on the economy was far worse.
The 2010 projections showed a drop in GDP of almost 18 percent by 2025, compared to a balanced budget scenario. This was more than twice as large as the impact shown in the prior year’s projections. The sharp projected drop in GDP could have been used to emphasize the urgency of deficit reduction. As was the case with the recent Social Security projections, CBO corrected its numbers after the error was exposed.
Yesterday the Labor Department released data from its December Job Openings and Labor Turnover Survey (JOLTS). One of the items that got lots of attention was a rise in the quit rate to its highest level of the recovery. In fact, it is now pretty much back to pre-recession levels. (This is especially true of workers in the public sector — interesting story for another day.)
While it is good news if workers feel they can leave a job where they are unhappy or which does not fully utilize their skills, the news may not be as good as it first appears. The weak labor market of the last seven years led to very low quit rates. This means that many people who would have left their jobs in a more normal labor market stayed at their job because they were worried about finding a new one. As a result, we should expect there are many more people at jobs they would like to leave in early 2016 than would be the case say in 2007 before the recession hit.
The implication would be that quit rates should not just be returning to their pre-recession level, but rather they should rise substantially above their pre-recession level, at least for a period of time. I’m not sure whether this makes sense or not. We don’t have data on quit rates prior to 2000, so we can’t look back at what happened after prior recoveries from a steep downturn.
Anyhow, it seems plausible to me that the quit rate should be elevated for a period of time to compensate for the unusually low quit rate of prior years. If someone wants to tell me why this is wrong, I’m listening.
Yep, we have such clear warning signs of imminent disaster. I should probably also point out that the interest burden measured as a share of GDP (net of money refunded from the Fed) is at the lowest level since before World War II. You can see we are imposing a terrible burden on our children. At least the Post is honest and says that its deficit reduction means cutting Social Security and Medicare.
Oh well, here on Planet Earth low interest rates and low inflation are a very good market signal that the economy could use much more demand (i.e. larger budget deficits). The Post actually seems to support this, but tells us about the Congressional Budget Office's (CBO) projection of higher deficits in future years. As we pointed out yesterday, those higher deficits are the result of CBO's projection that interest rates will rise sharply. They have a great track record of being badly wrong on this score six years in a row. I suppose seventh time could be a charm, but I wouldn't bet on it.
Anyhow, serious people would be worried about boosting the economy now and putting people back to work. People are suffering today and our children our suffering. This is both because we have plenty of money so that they don't have to drink lead and also because putting their parents out of work is a horrible thing to do to kids.
By Dean Baker and Nick Buffie
The Peter Peterson gang has been hard at work lately trying to get people worried about the budget deficit. After all, with interest payments on the debt as a share of GDP at a post-war low and an interest rate on long-term Treasury bonds of almost 2.0 percent, things look pretty bleak. (That’s sarcasm.)
But the Washington deficit hawks (great name for a NFL team) have never let the real world interfere with their ranting about deficits, which invariably turn to the need to cut Social Security and Medicare. Unfortunately, they are getting some support in this effort from the folks at the Congressional Budget Office (CBO).
While the CBO forecasts don’t look exactly like the sky is falling end of the world stuff, they do show that the debt and deficit will both rise as a share of GDP. And, if the debt is rising as a share of GDP, and we never do anything, then at some point it will do real damage to the economy.
Most of this logic is beyond silly in a context where the economy is still far below its full employment level of output. Debt or deficits can only be an issue when the economy is close to full employment, until that point the only problem with deficits is that they are not large enough. Cutting deficits when the economy is below full employment means slowing growth and throwing people out of work.
But that is not the point I wanted to make. I thought it was worth showing why CBO is projecting that deficits will rise over the next decade. If we turn to Table 1-2 of the latest CBO Budget and Economic Outlook, we find that the deficit for this year is projected to be 2.9 percent of GDP. This should leave the ratio of debt-to-GDP more or less constant, depending on the exact growth and inflation numbers for the year.
