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).
We know that the Washington Post editors really hate Bernie Sanders and rarely miss an opportunity to show it. Dana Milbank got in the act big time today as he once again denounced Sanders (along with Donald Trump and Ted Cruz) in his column.
There was much good stuff in the column but my favorite was when he told readers:
"MacGuineas's group [the Committee for a Responsible Federal Budget] calculates that Sanders would increase government spending to unimaginable levels: to as much as 35 percent of gross domestic product, from the current 22 percent."
The key word here is "unimaginable." Most western European governments have ratios of government spending to GDP of more than 40 percent and some have ratios of more than 50 percent. Apparently, Mr. Milbank finds the whole European continent unimaginable.
What is especially striking is that most of the increase in government spending would be the result of the government diverting payments for employer provided health insurance to a government-run universal Medicare system. Apparently, Milbank thinks it intolerable that the money taken out of workers' paychecks to be sent to private insurers would instead be taken out of workers paychecks to be sent to the government, even if it would lead to savings of several hundred billion dollars a year in administrative costs and insurance industry profits. In Dana Milbank-land this is the height of irresponsibility.
What is perhaps most incredible is Milbank's notion of irresponsible. His sole measure of responsibility is the size of the government budget deficit and debt, which are for all practical purposes meaningless numbers. (If the government puts in place patent protection that requires us to pay an extra $400 billion a year for prescription drugs, this adds zero to the budget deficit or debt and therefore doesn't concern Milbank. However, if it borrowed an extra $400 billion a year to pay for developing new drugs, he would be furious.)
On the other hand, forcing millions of people to be out of work because of deficits that are too small apparently does not bother Milbank in the least. Since the crash in 2008 we have needlessly foregone more than $7 trillion in potential output. Millions of people have been kept out of work with their children thereby growing up in families that were in or near poverty levels. We also have the stories like the children in Flint exposed to lead, all because Milbank and his friends want to whine about budget deficits.
Many might view this set of policies as being irresponsible. But in Milbank's worldview, which is widely shared in Washington policy circles, it doesn't matter what you do to the country as long as you keep the deficit down.Add a comment
The Washington Post is well known as a hotbed of protectionist sentiment, at least when it comes to policies that redistribute income upward. For that reason it was not altogether surprising that the paper never once mentioned the role of patent monopolies and related protections in a front page article on the difficulties cancer patients face in dealing with the high price of drugs.
The article begins by talking about a patient, Scott Steiner, who needed the cancer drug Gleevec. The manufacturer, Novartis, charges $3,500 a month for the drug. The article tells readers that the Mr. Steiner's insurer was unwilling to pay for the drug and there was no way that he and his family could afford this expense. Fortunately, an oncology social worker (the hero of this article) was able to negotiate a free supply of the drug from the manufacturer.
While this is good news for Mr. Steiner, what the article neglected to mention is that the only reason Gleevec costs $3,500 a month is because the government granted the company a patent monopoly. A high quality of generic version is produced by Indian manufacturers for $2,500 a year.
This difference in prices is equivalent to the United States imposing a 1,600 percent tariff on Gleevec. This patent monopoly leads to all the waste and economic distortions that economists would predict from massive tariffs. Undoubtedly many cancer patients don't get Gleevec because they can't afford its patent protected price and are not as lucky as Mr. Steiner in having a social worker who can work out an arrangement with Novartis.
In addition, the whole struggle to get a drug whose price is artificially inflated is a needless waste that is being imposed on people facing a potentially fatal disease. And of course the time spent by a third party is a total waste of resources that would not be necessary if Gleevec were sold at its free market price. In addition, the enormous mark-up received by Novartis gives it an incentive to oversell its drug, promoting it in cases where it may not be the best treatment. (Yes, we have to finance the research, but there are far more efficient mechanisms than this relic of the middle ages.)
While economists have written endless articles and books on the costs of protectionism, none of this information finds its way into the Post's article. It is probably worth noting that drug companies are a major source of advertising revenue for the Post.Add a comment
As we all know, one of the major recreational sports of media outlets is finding new and innovative ways to scare people about Social Security. One of my favorites is "infinite horizon accounting." This is when you project out Social Security spending and revenue into the infinite future and then calculate the difference. It gives you a REALLY BIG NUMBER.
