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).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

Hedge fund manager and Trump transition team member Anthony Scaramucci, repeated one of the great lies of the era of Trump on Morning Edition today. He claimed that businesses could not get access to credit and blamed it on the regulations in the Dodd-Frank financial reform bill. This is the reason that he and others have given for repealing Dodd-Frank. 

The problem with this story is that it is entirely an invention of the right wing. As I point out earlier this week the National Federation of Independent Businesses has been conducting a monthly survey of small businesses for more than thirty years. One of questions it poses is about credit conditions. In the most recent survey only 2 percent reported that financing was their top business problem. This is near a low point for the survey's history. In other words, they are finding that small businesses are having very little problem getting access to credit.

Larger businesses that can borrow directly through credit markets also have little problem. Many economists, including Fed Chair Janet Yellen, have worried about the collapse of credit spreads, meaning that they are concerned that risky businesses actually are getting credit at too low an interest rate.

In other words, the idea that Dodd-Frank is preventing businesses from getting credit is a complete invention, like Fox's War on Christmas.

Add a comment

Every economist in the world can quickly explain how a 10 percent tariff on imported steel will lead to corruption. The same logic applies to drug patents, although since they are the equivalent of tariffs many thousand percent (they typically raise the price of protected drugs by factors of ten or even 100 or more), the incentives for corruption are much greater.

This is why every economist in the world should have been nodding their heads saying "I told you so" when they read this NYT article about a kickback scheme between a major drug manufacturer and a mail order pharmacy. Unfortunately, there were no economists mentioned in this piece. And, it is quite possible that most economists support this form of protectionism, in spite of the enormous inefficiency and corruption that results. (Yes this is a major point in my book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

Add a comment

Sebastian Mallaby use his Washington Post column to warn readers that the fiscal stimulus from a Trump administration, in the form of stimulus spending and tax cuts, could lead to too much demand in the economy. The result will be higher interest rates and higher inflation. And then things might get really bad:

"The economy would spiral back toward the stagflationary 1970s. It is too dark a prospect to believe. But the logic that takes us from here to there is chillingly straightforward."

Woooooooo, "chillingly straightforward?"

Okay, some of us are old enough to remember the seventies and they were not exactly the horror story that Mallaby paints. Employment grew by more than 27 percent over the course of the decade. This translates into an annual growth rate of almost 2.5 percent, which would come to more than 3.2 million new jobs a year. Are you scared yet?

GDP grew at an annual rate of almost 3.2 percent. That looks pretty good compared to the 2.0 percent rate we have been seeing the last six years.

Of course, the seventies were not all great. There was a sharp slowdown in productivity growth that began in 1973. This led to stagnating wages for the rest of the decade. It is worth noting that, in contrast to later decades, the wage stagnation of the 1970s was due to weak productivity growth, not upward redistribution.

It is also worth pointing out that there were unique events that pushed inflation higher in the 1970s, most importantly the quadrupling of world oil prices in 1973–74 and then again in 1978–1979 following the Iranian revolution. Also, there was a measurement error in the consumer price index that had the effect of amplifying rises in the inflation rate at a time when wage and other contracts were widely indexed.

Anyhow, the key point here is that the horror story of the seventies, which is often told by Mallaby and others, is their own invention, not something that existed in the real world. This is important in the context of Trump's economic proposals, since they actually could provide a considerable boost to demand and employment.

It is certainly possible that his tax cuts go too far in creating large deficits, which could mean higher interest rates and higher inflation, as Mallaby suggests. But it is absurd to claim that economic disaster, in the form of runaway inflation, is just around the corner.

There are many very good reasons to fear a Donald Trump administration, but the risk that he might over-stimulate the economy is not one of them.

Add a comment

The Washington Post editorial page decided to lecture readers on the meaning of progressivism. Okay, that is nowhere near as bad as a Trump presidency, but really, did we need this?

The editorial gives us a potpourri of neo-liberal (yes, the term is appropriate here) platitudes, all of which we have heard many times before and are best half true. For framing, the villains are Bernie Sanders and Elizabeth Warren who it tells us “are embracing principles that are not genuinely progressive.”

I’ll start with my favorite, the complaint that the trade policy advocating by Warren and Sanders would hurt the poor in the developing world, or to use their words:

“And their ostensible protection of American workers leaves no room to consider the welfare of poor people elsewhere in the world.”

I like this one because it turns standard economic theory on its head to advance the interests of the rich and powerful. In the economic textbooks, rich countries like the United States are supposed to be exporting capital to the developing world. This provides them the means to build up their capital stock and infrastructure, while maintaining the living standards of their populations. This is the standard economic story where the problem is scarcity.

