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

The concept of "free trade" has acquired near religious status among policy types. All serious people are supposed to swear their allegiance to it and deride anyone who questions its universal benefits.

Unfortunately, almost none of the people who pronounce themselves devotees of free trade actually do consistently advocate free trade policies. Rather they push selective protectionist policies, that have the effect of redistributing income to people like them, and call them "free trade."

The NYT gave us yet one more example of a selective protectionist masquerading as a free trader in a column this morning by Jochen Bittner, a political editor for Die Zeit. Bittner contrasts the free trading open immigration types, who calls Lennonists (in the spirit of John Lennon's song, Imagine) and the Bannonists who are nationalists followers of Steve Bannon or his foreign equivalents.

The problem with this easy division is that the "free traders" wholeheartedly support very costly protectionist measures in the form of ever stronger and longer patent and copyright protections. These protections redistribute several hundred billions dollars annually (at least 3 percent of GDP in the United States) from the bulk of the population to the small group of people who are in a position to benefit from these government granted monopolies.

In the United States, the "free traders" in most cases also support the protectionist restrictions which severely limit the ability of foreign trained doctors and dentists and other high-end professionals from working in the United States. As a result of these protectionist measures doctors in the United States earn twice as much as their counterparts in other wealthy countries, costing us around $100 billion a year in higher health care costs.

The "free traders" in almost all cases supported the government bailouts of the financial industry which saved the banks from being held responsible for their own greed and incompetence. As a result of these bailouts a seriously bloated financial industry was protected from the market and was allowed to continue to siphon hundreds of billions of dollars annually out of the rest of the economy.

It is undoubtedly convenient for the self-professed free traders to ignore all the forms of protectionism that benefit them to the detriment of the rest of the society (including most of the "Bannonists"), but it is not accurate and it is not honest.

Yes, all of this is covered in my (free) book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

Add a comment

There are an awful lot of things to really dislike about Donald Trump and his conduct as president to date, but that doesn’t mean everything his administration does is wrong. In particular, there is considerable truth to what he has said about trade costing a large number of good paying manufacturing jobs and hurting the living standards of the middle class.

Unfortunately, rather than acknowledging this point, the media show the same determination as global warming denialists in saying that trade cannot be a problem. We got two examples of this sort of denialism in recent days.

The first was a piece in the Washington Post criticizing Trump adviser Peter Navarro’s view of trade and the trade deficit. While Navarro makes many questionable arguments in pushing his views on trade, his point that the trade deficit can reduce growth and employment is absolutely correct.

Ever since the crash in 2008 the bulk of economics profession has agreed that we faced a situation of “secular stagnation,” where the economy faced a persistent shortfall of demand. In this context, anything that boosts demand, such as an increase in government spending, private consumption, or a reduction in the trade deficit, leads to more output and employment.

In this context, the piece’s comment, taken from Harvard University economics professor N. Gregory Mankiw, “that a smaller trade deficit means lower investment along with possibly higher interest rates and less consumption” is completely wrong. If the economy is operating below full employment, as it certainly has been through most of the period from 2008 then reducing the trade deficit certainly can be a net addition to growth. As Mankiw says, “even a freshman at the end of ec 10 knows that.”

In this context, Navarro’s claim that a lower trade deficit could bring in $1.74 trillion in tax revenue over the course of a decade cannot be so easily dismissed even though the Post tells us:

“Hooey, say economists across the political spectrum.”

The key question here is whether the economy is now at potential GDP and whether it is likely to be over the next decade, even with a trade deficit that is close to 3.0 percent of GDP ($538 billion in the most recent quarter). On this question, the Congressional Budget Office (CBO) might be on the side of Navarro.

Add a comment

He uses his column today to tell us that "this century is broken." Much of his tale involves the old problem with men story.

"For every one American man aged 25 to 55 looking for work, there are three who have dropped out of the labor force. If Americans were working at the same rates they were when this century started, over 10 million more people would have jobs. As Eberstadt puts it, 'The plain fact is that 21st-century America has witnessed a dreadful collapse of work.'

