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).
Trade deals are usually thought to increase productivity by allowing countries to benefit from comparative advantage, where each country concentrates on the areas where it is relatively more efficient. For this reason it is striking that a study on the impact of reversing NAFTA that was cited in a NYT article found that the United States, Canada, and Mexico would all see an increase in productivity if NAFTA was reversed.
While both the article and the study highlighted the number of jobs that would be lost if NAFTA were repealed, the study actually projects that GDP would fall by a considerably smaller percentage for each of the three countries. In the case of the United States, the study projects a loss of 255,000 jobs or 0.17 percent of total employment. However GDP is projected to fall by just 0.08 percent. This implies a gain in productivity of 0.09 percentage point.
Canada is projected to 125,000 jobs or 0.69 percent of total employment. However its GDP is only projected to drop by 0.48 percent, implying a productivity gain of approximately 0.21 percent. Mexico turns out to be the big winner, with its employment falling by 951,000 or 1.82 percent, while GDP only drops by 0.87 percent, implying a productivity gain of approximately 0.95 percent.
This gain in productivity is presumably associated with higher wages, since we expect workers to be paid in accordance with their productivity. In principle, governments could tax away a portion of these wage gains and redistribute them to the unemployed to ensure that everyone gains, making the reversal of NAFTA a win-win for all involved.
No, I don't take these projections seriously, but the NYT apparently wants us to. So, if we buy what the NYT is selling, we should believe that we could get a modest boost to productivity if we just did away with NAFTA altogether.Add a comment
Doug Schoen, a former consultant to Bill Clinton, argued the case that the Democrats should keep their ties to Wall Street in a NYT column this morning. While he does advance his argument with some red-baiting and bad logic, he uses tradition as a starting point.
"Many of the most prominent voices in the Democratic Party, led by Bernie Sanders, are advocating wealth redistribution through higher taxes and Medicare for all, and demonizing banks and Wall Street.
"Memories in politics are short, but those policies are vastly different from the program of the party’s traditional center-left coalition. Under Bill Clinton, that coalition balanced the budget, acknowledged the limits of government and protected the essential programs that make up the social safety net.
"President Clinton did this, in part, by moving the party away from a reflexive anti-Wall Street posture. It’s not popular to say so today, but there are still compelling reasons Democrats should strengthen ties to Wall Street."
Of course memories are not actually short, contrary to what Schoen claims. Many supporters of harsher policies directed against the financial sector remember the stock bubble whose crash led to what was at the time, the longest period without job growth since the Great Depression. They also remember a financial sector that continued to run wild as the housing bubble inflated. And they remember the Great Recession that followed the collapse of that bubble. And, they remember the government's bailout policies that ensured that the financial industry types would end up on their feet and not in jail.
But Schoen does go beyond appealing to tradition.Add a comment
When it became impossible to sell the Trans-Pacific Partnership (TPP) on its economic merits, proponents of the deal began to argue for it as a way to contain China's power in the region. Thomas Friedman picks up this line and runs with it in his latest column.
"Trump came into office vowing to end the trade imbalance with China — a worthy goal. And what was his first move? To tear up the Trans-Pacific Partnership, the trade deal that would have put the U.S. at the helm of a 12-nation trading bloc built around U.S. interests and values, potentially eliminating some 18,000 tariffs on U.S. goods and controlling 40 percent of global G.D.P. And China was not in the group. That’s called leverage.
"Trump just ripped up the TPP to “satisfy the base” and is now left begging China for trade crumbs, with little leverage. And because he needs China’s help in dealing with North Korea, he has even less leverage on trade."
Let's see, we're eliminating 18,000 tariffs. That sounds really impressive, except the vast majority of these tariffs were near zero anyhow. Admittedly, a zero tariff is more supportive of trade than a tariff of 1.0 percent, but it's not exactly going to lead to a flood of exports. It has roughly the same impact as a 1.0 percent decline in the value of the dollar, the sort of change in currency values that we often see in a single day.
The touting of the number of tariffs, rather than the impact on trade is the sort of cheap trick propagandists resort to when they can't make a serious argument. It's worth also noting that the 18,000 tariff figure includes many altogether meaningless tariffs, like Brunei's tariffs on ski boots made in the United States and tariffs on items that are already banned from international trade, like shark fins.Add a comment
No regular reader of the NYT expects great insights from David Brooks, but the sort of name-calling in today's column is the sort of thing one expects from a grade schooler. It turns out that if you don't agree with Brooks' view of the world you are a "downswinger," you have gone from a "optimistic, progress-embracing view toward a pessimistic, system-doubting view."