We got an example of the casual use of this infinite horizon accounting in a column by Wharton Business School Professor Olivia Mitchell. The column was actually on a different topic, but towards the end the piece tells readers:
"The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S."
Note that there is no mention of the time horizon for the $28 trillion shortfall, so readers would have no way of knowing that it is for all future time. The comparison to current GDP is both wrong (GDP in 2016 will be over $18 trillion) and misleading. Why would we compare a deficit measured for all future time to this year's GDP? If we compared the deficit to future GDP it would be 1.3 percent, a bit more than one-third of the annual military budget.
It's also worth noting that the bulk of this deficit is for years after 2100. In other words, we are being cruel to children not yet born by writing down Social Security spending paths that exceed what they are projected to tax themselves. Can you envision anything so cruel? (The big problem is that the projections assume they will live longer and therefore have longer retirements.)Add a comment
The problem of deflation just refuses to go away. I don't mean the problem of weak economies with very low inflation rates, I mean the media's obsession with the idea that something really bad happens if the rate of price change crosses zero and turns negative.
We got another example of this strange concern in the NYT this morning. The piece noted the European Central Bank's (ECB) concern:
"Still, the central bank acknowledged its deep concern about the risk that the eurozone’s economic doldrums, characterized by a worrisomely low rate of inflation, could devolve into outright deflation, a vicious circle of falling prices and demand that can undercut corporate profits and cause unemployment to soar. ...
"Deflation sets in when falling prices prompt people to delay purchases because they expect prices to fall even further. Consumer spending and investment collapse, companies dismiss workers, and spending falls even further as people lose their jobs and incomes. Central bankers fear deflation because once it sets in, it is notoriously difficult to reverse."
To see the silliness of this line of argument, consider first what falling prices literally mean. Suppose that the price of shoes is declining at a 0.5 percent annual rate. How long will you put off a purchase of a $100 pair, knowing that it you wait a year it will save you 50 cents?Add a comment
Let me start this one by saying that I think Trump’s threats of a 45 percent tariff on Chinese imports are a bad idea. We should take steps to lower the value of the dollar against the yuan, but the public threat of large tariffs is probably not the best way to go. The route is obviously through negotiations where we would have to give up things, like protections for Microsoft’s copyrights and Pfizer’s patents.
But that aside, the fact that a particular policy is unwise should not be a license for the media to say absurd things to discredit it. The NYT seems to take this path in an Upshot piece by Michael Schuman that purports to tell readers, “how a tariff on Chinese imports would ripple through American life.”
The piece tells readers:
“But if there were a 45 percent tariff on Chinese goods, at least part of that would probably be passed onto consumers in the form of higher prices. Americans would end up buying fewer Chinese things, and fewer things from anywhere else. ...
“For this reason and others, quite a lot of the money spent on Chinese goods actually ends up in the wallets of Americans. A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers.
“In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States.”
Note what is being argued here. Higher prices on imports from China will lead to less consumption in the U.S. economy. That means an increase in the savings rate. (This is definitional. If you don’t consume you save.)
Many economists have been troubled by the low savings rate in the United States. I have never seen any models that try to explain low savings as the result of cheap imports from China and other countries, but apparently this is what Mr. Schuman and the NYT would have us believe. I look forward to article writing up this theory linking savings rates to import prices.
If it’s not clear, this argument is silly. People will likely spend the same with the tariffs as they did without the tariffs. They will buy fewer goods imported from China, end of story. No need for the truck drivers to fear mass layoffs.Add a comment
The Washington press corps has gone into one of its great feeding frenzies over Bernie Sanders' interview with New York Daily News. Sanders avoided specific answers to many of the questions posed, which the D.C. gang are convinced shows a lack of the knowledge necessary to be president.
Among the frenzied were the Washington Post's Chris Cillizza, The Atlantic's David Graham, and Vanity Fair's Tina Nguyen, and CNN's Dylan Byers telling about it all. Having read the transcript of the interview I would say that I certainly would have liked to see more specificity in Sanders' answers, but I'm an economist. And some of the complaints are just silly.