But to justify trade policies that have harmed tens of millions of U.S. workers, either by costing them jobs or depressing their wages, the Post discards standard economics and tells us the problem facing people in the developing world is that there is too much stuff. If we didn’t buy the goods produced in the developing world then there would just be a massive glut of unsold products.

In the standard theory the people in the developing world buy their own stuff, with rich countries like the U.S. providing the financing. It actually did work this way in the 1990s, up until the East Asian financial crisis in 1997. In that period, countries like Malaysia, Vietnam, and Indonesia were growing very rapidly while running large trade deficits. This pattern of growth was ended by the terms of the bailout imposed on these countries by the U.S. Treasury Department through the International Monetary Fund.

The harsh terms of the bailout forced these and other developing countries to reverse the standard textbook path and start running large trade surpluses. This post-bailout period was associated with slower growth for these countries. In other words, the poor of the developing world suffered from the pattern of trade the Post advocates. If they had continued on the pre-bailout path they would be much richer today. In fact, South Korea and Malaysia would be richer than the United States if they had maintained their pre-bailout growth rate over the last two decades. (This is the topic of the introduction to my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, it’s free.)

Add a comment

The NYT bizarrely equated trade with trade agreements in an article on a debate within the Democratic Party over its future policy course. The piece referred to Senator Bernie Sanders' opposition to recent trade pacts then presented a quote from Colorado Governor John Hickenlooper:

"I don’t think you can be anti-trade...In the modern world, we need consumers overseas for our products as well."

Of course Sanders has never indicated he was against trade, nor has any prominent figure in this debate, so as presented, Mr. Hickenlooper's comment is essentially a non sequitur. In fact, the Trans-Pacific Partnership (TPP), the trade deal most in the news at present, actually contains major protectionist measures in the form of stronger and longer patent and copyright related protections, arguably it is supporters of this pact who can most accurately be called "anti-trade."

Anyhow, if Mr, Hickenlooper is effectively speaking in non sequiturs it would be appropriate to call attention to this fact. After all he is identified in the piece as being "mentioned as a possible 2020 presidential candidate."

Add a comment

One of the great myths perpetuated by the right is that Dodd-Frank and other financial regulations by the Obama administration are preventing the financial sector from functioning. As a result, small businesses supposedly can't get the credit they need to grow or even survive. University of Maryland economist Peter Morici made this argument in a Morning Edition segment in a debate with my friend Jared Bernstein.

There is actually a simple response to this claim: it's not true. The National Federation of Independent Businesses has been conducting a monthly survey of small businesses for more than thirty years. One of questions it poses is about credit conditions. In the most recent survey only 2 percent reported that financing was their top business problem. This is near a low point for the survey's history. In other words, if small businesses are having serious problems getting credit, someone forget to tell them.

Add a comment

Lara Merling and Dean Baker

For the second time in the last five elections we are seeing a situation where the candidate who came in second in the popular vote ends up in the White House. This is of course due to the Electoral College.

As just about everyone knows, the Electoral College can lead to this result since it follows a winner take all rule (with the exception of Nebraska and Maine). A candidate gets all the electoral votes of a state whether they win it by one vote or one million. In this election, Secretary Clinton ran up huge majorities in California and New York, but her large margins meant nothing in the Electoral College.

In addition to the problem of this winner take all logic, there is also the issue that people in large states are explicitly underrepresented in the Electoral College. While votes are roughly proportionately distributed, since even the smallest states are guaranteed three votes, the people in these states end up being over-represented in the Electoral College. For example, in Wyoming, there is an electoral vote for every 195,000 residents, in North Dakota there is one for every 252,000, and in Rhode Island one for every 264,000. On the other hand, in California there is an electoral vote for every 711,000 residents, in Florida one for every 699,000, and in Texas one for every 723,000.

The states that are overrepresented in the Electoral College also happen to be less diverse than the country as a whole. Wyoming is 84 percent white, North Dakota is 86 percent white, and Rhode Island is 74 percent white, while in California only 38 percent of the population is white, in Florida 55 percent, and in Texas 43 percent. White people tend to live in states where their vote counts more, and minorities in places where it counts less. This means that the Electoral College not only can produce results that conflict with a majority vote, but it is biased in a way that amplifies the votes of white people and reduces the voice of minorities.

merling baker electoral 2016 11 fig 1

The figure illustrates the gap in Electoral College representation for minority voters. Based on the weight of each vote in each state and given the fact that most minority voters reside in states where each person’s vote counts less in the Electoral College, the result is minority voters are grossly underrepresented. African American votes on average have a weight that is 95 percent as much as white votes, Hispanic votes are on average 91 percent, and Asian American votes, 93 percent as much of a white vote. In the Electoral College, white votes matter more. 