Well hey, who wants to be a downswinging pessimist, as opposed to someone who embraces progress? How about we instead divide the world between those who live in reality and work for a living and those who earn a good salary lying in NYT columns.
David Brooks begins his piece by telling us these are the best of times, especially for those of us who live in the United States. Here's his second paragraph:
"In 1980 the U.S. had a slight edge in G.D.P. per capita over Germany, Japan, France and the U.K. But the U.S. has grown much faster than the other major economies over the past 37 years, so that now it produces about $54,000 of output per capita compared with about $39,000 for Japan and France."
Hmmm, a slight edge in 1980? Here's the numbers according to the International Monetary Fund.Add a comment
The White House is pushing the line that their proposed cut to corporate tax rates will lead to an increase in average household income of more than $4,000.
“Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggests that over a decade, this effect could be much larger.”
This is a pretty impressive claim, but it gets even better a couple of pages later:
“When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”
There are few things worth pointing out about the White House’s claims here. First, the idea that workers would see large gains from a reduction in corporate income tax rates is not based on the idea that lower taxes will be directly passed on in wages. The amount of tax at stake is far too small to have the sort of impact on wages claimed here.
Rather the implication is that there would be a huge burst of investment leading to a huge increase in productivity and growth. The higher levels of productivity would be passed on to workers in the form of higher wages.Add a comment
Robert Samuelson used his column to relate concerns expressed by former Fed chair Ben Bernanke that the Fed would lack the ability to fuel a recovery when the United States next falls into a recession. Although Samuelson doesn't go into detail, the background here is that the country has faced a persistent shortfall of demand at least since the collapse of the housing bubble.
One way this shortfall can be filled is with larger budget deficits. Unfortunately, there is intense political opposition to budget deficits fueled by people like Wall Street billionaire Peter Peterson and the Washington Post. The failure to have larger deficits have cost the country trillions of dollars in lost output and made the economy permanently weaker, in effect imposing a huge tax on our children and grandchildren in the form of lower wages.
The other obvious way that the shortfall could be filled is with a smaller trade deficit. If our trade deficits were for example, 1.0 percent of GDP instead of the current 3.0 percent of GDP, we would not be facing a shortfall of demand and Bernanke's problem would disappear. Unfortunately, people in policy circles largely cling to an absurd trade deficit denialism under which the size of the deficit cannot affect demand and employment, an argument which is made explicitly in a NYT column this morning by former Secretary of State George Schultz and Pedro Aspe, a former secretary of finance in Mexico.Add a comment
This is a question that people should be asking, as there is a considerable effort to include digital commerce in a revised NAFTA argument, as argued in a NYT column by former Secretary of State George Schultz and Pedro Aspe a former secretary of finance in Mexico. For example, the rules on digital commerce may prevent countries from imposing punitive damages, similar to what exist for copyright infringement under the Digital Millennium Copyright Act, for spreading fake ads. This is a realistic fear since Facebook and other major social media companies are likely to have substantial input into writing digital commerce provisions, whereas groups concerned about fair elections and the rights of users are not.
This piece also contains a striking error in economic reasoning. It dismisses concerns about trade deficits, telling readers:
"We hear a lot about trade deficits, but repealing trade agreements will not fix the arithmetic. If a country consumes more than it produces, it will import more than it exports. Federal deficit spending, a huge and continuing act of dissaving, is the big culprit. Control that, and you will control trade deficits."
It is definitional that a country with a trade deficit consumes more than it produces, sort of like it is definitional that a dead person doesn't have a working brain. But just as we might want to know why a person died, we also have reason to want to know why a country is running a trade deficit.
If a country is below its potential level of output, which means that it has higher than necessary levels of unemployment, then the trade deficit has been a factor reducing demand in the economy and increasing unemployment, as was undoubtedly the case in the United States since the collapse of the housing bubble until at least the very recent past. In this context, a lower budget deficit would reduce the trade deficit only by shrinking the economy further and in that way reducing imports. (When the economy is smaller, we buy less of everything, including imports.)
The lost output due to the trade deficit since the crash runs into the trillions of dollars. If we had more balanced trade, millions of additional workers would have had jobs and people would have been able to keep homes. This is a big deal, it is amazing that these distinguished figures don't seem to understand the issue.