When asked how he would break up the big banks Sanders said he would leave that up to the banks. That's exactly the right answer. The government doesn't know the most efficient way to break up JP Morgan, JP Morgan does. If the point is to downsize the banks, the way to do it is to give them a size cap and let them figure out the best way to reconfigure themselves to get under it.
The same applies to Sanders not knowing the specific statute for prosecuting banks for their actions in the housing bubble. Knowingly passing off fraudulent mortgages in a mortgage backed security is fraud. Could the Justice Department prove this case against high level bank executives? Who knows, but they obviously didn't try.
And the fact that Sanders didn't know the specific statute, who cares? How many people know the specific statute for someone who puts a bullet in someone's head? That's murder, and if a candidate for office doesn't know the exact title and specific's of her state murder statute, it hardly seems like a big issue.Add a comment
Roger Cohen gave us yet another example of touching hand-wringing from elite types about the plight of the working class in rich countries. The gist of the piece is that in Europe and the U.S. we have seen growing support for candidates outside of the mainstream on both the left and the right. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However, Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world.
In Cohen's story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain "liberty" (he means the market) in order to protect it.
This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That's just the way it is. Cohen is smart and hard working, that's why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world's poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don't become fascists.
We all should be glad that folks like Cohen support a stronger welfare state, but let's consider his story. The basic argument is that poor countries have only been able to develop because their workers were able to displace the workers in rich countries. This lead to unemployment and lower wages in rich countries.
Let's imagine that mainstream economics wasn't a make-it-up-as-you-go-along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries. The idea is that capital is plentiful in rich countries and therefore gets a low rate of return. It is scarce in poor countries and therefore gets a high rate of return.Add a comment
Contrary to the robots taking our jobs story, Robert Samuelson gets the basic story right. Productivity growth has fallen through the floor, rather than going through the roof as the robot story would have us believe. Productivity growth has averaged just over 1.0 percent annually since the start of the recession in December of 2007. It has been less than 0.4 percent a year in the last two years.
Samuelson speculates that this slow growth might be due to the old economy competing with the new economy. His example is Walmart setting up an Internet based system to compete with Amazon. He argues that much of this will end up being wasted, as only one of the sellers will end up winning.
While Samuelson is right that this competition can lead to waste, but that is always true. Companies always are competing to gain or keep market share. Some end up losing, meaning that their investment was a waste from the standpoint of the economy as a whole. (The competition is nonetheless important in a dynamic sense in that it forces the winners to be more efficient.)
For Samuelson's story to be correct, we would have to be seeing much more of this competition today than in prior periods. That doesn't in any obvious way appear to be true. For example, investment is not especially high as a share of GDP.
My alternative explanation is that a weak labor market and low wages explain much of the slowdown in productivity. The argument is straightforward. When Walmart can hire people at very low wages, they are happy to pay people to stand around and do almost nothing. That is why many retailers now have greeters or sales people standing in aisles who contribute little to productivity.
If wages were higher, Walmart would not employ these people. This would make little difference in its sales, but would reduce the number of people they have working, thereby increasing productivity. If this phenomenon is common, it could be a factor in the productivity slowdown since the start of the Great Recession.Add a comment
The NYT article on the March jobs report featured several economists describing the current state of the economy in glowing terms. Scott Clemons, chief investment strategist at Brown Brothers Harriman, described the current economic situation as being a “near Goldlocks scenario.” He said the jobs and wage gains in March were healthy, but not so strong as to prompt the Federal Reserve Board to raise interest rates to slow growth.
Michelle Meyer, deputy head of United States economics at Bank of America Merrill Lynch, described the economic situation as “a best-case scenario.” Michael Gapen, chief United States economist at Barclays, also was very positive about the economy. This view seemed to be reflected in the first two paragraphs in the article which were also overwhelmingly positive about the current state of the economy.
(In fairness, the piece included several comments noting how far the economy has yet to go to recover to pre-recession levels. Also, in addition to the optimism from the bank economists, it included a comment from Claire McKenna, a senior policy analyst with the National Employment Law Project.)
While there is little doubt that the economy is doing much better in recent months than it had been earlier in the recovery and that workers are seeing some gains, it is important to ask about the implicit base of comparison in these comments.