It is worth noting that there is a fix to this problem which does not require a constitutional amendment or even action by Congress. The organization, National Popular Vote, has been pushing states to pass legislation whereby their electoral votes will go to the winner of the national popular vote. This switch does not happen until states representing a majority of electoral votes have passed the same legislation. At that point, the winner of the popular vote will automatically be the winner of the electoral vote.

Add a comment

The NYT had an interesting piece that focused on the Carrier air conditioner factory in Indianapolis, Indiana that the company is closing and moving to Mexico. The piece describes the impact on the city and the people who work in the factory, many of whom apparently voted for Donald Trump in the hope that he would save their jobs.

One item in the story is somewhat misleading. The piece presents the views of John Van Reenen, an economist at M.I.T.:

"'These are fundamental forces that have more to do with technology than trade.'

In particular, he said, across developed economies more national income is going to capital, that is, owners and shareholders, rather than labor. 'We’ve seen this in many countries with different political systems,' he said. 'It’s a winner-take-all world.'"

There are two important qualifications that should be made to these comments. First, while there was a substantial shift of income from labor to capital in most wealthy countries in the the last four decades, that was not really the case in the United States. While there were cyclical ups and downs, there was little change in the capital share of corporate income until 2005, as shown below.

Book4 28361 image001

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

This is worth noting since the bulk of the upward redistribution had already been accomplished by 2005. The implication is that the upward redistribution was not due to firms getting more profits are the expense of workers in general, but rather higher paid workers benefiting at the expense of less-highly paid workers.

In the context of the trade story discussed here, this means that the lower cost of labor from outsourcing jobs to other countries was largely passed on to consumers in lower prices. While the workers who lost jobs and/or were forced to take pay cuts are hurt in this story (essentially the portion of the work force without college degrees), high end workers like CEOs and Wall Street types benefit. Also professionals like doctors, who benefit from protectionist restrictions (foreign doctors are prohibited from practicing in the United States unless they complete a U.S. residency program), benefit as well. This policy of selective protectionism had the predicted and actual effect of redistributing income upward.

The shift of income to profits since 2005 is likely in large part a result of the weakness in the labor market following the collapse of the housing bubble and the resulting recession. It appears that the labor share is again recovering, but whether it actually gets back to its pre-recession (and pre-2005) level will depend in large part on whether the labor market is allowed to tighten further or the Fed prevents further tightening by hiking interest rates.

The other qualification to Van Reenen's comments is that technology does not by itself determine distribution. The claims to ownership of technology (i.e. patent protection, copyright protection, and related forms of intellectual property claims) are what determine distribution. In the past four decades, Congress has implemented numerous measures both nationally and internationally through trade agreements that had the explicit purpose of making these protections stronger and longer. So the resulting upward redistribution cannot be attributed simply to "technology," rather it was the result of policy decisions that were intended for this purpose.

Add a comment

I will claim no special insight into the politics that led to Trump’s election Tuesday. I was as surprised as anyone else when not just Florida and North Carolina, but also Pennsylvania, Michigan, and Wisconsin started to turn red. But that’s history now. We have to live with the fact of President Trump and we have to figure out how to protect as much as possible of what we value in this country from his presidency.

This won’t be easy when the Republicans control both houses of Congress and will soon be able to appoint a new justice to the Supreme Court to again give them a right-wing majority. But there are still points of pressure.

Most importantly, the people in Congress want to get re-elected. Pushing unpopular policies like privatizing Social Security or Medicare, or taking away insurance by ending Obamacare, will be horrible albatrosses hanging over their heads the next time they face voters. This reality has to constantly be put in their faces. It is easy for politicians to push nonsense stories about eliminating trillions of dollars of waste, fraud, and abuse. It is much harder to get away with taking away your parents’ Social Security check or the health care insurance that pays for your kid’s insulin.

The other point of pressure is that we know (even if the folks who report the news don’t) that Trump got elected by making many promises that he will not be able to keep. Rebuilding an economy in which the benefits of growth are broadly shared is a great idea, but Donald Trump is not going to bring back the coal mining jobs lost in West Virginia, Kentucky, Ohio and elsewhere. These jobs were not lost because of environmentalists concerned about the future of the planet; they were lost because of productivity growth in the industry (think of strip mining replacing underground mining). We should make sure that people regularly are informed about President Trump’s progress in bringing back coal mining jobs to Appalachia.

