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).
It has become a common practice for reporters to refer to former Secretary of State Hillary Clinton's proposal to spend $275 billion on infrastructure. Is this a lot of money? My guess is that almost no one reading the number has a clue. Certainly Secretary Clinton wants people to think it is a major commitment.
While there is no obvious yes or no answer, it would help first of all if reporters started by giving a time frame. Spending $275 billion over one year is a much larger commitment than $275 billion over 10 years. The proposal would spend this money out over five years, making the annual amount $55 billion a year.
By comparison, the new highway bill calls for spending just over $60 billion annually on infrastructure over the next five years, so Clinton's proposal would nearly double current spending. As a share of the total budget it is still not a huge deal. With government spending projected to average around $4.7 trillion over the first five years of a Clinton administration, the proposal would amount to a bit less than 1.2 percent of projected spending. Measured as a share of projected GDP, it would be roughly 0.2 percent. And, it would come to roughly $170 a year per person in spending.
There are other ways to measure this sum, including looking at past levels of spending or relative to estimates of the need for new infrastructure. Reporters have much room to pick and choose on this one, but telling us that Clinton wants to spend $275 billion on infrastructure really is not providing information.Add a comment
Neil Irwin had a piece in the Upshot section of the NYT raising the possibility that the Fed could have negative interest rates on reserves, rather than its current near zero rate, as a way to provide an additional boost to the economy. The argument is that it is very inconvenient to carry cash, so deposits would not flee banks even if the interest rate were a small negative number.
The problem is that this analysis does not consider the realities of the banked population. Banks have millions (tens of millions?) of customers with relatively low balances. These customers are marginally profitable to the banks. (Often the banks profit on fees from these people, like overdraft charges.)
If banks had to pay interest on reserves then these accounts would be even less desirable for banks, since they now would have to pay interest on the reserves that the small account holders had brought to their bank. For this reason, they may opt to raise their fees for opening and maintaining a bank account. The result would be that more people would be getting by without bank accounts.
Any serious discussion of negative interest rates has to deal with this problem.Add a comment
Matt Yglesias is trying to convince people that we should not be mad at Alan Greenspan, the Bush administration economic policy team, and the economics profession for missing the housing bubble that sank the economy. He says that "financial bubbles are much harder to spot than people realize" and argues that the subsequent history shows that I actually was wrong in identifying a housing bubble in 2002.
There are two important points that need to be made here. First, my claim has always been that identifying asset bubbles that move the economy is in fact easy. This both narrows the scope for observation and also gives us more evidence against which to check the assessment. In terms of narrowing the scope, I would not hazard a guess as to whether there is a bubble in the market for platinum or barley. You would need to do lots of homework about these specific industries and also the prospects for related sectors that could provide platinum or barley substitutes, as well as the industries that use these commodities as inputs.
In looking at the housing market in 2002, it was possible to see that sale prices had diverged sharply from rents. While sale prices had already risen by more 30 percent compared with their long-term trend, rents had gone nowhere. Also, the vacancy rate in the housing market was at record highs. This strongly suggested that house prices were not being driven by the fundamentals. (Weak income growth also seemed inconsistent with surging house prices.) If families suddenly wanted to commit so much more of their income to housing, why wasn't it affecting rents and why were so many valuable units sitting empty?
And, the housing market was clearly driving the economy. Housing construction was reaching a record share of GDP. This was not something that would be expected when most of the baby boom cohort was looking to downsize as kids moved out of their homes. Also, the housing wealth created by the bubble was leading to a consumption boom, driving savings rates even lower than they had been at the peak of the stock bubble.
I'll confess that I did not expect the bubble to continue as long as it did. I learned from my experience with the stock bubble that the timing of the bursting is pretty much unknowable, but it never occurred to me that Greenspan and other financial regulators would allow the proliferation of junk mortgages to the level they reached in 2004–2006, the peak bubble years.
Contrary to the "who could have known?" alibis told by the folks setting policy, the abusive mortgages being pushed at the time were hardly a secret. The financial press were full of accounts of NINJA loans, where "NINJA" stands for no-income, no job, and no assets. Anyone who cared to know, realized that millions of mortgages were being issued that could only be supported if house prices continued to rise.