The average hourly wage increased at a 2.3 percent rate over the last year. Its annualized rate of increase over the last three months compared with the prior three months is also 2.3 percent, which indicates no acceleration. Since inflation over the last year was only 1.0 percent, this translates into a 1.3 percent increase in real wages over this period. While this is a decent rate of increase, it is only roughly equal to the trend rate of productivity growth. In other words, this is the rate of wage growth that workers should be able to assume in a normal year.
However, there are two reasons to consider this rate inadequate. First, workers lost an enormous amount of ground in the downturn. The average real hourly wage did not pass its 2008 peak until November of 2014. (Workers had also seen almost no wage growth in the prior business cycle, so they had lots of ground to make up even in 2008.)
The Washington Post repeated one of the major myths about the recovery in an article in the March employment report when it told readers:
"In the long shadow of the recession, the share of the population in the work force sunk to 62.4 percent in September, the lowest level in nearly 40 years. The government calculates that number by counting the people who have a job or are actively looking for one. That means students, retirees and stay-at-home parents are generally not considered part of the labor force.
"Indeed, the shrinking of America's workforce is largely due to broader demographic shifts. The labor force peaked at 67.3 percent of the popuation in 2000 and has been drifting downward ever since. The biggest driver has been the retirement of Baby Boomers, who are turning 65 at the rate of 10,000 each day. Young people are also staying in school longer and less likely to work during their studies."
Actually, the main reason the labor force participation rate (LFPR) has fallen has been a drop in the LFPR among prime age workers (ages 25–54). This peaked in 2000 at 82.8 percent in early 2000. In September of 2015 it bottomed out at 79.2 percent, 3.6 percentage points below its 2000 peak. The drop in LFPR in the recession and weak recovery has been primarily a story of workers in their prime working years leaving the labor force, not baby boomers retiring or young people staying in school longer.
The piece also cites reports by Wells Fargo and the Kansas City Federal Reserve Bank indicating that those with more education are doing much better in finding work in the recovery. This is not clear from the data. In the last year the employment rate of people with college degrees has not changed, while it fell by 0.6 percentage points for those with some college.
By contrast, the employment rate for people with just high school degrees fell by just 0.1 percentage point. It rose by 1.7 percentage points for workers without high school degrees. This gap is even more striking since the retiring baby boomers are less-educated on average than younger workers, so their retirement should be having a disproportionate effect in reducing the employment rate of less-educated workers.
Note: Link corrected.Add a comment
It is sometimes difficult to distinguish between the paid content and the news stories in the NYT. Farhad Manjoo’s piece on Uber’s new carpooling service could leave any reader confused. Manjoo seems to have taken everything Uber said about this service at face value, just as one would expect in paid content.
We can start with the story that sets up the piece. The story is that Abby is going from San Francisco Tenderloin district to the Noe Valley, a trip which the piece tells us would ordinarily take about 25 minutes by car. She decides to use UberPool instead of driving. Before the UberPool trip ends, it picks up four other passengers. According to the article, the total trip takes 55 minutes (not all of it with Abby, who gets out before the last stop) and covers 10 miles.
The piece then tells readers:
'In total, Uber collected about $48 for the ride, of which the driver kept $35. The company had collapsed five separate rides into a single trip, saving about six miles of travel and removing several cars from the road.'
That might be Uber’s story, but let’s look at this more seriously. The driver has to pay for gas, insurance, and depreciation on the car. The I.R.S. puts these costs at an average of 54 cents a mile. We know the trip covered ten miles, but the driver also has to get to the start point and back from the end point. Let’s conservatively say that adds five miles for a total 15 miles driven. This comes to $8.10, which reduces the hourly pay rate for this ride to $26.90. That’s still not too bad, but remember, this is for the time the driver actually has people in the car. If he has to wait another half hour for his next fare, then the hourly rate falls to $17.90. Keep in mind this is in a city with high living costs where the minimum wage is being raised to $15.00 an hour.Add a comment
Most newspapers try to avoid the self-serving studies that industry groups put out to try to gain public support for their favored policies. But apparently The New York Times does not feel bound by such standards. It ran a major news story on a study by Citigroup that was designed to scare people about the state of public pensions and encourage them to trust more of their retirement savings to the financial industry.