"That means there’s an army of Americans semi-attached to their communities, who struggle to contribute, to realize their capacities and find their dignity. According to Bureau of Labor Statistics time-use studies, these labor force dropouts spend on average 2,000 hours a year watching some screen. That’s about the number of hours that usually go to a full-time job."

While it apparently makes folks like Brooks feel good to tell these sorts of morality tales about the failings of men today, it actually has nothing to do with reality. While fewer prime-age men (ages 25–54) men are working today than in 2000, the share of prime-age women has fallen by almost the same amount. Furthermore, the percent of prime-age women working had been rising prior to 2000 and was projected to continue to rise by most economists.

The fact that women's employment rates have fallen as well is important because it indicates that, contrary to what Brooks tells us, the problem is not a gender specific moral failing. The problem is most likely a good old-fashioned shortfall in demand in the economy.

This matters a great deal because we actually do know how to create more demand. It's called "spending money." This means that if the government spent more money on things like education, health care, and infrastructure, we could get more of these prime-age men and women employed. There are other ways to create demand. For example, if we got our trade deficit down by reducing the value of the dollar it would also generate more demand and employment.

If we are troubled by the large number of prime-age workers who are not employed there are policies that we could pursue that would address the problem. In other words, we should be more worried about the moral failings of people in a position to make economic policy than the moral failings of the folks not working.

Add a comment

Yes, as Un-American as that may sound, Bill Gates is proposing a tax that would undermine Donald Trump's efforts to speed the rate of economic growth. Gates wants to tax productivity growth (a.k.a. "automation") slowing down the rate at which the economy becomes more efficient.

This might seem a bizarre policy proposal at a time when productivity growth has been at record lows, averaging less than 1.0 percent annually for the last decade. This compares to rates of close to 3.0 percent annually from 1947 to 1973 and again from 1995 to 2005.

It is not clear if Gates has any understanding of economic data, but since the election of Donald Trump there has been a major effort to deny the fact that the trade deficit has been responsible for the loss of manufacturing jobs and to instead blame productivity growth. This is in spite of the fact that productivity growth has slowed sharply in recent years and that the plunge in manufacturing jobs followed closely on the explosion of the trade deficit, beginning in 1997.

 Manufacturing Employment

manu emplSource: Bureau of Labor Statistics.

Anyhow, as Paul Krugman pointed out in his column today, if Trump is to have any hope of achieving his growth target, he will need a sharp uptick in the rate of productivity growth from what we have been seeing. Bill Gates is apparently pushing in the opposite direction.

Add a comment

We all know about the need to make trade-offs in budgeting, most of us have to do it on a regular basis in our daily lives. But what about the trade-offs for the federal government? Arguably there is no need for trade-offs right now. Both interest rates and inflation are at low levels, so it is not obvious that there is any problem with larger deficits, but folks in both parties are fixated on the need to run low budget deficits or even to have balanced budgets, so these politics dictate the need for trade-offs.

In this context, it is worth making some comparisons as the Republicans seem prepared to slash a number of relatively low cost programs that have received considerable visibility. At the top of this list would be federal funding for Legal Services, a program that has provided legal assistance to low income people for decades. This program provides lawyers for people facing foreclosures or evictions, for people who need help with a divorce or will, or for many other situations that would typically require the assistance of a lawyer. The appropriation last year came to $375 million, or 0.011 percent of the federal budget.

Another item on the chopping block is the Corporation for Public Broadcasting (CPB). CPB helps fund National Public Radio as well as public television stations around the country. It got $445 million from the federal government last year or 0.013 percent of total spending.

Then there is the National Endowment of the Arts (NEA). The NEA supports a variety of education and cultural events around the country. It got just under $150 million last year or 0.004 percent of the total budget. There are a number of other small programs also on the chopping block, including AmeriCorps and the White House Office of National Drug Control Policy.

It is interesting to compare the spending of these programs that face cuts or may be eliminated altogether with spending of security for President Trump and his family. In the past, presidents have generally tried to limit their own travel and that of their families so as not to create large security bills for the country. Apparently, this is not a concern of President Trump.