Anyhow, it was inexcusable for the folks at the Fed, at the Council of Economic Advisers, and other policy posts to have been blindsided by the bubble and the damage that would be caused by its collapse. If dishwashers had failed so miserably at their jobs, they would all be unemployed today. Fortunately for economists, they don't have the same level of accountability.Add a comment
The Washington Post has long expressed outrage over the fact that unionized auto workers can get $28 an hour. Therefore it is hardly surprising to see editorial page writer Charles Lane with a column complaining that "the United Auto Workers sell out nonunion auto workers."
The piece starts out by acknowledging that the AFL-CIO opposes tax provisions and trade agreements (wrongly called free trade agreements — apparently Lane has not heard about the increases in patent and copyright protection in these pacts) that encourage outsourcing. He could have also noted that it has argued for measures against currency management and promoted labor rights elsewhere, also measures that work against outsourcing. And, it would be appropriate to note in this context its support for measures that help the workforce as a whole, like Social Security, Medicare, unemployment insurance, and the Affordable Care Act.
But in spite of this seeming support for the workforce as a whole, Lane decides he going to prove to his readers that the United Auto Workers supports outsourcing. His smoking gun is the argument that if the union had agreed to lower pay for its workers at the Big Three, then they might shift fewer jobs to Mexico.
Lane's water pistol here is shooting blanks. As he himself notes in the piece, even the non-union car manufacturers are shifting jobs to Mexico. They have cheaper wages there, companies will therefore try to do this. Essentially, Lane is arguing that unions sellout non-union workers by pushing for higher wages for their workers because if unionized workers got low pay in the United States, there would be less incentive to look overseas for cheap labor. That may be compelling logic at the Washington Post, but probably not anywhere else in the world.
It is worth noting that the Washington Post has never once run either an opinion piece or news article on the protectionist measures that allow U.S. doctors to earn on average twice as much as their counterparts in other wealthy countries. This costs the country nearly $100 billion a year in higher health care costs, or just under $800 a household.
It is probably also worth noting that manufacturing compensation is on average more than 30 percent higher in Germany and several other European countries than in the United States. And unions in general are associated with lower levels of inequality, according to the International Monetary Fund.
But hey, Charles Lane and the Washington Post are outraged that auto workers can earn $28 an hour.Add a comment
Eduardo Porter discusses whether a no growth economy is feasible as a solution to addressing global warming. While he is largely right about the practicality of no-growth economy, there are a couple of points worth adding.
As a practical matter, it is just simple arithmetic that a larger world population will require fewer greenhouse gas (GHG) emissions per person. For this reason, a shrinking world population, or least more slowly growing one, would make it easier to hit emissions targets.
The second point is that historically people having taken the dividend of productivity gains in a mix of more lesiure and higher income. Given the strong correlation between income and GHG it would be desirable to structure policy to give people more incentive to take the benefits of productivity growth in leisure.
There has been a huge difference in this area between Europe and the United States over the 35 years. Europeans can almost all count on 4–6 weeks a year of paid vacation, paid family leave and sick days, and often shorter workweeks. As a result, the average work year in Europe has 20 percent fewer hours than in the United States. These countries have much lower levels of GHG per person than the United States. Policies that push the United States in this direction and push Europe further in the direction of more leisure should help to reduce GHG emissions.
As a definitional matter, better software, education, and health care would all be forms of economic growth. It is difficult to see why anyone would be opposed to such gains.Add a comment
Most economists argue that the Fed's quantitative easing policy, in which it bought up more than $3 trillion in government bonds and mortgage backed securities, is still helping to keep interest rates down even though the Fed has stopped buying these assets. The argument is that by holding a large stock of bonds the Fed is keeping their price higher than would otherwise be the case. And higher bond price mean lower interest rates.
While economists generally accept this view that the holding of a large stock of assets matters with U.S. interest rates, rather than just the flow of purchases, they don't seem to apply the same logic to currency prices. This NYT article on the Chinese Renminbi becoming an international currency never mentions the fact that China's central bank still holds more than $3 trillion in foreign exchange in discussing whether the renminbi is a freely floating currency.