Before getting into some specific issues, it is worth noting that not everything Trump says he wants to do is bad. He says that he wants a big infrastructure program. This is badly needed both to modernize our infrastructure and also to create jobs. Trump’s proposed tax cuts will provide a boost to demand that will generate jobs as well. It’s horribly targeted in giving most of the benefits to the rich, but it will still lead to more consumption and therefore more demand and jobs. This may finally give the economy enough stimulus to restore the labor market to its pre-recession strength. That will be good, especially since the beneficiaries of the job growth and the stronger labor market will be disproportionately African American and Hispanic and less-educated workers. Now, I will get to some specifics.

Add a comment

The NYT ran a piece with the headline, "Trump rides a wave of populist fury that may damage global prosperity." The headline is absolutely bizarre for the simple reason that we are not seeing anything that a serious person can call "global prosperity." Thanks to the austerity policies pursued across much of the across Europe, and to a lesser extent the United States, countries across the developing world have seen a decade of weak or even negative growth. The employment rate of prime age workers (ages 25-54) is still below its pre-recession level in many countries, including in the United States.

These points are actually a major point of the article itself, which emphasizes the poor performance of most economies as a trigger for populist sentiment. In this respect the headline effectively contradicts the point of the article. While the populist policies being advocated by politicians may not offer a good answer for economic problems, we do not have to worry that they somehow will ruin an economic golden age. The mainstream leaders designing economic policy already destroyed prosperity, which doesn't mean that some ill-designed populist policies couldn't make things worse.

One point where the article is mistaken is in dismissing the idea that some people in the UK might be benefited by Brexit.

"In northeastern England (something like the Rust Belt of Britain) people who voted to leave Europe speak openly about doing so to punish those who beseeched them to vote to stay — people like the exceedingly unpopular former prime minister David Cameron. The situation is so depressed, it cannot get worse, the logic runs. Any economic pain will fall on wealthy Londoners, people say.

"But that is almost certainly nonsense. A rupture of trade with Europe is likely to hit these industrial communities hardest. And if that happens, the people living there will be angrier than ever."

Actually there is a very plausible story under which Brexit may benefit left behind industrial communities, which comes directly out of standard economics. Brexit is likely to first and foremost hit the London financial center by denying it privileged access to the EU. This will lead to less exports of financial services, which lower the value of the pound, other things equal. That makes the goods produced by industry in the UK more competitive, increasing output and employment.

This is largely consistent with what we have seen in the months since the vote for Brexit. The pound has plunged against both the euro and the dollar. Also, we have seen a sharp decline in London real estate prices, while house prices have risen in the rest of the country.

While Brexit may not have been an ideal tool for the purpose (policy is never textbook ideal), it may actually provide an effective way to divert resources from the financial sector to the rest of the UK economy. It is certainly too early to pronounce the policy successful in this respect, but it is also too early to insist that it is a failure.


Add a comment

It will be very hard to get used to the two words “President Trump,” but somehow we will have to figure out a way to survive and keep the country and world intact for the next four years. There are many factors behind the rise of Donald Trump. Clearly, a big part of Trump’s appeal lay in his open expressions of racism, xenophobia, and misogyny.

But this is not the whole story. Many of the white working class people who voted for Trump yesterday voted for Barack Obama just four years earlier. Their character was not transformed in the last four years.

Undoubtedly, part of the story is that some of these people could not bring themselves to vote for a woman for president, even if they could vote for a black man with a foreign-sounding name. There were endless accounts of open and hateful displays of sexism directed against Hillary Clinton and her supporters, many of them encouraged by the candidate himself.

However, even against this backdrop the election was still incredibly close, with states like Wisconsin, Pennsylvania, and Michigan certainly well within Clinton’s reach. There were many factors that depressed Clinton’s vote, most obviously the endless drumbeat about e-mails, which were amplified in the last days of the campaign by F.B.I. Director James Comey’s bizarre intervention into the race.

While many of these factors were beyond the control of Clinton and the Democrats, one factor that was under their control was the decision to push the Trans-Pacific Partnership (TPP). Needless to say, there is little public knowledge of the details of the TPP. But the TPP symbolized a pattern of trade that cost millions of manufacturing jobs in the prior decade and put downward pressure on the wages of the workers without college degrees more generally.