However if we look out to 2026, the end of the CBO projection period, the deficit is projected to be 4.9 percent of GDP. At that level, the debt-to-GDP ratio would be rising, and we would be down the road toward higher interest payments leading to higher deficits, leading to higher interest payments and pretty soon, Zimbabwe.
Binyamin Appelbaum has an NYT piece arguing that many economists oppose a draft. At the risk of losing my economist card, let me raise a couple of points of dissent.
First, Appelbaum dismisses the argument that requiring everyone to share the risk of fighting a war, regardless of class, as being a deterrent to politicians’ adventurism. He refers to research that shows this is not true.
While I have not seen the research, I would be skeptical. Even if the children from wealthier families can ultimately escape a draft, forcing them to jump through hoops still means they pay a price for a war, even if not as great a price as the children from poorer families who actually have to fight. (Bill Clinton’s letter to his ROTC colonel is an excellent example of this sort of price. ROTC was a way to escape the war for those lucky enough or connected enough to get in.) Certainly protests of the Vietnam War seemed to fall off sharply when Nixon stopped sending draftees there, as the piece notes.
The other point is that the military has historically been an important source of upward mobility, at least for men, when it involved near universal service. This meant that children from disadvantaged backgrounds had the opportunity to meet, and occasionally make connections with, people who grew up in families with far more resources. (It is also good if people who will subsequently hold positions of responsibility at least have some contact with people who grew up in working class and poor families.)
These benefits are even more concrete when veterans enjoy benefits like low-cost or no-cost college tuition and access to low interest mortgages. Congress is more likely to support generous veterans benefits when they apply to nearly the whole population, rather than a subset of relatively low-income people who have little alternative to the military as a promising career opportunity.
For these reasons a draft might not be a bad idea, in spite of the standard economic arguments against it.
Correction: An earlier version incorrectly said that the piece had claimed that "all" economists opposed the draft.
Steve Eisman, the hedge fund manager of Big Short fame, argued against breaking up the big banks in a NYT column today. His basic argument is that we now have things under control because the regulators have effectively limited the banks’ ability to leverage themselves. He also says that even if we wanted to break up the banks, we don’t know how to do it:
“Furthermore, no advocate of a breakup has come forward with a plan on how to do it. Large banks are global, complex, integrated institutions. Breaking them apart would be incredibly difficult, long and disruptive, and the banks might have to freeze loan growth during the process, slowing our economy even further.”
Hmmm, “no advocate of a breakup has come forward with a plan,” sounds a bit like nobody saw the housing bubble.
Okay, first Eisman raises a good point in that regulation is much better today than it was before the crisis. But those of us who are in favor of downsizing the behemoths question whether that will always be the case. After all, there is a lot of money to be gained from being able to outmaneuver the regulators.
And I’m not sure that many people would want to bet the health of the financial system on Washington bureaucrats staying a step ahead of the Wall Street gang. And in spite of improved regulation, I don’t think many people believe that the government would let J.P. Morgan or Goldman Sachs go under if they faced bankruptcy.
But let’s leave aside the merits of breaking up the banks and ask whether it could be done. There is in fact a simple way to break up the banks; let the banks do it themselves.
Okay, I’m not going to get in the habit of responding to everything Paul Krugman writes on Bernie Sanders, but there are a few quick points worth making about his latest post on Sanders’ electability.
1) Krugman is raising an entirely reasonable point that voters should consider, so no one should be upset at him for putting the issue on the table. (No, he is not looking for a job in the Clinton administration.)
2) We should be clear on the question being asked. If the issue is keeping the Republicans out of the White House, then the question is not whether Bernie Sanders could beat the Republican nominee. The question is how likely is it that Sanders could defeat Clinton for the nomination, and then lose a general election that Clinton would have won?