If we believe that economics works the same way with currency values as with interest rates, then we have to believe that the decision by the Chinese central bank to continue to hold large amounts of dollars and other foreign currencies is raising their value relative to the renminbi compared to a situation where the bank held a more normal amount of reserves. This matters, since the implication is that the renminbi is still well below the level it would be at if the exchange rate was set without central bank interventions.Add a comment
Andrew Biggs has a piece in Forbes arguing that the standard estimates of retirees income are flawed because they ignore payouts from defined contribution (DC) accounts like 401(k)s and IRAs. Biggs has a point. There is a fundamental asymmetry in the treatment of traditional defined benefit pensions, which send retirees a check every month, and defined contribution pensions from which retirees must make withdrawals. The checks are generally counted as income on our surveys, the withdrawals often are not.
For this reason Biggs is correct to note that measures derived from the Current Population Survey (CPS), which the Social Security Administration uses for its Income of the Aged report, are likely biased downward. The question is how large the bias is. Based on IRS data, Biggs calculates that the correct number for retiree income might be more than 80 percent higher than the income reported by the CPS, an average understatement of almost $6,000 per person. That would be real money.
There are three reasons to think there might be less here than Biggs suggests.
1) Biggs used 2012 as the basis for his calculations, since this was the most recent year for which the IRS provided data on the over 65 population. It turns out that 2012 is a bad year from which to make extrapolations for reasons that every good tax-hating right-winger should know. The tax rate on high-income households was raised in 2013. This means that if you were one of those households, you would probably have wanted to take more from your IRA in 2012 at the lower tax rate.
If we look at the overall taxable withdrawals from IRAs, there was a drop from $230.8 billion in 2012 to $213.6 billion in 2013. Biggs' extrapolation would have shown an increase in 2013 to roughly $242 billion, an overstatement of more than 13 percent.Add a comment
I'm serious, here's how he begins his column (titled "Generational warfare, anyone?") this morning:
"An enduring puzzle of our politics is why there isn’t more generational conflict. By all rights, younger Americans should be resentful. Not only have they been tossed into the worst economy since the 1930s, but also there’s an informal consensus that the government, whatever else it does, should protect every cent of Social Security and Medicare benefits for the elderly. These priorities seem lopsided and unfair."
Yeah, think about that one. We have seen an enormous upward redistribution over the last 35 years. Without this upward redistribution the wages of a typical worker would be more than 40 percent higher today. This money has gone to Wall Street types—you know the folks who sunk the economy and then got us to bail out their banks when the market would have sank them. The money has gone to CEOs who put in their friends as corporate directors. The friends then return the favor by paying the CEOs tens of millions of dollars a year.
The money has gone to drug companies who use their political power to get Congress to give them stronger and longer patent protection and folks like President Obama's trade team to extend this protection around the world. It has gone to doctors and dentists who have used their political power to strengthen the protectionist barriers that ensure them ever higher pay. And it goes to folks like Samuelson's employer, Jeff Bezos, who has pocketed around $4 billion as a result of the exemption of Amazon from the requirement to collect state sales taxes.
But Samuelson and his friends are disappointed and puzzled that they can't get young people angry over their parents' and grandparents' $1,200 a month Social Security check. Life is tough.Add a comment
I am going to submit a piece to the Washington Monthly about how astronomers should support science. After reading Robert Atkinson's Washington Monthly piece on progressives and productivity, I'm convinced its editors would find its thesis compelling.
The Atkinson piece is more than a little annoying since it paints an imaginary image of progressives that exists only in Atkinson's head. Atkinson tells us that progressives should support productivity growth, after first going through some bizarre nonsense on the path of wages and productivity. (Wages have diverged sharply from productivity over the last three decades. This is measured using hourly wages and productivity. Someone would only bring family income into this calculation, as Atkinson does, if they are either confused or dishonest.)
Every progressive I know would very much like to see more productivity growth. The most immediate way to secure more productivity growth would be to have faster economic growth. This is both likely to spur investment and also shift workers from low paying, low productivity jobs to higher paying, higher productivity jobs. This is exactly what happened in the late 1990s when the Fed allowed the unemployment rate to fall to 4.0 percent, ignoring the widely held view in the mainstream of the economics profession that unemployment could not fall below 6.0 percent without leading to spiraling inflation.