Unlike past presidents, he has requested Secret Service protection for his adult children. Given their travel habits running President Trump’s business, this is likely to be a considerable expense for the government. For example, the Washington Post reported that one trip to Uruguay by Eric Trump to open a hotel there cost the government almost $100,000 in security expenses. In addition, Trump’s decision to take his weekends at his golf club in Florida, rather the White House or Camp David, costs us more than $3 million a shot. And the decision by Melania Trump to stay in New York with her son is apparently costing taxpayers close to $2 million a day.

People may want to ask where they get the most money for their tax dollars.


Book3 19072 image001

Source: See text.
Add a comment

Pedro da Costa tells us in Business Insider that the Republican tax proposal, with its border adjustment, is going to be really bad news because it will lead to a spike in inflation. The story is that the 20 percent tax imposed on imports will lead to a one-time jump in the core inflation rate of between 1.4 and 2.1 percentage points.

The implication is that the tax will be almost fully passed on to consumers. With imports at 15 percent of GDP, these numbers would be plausible.

While this is not an impossible scenario, it is worth thinking back to what Neil Irwin told us in the New York Times last week. He warned that the tax would lead to a 25 percent rise in the dollar, which could lead to a financial crisis as a result of the increase in the size of the dollar denominated debt held by developing countries. This is also a plausible scenario, although the prospect of a 25 percent increase in the value of the dollar seems a bit out of line, as I noted at the time.

Anyhow, it is worth stepping back for a moment and thinking this one through. Both Pedro da Costa and Neil Irwin are very good reporters. Neither is just making things up, but they are telling us completely opposite stories about the impact of the Republican tax proposal. In da Costa's version, the dollar moves little, with almost all the adjustment being in price. (It's worth noting that this would lead to a large reduction in the trade deficit.) In the Irwin version, the dollar fully adjusts leaving import prices essentially unchanged for people living in the United States.

My guess is that the Irwin version is closer to reality (not the crisis part), but the more fundamental point is that we actually have very little idea what will happen if this tax is implemented. It seems that many folks are prepared to shoot at this tax because they don't like the people pushing it.

I'm not terribly fond of them either, but this does seem like a serious proposal, which deserves a serious look. For the record, it did not originate with either Trump or Republicans in Congress, but rather Alan Auerbach, a Berkeley professor who I have always taken to be a serious economist. (I don't know his political leanings.)

Add a comment

Hey, no one said Speaker Ryan wasn't a smart guy. (Actually, many people have, but whatever.) Anyhow, the Republicans have published an outline of their proposal for an Obamacare replacement. It seems designed to ensure that tens of millions of people lose their health insurance coverage.

The basic story is that the plan is designed to fragment the market by both allowing a wider range of insurance policies and also by promoting health savings accounts in which people can place money tax free. (Oh yes, and the financial industry can make lots of money on fees.) This will mean that almost anyone in good health will get catastrophic policies that cover large expenses, but leave most normal expenses to the patient. Since most people are relatively healthy, this would be a good deal for most of the population.

The numbers on this are striking. The Centers for Medicare and Medicaid Services projects that health care costs in 2017 will average $10,800 this year. The average for cost for the ten percent of most expensive patients is $54,000. The average cost for the least expensive 50 percent is just $700. (These figures include seniors who are covered by Medicare. The skewing would be a bit less if the over 65 age group were pulled out of the calculation.)

Since most people have very little by way of health care spending, it would make sense for them to use the tax credit proposed in the Republican plan to buy a catastrophic plan, that may have a deductible of $10,000 or $12,000 or more. This plan would cost little and allow them to put most of the credit in a health savings account. 

This means that the only people who would be interested in buying conventional insurance policies would be people with high medical expenses. Insurers will price these policies to reflect the anticipated costs. This means that they would have to cost tens of thousands of dollars per person. Most of these people will not be able to afford these plans. The credit proposed by the Republicans (which is likely to be around $2,500 from the description in the plan), will not go far towards meeting the cost of policies for these people.

So, the Republicans deserve credit for devising a plan to reduce the cost of insurance for healthy people. It just means that tens of millions of people who actually need insurance won't be able to get it.