Add a comment

Alec MacGillis had an interesting profile of Tom Nides in the New Yorker. Nides is currently a top executive at Morgan Stanley who is frequently mentioned as a leading contender for Treasury Secretary or other high level position in the Clinton administration. The piece ends with this remarkable section:

"But Barney Frank, the former Democratic congressman—who, despite having co-authored Dodd-Frank, is not opposed to former Wall Street executives working in Washington—told me that, in a friendly debate that he and Nides have conducted in recent years, Nides has vigorously defended Wall Street compensation: 'He said, "These are extremely talented people who do valuable work.’"'"

This one deserves a bit of thought. Remember, we're talking about the top people at major banks, like former Wells Fargo CEO John Stumpf. These people earns tens of millions of dollars a year. The folks at the hedge funds and private equity funds can earn hundreds of millions of dollars a year.

When we think about their talents, remember these are exactly the group of people that fueled the housing bubble with their fraudulent loans and bad securities. The country has paid and continues to pay an enormous price for this episode. If we look at the Congressional Budget Office's estimates of potential GDP, its current estimate for 2016 is more than ten percent below its projection of 2016 potential GDP back in 2008, before the crash.

To get an idea of the magnitude of 10 percent of GDP, this is roughly 2.5 times the size of the Social Security tax. There are any number of people in Washington who would go absolutely nuts over the suggestion that we raise the Social Security tax by 2.0 percentage points (even if phased in over a decade). Imagine raising it by 30 percentage points. This would have the equivalent impact on people's income as the long-term damage from the collapse of the housing bubble.

It is also worth noting that the Wall Street gang did not do even do well from the standpoint of the firms and shareholders they ostensibly work for. Two of the five major investment banks, Bear Stearns and Lehman, collapsed. The other three also would have gone under in the crisis, if not bailed out by the Fed and the Treasury. In addition, Citigroup and Bank of America, two of the four largest commercial banks, also would have faced collapse if not for massive government aid. 

These Wall Street folks may be incredibly talented people in the same way that Bernie Madoff was, but if their talents benefit anyone other than themselves, they keep this fact well hidden.

Add a comment

Yep, he tells us the real national embarrassment is not having a racist, sexist, xenophobic candidate as a major party presidential nominee. It's not our failure to address global warming so our kids might face a ruined planet. No, Robert Samuelson tells us our real national embarrassment is that we have an aging population and, horror of horrors, this may involve spending more money on Social Security and Medicare. Okay, let's go through his story.

Samuelson tells us:

"In 1990, those 65 and over comprised 12.5 percent of the population; now, according to Census Bureau projections, that share is racing toward 16 percent in 2020 and 19 percent in 2030. That’s one in five Americans. Already, federal spending for older Americans (mainly Social Security, Medicare and nursing-home care under Medicaid) dominates the national budget. It’s crowding out spending on other programs, from defense to parks, and is the chief source of chronic budget deficits.

"Nor is that all. The economy’s slowdown reflects in part the retirement of millions of baby boomers, whose exit from work reduces labor force growth. The generational unfairness is palpable. Younger Americans are seeing more of their taxes diverted to care of the elderly, who often are in better financial shape than the young who are subsidizing them.

"What we need — it was obvious even before the Bill Clinton presidency — is a new social contract between generations, one that acknowledges longer life expectancy (justifying higher eligibility ages for Social Security and Medicare benefits) and greater wealth among millions of older Americans (justifying lower benefits for well-to-do retirees)."

Okay, so we have a rising share of the population over age 65. That is something that happens when a country gets wealthier and medical technology improves. If we take a little longer view, the share of the population over age 65 was 7.4 percent in 1945. It's currently just under 15.0 percent. That means that we have seen a rise in the share of the over age 65 population rise by more than 7.5 percentage points. Apparently in Robert Samuelson world, that rise was okay, but something really really bad will happen when the share of people over age 65 rises another 4.0 percentage points to 19.0 percent.

Add a comment

Ross Douthat devoted his NYT column this morning to how people in the United States and other wealthy countries deal with a world in which they have fewer children. It's mostly devoted to social psychological speculation, which I will leave to others to assess, but I do want to pick up on an economic item that is a central theme.

Douthat tells readers:

"The Obama White House’s 'Life of Julia' ad campaign in 2012 — featuring a woman whose every choice was subsidized by the government from cradle to grave, with a lone child but no larger family or community in sight — seemed to many conservatives like a perfect confirmation of our fears: Here was liberalism explicitly pitching the state as a substitute for kith and kin."