Most of the progressives I know are actively leaning on the Fed to not raise interest rates and instead allow the unemployment rate to continue to fall. Where are the centrists and conservatives who supposedly care about productivity on this one? When is Atkinson?Add a comment
The Washington Post had an article on a new report from the Government Accountability Office which noted that most clinical trials don't report differences in outcome by gender. This could be another advantage of publicly funded clinical trials. The government could make a condition of financing that all the baseline characteristics of the participants in trials (e.g. gender, age, weight, etc.) be publicly disclosed along with the outcomes. This would allow other researchers and doctors to better determine which drugs might be best for their patients.
Of course, the other major advantage of having the government pay for the trials (after buying up all rights to the drugs) is that successful drugs would be immediately available at generic prices. It would not be necessary for hand wringing over paying tens or hundreds of thousands of dollars for drugs like Sovaldi or the new generation of cancer drugs coming on the market. It also wouldn't then be necessary for the Obama administration to send its trade negotiators overseas to beat up our trading partners demanding stronger and longer patent and related protections for prescription drugs.Add a comment
Steven Pearlstein has some useful ideas for limiting the rise in college costs, but he leaves an obvious item off the list. How about a hard cap on the pay of university presidents and other high level university employees?
The president of the United States gets $400,000 a year. That seems like a reasonable target. (This would be a hard cap, including all bonuses, deferred comp, etc. There is no reason to waste time with a cap that can be easily evaded.)
This would not be an interference with the market determination of pay. The deal would be that this cap would apply at public colleges and universities and also private schools that get tax-exempt status. If a school doesn't want to get money from the government, either in direct payments or tax subsidies, it would be free to pay its top management whatever it wanted.
Of course schools would scream bloody murder since many now give their presidents compensation packages that are three or four times this amount. But, life is tough. Just as U.S. manufacturing workers have had to adjust to a world where they compete with workers in the developing world earning $1 an hour, or less, university presidents may have to adjust to a world in which taxpayers will not subsidize their pay without limit.
While some of the current crop of presidents may take their deferred compensation and walk, there are many talented and hardworking people who would gladly take a job that pays ten times what the median worker makes in a year. Besides, since we keep hearing cries from the Washington Post crowd about the need to tighten our belts, what could be a better place to start?Add a comment
The Washington Post, which has in the past expressed outrage over items like auto workers getting paid $28 an hour and people receiving disability benefits, is again pursuing its drive for higher unemployment. The context is an editorial denouncing former Secretary of State Hillary Clinton's "pander" to middle class voters.
The specific issue is Clinton's promise to increase government spending in various areas while ruling out a tax increase on families earning less than $250,000 a year. The Post tells readers that this promise will be impossible to keep:
"To the contrary, if the U.S. government is to do all those things and still reduce its long-term debt to a more manageable share of the total economy, middle- and upper-middle-class Americans are going to have to contribute more, not less."
While the Post does have a good point on a pledge that sets promises to protect people earning more than 97 percent of the public from any tax increases (the $250,000 threshold), the idea that the current level of the debt is unmanageable has as much basis in reality as creationism. The interest rate on 10-year U.S. Treasury bonds is just 2.2 percent. This is three full percentage points below the rates we saw in the late 1990s when the government was running budget surpluses. The current interest burden of the debt, net of payments from the Federal Reserve Board, is well under 1.0 percent of GDP. This compares to a burden of more than 3.0 percent of GDP in the early 1990s.
In other words, the Post has zero, nothing, nada, to support its contention that the current level of the debt is somehow unmanageable. This claim deserves to be derided for the sort of flat earth economics it is.
And, it needs to be pointed out that cutting the budget (or raising taxes) in a context where the economy is below full employment means reducing demand. This means reducing employment and increasing unemployment, especially in a context where there is no plausible story that interest rates will decline enough to induce an offsetting increase in demand.
So once again we see the Post pushing a policy with the predictable effect of hurting workers. It wants lower deficits and debt which will mean higher unemployment and lower wages. And, it is upset that Hillary Clinton doesn't seem to share its agenda.Add a comment
Susan Dynarski had an interesting piece in the NYT on the relative effectiveness of charter schools in inner city and suburban neighborhoods. She reported on the findings from her own work, as well as others, that charter schools tend to result in higher achievement levels for inner city children, but had no effect on outcomes for children in suburban areas.