It is also striking that they tout the competitiveness of U.S. manufacturing relative to European and Asian competitors. This must be their own subjective definition of competitiveness, since by the market test (the trade balance) the United States' manufacturing sector is losing badly.Add a comment
Donald Trump has justified his decision to ending a subsidy for insurers providing improved coverage for moderate income households by saying that he wanted to end subsidies for insurers. Actually, because insurers are required under the Affordable Care Act to provide these subsidies to moderate income households whether or not they receive the government subsidies, Trump's decision will likely lead to higher premiums. And, since the subsidy provided to moderate income households depends on the size of the premium, the subsidies provided to these households will rise in step with the premiums.
As a result, while Trump is cutting off the direct subsidy to insurers from the government, the indirect subsidy through the government's assistance to households buying insurance will increase by an even larger amount. As a result, the Congressional Budget Office projects that the amount the government will pay out in insurance subsidies over the next decade will increase by almost $250 billion (roughly 0.5 percent of federal spending), with the bulk of this money ending up in the pockets of insurers.
It is not clear that Trump understood that his action would increase the money going to insurers, but it would have been helpful to note this outcome.Add a comment
The Washington Post had a lengthy piece on the intense lobbying efforts by the pharmaceutical industry, along with retail drug store chains, to block legislation that would have imposed stronger penalties for improperly prescribing and distributing opioids. While the piece provides considerable detail on the efforts of specific actors to intervene with members of Congress to weaken legislation, it neglects to mention the importance of patent monopolies in this picture.
As everyone who has taken econ 101 knows, when the government imposes a tariff in a market that raises the price of an item by 10 or 20 percent, it encourages corruption. The beneficiaries of this tariff have incentive to lobby to try to extend and enlarge this protection. Lobbying and bribing politicians can be a more effective way to increase profits than cutting production costs or developing a better product.
In the case of patent monopolies, the price can increase by a factor of ten or even a hundred, equivalent to a tariff of 1,000 or 10,000 percent. The implied mark-ups provide an enormous incentive for companies to lobby to protect and enhance their markets. As the piece tells readers, "each 30-pill vial of oxycodone was worth $900." If a 30-pill vial was selling for $30, there would have been much less incentive to lobby against legislation that would limit sales.
For some reason patent monopolies and their role in maintaining high prices for opioids are never mentioned in this piece. It is probably worth mentioning that the Washington Post gets a substantial amount of advertising revenue from the pharmaceutical industry.Add a comment
For four decades the United States has actively pursued a trade policy designed to put manufacturing workers directly in competition with low-paid workers in the developing world, while largely protecting doctors and other highly paid professionals. It has also sought to impose longer and stronger patent, copyright, and related protections on our trading partners, as it strengthened these protections at home also.
The predicted and actual effect of these policies is to redistribute income from the less-educated (those without college degrees) to more educated workers and owners of capital. Not surprisingly, many of the losers from this pattern of trade are unhappy about it and have sought paths to change it. This was one reason many less-educated workers voted for Donald Trump for president.
While the basic facts in this story are pretty clear, the NYT seems confused about them. It told readers:
"People here embraced Mr. Trump’s anti-trade message, including his vow to withdraw from the North American Free Trade Agreement and punish China, even though Canada, Mexico and China are Iowa’s three largest foreign trading partners. They did not mind if Mr. Trump opposed increasing the minimum wage and expanding access to health care."
It is not clear what is supposed to meant by "even though" in this context. People in Iowa would not be hurt by trade with countries if its economy was not actually involved in trade with the countries. If a manufacturer in Iowa gets many of its parts from Canada, Mexico, or China then it could be displacing workers who might otherwise be employed in Iowa. If manufacturers located in Iowa had no trade with these countries, this would not be the case. It is precisely because Iowa's economy has been exposed to trade with these countries that its workers could end up as losers.
It is also worth noting that Trump promised to offer a better health care plan in his campaign, with lower deductibles, premiums, and co-pays. Iowa's voters might have been more aware of the fact that he was lying if the NYT and other news outlets had spent a bit more time talking about health care and less time on Hillary Clinton's e-mails.Add a comment
Donald Trump came up with a new measure this week when he compared the wealth created by a rising stock market with the government debt. It is not clear how much the president has to do with stock valuations, but arguably his promised tax cuts may be a factor pushing the market higher.