In this respect, it is important to recognize how much the nomination process is stacked towards Clinton. It is not just a question of her having the vigorous support of a former Democratic president and largely controlling the Democratic National Committee. She is also likely to have the overwhelming support of the super-delegates (Democratic members of Congress, state office holders, and other prominent Democrats).
The super-delegates are just under 15 percent of the total number of delegates. If Clinton wins this group by a margin of 80 percent to 20 percent (she has more than 95 percent of the super-delegates who have already made a commitment), then Sanders would have to capture more than 55 percent of the elected delegates to get the nomination.
This means that Sanders could not get the nomination just by scraping by in the primaries; he would need a decisive victory. The question then is, if Clinton were to lose decisively in the primaries to a candidate who has all the weaknesses touted by the experts to whom Krugman referred us, how likely is it that she would have been able to win the general election if Sanders had not gotten in her way?
The point is important, because if the argument is that Sanders can’t win an election that Clinton would not have won either, then we aren’t arguing over control of the White House, we are arguing over who gets to make the concession speech on November 8th. There is the issue that the margin would be smaller with a Clinton candidacy and this would help Democrats lower down on the ticket. This is an important issue worth considering, which is point 3).
The Washington Post had an article on a vote in West Virginia to make it a “right-to-work” state. This means that workers cannot sign enforceable contracts with employers, which require that workers covered by the contract pay the union their share of its operating costs.
The piece refers to a study that purported to find that states with “right-to-work” (RTW) laws had more job growth than other states. This study was fundamentally flawed in its design, since it was treated as a time series study, using years as individual observations, when it really was a cross section study.
Only one state actually switched from being non-RTW to being RTW in the period analyzed. (The study wrongly has both Texas and Utah making this switch, when in fact they just adopted stronger RTW laws.) This means that they really only have data on the 50 states, not separate observations for each year for each state. Treating the analysis as a time-series in this way gives an illusion of having much more data than is actually available. This makes it possible to get statistical significant results when it almost certainly would not be possible if the analysis were done correctly.
To see this point, imagine the study had used monthly data instead of annual data. This would give them twelve times as many data points, even though there was no additional information on the relevant variable. If a test finds statistically significant results in this context, which would not be present in a simple cross section analysis, then these results are clearly being driven by other factors, not a state’s RTW status.
In most ways the January employment report was weaker than most economists had expected (not me, my jobs prediction was 140,000). However, many reporters seized on the 12 cent reported rise in wages in January to say that wages are finally starting to rise at a healthy pace. This was indeed a large one-month jump, but the 2.5 percent rise over the last year was pretty much the same we had been seeing for many months. (The Post piece took the 2.9 percent annual rate over the last six months to claim a more solid rise.)
There are two points to make on this wage growth. First, the monthly numbers are extremely erratic. The Labor Department reported zero growth in the hourly wage for December. It is almost inconceivable that average wages didn’t rise at all in December and then suddenly jumped 12 cents (0.5 percent) in January. This is why it is best to do some averaging.
The six month average used by the Post is better than taking a single month, but can also be misleading. If we had done six month averages last year, we would have been happy to see a rise of 2.6 percent over the prior six months in August, only to be disappointed when it dropped to 2.2 percent in September. My preferred approach is to compare the average wage of the last three month period (Nov to Jan in this case) and compare it to the average for the prior three month period (Aug to Oct). That produces an annual rate of 2.45 percent in this case. Not much evidence of an acceleration of wage growth in this story.
The other point is that the rise in January was almost certainly helped by the effect of a rise in many state and local minimum wages at the start of the year. The average hourly wage in the leisure and hospitality sector rose by 0.8 percent in January. This is important to note, since we will not see this effect repeated in future months. In short, we should hold the applause on wage growth until we see it confirmed by more data. (On this point, it is worth noting that the Labor Department’s Employment Cost Index for the 4th quarter showed no evidence of any acceleration in the growth of wages or compensation.)