Add a comment

The Washington Post warned readers that health care costs were about to start rising sharply again in an article reporting new projections from the Centers for Medicare and Medicaid Service (CMS). While there is definitely a risk that these projections may be right, and health care will impose a considerably larger burden on the economy over the next decade than it does now, it is worth noting that the projections from CMS have not proven especially accurate in the past.

For example, in 2007 it projected that health care spending would rise as a share of GDP from 16.3 percent in 2007 to 18.8 percent in 2015, the most recent year for which data are available. According to CMS, spending in 2015 was just 17.8 percent of GDP, a full percentage point less than had been projected.

It is also worth noting that we pay roughly twice as much for physicians, drugs, and other items used in providing health care than other wealthy countries. If we become less protectionist over the next decade then we might expect prices in the United States to fall towards world levels, which would dampen the pace of health care cost growth.

Add a comment

Of course China could argue this, it would be really stupid, but nothing prohibits countries from making stupid arguments if they want to push their agenda. In this vein, the Wall Street Journal told readers that if the U.S. took actions against China and other countries for deliberately depressing the value of their currencies by buying dollars they:

"...could argue that Federal Reserve policies that weaken the dollar qualify as subsidies."

Obviously they could make this argument, but it makes little sense. There is a clear difference between central bank policies designed to affect the domestic economy and policies that are designed first and foremost to affect the value of the currency. It really is not hard for people to understand the distinction between a central bank buying its own country's bonds and a central bank buying the bonds and assets of other countries. This is about as sharp and clear a distinction as imaginable.

Central bank policy will affect will the value of the currency, but so will other policies. For example, a large reduction in government spending would be expected to reduce output and lower interest rates. Other countries could with equally good grounds contest this cut in government spending as an unfair subsidy.

This is a clear case where the Wall Street Journal does not like a policy and is inventing reasons for its readers to go along with its view.

Add a comment

Robert Samuelson is unhappy that people continue to believe something that is true — that we bailed out the bankers — and happy that people still believe something that is not true — that we prevented a second Great Depression. In his column Samuelson complains:

"The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system."

Okay, let's imagine the counterfactual. We decide to take the free market seriously and let it work its magic on Citigroup, Bank of America, Goldman Sachs and the rest of the high rollers. These huge banks all go into bankruptcy with the commercial banking parts of the operations taken over by the FDIC. All insured deposits are fully protected, with the FDIC and Fed having the option to raise the limits to protect smaller savers.

The shareholders of these banks are out of luck. They have zero. Samuelson is right that share prices were depressed during the crisis, but that is different than going to zero. Furthermore, operating with the protection of Treasury Secretary Timothy Geithner's promise of "no more Lehmans," the share prices soon bounced back.

Add a comment

This is really getting over the top. Republicans in Congress are debating an overhaul of the corporate income tax which would eliminate many of the opportunities for gaming the current tax code. To my mind this is great news, because the tax-gaming industry is where many of the richest people in the country, like private equity fund partners, make their money.

This means that the current corporate tax code is a mechanism for transferring money from the rest of us to the likes of Mitt Romney and Peter Peterson. It's understandable that these people would be very upset by a plan to end their tax-gaming windfalls, but why is Neil Irwin at NYT so upset?

The story he pushes is that border adjustability rules in the proposed reform would create enormous disruptions in the economy because it would lead to a sharp rise in the value of the dollar. Irwin tosses around a hypothetical 25 percent increase in the value of the dollar which he warns:

"...could shift trillions of dollars of wealth from Americans to foreigners; set off an emerging markets financial crisis; wreak havoc in global oil markets; and cause sustained harm to the American higher education and tourism industries (including, as it happens, luxury hotels with President Trump’s name on them)."

Okay, this is more than a little bit silly.

Add a comment

Donald Trump has used his podium on several occasions to harangue companies about moving jobs overseas. This is probably not an effective way to conduct economic policy, but Justin Wolfers misled NYT readers in claiming:

"Research shows that efforts to boost employment by making it difficult or costly to fire workers have backfired. The prospect of a costly and lengthy legal battle for laid-off employees makes it less appealing to hire new workers. The result has been that higher firing costs have led to to weaker productivity, sclerotic labor markets and higher unemployment."