In principle, stock prices are supposed to reflect the discounted value of future profits, so if people come to think that Trump will give corporate America more money at the expense of those who own little or no stock, it should push the market higher. This would be good news for the relatively small number of people who own large amounts of stock, but bad news for those who rely largely on wages for their income and will likely face higher taxes and/or reduced government services as a result of lower corporate tax rates.
However, even by this measure, Trump is doing poorly as the NYT pointed out. The stock markets in Japan, Germany, and France, along with many others, have risen more in the last year than the U.S. market. So it appears that Trump has been a drag on the stock market.
Also, Trump does very poorly by his metric compared with Obama. Trump blamed Obama for adding $10 trillion to the federal debt during his administration. He apparently missed the Great Recession caused by the collapse of the housing bubble which happened before Obama entered the White House. This was the major cause of the run-up in debt over the last eight years.
But if presidents get credit for an increase in stock values, then Obama's performance vastly exceeds Trump's. In October of 2009, the stock market was already up by more than 30 percent from where it had been on inauguration day, compared to less than 20 percent with Trump. Furthermore, the stock market more than doubled during President Obama's tenure, creating more than $20 trillion in wealth, this hugely exceeds the government debt added in this period, so by the Trump Metric, Obama did fantastic in his terms in office.
(For the record since people, and mostly American people, own the government debt, this is also wealth. So absolutely nothing about the Trump story makes any sense.)Add a comment
For many years before and after the Affordable Care Act went into effect, many policy-types argued that its success or failure would depend on whether the "young invincibles" would sign up for health care insurance. The argument was that the system needed premiums from young people with few medical expenses in order to balance out the cost of providing care to less healthy people.
The problem with this story is that it is not just young people who have low medical expenses: most older people (pre-Medicare age) also have relatively low health care expenses. In fact, the older healthy people help the finances of the system more since the premiums for the 55 to 64 age bracket average three times the premiums of the youngest age bracket. If we have a healthy young person and a healthy old person, both of whom cost the system nothing, we are much better off if we can get three times the premium from the older person.
The Kaiser Family Foundation did a nice analysis of this issue a few years back showing that even extreme skewing of enrollment by age made relatively little difference to the finances of the system. On the other hand, skewing by health makes an enormous difference.
Vox had a nice piece on the issue of the skewing of the patient pool in the context of President Trump's executive order allowing insurers to offer bare-bones plans that would only be attractive to healthy people. The piece pointed out that Tennessee already has a plan along the lines authorized by Trump and that it has pulled 23,000 people out of the exchanges. It points out that insurance premiums on the Tennessee exchange are among the highest in the country, presumably because more healthy people have been removed from the pool.
However, in making this case, it tells readers:
"Those 23,000 people buying the skimpier health plan are presumably younger and healthier."
While it is very likely that the people buying into the bare-bones plan offered in Tennessee are healthier than the population as a whole, there is no reason to assume they are younger. In fact, the older pre-Medicare age group may actually save more money from this plan than younger people.
So let's leave the age issue out of the discussion, it just generates needless confusion. To keep costs down an insurance pool needs healthy people, it doesn't matter how old they are.Add a comment
The same day that it ran a front page story that hyped fears of huge tariffs in the event that NAFTA is repealed, the NYT ran a column highlighting the problems of protectionism. Incredibly, the column was pushing for stronger protectionism in the form of better enforcement of copyright monopolies, without any recognition that it was pushing protectionism.
This is a great example of how elite types push protectionist policies to benefit themselves, with zero recognition that they are pushing protectionism. If anyone is confused, copyright protection is a type of protectionism, unlike the tariffs of 5–10 percent that we might see if NAFTA is repealed, copyrights raise the price of protected items by many thousand percent above their free market price.
Books, software, recorded music, movies, and other video material that could be transferred at near zero cost in the absence of copyright protection instead become hugely costly. All the models that economists use (and journalists imperfectly internalize) that show the waste caused by tariffs raising prices above the free market price apply to copyright (and patent) protection as well, except the sums involved are several orders of magnitude larger in the case of copyright protection.
Of course copyright monopolies do serve an important purpose, they provide an incentive to do creative work. However there are other more modern and efficient mechanisms that can be used. For example, I outline a tax credit system modeled on the charitable contribution tax deduction in chapter 5 of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it's free). (Seattle is doing something comparable now by giving voters vouchers for campaign contributions.)