It is striking that the bad news in this report has been largely overlooked. In the addition to the slower than expected jobs growth, some of the measures on the household side were not good. Both the average and median length of unemployment increased, as did the share of long-term unemployed. Also, the percentage of unemployment due to voluntary job leavers fell. At 9.9 percent, it is at a level that would be expected in a recession, not a strong labor market.
In short, while not a terrible report, this is not one that should have prompted celebration.
In a piece on the difficulty that many people are having in paying their rent, Morning Edition told listeners that rents have risen back to their levels of the housing bubble years. Actually rents didn’t rise in the housing bubble, rather they pretty much tracked the overall rate of inflation. The sharp divergence between house sale prices and rents was one of the reasons that people who pay attention to data were able to recognize the bubble.
Neil Irwin had an Upshot piece this morning on the likelihood that the U.S. economy will fall into recession in 2016. He argues that a recession is unlikely, but then gives readers a scenario in which it is possible.
I will say first that I agree that a recession is unlikely. Recessions in the past were brought on by the Fed’s efforts to slow inflation with higher interest rates or by the bursting of an asset bubble.
The Fed’s December rate hike was a mistake, but that is not going to cause a recession. And, few of the members of the Fed’s Open Market Committee are wacky enough to raise rates further in a weak economy with no inflation.
While there may have been bubbles in some sectors of the economy, there was nothing like the $10 trillion bubble in the stock market in the late 1990s or the $8 trillion bubble in the housing market in the last decade. None of the various bubbles were driving the economy, so their collapse will not bring about a recession.
The question then is what could bring a recession. Irwin’s answer is that the continuation of low oil and commodity prices leads to downturns in oil exporting countries and loan defaults by energy producers both domestic and foreign. The hurt to the economy from weaker demand is then compounded by the pessimism of consumers and firms. The former cut back on consumption, while the latter cut back on investment. With the Fed paralyzed by already low interest rates, and also its unwillingness to concede the December rate hike was a mistake, the economy slides into recession.
I see this story as highly unlikely. First, while psychology does matter, there is a tendency to hugely over-rate the size of these effects. For years economists and economic writers were telling us that people were reluctant to consume following the collapse of the housing bubble because they were fearful about their economic prospects.
In fact, there was a much simpler explanation. People had lost trillions of dollars of wealth when the housing bubble burst and the stock market plunged. The “wealth effect,” the idea that people spend based on their wealth, is an economic concept that dates back almost a century. Alan Greenspan frequently touted that people were consuming based on the equity generated by the housing bubble.
Why was it a surprise that they cut back their consumption when this wealth disappeared? The evidence that people are now saving their oil dividend is extremely weak and can easily disappear in subsequent revisions to the data. In short, I don’t see a story where people cut back their consumption in a big way because they hear that Russian economy is in trouble.
There may be a bit more of a story on the investment side, but here too the psychological hit in 2008 was hugely exaggerated. If we pull out structures (there was also a bubble in non-residential investment) Investment actually didn’t fall that much in the downturn and fairly quickly got back to pre-recession levels as a share of GDP. This doesn’t mean that bad vibrations from plummeting oil prices can’t have an impact, just that it is not likely large enough to be recession material.
On the Fed, it is important to note that it is far from out of ammunition. In addition to its conventional control of the short-term interest rate, and its buying of long-term bonds under quantitative easing, the Fed can also go the route of targeting long-term interest rates. Under this policy, which has been pushed by Joe Gagnon, a former Fed economist, the Fed would set a target of say 1.0 percent for the interest rate on 5-year Treasury notes. It would commit itself to buying as many notes as necessary to keep the interest rate at its targeted level.
The Fed has not tried this sort of policy in more than half a century, but there is no legal constraint that prevents it from going this route. Presumably its hesitance is the fear that such a policy could spur inflation.