While I don't recall the campaign ad, presumably the subsidies are for items like child care, education, health care, and Social Security. Douthat is making a clear contrast between incomes that people earn in the market, implicitly without the hand of government, and the items that the government gives to people. In his view, and the view of the conservatives he refers to, the former is good and latter in some way bad. This distinction becomes more problematic when we acknowledge that the government shapes the market in ways that enormously impact the ability of people to earn income in the market.

Starting with an example that was in the news last week, the Fed may soon decide to raise interest rates. The purpose of this move is to slow the economy and the rate of job creation. In addition to keeping some people from getting jobs (disproportionately African Americans and Hispanics), a higher rate of unemployment will weaken the bargaining power of workers who do have jobs. In particular, it puts downward pressure on the wages of the workers at the middle and bottom of the wage distribution.

Going in the opposite direction, the government protects the income of doctors from prohibiting foreign doctors from working in the United States unless they have completed a residency program in the United States. As a result of this restriction, doctors in the United States earn twice as much as their counterparts in other wealthy countries like Germany and Canada. This costs the country roughly $100 billion a year in higher medical expenses.(This effectively reduces the wages of all non-doctors, since our money buys less.)

In the same vein, the government grants patent monopolies in prescription drugs. These monopolies allow drug companies to charge prices that are often several thousand percent above the free market price. This protectionism both makes some of those involved in the process of developing and distributing drugs very rich and ends up costing the rest of us a huge amount in higher drug prices. The gap between the patent protected price of drugs and the free market price can easily exceed $350 billion a year.

There are a variety of other mechanisms through which the market has been shaped in recent decades to redistribute income upward. This is the topic of my new book Rigged: How Globalization and the Rules of the Market Economy Were Structured to Redistribute Income Upward (it's free). It is important to recognize how the market was structured to enrich the rich since it undermines the moral distinction that Douthat and his fellow conservatives want to make.

Add a comment

It's often said that economists are not very good at economics. (How else could they miss the $8 trillion housing bubble that sank the economy?) Anyhow, we are getting another case proving this point in the discussion of the acceleration of wage growth following the release of the October employment report.

While it does seem that there is a modest uptick in the rate of growth of the average hourly wage, this appears to be almost entirely due to the fact that we are seeing a shift from non-wage compensation (mostly health care) to wages. This was one of the goals of Obamacare, as it was hoped it would slow the growth of health care costs, leaving more money to go into workers' paychecks.

This is still good news for workers (if the quality of their health care insurance is not deteriorating), but it is a substantially different story from one in which tighter labor markets are leading to a more rapid growth in compensation. In the latter case, there is at least an argument for the Fed to be concerned about the risk of inflation and to raise rates. However, it doesn't make sense for the Fed to be thinking about raising interest rates and slowing job growth just because employers are shifting compensation from health care to wages.

Here's the picture for the last five years. (The graph shows the annualized rate of change each quarter.)


I can't see any acceleration in this picture. I guess that's why I'm not at the Fed.

Add a comment

Carolyn Johnson has done a lot of excellent reporting on abuses and price gouging by the pharmaceutical industry, but her piece today on the "solution to the global crisis in drug prices" is more than a bit bizarre. I'll save you the suspense. The solution is a "public benefit" company which is not set up to maximize profit. (I'm not sure what prevents it from being bought out by a standard profit maximizing company, but we'll leave that one aside.)

While it is encouraging to hear some researchers actually interested in helping humanity rather than getting as rich as Bill Gates, this really seems like a major sidebar. There have been a long list of proposals of various types to have research funded in some form by the government, with all the findings placed in the public domain so that new drugs would be available at generic prices.

In this story, there is no need to rely on beneficent researchers. Researchers are paid for their work at the time they do it, just like billions of employees throughout the world. If it turns out poorly, that is unfortunate. Of course, incompetent researchers would be fired just like incompetent dishwashers and custodians. But if their work turned out to have huge health benefits, the public would enjoy them in the form of affordable drugs.

Publicly funded research also has the great benefit that research findings could be made public so that other researchers and doctors could benefit. This would allow research to advance more quickly and also for doctors to make more informed prescribing choices for their patients. (As it stands now, the industry only makes the results available that help it to market its drugs.)

Anyhow, it is remarkable that Johnson seems to be unaware of proposals for publicly funded research. (It can go through the private sector — it just doesn't rely on patent monopolies.) The proponents are not an obscure group, they include Joe Stiglitz, a Nobel prize winning economist.