Unfortunately, instead of considering alternatives to copyright monopolies, our elites are prepared to use ever more intrusive laws and tools for enforcement. And then they ridicule the less-educated workers who suffer from the upward redistribution caused by patent and copyright protection for not having the skills needed to succeed in the modern economy.Add a comment
A front-page NYT piece warned that Trump may actually carry through on his threat to pull out of NAFTA. In recounting the fallout from a collapse of the agreement, the paper tells readers:
"If the deal does fall apart, the United States, Canada and Mexico would revert to average tariffs that are relatively low — just a few percent in most cases. But several agricultural products would face much higher duties. American farmers would see a 25 percent tariff on shipments of beef, 45 percent on turkey and some dairy products, and 75 percent on chicken, potatoes and high fructose corn syrup sent to Mexico."
The tariffs reported for agricultural exports to Mexico are the pre-NAFTA level. Mexico would not necessarily raise its tariffs to these levels since it would mean large price increases to their consumers. Governments usually don't like to impose large taxes on their citizens, especially just before an election. (Mexico has a presidential election next summer.) While it is worth pointing out the past history of tariffs on these items and that Mexico would certainly have the right to raise them to pre-NAFTA levels, the NYT's assumption that it would raise tariffs by this amount is unwarranted.Add a comment
Eduardo Porter had an interesting column on how smaller cities are less resilient to economic shocks than larger ones. As a result, they have been losing jobs and people, while larger cities have been gaining them. While the piece makes many interesting points it is misleading in describing this pattern as a natural outcome from technology:
"As technology continues to make inroads into the economy — transforming industries from energy and retail to health care and transportation — it bodes ill for the future of such areas."
The distribution of the benefits from technology is determined to a very large extent by policies on patent, copyrights, and other forms of intellectual property. Bill Gates, the richest person in the world, would probably still be working for a living if not for the copyright and patent monopolies he holds on Windows, Word, and other types of software.
While these monopolies serve a purpose — they provide an incentive to innovate and produce creative work — they are policies, not facts of nature. It is wrong to treat them as being simply given and unchangeable. We have made these forms of protection longer and stronger over the last four decades, which redistributes more money from the bulk of the population to the people in a position to benefit from these forms of protectionism.
We could decide going forward that the benefits from strengthening these protections, insofar as they exist, do not outweigh the costs in terms of greater inequality. We could also look to more modern and efficient mechanisms for supporting innovation and creative work.
In any case, it is simply wrong to imply that it is technology that has benefited large cities at the expense of the rest of the country. It was conscious policy. This basic fact needs to be acknowledged in any serious discussion of the topic.Add a comment
PRI had an interview with NYT reporter Steve Erlanger on the situation in Catalonia in which he said that Spain had pretty much recovered from the recession and debt crisis. That's not what the data say.
According to the data from the OECD, the employment rate for prime-age workers (ages 25–54) is still down by almost 5 percentage points from its pre-crisis peak. For young people (ages 15–24), it has fallen by 20.0 percentage points from 39.4 percent to 19.4 percent. In the United States, this sort of drop off in employment rates would mean that an additional 10 million people are out of work.
This deterioration in the economy may have some connection to the unhappiness of the people in Catalonia with the Spanish government.Add a comment
In an NYT Upshot piece on innovation in health care, Aaron Carroll and Austin Frakt argue that the U.S. subsidizes other countries health care by paying higher prices for prescription drugs. This is far from obvious.
Since the U.S. grants patent monopolies and then puts no checks on prices, brand drugs do cost far more here than elsewhere, but that doesn't mean that other countries are not paying enough to support innovation. The price of patent-protected brand drugs is on average around ten times their free market price. In Europe and Canada, prices are around half the U.S. price which means they are around five times the free market price.
This gap between the patent-protected price in other wealthy countries and the free market price should be more than enough to support the research done by the pharmaceutical industry. (They claim to spend around $50 billion a year on research directly. Even adding in what they pay to buy up other companies only gets to around $100 billion, a bit more than 20 percent of annual U.S. spending on drugs.)
European levels of spending may not be sufficient to support the marketing and profits of the U.S. industry, but that speaks more to the inefficiency of the U.S. industry, not the failure of other countries to pay for research. It is also worth noting that without the perverse incentives created by patent monopolies, the research process would almost certainly be more efficient.