While it is understandable that the Fed must concern itself with inflation, it is important for the public to recognize that it has policy options to boost the economy and lower unemployment that it has chosen not to use. It is simply wrong to say the Fed is out of ammunition.
The NYT had a front page article on how bad debt is threatening world growth. The article focused on China, which it indicated could have as much as $6 trillion in bad debt.
It would have been worth mentioning that China’s government could easily cover the cost of bad debt and keep its economy moving forward. The government’s debt to GDP ratio is very low, its interest burden is less than 1.0 percent of GDP, and it is more worried about deflation than inflation.
In this context, there is no economic reason the government could not put up the money to clear up bad debts. The only obstacles would be political.
It’s clear that Bernie Sanders has gotten many mainstream types upset. After all, he is raising issues about the distribution of wealth and income that they would prefer be kept in academic settings, certainly not pushed front and center in a presidential campaign.
In response, we are seeing endless shots at Sanders’ plans for financial reform, health care reform, and expanding Social Security. Many of these pieces raise perfectly reasonable questions, both about Sanders’ goals and his route for achieving them. But there are also many pieces that just shoot blindly. It seems the view of many in the media is that Sanders is a fringe candidate, so it’s not necessary to treat his positions with the same respect awarded the views of a Hillary Clinton or Marco Rubio.
The New Yorker is clearly in this attack mode. It ran a piece by Alexandra Schwartz asking, “Should Millennials Get Over Bernie Sanders?” You can guess the answer.
But the piece runs into serious problems getting there. It tells readers:
“[Sanders’] obsession with the banks and the bailout is itself phrased in weirdly retro terms, the stuff of an invitation to a 2008-election theme party. As my colleague Ben Wallace-Wells points out, we voters under thirty have come of political age during the economic recovery under President Obama. When I graduated from college, unemployment was close to ten per cent; it’s now at five. Sanders’s attention to socioeconomic justice is stirring and necessary, but when his campaign tweets that it’s “high time we stopped bailing out Wall Street and started repairing Main Street,” you have to wonder why his youngest supporters, so attuned to staleness in all things cultural, are letting him get away with political rhetoric that would have seemed old even in 2012.”
Those familiar with economic data know the labor market, which is the economy for the vast majority of the public, is very far from recovering from the recession. While the unemployment rate is reasonably low, this is largely because millions of workers have dropped out of the workforce.
And, contrary to what is often asserted, these are not retiring baby boomers or people without the skills needed in a modern economy. The employment rate of prime age workers (ages 25–54) is still down by 3.0 percentage points from its pre-recession level. Furthermore, this drop is for workers at all levels of educational attainment. Employment rates are even down for workers with college and advanced degrees. Other measures of labor market strength, like the percentage of people involuntarily working part-time, the quit rate, and the duration of unemployment spells are all still at recession levels.
Furthermore, the huge shift from wages to profits that we saw in the downturn has not been reversed. As a result, wages are more than 6.0 percent lower than they would be if the labor share had not changed.
Source: Bureau of Economic Analysis.
If this stuff is hard for New Yorker editor types to understand, if workers lose 6.0 percent of their wages to profit it has the same impact on their living standards as if they faced a 6.0 percentage point increase in the payroll tax. Would the New Yorker think that today’s young people have anything to complain about if they had seen an increase in the payroll tax in 2009-2010 of 6.0 percentage points and which still remains in place today?
If the answer to that one is “yes,” then its editors should be able to understand why millennials in 2016 are unhappy about the state of the economy and why they might find a figure like Senator Sanders attractive.
Eduardo Porter had a piece this morning about how a group of academics on the left and right came together around a common agenda. It is worth briefly commenting on two of the items on which the “left” made concessions.