Actually, more recent research results, including more recent work from the OECD (the source to which he links), show that there is no necessary link between restrictions on firing and unemployment. While excessive restrictions on firing can undoubtedly hurt employment and growth, there is no reason to assume that moderate amounts of severance pay, or other disincentives to dismiss workers, will discourage investment and hiring.

A requirement to give longer term workers severance pay when dismissed does change the incentives facing an employer. In this situation they have more incentive to retrain workers to ensure that they are as productive as possible. They may also opt to invest more in existing facilities rather than move overseas in order to avoid severance pay. 

Add a comment

The NYT had an interesting piece giving profiles of several young people who are struggling to find full time jobs in Europe. All of the people profiled have college degrees, several have considerably more education.

While the article notes that the situation faced by these young people is the result of the weak economy following the crash in 2008, it would have been helpful to point out that this weakness is the result of policy choices by Europe's leaders. They have deliberately decided to run low budget deficits in spite of the fact that most of the continent is operating well below its potential. Long-term interest rates are very low and inflation remains below the European Central Bank's 2.0 percent target, which itself is absurdly low.

In short, the plight of these young people and tens of millions of others should be seen as the fruit of the economic policy pursued by dogmatic leaders across Europe. It is not something that just happened.

Add a comment

It really is hard to understand, the potential gains are enormous. If we got the pay of our doctors down to the levels in other wealthy countries it could save us close to $100 billion a year. Our doctors average more than $250,000 (that's after paying for malpractice insurance and other expenses), with doctors in places like Germany and Canada getting about half of this amount. 

The barriers may not be as large in other highly paid professions (we prohibit foreign doctors from practicing here unless they complete a U.S. residency program), but the economy would benefit enormously from exposing all the highly paid professions to international competition. It is bizarre that this topic never gets raises even in pieces like this one in the NYT touting the virtues of immigration.

(We can deal with the problem of brain drain from developing countries, by compensating them for the doctors and other professionals that come here. Even if we paid them enough to allow them to train two or three doctors for every one that came here, the U.S. would still be way ahead.)

Add a comment

Economists have been worried about the weak productivity growth of the last decade, with some worried it will continue indefinitely. In the last decade, productivity growth has averaged less than 1.0 percent annually. This compares to a rate of close to 3.0 percent a year in the decade from 1995 to 2005 as well as the quarter century from 1947 to 1973. Slower productivity growth limits the extent to which wages can rise, except through redistribution.

However, Thomas Friedman apparently believes that if we end NAFTA, we will bring back manufacturing to the United States. But he argues that the new manufacturing capacity will be far more productive than the industry at present, and therefore mean very few jobs. He told readers:

"And if Trump forces all these U.S.-based multinationals to move operations from Mexico back to the U.S., what will that do? Help tank the Mexican economy so more Mexicans will try to come north, and raise the costs for U.S. manufacturers. What will they do? Move their factories to the U.S. but replace as many humans as possible with robots to contain costs."

Economists usually believe that expanding trade leads to higher productivity, so Friedman is offering a novel thesis with this idea that contracting trade will lead to more rapid productivity growth.

Add a comment

The NYT ran a piece discussing the possibility that we are substantially undercounting growth because we aren't incorporating the benefits of many things we can now get for free, like information over the Internet. There are many interesting issues here, although it is difficult to believe the uncounted benefits add much to growth. We also have uncounted costs, like paying for the cell phone and Internet service that you need now to stay in communication with friends and family. We also have to pay for all sorts of on-line security, which we didn't have to do before we were on-line. (The payments for antivirus software and other security measures add to GDP and growth.)

Regardless of the validity of the claims for under-measured growth, there is an important logical point. If we are undercounting growth, then we are getting richer faster than the official data show. Harvard economist Martin Feldstein is cited in the piece saying that he thinks we are undercounting GDP growth by 2 percentage points annually. This means that we have to add this figure to current growth rates.