While this finding is interesting, it is important to note an important limitation to much of the research that has been done. Dynarski describes the nature of the tests:
"In the case of charter schools, researchers have found an innovative way to overcome selection bias: analyzing the admission lotteries that charters are required to run when they have more applicants than seats.
"Each lottery serves as a randomized trial, the gold standard of research methods. Random assignment lets us compare apples to apples: Lottery winners and losers are identical, on average, when they apply. Any differences that emerge after the lottery can safely be attributed to charter attendance."
Actually the claim that differences in outcomes, "can safely be attributed to charter attendance," is not true. There are two differences between the students who win the lottery and attend a charter school. One is the issue being examined, that they are attending a charter school. The other is that they are being placed in a school where the other students all have parents who were sufficiently motivated to enter their children in a lottery to try to get them in a better school.Add a comment
The election of the conservative candidate to the presidency in Argentina has been cause for celebration in mainstream Washington, as typified by this Washington Post editorial. I won't claim to know which candidate offered the better path for the country going forward, but we should not let the Washington Post types rewrite the past.
The governments led by the Kirchners have much to show for their twelve years in power. Nestor Kirchner took power in May of 2003, just as Argentina was beginning its recovery from its dramatic default and devaluation at the end of 2001. The I.M.F. was insisting that Argentina return to the austerity path that had led to a horrible recession in the years from 1998 to 2001. Its per capita income had already declined by more than 15 percent at the point of the default making the downturn more than four times as severe as the 2007–2009 recession in the United States. Kirchner said no deal.
Instead he pursued policies to promote growth and employment, with an emphasis on helping those at the bottom end of the income distribution. To the great consternation of the folks at the I.M.F. (where Argentina became known as the "A-word"), his policies largely succeeded. While the I.M.F. kept predicting economic collapse, Argentina's economy grew rapidly. By the middle of 2003 it had already made up all the ground lost following the default and by the end of 2004 its per capita income was above the pre-recession level. And, it was much more evenly distributed.Add a comment
I'm a big fan of mass transit, bikes, and walking, but bad numbers are not the way to get people out of their cars. Someone came up with the statistic that the rate of traffic fatalties is 1.07 deaths per million vehicle miles traveled. Then, the NYT, ABC, NBC, Bloomberg, and AP all picked up this number.
Think about that one for a moment. The average car is driven roughly 10,000 miles a year. If you have 20 friends who are regular drivers, these news outlets want you to believe that one will be killed in a car accident every five years on average. Sound high?
Well, the correct number is 1.07 fatalities per 100 million miles according to the National Highway Traffic Safety Administration, so they were off by a factor of 100. So be careful driving this holiday weekend, but the risks are not quite as great as some folks are saying.
Thanks to Robert Salzberg for calling this one to my attention.Add a comment
The usually astute Greg Ip gets derailed in a high production values piece that tries to tell us that our problems stem from not having enough kids. For those left scratching their heads while sitting in traffic jams or standing in over-crowded subway cars, the basic story is that we somehow don't have enough workers to do all the work. (Where are those damn robots when we need them?)
Anyhow, the piece starts out quickly on the wrong foot:
"Ever since the global financial crisis, economists have groped for reasons to explain why growth in the U.S. and abroad has repeatedly disappointed, citing everything from fiscal austerity to the euro meltdown. They are now coming to realize that one of the stiffest headwinds is also one of the hardest to overcome: demographics."
Umm no, those of us who warned of the housing bubble and predicted that the resulting downturn would be hard to reverse saw the weak growth as a 100 percent predictable problem from a shortfall in aggregate demand. There was no source of demand to replace the construction and consumption demand driven by the bubble.
And, I don't recall being at all troubled by slower aggregate growth, the issue was that we were seeing insufficient growth to fully employ the population. The United States and many other wealthy countries have seen a sharp decline in the employment to population ratio. This is true even when we look at the employment to population ratio for prime age (ages 25–54) workers. This is down by three full percentage points from its pre-recession peak and by more than four percentage points from its 2000 peak. It is pretty hard to explain the drop in the percentage of people working by demographics.
We later get the strange statement:
Add a comment
"Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers."