We already spend over $30 billion a year on biomedical research through the National Institutes of Health (NIH). While this money is primarily devoted to basic research, there is no obvious reason the funding couldn't be doubled or tripled and designated to finance developing new drugs and carrying them through the FDA approval process. We spend over $430 billion a year on prescription drugs that would sell for 10–20 percent of this price in a free market, so there is plenty of room to increase funding and still end up way ahead.

While the industry pushes the line that the NIH or equivalent agency would turn into bumbling idiots if they allocated money for drug development, it argues that the current funding is money very well spent and consistently argues for more. Perhaps Johnson shares the industry's bizarre theory of knowledge, otherwise it is difficult to understand why she would not be looking at this obvious solution for high drug prices.

Add a comment

by Dean Baker and Lara Merling

It's no secret that many folks, including many on the Fed, want to see higher interest rates. There are a variety of arguments put forward, including the story of huge but invisible bubbles that could burst and sink the economy just like the housing bubble did in 2008.

But the argument that deserves the most credibility is the conventional one that a low rate of unemployment is creating an overtight labor market. This leads to more wage growth, which will get passed along in more rapid inflation, which will soon force the Fed's hand. At some point the Fed will have to raise rates to keep inflation from getting out of control or we will be back in an era of excessive inflation. By this logic it is better to get out front and do it now.

In this story, we should at least be seeing the beginnings of an acceleration of inflation, but we don't. The figure below shows the core personal consumption expenditure deflator which provides the basis for the Fed's 2.0 percent (average) inflation target.

Book2 19143 image001

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

The figure shows the annualized rate of inflation using average price levels from the most recent three-month period compared with average price levels from the prior three month period. It's pretty hard to see any evidence of an upward trend in these data. The core rate had approached 2.5 percent in early 2011. It had minor fluctuations, but eventually bottomed out at 1.0 percent in the fall of 2014. It has moved modestly higher in the last two years, peaking at 2.0 percent at the end of 2015, but since then has crept down to 1.7 percent. 

Of course, it is always possible that we will see the picture change and inflation will suddenly start to accelerate, but the point is that it has not yet done so. Furthermore, none of the standard models show that inflation suddenly jumps upward. If it does start to increase it would likely be a long and gradual process. For this reason, it is difficult to see the urgency in the drive to raise interest rates.

Add a comment

Thomas Edsall's NYT column contrasted the downscale white working class Trump supporters with the growing number of college educated and relatively upscale supporters of Democrats. Near the end of the piece, Edsall quotes M.I.T. economist Daron Acemoglu:

"As long as the Democratic Party shakes off its hard-core anti-market, pro-union stance, there is a huge constituency of well-educated, socially conscious Americans that will join in."

Rather than completely abandon its base in the working class (of all races) there is an alternative route for the Democrats, they could abandon their hard core anti-market positions that benefit the wealthy.

This could start with abandoning their position, especially in trade deals, to make government granted patent and copyright monopolies longer and stronger. These anti-market interventions are affecting an ever larger share of the economy (in prescription drugs alone patent related protections likely increase the costs by more than $350 billion annually). They directly redistribute income from ordinary workers to the relatively wealthy minority in a position to earn rents from these forms of protectionism.

The Democrats can also abandon the licensing restrictions that protect doctors, dentists, and other highly paid professionals from both domestic and international competition. Our laws prevent doctors from practicing medicine unless they complete a U.S. residency program. This is about as blatant a protectionist barrier as you'll find these days. It allows doctors in the United States to earn on average more than $250,000 a year, twice as much as their counterparts in other wealthy countries like Germany and Canada. This protectionism costs us around $100 billion a year in higher medical costs.

We could also subject the financial sector to the same sort of taxes as other sectors of the economy pay (e.g. a financial transactions tax). This market based reform could eliminate more than $100 billion a year in waste in the financial sector that ends up as income for bankers and hedge fund types.

There is a long list of market-friendly measures that would help to reverse the upward redistribution of the last four decades. (Yep, this is the topic of my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) Anyhow, supporters of this upward redistribution do their best to turn language on its head and deny that these forms of protectionism are protection. They pretend that patent and copyright protections are the free market or that they never heard of restrictions on foreign doctors. Unfortunately, this group of deniers includes most of the people who write on these issues. But, there is always hope that they can learn.


Note: Typos in an earlier version were corrected, thanks Robert Salzberg.

Add a comment

The promoters of "free trade" are feeling frustrated these days. Their trade deals are facing large-scale public opposition everywhere. This opposition almost derailed a trade deal between Canada and the European Union. In the United States, both major party candidates are openly opposed to the Trans-Pacific Partnership (TPP).