The first is agreeing that Social Security benefits for “affluent Americans” should be reduced. There are three major problems with this policy. The first is that “affluent Americans” don’t get very much Social Security. While it is possible to raise lots of money by increasing taxes on the richest 1–2 percent of the population, the rich don’t get much more in Social Security than anyone else. This means that if we want to get any significant amount of money from reducing the benefits for the affluent we would have to reduce benefits for people that almost no one would consider affluent. Even if we went as low as $40,000 as the income cutoff for lowering benefits, we would still only save a very limited amount of money.
The second problem is that reducing benefits based on income is equivalent to a large tax increase. To get any substantial amount of money through this route we would need to reduce benefits at a rate of something like 20 cents per dollar of additional income. This is equivalent to increasing the marginal tax rate by 20 percentage points. As conservatives like to point out, this gives people a strong incentive to evade the tax by hiding income and discourages them from working.
Finally, people have worked for these benefits. We could also reduce the interest payments that the wealthy receive on government bonds they hold. After all, they don’t need as much interest as middle-income people. However no one would suggest going this route since the government contracted to pay a given interest rate.
Social Security involves a similar sort of commitment, although many on the right would like to deny this fact. The program is already structured to be highly progressive, the wealthy pay much more money into the program for every dollar they get back. There are many proposals from the left to make the program even more progressive by increasing the taxes paid by the wealthy. This would help to ensure the long-term solvency of the program while maintaining the level of benefits for all workers. There is a serious risk that cutting benefits for middle income seniors will be a first step in the opposite direction, undermining the public support for the program.
The other dubious position in this agenda is the strong endorsement for marriage. While there are enormous benefits from strong relationships, especially for children, the government is not a very good matchmaker. It is not obvious what the government can do to increase the likelihood that two compatible people will remain together in a healthy relationship.
There are plenty of unhealthy relationships, where one member is abusive of the other and often children. In these cases, it is not good to keep couples together and it would be foolish for the government to try.
As a matter of policy, we have to recognize that a large number of children will be raised by single parents. We need policy to ensure that these children are not penalized as a result of their parent’s marital status. Many proposals to promote marriage will at least indirectly have this effect.
Margot Sanger-Katz had a NYT Upshot column arguing that Hillary Clinton and Bernie Sanders plans to have Medicare negotiate drug prices ultimately won’t prove successful in lowering costs because Medicare can’t simply refuse to pay for a drug. There is much truth to this argument, but it is worth working through the dynamics a step further.
The reason why Medicare has to accept prices from a single drug company, as opposed to choosing among competing producers, is that the government gives drug companies patent monopolies on drugs. Under the rules of these monopolies, a pharmaceutical company can have competitors fined or even imprisoned, if they produce a drug over which the company has patent rights.
The granting of patent monopolies is a way that the government has chosen to finance research and development in pharmaceuticals. (It also spends more than $30 billion a year financing biomedical research through the National Institutes of Health.) It could opt for other methods of financing research.
For example, Bernie Sanders proposed a prize fund to buy the rights to useful drug patents, following a model developed by Joe Stiglitz, the Nobel Prize winning economist. Under this proposal, pharmaceutical companies would be paid for their research, but the drug itself could then be sold in a free market like most other products.
In this situation, almost all drugs would be cheap. We wouldn’t have to debate whether it was worth paying $100,000 or $200,000 for a drug that could extend someone’s life by 2–3 years. The drugs would instead cost a few hundred dollars, making the decision a no-brainer.
There are other mechanisms for financing the research. We could simply have the government finance clinical trials, after buying up the rights for promising compounds. In this case also approved drugs could be sold at free market prices.
There are undoubtedly other schemes that can be devised that pay for research without giving drug companies monopolies over the distribution of the drug. Obviously we do have to pay for the research, but we don’t have to use the current patent system. It is like paying the firefighters when they show up at the burning house with our family inside. Of course we would pay them millions to save our family (if we had the money), but it is nutty to design a system that puts us in this situation.
Anyhow, if we are having a debate on drug prices, we shouldn’t just be talking about how to get lower prices under the current system. We should also be talking about changing the system.