There would be no incentive to spend money researching duplicative drugs simply to share in the patent rents of a breakthrough drug. This doesn't mean that it is not desirable to have multiple drugs for a specific condition, but the priority of developing a second, third, or fourth drug for a condition where an effective treatment already exists is almost certainly lower than developing a drug for a condition for which no effective treatment exists. Ending the reliance on patent-supported research would also take away the incentive for drug companies to misrepresent the safety and effectiveness of their drugs.Add a comment
A NYT article on the seemingly healthy state of the world economy carries the headline, "The economy is humming. Banks are cheering. What can go wrong?" The piece is written as though we need to fear the possibility that another financial crisis is just around the corner. We don't.
It's become popular in the economics profession to highlight the financial crisis as the culprit behind the Great Recession, as opposed to the collapse of the $8 trillion housing bubble. This is very self-serving for economics profession because finance can be complicated. After all, not many people are experts on collaterized debt obligations and all the various risks that can be created if they and other complex derivatives lose value.
By contrast, the housing bubble was a pretty simple story. We had an unprecedented run-up in nationwide house prices that could not plausibly be explained by the fundamentals in the housing market. Rents were following their historic pattern, pretty much rising in step with the overall rate of inflation. And, we already had a record vacancy rate even before the bubble burst. That doesn't fit a story with house prices being driven by the fundamentals of supply and demand in the housing market.
And the bubble was clearly driving the economy. Residential construction hit a record share of GDP in 2005, at almost 6.5 percent. (Normal is around 3.5–4.0 percent.) The $8 trillion in bubble generated housing wealth also led to a consumption boom, with consumption hitting a record high as a share of GDP.
It should have been obvious both that there was a bubble and that there would be no easy way to replace the demand generated by the bubble after it burst. The fact that virtually the entire economics profession failed to recognize the situation is an enormous embarrassment. Therefore, we get the complicated financial crisis story as a cover-up.
The financial crisis story also has the added dividend of justifying the Wall Street bailout. After all, the alternative was a Second Great Depression. No one really has a coherent story as to why we would have been condemned to a Second Great Depression if we let the market work its magic on Goldman Sachs, Citigroup, and the rest, but if we're already in the magical mystery world of financial crisis land, then sure, maybe the curse from letting the big banks go under will condemn us to a decade of double digit unemployment.Add a comment
The Washington Post decided to highlight the Republicans' flip-flop from being a party obsessed with debts and deficits in the Obama years to one that doesn't really care, as long as it can give more tax cuts to the rich. In presenting the background on the deficit and debt, it makes a number of assertions that are likely to mislead readers.
The fourth paragraph tells readers:
"The moves come as the federal deficit, the difference between what the government earns in revenue and spends on programs, is growing more quickly. It will be $600 billion this year and is projected to reach $1.46 trillion in a decade, even without additional policy actions."
This might sound like a rapid jump in the size of the deficit because it is not expressed relative to the size of the economy. In fact, the projections show the deficit rising from 3.6 percent of GDP in 2017 to 5.2 percent of GDP in 2027.
Furthermore, almost the entire increase in the projected deficit is the result of a projected increase in interest payments equal to 1.5 percentage points of GDP. This increase is due the Congressional Budget Office's (CBO) projection that interest rates will be substantially higher in the future than they are today. In this respect, it is worth noting that CBO has consistently been wrong in its interest rate projections since 2010, hugely overstating the extent to which interest rates will rise.
It is also worth noting that another factor driving up projected deficits is the assumption that the Federal Reserve Board will sell off much of its assets so that it will refund substantially less money to the Treasury in future years than it is now doing. Currently, it is refunding about $90 billion annually (0.5 percent of GDP) based on the interest it receives from its assets. This is projected to fall to about 0.2 percent of GDP in a decade. For some reason, the Washington Post, in spite of its concern about deficits, has never mentioned the impact on the deficit of the Fed's decision to sell off its assets.Add a comment
The NYT had an interesting article about an effort to make a number of cancer drugs available in several African countries at generic prices. This will make many treatments that are extremely expensive in the United States affordable for these countries. As the piece notes, the Indian drug manufacturer intends to sells many of the pills at 50 cents each and infusions for $10. The prices in the United States could be close to one hundred times as high, as was the case with many AIDS drugs and the hepatitis C drug Sovaldi.
This is a great story for the people who will now be able to get treatment. It also drives home the simple and obvious point: drugs are almost invariably cheap to produce. They are expensive because we give drug companies patents and other types of monopolies.