The NYT recognizes some of the problems in recent trade pacts, but still badly misrepresents the key issues in an editorial on trade. The misrepresentation picks up a recent theme of the selective protectionists (a.k.a. "free traders"). It claims that trade has been falling:

"The total value of American imports and exports fell by more than $200 billion last year; they’ve fallen by an additional $470 billion in the first nine months of this year. Sluggish growth is both a cause and a result of this slowdown."

Numbers fans everywhere know the trick here. As I pointed out yesterday, the reason that the value of U.S. trade fell last year was the drop in the prcie of oil and commodities. The real value of trade rose by $2.3 billion from 2014 to 2015. This is admittedly slow growth, but it is not the same thing as the advertised decline. (These data are available from Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.6.)

The editorial compounds the error by bringing in data from 2016. It's true the nominal value of trade fell by $163 billion (not the $470 billion advertised) in the first nine months of 2016, but if we adjust for falling prices trade actually rose by $63 billion.

But this aside, it's time to stop honoring the lies by the promoters of trade deals. These deals have nothing to do with free trade. They are designed to redistribute income upward.

Add a comment

The NYT had an interesting article arguing that trade has stopped growing in the last couple of years. The piece notes data showing that combined U.S. exports and imports fell in the 2015 compared to 2014 and seem likely to fall again in 2016. It then raises the concern that this will lead to slower growth going forward. There are a couple of points that complicate this issue.

The first is that the drop in the dollar value of trade is the result of lower prices, not a smaller volume of goods and services being imported and exported. While the nominal value of exports fell by $111.0 billion from 2014 to 2015, the real value actually rose by $2.3 billion. On the import side, the nominal value fell by $97.8 billion while the real value rose by $116.5 billion.

In other words, the actual amount of goods and services crossing U.S. borders in 2015 was in fact higher in 2015 than in 2014, we were just paying less for what we imported and foreigners were paying less for what we exported to them. The big factors here were the sharp drop in oil prices and comparable drops in the price of many agricultural commodities that we export. It is not clear that this is bad for economic growth, but in any case the issue is not a drop in the quantity of goods and services crossing national borders.

The other point is that the definition of a traded item can change depending on the property rules in place at the time. To take a simple example, suppose that one billion people in China use Microsoft's Windows operating system. If we make them all pay $50 for each system then this is $50 billion in U.S. exports to China. Now suppose that everyone in China is able to use Windows at no cost. In this case we have $50 billion less in exports, but we still have one billion people in China getting the benefit of the Windows operating system.

Much of the focus of U.S. trade policy in recent decades has been about making other countries pay for items that in principle could be free through patents and copyright protection. (Yes, this is protectionism, even if your friends profit from it.) It is not clear that we are boosting world growth by making countries pay more money for items like prescription drugs, software, recorded music and video material, although we would certainly be increasing the dollar value of trade flows.

The long and short is that it is not clear what we are measuring when we see a decline in trading or volume or what it would mean if trading volume increases because we can force other countries to pay for items that would otherwise be available for free. (Yes, these issues are covered in my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, which is available for free.)


Add a comment

By Lara Merling

The official unemployment rate in the U.S. is currently estimated at 5 percent, a number that is sufficiently low for some to claim that the economy is at full employment. The unemployment rate varies significantly across states. Between September 2015 and March 2016 the unemployment rate has averaged 2.8 percent in North Dakota, 3 percent in Hawaii and New Hampshire, while in West Virginia it was at 6.4 percent, and in Washington DC, and Alaska it averaged 6.6 percent.

Once the labor market is at full employment, it is difficult to have much by way of further employment gains beyond the growth in the working-age population. If the current 5.0 percent unemployment rate is actually close to full employment, then we should expect to see smaller increases in the employment-to-population ratio (EPOP) in states with lower unemployment rates, since these states should be running up against the full employment limit. We would then expect higher gains in EPOPs in states that have higher unemployment rates which are further away from reaching full employment.

The figure below compares the change in the EPOP in each state over the period from March 2016 and September 2016, for people between the ages of 18 and 64, with the state's average unemployment rate for September 2015 to March 2016.

 Book11 8941 image001

As can be seen there is no relationship between the unemployment level and the change in EPOP. Some states with very low unemployment rates have seen large increases in EPOP, while some of the states with the highest unemployment levels have seen much smaller increases, or even decreases in EPOP. While this comparison is far from conclusive, it does not easily fit with a story with the labor market approaching full employment.

Add a comment