In the case of wage growth, if Feldstein is correct, then average (not median) real wages can be expected to grow 3.5 percentage points annually for the next two decades, rather than 1.5 percent growth rate projected by the Social Security trustees. This means that in two decades real wages will have nearly doubled and three decades they will be 180 percent higher than they are today.

This would mean a great deal in terms of economic policy. We have many people running around Washington warning about how our kids will face crushing tax burden if we don't reduce our deficits and debt. Suppose that Martin Feldstein is correct and we actually are understating growth by 2.0 percentage points annually. And suppose the deficit fearmongers are right and in two decades we have to raise taxes on our kids.

If we raised Social Security taxes by five full percentage points (way more than any projections indicate would be necessary) their after-tax earnings would still be on average almost 90 percent higher than what workers receive today. In thirty years, their after tax wages would be more than 160 percent higher. 

As I said, I don't think it's plausible that we could be understating growth by anything close to the 2.0 percent claimed by Feldstein. However, if we are, then our kids will be incredibly rich relative to today's workers. It would be rather silly for us to waste our time worrying about deficits or debts out of a concern for generational equity. (It is silly anyhow, since debt and deficits have almost nothing to do with generational equity, but that is another story.)

Add a comment

Margot Katz-Sanger left this point out of her scorecard on Obamacare. Since people are now able to get inursance through the exchanges, they are no longer dependent on getting it from their employer, which usually means working a full-time job. As a result, the number of people choosing to work part-time has risen by more than 2 million since the law went into effect. The people benefiting have disproportionately been young parents and older workers who are too young to qualify for Medicare.

Add a comment

Yahoo ran a piece pointing out that it didn't really make sense for Donald Trump to take credit for the jobs report released on Friday since the survey on which the report is based was taken in the middle of January, before he was in the White House. The piece concludes by telling readers:

"So while Trump can’t be blamed for disappointing data or take credit for a good report, next month is all his!"

While the first point is entirely correct, it doesn't really make sense to give a president credit or blame for what happens in the early months of their administration. The economy has a great deal of momentum, which means it will continue whatever path it is on for some time.

In the case of President Obama, the economy was tanking when he came into office, losing more than 700,000 jobs a month. While he did quickly push a modest stimulus package through Congress, it wasn't signed until the end of February and didn't really start to have an impact until April. Even at that point, Obama's program had to counteract an enormous amount of negative momentum in the economy.

In Trump's case, the economy is on a path of modest growth and relatively strong job creation. This is likely to continue for the foreseeable future, unless he does something to slow or speedup growth, or there is some extraordinary shock to the economy.

Anyhow, we are inevitably going to try to score the performance of a president and it is customary to treat the day they take office as the starting point for the scorecard. However, as a practical matter, this approach does not make a great deal of sense.


Thanks to Robert Salzberg for calling this piece to my attention.

Add a comment

It's not clear that this is what he intended to do in a column that rightly criticized Donald Trump for quickly abandoning his pledge to force drug companies to lower prices, but it is what he did. Pearlstein asserts:

"Because ours is the only country that does not negotiate prices with drug companies, using a national formulary, Americans pay roughly twice what patients in other countries do for the most widely used drugs still under patent. What that means, in effect, is that Americans pay for the 20 percent of drug industry revenue that is invested in researching new drugs, giving the rest of the world a free ride. In exchange for this largesse, a disproportionate share of the high-paying research jobs are located in the United States."

Pearlstein is asserting that the United States is making its citizens pay more than people elsewhere for their drugs, in effect as a bribe, to get drug companies to locate research jobs in the United States. This is a clear violation of WTO rules and would be quite a news story if Pearlstein has any evidence to back up this assertion.

As a practical matter, we would expect drug companies to locate their research facilities where the cost of the research is lowest. The cost of research is not affected one iota by what a country's citizens pay for drugs. Most likely the reason most research is located in the United States is the enormous subsidies that the government provides through the National Institutes of Health (NIH). It is not a coincidence that a huge number of biotech companies are located in the Maryland suburbs of Washington, right next to the NIH campus.