Both the article and the study itself seem intended to scare more than inform. For example, the piece tells readers:
"Twenty countries of the Organization for Economic Cooperation and Development have promised their retirees a total $78 trillion, much of it unfunded, according to the Citigroup report.
"That is close to twice the $44 trillion total national debt of those 20 countries, and the pension obligations are 'not on government balance sheets,' Citigroup said."
Okay folks, how much is $78 trillion over the rest of the century for the 20 OECD countries mentioned? Is it bigger than a breadbox?
The NYT has committed itself to putting numbers in context, where is the context here? Virtually none of the NYT's readers has any clue how large a burden $78 trillion is for the OECD countries over the rest of the century. The article did not inform readers with this comment, it tried to scare them. That is not journalism.
For those who are keeping score, GDP in these countries for the next 80 years will be around $2,000 trillion (very rough approximation, not a careful calculation) so we're talking about a big expense, roughly 4 percent of GDP, but hardly one that should be bankrupting.
Furthermore, the whole treatment of the expense as an "unfunded" liability is problematic. Suppose the United States spends 7 percent of its GDP on education (roughly current spending) and this share is projected to rise to 8 percent over coming decades. We can treat the commitment to educating our children as an "unfunded liability," after all we don't have any money set aside from prior years to fund it.
But since we are already spending the 7 percent on education every year, the additional burden will just be the boost to 8 percent. That is a burden of 1 percentage point of GDP or roughly half the cost of the increase in annual military spending associated with the wars in Iraq and Afghanistan.
There is a similar story with public pensions. In the case of Social Security, the U.S. is currently spending about 5.0 percent of GDP on the program, up from 4.0 percent in 2000. Spending is projected to rise by another percentage point over the next 10–15 years, are you scared?
Almost every item mentioned in this article seems intended to scare from the very paragraph:
"When Detroit went bankrupt in 2013, investors were shocked to learn that the city had promised pensions worth billions more than anyone knew — creating a financial pileup that ultimately meant big, unexpected losses for Detroit’s bondholders."
Investors were shocked, really? Are the people who invest trillions of dollars morons? The books of Detroit's pension system were publicly available. The problem was not the actuarial accounting blamed in this piece, the problem was simply that Detroit was a bankrupt city unable to meet its obligations because of a tax base that crashed as it lost two-thirds of its population.
If there were any investors who were shocked by Detroit's pension liabilities then the NYT should do a major piece profiling these people. They are almost certainly way over their heads in jobs that pay six and seven figure salaries.
Finally, there is little doubt that the Citibank piece itself is intended as a promotional piece for the financial industry. After detailing the alleged crisis facing public pension funds, Citibank tells readers:
"Finally, the silver lining of the pensions crisis is for product providers such as insurers and asset managers. Private pension assets are forecast to grow $5–$11 trillion over the next 10–30 years and strong growth is forecast in insurance pension buy-outs, private pension schemes, and asset and guaranteed retirement income solutions."
The one small hint that readers get in the article that this study was an industry promotion piece comes when we are told:
"For years there have been frequent reports of pension systems rife with pay-to-play deals, improper payouts, overly risky investment strategies and other problems. But the Citigroup researchers looked beyond such scandals and depicted the worldwide accumulation of giant, invisible pension obligations as a matter of simple demographics."
Of course, it might have been more useful if instead of telling readers that the study, "looked beyond such scandals," to tell readers that the study ignored such scandals.Add a comment
Eduardo Porter had an interesting piece in the NYT in which he argued that NAFTA actually saved jobs for auto workers in the United States. The argument is that by allowing U.S. manufacturers to have easier access to low cost labor in Mexico for part of their operation, they were able to keep a larger market share than would otherwise be the case.
The same would apply to foreign manufacturers choosing to locate operations in the United States rather than staying in Europe, Japan, or elsewhere. The argument is that better access to low cost labor in Mexico made locating part of their operating in the United States more attractive.