This is done to to give them an incentive to carry on research. It is an incredibly backward and wasteful way for the government to finance research. It would be great if we paid for the research upfront and allowed drugs to be sold at their free market price rather than trying to find ways to extract money from people suffering from serious illnesses, or to force them to pressure governments or their insurers to cough up the money.Add a comment
By Josh Bivens, Research Director, Economic Policy Institute
Dean Baker, Co-Director, Center for Economic and Policy Research
Michael Madowitz, Economist, Center for American Progress
A consistent drumbeat in Donald Trump’s campaign for the presidency was a promise that he would stand up for the American working class against financial elites who had rigged policy to enrich themselves, a message that clearly resonated with some voters. He has reneged on this commitment in virtually every area of public policy, including providing better health care coverage than Obamacare, crafting better trade agreements, making sure tax cuts go to the middle class, and standing up for workers’ rights at work.
This month, workers who supported Trump may see another betrayal. It has been reported that Trump may pick Kevin Warsh, who married into a billionaire family, to replace Janet Yellen as the next Chair of the Federal Reserve Board of Governors (BOG). Decisions made by the Fed’s BOG are extraordinarily important for American workers. In recent years, pressure has built for the Fed to begin applying the brake to America’s economic recovery by raising interest rates. The rationale for this is that the Fed must slow growth to tamp down inflationary pressures. Warsh has consistently been on the side advocating for slowing growth to fight inflation. But these inflationary pressures appear nowhere in either wage or price data. And if the Fed hits the brake prematurely, millions of Americans could lose opportunities to work, and tens of millions could see smaller wage increases.
One underappreciated aspect of raising interest rates is that they will put upward pressure on the value of the U.S. dollar, and this stronger dollar will make U.S. exports less competitive on world markets while making foreign imports cheaper to American consumers. This will in turn lead to rising trade deficits which stunt growth in manufacturing employment. Warsh knows about this argument, but he just doesn’t really care.
“I would say that the academy's view, the broad view of folks at the IMF and economics departments at elite universities, is that if only the dollar were weaker, then somehow we'd be getting this improvement in GDP arithmetic, we'd have an improvement in exports and we'd be getting much closer to trend. That's not a view I share. My own views are that having a stable currency, now more than ever, provides huge advantages to the U.S. The U.S. with the world's reserve currency is a privilege, but it is a privilege that we can't just look to history to remind us of; it's a privilege we have to earn and continually re-earn. And so it does strike me that those that think that dollar weakness, made possible by QE as one channel for QE, is the way to achieve these vaunted objectives are going to be sorely disappointed."
The effect of a high dollar in worsening the trade deficit is not just something that people at the IMF and in elite universities say; it is well-established in the data. Warsh doesn’t offer any evidence to counter the widely accepted view that a high dollar leads to a larger trade deficit, he just says that he doesn’t like it.
This blithe waving-away of clear evidence that a rising dollar will lead to larger trade deficits and displace American manufacturing jobs is par for the course when it comes to Warsh’s views of globalization. He is an ardent proponent of trade agreements that expose American workers to fierce global competition but provide even greater protection for corporate profits, protections that come at the expense of policymaking autonomy and democratic accountability in the poorer trading partners of the United States. As a Fed governor, he proclaimed fhat the Fed had a role in weighing in to support trade deals like NAFTA and the Trans-Pacific Partnership, departing from the general view that the Fed should restrict its scope to issues directly related to the conduct of monetary policy.
A Warsh nomination for Fed chair would be a perfect example of how the financial sector capture of the Federal Reserve has hamstrung the economic leverage and bargaining power of low- and middle-wage workers. Finance hates inflation and doesn’t especially care if the unemployment rate is unnecessarily high. As a result, the Fed has for decades greatly overweighted its mandate to avoid above-target inflation while underweighting its mandate to pursue maximum employment. Part of the fallout of this frequently too-tight stance of monetary policy has been chronic trade deficits which have cost the country millions of manufacturing jobs. And while growing evidence shows that America’s stance towards globalization in recent decades has privileged the interests of corporations over typical workers, Warsh wants the Fed to be an advocate for doubling-down on this failed approach.
If Trump was serious about unrigging the rules of the American economy and globalization to help American workers, Warsh would not be in the running to be Fed chair. He both lacks the stature and the competence for the position. The clear choice is to re-appoint Janet Yellen, a chair with a solid track record as Trump himself has repeatedly acknowledged.Add a comment