It is also absurd to claim, as Pearlstein does, that we give the rest of the world "a free ride." The rest of the world pays plenty of money to finance the research being done by the pharmaceutical industry. The industry only claims to do $50 billion a year in research spending. They collect well over $500 billion a year in revenue outside of the United States. In effect, Pearlstein is claiming that if the U.S. government decides to hand the pharmaceutical industry another $50 billion a year in profits because of the power of their lobbyists, that other countres are free-riding because they are not equally corrupt.

Of course, serious newspapers would be discussing more efficient alternatives to patent-monopoly supported drug research (see Rigged, chapter 5), but the Washington Post gets considerable advertising revenue from the pharmaceutical industry.

Add a comment

It's often said that the economy is too simple for economists to understand it. Neil Irwin gave us evidence to support this assertion in a NYT column today. The piece both raises the question of whether the economy is too dynamic, or not dynamic enough, and what we can do to protect workers if it is too dynamic.

On the first question, we really don't have to debate much. We have good measure of the economy's dynamism, it's called "productivity growth." Productivity growth measures the increase in the amount of output in an average hour of work. It has has been extremely slow in the last decade, just 1.0 percent annually. It was rapid from 1995 to 2005, at 3.0 percent a year, but this was just equal to the pace during the period from 1947 to 1973. So, we clearly have no reason to worry that the economy is too dynamic.

In terms of protecting workers, the piece makes the point that workers who lose their job due to innovation are an important externality. This is obviously true. It's also not a new point. Other wealthy countries require that companies give severance pay to longer term workers. This both provides a bit of insurance to workers and effectively causes companies to internalize at least part of the costs associated with throwing a long-term employee out of work.

For example, if companies are required to pay two weeks of severance pay for each year of work, then a company planning to lay off a worker who has been employed for twenty years would have to pay forty weeks of severance pay. This would be a substantial disincentive to laying off workers. Companies would then have more incentive to modernize existing facilities and to retrain workers so they have the skills needed to be as productive as possible.

One of the great things about required severance pay is that it can be mandated at the state level. This means that there is no need to wait until Donald Trump and the Republican congress decide it is a good idea. States with progressive governments can adopt laws to this effect tomorrow. (At the moment, Montana is leading the way, with a law that prohibits dismissal without cause.)

Anyhow, this really is not a hard problem, nor is it new. We can provide a substantial degree of protection to workers from job loss due to technology or any other reason. We have chosen not to do so.

Add a comment

One of the central themes in the Republican drive to repeal Dodd-Frank is the claim that it has made it difficult for businesses to get credit. This assertion is often given the he said/she said treatment, as in this Washington Post piece today. (Actually, it's often just given the he said treatment, where the assertion is accepted as fact, with the question being whether a reduction in business credit is worth making the banking industry safer.)

There is actually evidence that we can look to in order to assess the ability of businesses to get credit in the Dodd-Frank era. On the one hand we can look at the interest rate on high-yield bonds as being the cost of capital to many mid-size firms that are big enough to get access to the bond market, but still far too risky to qualify as investment grade.

Rates in this market, as well as spreads against Treasury bonds, have been extraordinarily low in recent years. In fact, there were so low that Fed chair Janet Yellen warned against a bubble in this market in the summer of 2014. The other major piece of evidence is the self-assessment of businesses of the problems they face in getting credit.

The National Federation of Independent Businesses (NFIB) has been surveying its members on the problems they face in their business. They explicitly ask about credit conditions. In recent years, this has been a very minor problem and in fact last year hit record lows for the survey.

While all surveys have methodological issues, there is no reason to believe that the NFIB would tilt its findings to make credit look like less of a problem than it actually is. Nor is plausible that credit could be a major problem for a substantial portion of U.S. businesses but not for the businesses included in the NFIB survey.

In short, we do have evidence on the question of Dodd-Frank undermining access to business credit and it is unambiguous, it has not posed a major problem. The claim that Dodd-Frank has prevented businesses from expanding and undermined the recovery is one of those alternative facts that is so popular in political debates these days. It should not be taken seriously.

Add a comment