Currently we import roughly $100 billion a year in cars and parts from Mexico, this compares to total domestic production of around $500 billion. Porter argues that on net, because NAFTA improved the competitiveness of the U.S. industry, it actually saved jobs. This is not impossible, but it does seem implausible. I headlined the case of doctors to see an analogous story.
Suppose that we have large numbers of people going to other countries for major medical procedures to take advantage of the fact that the cost is typically less than half as much and sometimes less than one tenth as much for comparable quality care. (Imagine saving $200,000 on open heart surgery by having the operation in Germany. Most of these surgeries are done on a non-emergency basis, so it is possible.)
In this scenario, suppose that we have a somewhat different NAFTA that made it much easier for Mexican doctors to train to U.S. standards and come practice in the United States. Let’s imagine 200,000 Mexican doctors, or roughly one fifth of our total, chose to take advantage of this opportunity.Add a comment
I'm tied up with many other things, but since folks asked, I will give a quick comment/explanation of the Vox analysis of Bernie Sanders' tax plans. For those who haven't seen it, Vox put together a calculator that allows people to plug in their income and then see how their tax bill would change under the tax plans proposed by Donald Trump, Ted Cruz, Hillary Clinton, and Bernie Sanders. For the first two, most people get tax cuts. There is little change with Clinton, but big tax increases with Sanders.
For example, I took a single person with one kid, who earns $30,000 a year. According to the tax calculator, this person would see an increase in their tax bill of $3,680 as a result of the Sanders' tax package. I can't quite follow the math here, because the calculator says that Sanders plan gives this a person a tax rate of 18.1 percent, compared with 10.3 percent for the current system. This implies an increase in the tax rate of 7.8 percentage points of this person's income. But 7.8 percentage points of $30,000 would get you $2,340 not the $3,680 indicated by the calculator.
Okay, but let's ignore the math problem and get to the underlying issues. Most of the basis for this tax increase for moderate income workers is Sanders' tax to pay for his universal Medicare plan. This would impose a payroll tax on employers of 6.2 percent and a 2.2 tax on individuals for income in excess of the standard deduction (roughly $9,500 for this person). There is also a 0.2 percentage point tax increase to cover the cost of paid family leave. In addition, some of the other taxes will have feedback that will affect moderate income earners, but these taxes are the bulk of the story.Add a comment
The prospect of Donald Trump getting the Republican presidential nomination is dominating media attention these days, with some cause, but this has meant that evidence of a weakening economy has been largely ignored. We have seen a series of reports in the last month suggesting that the economy is likely to perform considerably worse than the 2.5 percent growth rate predicted by most economists at the start of the year. (The Congressional Budget Office's projection was 2.7 percent.)
The most recent bad news was February's data on personal income and consumption. It showed real growth in spending for the month of 0.2 percent. While that is not too bad, January's figure was revised down from 0.4 percent to zero. Given that consumption is 70 percent of GDP, this is not good news on the growth front.
Other evidence of weakness comes from trade, where it seems that the deficit is continuing to expand in the first quarter due to a high dollar and weak growth elsewhere. Non-defense capital goods shipments, which is the largest category in investment, is running behind 2015 levels. Residential construction is holding up, but showing little, if any, increase over the second half of 2015. My bet is that we will see a serious downturn in the non-residential sector as some serious overbuilding of office space in many cities dampens irrational exuberance. Government spending may provide a modest boost in the quarter and year, but austerity fever still dominates politics at all levels.
In short, we could be looking at growth that is close to 1.0 percent for the year. The Atlanta Fed's GDPNow puts first quarter growth at just 0.6 percent. It is hard to see how such slow growth can be consistent with rapid job growth and a continuing drop in the unemployment rate, although I have been surprised in this area before. (Basically, it would mean that productivity growth is falling to zero or turning negative.)
Anyhow, the spate of weak economic reports deserve more attention than they have gotten. It could be bad news for lots of people.
By the way, I actually don't think a recession is likely, just exceptionally slow growth. The use of the R word was click bait to get you away from the Trump stories.Add a comment
Neil Irwin takes issue with Donald Trump using the trade surplus between countries as a scorecard on trade. He is largely right with a couple of important qualifications.