The NYT had an article on different trade models that are being used to predict the impact of the Trans-Pacific Partnership (TPP). It reported on the projections from a model from the Peterson Institute which shows that the TPP would add 0.036 percentage points to the annual growth for the United States rate over the next 14 years. On the other hand, it reported the projections of a model from Tufts University which showed that the deal would lose economy 450,000 jobs (@0.3 percent of total employment) and slow growth.
It would have been helpful to add a bit of background to this dispute. The model from the Peterson Institute explicitly assumes that the trade deal cannot have an effect on the trade deficit and employment:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
This was a conventional assumption in trade models prior to the Great Recession. The view was that if a trade deal led to a change in the trade deficit, currencies values would adjust so that the overall trade balance would not change. Furthermore, even if a rise in the trade deficit did lead to some fall in output and employment, this could be offset by fiscal and/or monetary policy. Therefore economists need not worry about trade’s impact on aggregate output and employment.
In the wake of the Great Recession many of the world's most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) no longer believe that the economy will automatically bounce back to full employment. They now accept the idea of “secular stagnation,” which means that economies can suffer from long periods of inadequate demand. If secular stagnation is a real problem, then there is no basis for assuming that the demand and jobs lost due to a larger trade deficit can be offset by other policies.
What else is new? Yep, the deficit is exploding and it will devastate our children and no one will listen:
“Based on the campaign so far, this important conversation seems unlikely. The leading candidates are playing Russian roulette with the nation’s future, assuming that deficits can be ignored because most Americans (or so it seems) would prefer it that way.”
Folks who pay attention to the economy might notice that the interest rate on 10-year Treasury bonds is now under 2.0 percent. Apparently it’s not just the politicians, the financial markets are not too concerned about the deficit either.
As far as the burden on our kids, interest on the debt (net of transfers from the Federal Reserve Board) comes to less than 0.8 percent of GDP. By comparison, interest payments were over 3.0 percent of GDP in the early 1990s condemning us to a decade of stagnation. (Oh wait, doesn’t seem to have worked out that way.)
If we are concerned about helping our kids, how about running larger deficits to employ their parents? More spending on infrastructure, education, health care and other needs would help to make the labor market tight enough so that workers have the bargaining power they need to get higher wages. It would also make the economy more productive in the future.
The risk to our children from having parents without the ability to care for them dwarfs any risk they face from higher interest payments on the debt. But hey, without Robert Samuelson they might not even have someone to tell them about the debt.
In today’s column he makes a pitch for Republican tax reform telling readers:
“If there is going to be growth-igniting tax reform — and if there isn’t, American politics will sink deeper into distributional strife — Brady [Representative Kevin Brady, the chair of the House Ways and Means Committee] will begin it. Fortunately, the Houston congressman is focused on this simple arithmetic: Three percent growth is not 1 percent better than 2 percent growth, it is 50 percent better.
“If the Obama era’s average annual growth of 2.2 percent becomes the “new normal,” over the next 50 years real gross domestic product will grow from today’s $16.3 trillion (in 2009 dollars) to $48.3 trillion. If, however, growth averages 3.2 percent, real GDP in 2065 will be $78.6 trillion. At 2.2 percent growth, the cumulative lost wealth would be $521 trillion.”
Of course 3.2 percent growth would lead to much more output than 2.2 percent growth. The problem is that there is no way on earth that any tax reform plan will add a full percentage point to growth. It would be an enormous success if a tax reform plan added 0.2–0.3 percentage points to growth.
While it is nice that Mr. Will can do compounding of growth rates, but we don’t have tax policies that will raise the growth rate by this amount even if we managed to over-ride every interest group that benefits from their special tax breaks.
So it’s nice that Republicans still want to believe in fairy tales, but those who are old enough to remember the Reagan tax cuts and the George W. Bush tax cuts or are slightly familiar with economics know better than to buy Mr. Will’s wild fables.