Irwin notes that a country with a trade surplus should see its currency rise against the dollar if it doesn’t reinvest the money in dollar assets. He then comments that if it does reinvest the money in dollar assets, whether or not it benefits the United States depends on what the money is used for. As Irwin points out, in the last decade the money was used in large part to invest in residential housing and to inflate the housing bubble. This was of course not useful.
But there is a deeper point here. In an era of “secular stagnation,” which means there is not enough demand in the economy, the foreign assets may in effect be invested in nothing. Most of the foreign capital that went into the United States in the housing bubble years did not get directly invested in housing. It was invested in government bonds and short-term deposits.
These investments don’t directly create any jobs; they are simply assets on a balance sheet. Insofar as foreigners invest their surplus dollars in U.S. assets not directly linked to employment (which will generally be the case) a trade deficit will be associated with higher unemployment, unless the economy has some other force generating employment to offset it.
Currently we are running an annual trade deficit of around $540 billion (@ 3 percent of GDP). This could be offset by spending more on education, infrastructure, clean technology or other areas, but the Very Serious People will not let us run larger budget deficits. In that context, it is quite reasonable to link a trade deficit to higher unemployment, so Trump is not wrong in that respect.
I know that no one reads the Washington Post's opinion pages for their insights on economic issues, but can't we hope for at least some connection with reality. In his column today warning that productivity growth is likely to be weak forever more, George Will told readers:
"America’s entitlement state is buckling beneath the pressure of an aging population retiring into Social Security and Medicare during chronically slow economic growth."
The entitlement state is "buckling." If we tried to make sense of this assertion it presumably means that excessive spending on these programs is leading to high interest rates and/or high inflation. The problem is that we are creating more demand than the economy is able to supply. The only problem with this analysis is that long-term interest rates remain near post-World War II lows and inflation remains well below even the Fed's unnecessarily low 2.0 percent target.
The only evidence the entitlement state is "buckling" from these programs seems to be the complaints from the folks at the Post and other Very Serious People. This does not appear to be a problem that exists in the real world.
On the more general claim about future productivity growth, which Will takes from Robert Gordon, it is worth recounting the past record of Gordon and other economists. There were three major shifts in productivity trends in the post-war era. There was a sharp slowdown in 1973, an upturn in 1995, and then a slowdown again beginning somewhere between 2005 and 2007.
No one saw the 1973 slowdown coming. More than forty years later there is no agreed upon explanation as to its cause. There were very few economists who saw the 1995 pick-up coming, although it is generally accepted that the information technology boom was its cause. Almost no one saw the slowdown coming in 2005-2007, and there is no agreement as to its cause.
Given the past record of economists (including Robert Gordon) in projecting the future path of productivity growth, we might be skeptical about a book that projects slow productivity growth for the indefinite future.Add a comment
Dan Balz ignored more than a decade of Speaker of the House Paul Ryan's writing and work in politics in an analysis that contrasts Ryan's "conservative, problem-solving party" with "a Cruz-style radical anti-government party content with blowing things up as they now stand." If Balz had paid any attention to the budgets that Paul Ryan eagerly touted as head of the House Budget Committee he would know that there is no one who has a better claim to being "anti-government" and "blowing things up as they now stand" than Mr. Ryan.
Ryan's budgets essentially proposed eliminating everything the government does except for Social Security, Medicare, Medicaid, and the military. The Congressional Budget Office's analysis of the his budget, which Ryan directed, showed that it would reduce all discretionary spending, plus non-Medicare and Medicaid entitlements to just 3.5 percent of GDP by 2050. This is roughly the current size of the military budget, which Ryan has indicated he wants to increase.
This means the Ryan budget called for eliminating everything else the government does, such as build and maintain infrastructure, monitor food and drug safety, support basic research in health care and other areas, protect the environment, and support early childhood education and nutrition. If eliminating just about the entire government is not "radical anti-government" it is hard to know what would be.
Balz owes Speaker Ryan an apology.Add a comment
According to a Foreign Affairs piece by Council on Foreign Relations Fellow Thomas Bollyky, the major pharmaceutical companies are being run by people who don’t know what they are doing. While they have devoted a large amount of time and resources to putting strong language on patent and related protections in U.S. trade agreements, including the recently concluded Trans-Pacific Partnership (TPP), Bollyky claims that these deals really don’t have much impact on drug prices in the partner countries. If Bollyky is right, the executives of Pfizer, Merck, and other major drug companies are just wasting energy that could be better devoted to other pursuits.
Unfortunately, Bollyky’s piece seems more designed to push the TPP than to seriously examine the extent to which drug prices in the member countries are likely to be affected by the deal. His main method for establishing his case is to look at past trade agreements that imposed tighter patent and related protections for prescription drugs and show that there was no sharp jump in drug prices immediately following the signing of an agreement. This is not a surprise.
In most cases, the rules in these agreements will only apply to new drugs, and even then to a subset of new drugs, for example patent protection for a drug that is a combination of already approved drugs. They may also allow for the extension of patent terms beyond the date where they would have expired under pre-trade deal rules, but here again the impact will only be felt gradually over time.
Furthermore, the date of a trade deal with the United States may not be the key factor in pushing up drug prices. The United States signed a deal with South Korea in 2012 that required stronger patent and related protections, but most of these conditions were already law as of 2009 due to a trade agreement Korea signed with the European Union. Apparently the executives of European drug companies also waste their time trying to impose these rules in trade deals.Add a comment
Everyone knows that reasonable people are supposed to hate protectionism, that is of course unless it's for doctors and lawyers, who lack the skills necessary to compete in the world economy (or drug patents). But that shouldn't mean that an ostensibly serious newspaper (I'm feeling generous today) gets to say whatever it wants to trash the policy.
Today we have the spectacle of the Washington Post telling us that Donald Trump's plan to impose 45 percent tariffs on imports from China coupled with his plan to impose 35 percent tariffs on imports from Mexico would cost us 7 million jobs if the countries retaliate and 3.5 million if they don't. This is supposedly the output that Mark Zandi got, the chief economist of Moody's Analytics, when he plugged these tariffs into their model. That seems more than a bit high to me. The logic of the tariffs is that they make it more expensive to import items from these countries, but the extent to which they raise prices here depends both on the extent to which we can substitute domestic production or can find other foreign sources.
The latter is likely to be especially important, since many of the items produced by both countries can be readily found elsewhere. In fact an analysis by the Peterson Institute of tariffs the U.S. imposed on imports of tires from China found that the tires were almost entirely replaced by imports from other countries. For this reason, the impact on consumers from tariffs imposed on these countries is likely to be substantially limited by the availability of imports from other countries and/or our ability to produce these items domestically.
But just to get a crude idea, let's assume that the price of our imports rise by half of the amount of the tariff. This is almost certainly a huge overstatement since for many imports the price rise will be just a small fraction of the size of the tariff, since there are alternative sources and even in the extreme cases the suppliers will almost certainly have to eat some of the tariff in the form of lower profit margins.Add a comment
Seriously, that is what they said, more or less. An AP news article on the latest revision to fourth quarter GDP data told readers:
"Friday’s report also contained a potentially worrisome sign — a weak first estimate of corporate profits. It showed that pretax profits fell 7.8 percent in the fourth quarter after a 1.6 percent drop in the third quarter. Fourth quarter profits were also down 11.5 percent from a year earlier — the steepest annual drop since 30.8 percent plunge in the fourth quarter of 2008 at the depths of the financial crisis."
It is not clear what about this drop in corporate profits is supposed to be worrisome. Corporate profits had risen at the expense of wages during the downturn. The profit share of national income is still well above its pre-recession level. Companies continue to have more profit than they know what to do with, since investment is still slightly below its pre-recession share of GDP, so there is not a plausible story that companies will somehow have to curtail investment due to shrinking profits. So why is AP worried that workers are getting back some of the income share they lost during the downturn.
As the piece notes, consumption was revised upward. The saving rate was reported as 5.0 percent in the fourth quarter, not much different from the 4.8 percent rate recorded in 2013, the low for recovery. The Post and other media outlets gave extensive coverage to economists explaining why consumers were being cautious and not spending their dividend from falling energy prices. The data now indicate that they were not being cautious, that they were pretty much spending it at the same rate as other income. (Well, at least it kept some economists employed.)
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