There is an ongoing myth about the downturn and the weak recovery that consumers unwillingness to spend has been a major factor holding back the recovery. An article in the Washington Post business section headlined, "heading into the holidays the retail industry faces a cautious consumer," draws on this myth. The reality is that consumers have not been especially reluctant to spend in the downturn or the recovery as can be easily seen in this graph showing consumption as a share of GDP.
As can be seen, consumption is actually higher relative to GDP than it was before the downturn. It even higher relative to GDP than when the wealth created by the stock bubble lead to a boom in the late 1990s. The only time consumption was notably higher relative to GDP was in 2011 and 2012 when the payroll tax holiday on 2 percentage points of the Social Security tax temporarily boosted people's disposable income relative to GDP.
(Those who see an upward trend need to think more carefully about what is being shown. Consumption can only continually rise as a share of GDP if investment and government spending continually fall and/or the trade deficit expands continually relative to the size of the economy. Standard models do not predict either event and both would be quite strange if true. It is also worth noting that the consumption share of GDP fell sharply in the 1960s due to the growth of investment and government spending.)
The weak consumption story is one of the myths that makes the housing bubble far more complicated that it actually is. The basic story is that housing construction, and the consumption driven by housing bubble generated equity, were driving the economy before the bubble burst in 2006–2008. When the bubble burst, the over-construction of the bubble years led to a huge falloff in construction and a temporary drop in consumption.
There was no component of demand that could easily fill this gap, which was on the order of six percentage points of GDP (@$1.1 trillion annually in today's economy.) The stimulus went part of the way, but it was too small and faded back to near zero by 2011.
The problem of the continuing weakness of the economy is that we still have nothing to fill this demand gap. Housing has come back to near normal levels, but not the boom levels of the bubble years. If anything, consumption is unusually high, driven by house and stock prices that are above trend, even if not necessarily at bubble levels.
The one sure way to close the demand gap is to reduce the trade deficit, most obviously by getting down the value of the dollar. Unfortunately, the powers that be in Washington don't talk about currency values, hence there are no provisions on currency in the Trans-Pacific Partnership. (There is an unenforceable side agreement.) We could try to get to full employment with shorter work weeks and years, through measures such as work sharing, paid family leave, and paid vacations, but this route is also largely off the agenda.
Anyhow, we don't have cautious consumers and we don't have any mysteries about the economy's ongoing weakness. We just have a lot of confusion generated by the media in discussing the topic.Add a comment
NPR had a piece on the horrible inflation of the 1970s and how the country was rescued by the herioics of Paul Volcker who was Fed chair at the time. The piece raises several points that could use a bit more context and leaves out some important information.
First and most importantly, the piece implies a world that did not exist. It begins with a discussion of a speech by President Gerald Ford in 1974. It told listeners:
"Inflation was the silent thief, and every year it got worse. Inflation got worse. It went from 10 percent to 11 percent to 12 percent. It wasn't clear exactly why and no one could agree on a simple way to fix it."
Neither part of this story is especially true. Inflation was hardly silent. It was widely reported, so people did know about it. Nor was it obviously a thief. Many, perhaps most, wage contracts were indexed to inflation, which meant that wages rose more or less in step with prices. While this was not true for everyone, a substantial segment of the population was able to insulate itself from the effects of inflation. This is one of the factors that made it harder to contain inflation.
It is also not true that no one knew how to fix it. Higher unemployment reduced workers' bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping from Gerald Ford to Paul Volcker, mispresents the actual course of inflation over this period. Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession in 1974–1975, so the method for bringing inflation under control was not quite as difficult to figure out as the piece implies.Add a comment
By Dean Baker and Evan Butcher
We all know how hard it is to get by in today’s competitive economy. That’s why billionaires need special help. The Wall Street folks got their multi-trillion bailout in the form of below market interest rate loans when their greed and incompetence would otherwise have put them into bankruptcy. The drug companies get longer and stronger patent monopolies both here, and with trade deals like the Trans-Pacific Partnership, around the world. And, Jeff Bezos and Amazon get tens of billions of dollars in handouts in the form of an exemption from collecting the same sales tax as his mom and pop competitors.
The basic story here is simple. States require that stores collect sales tax on the items they sell. This applies to every mom and pop book store or clothing store, as well as huge retailers like Walmart and Costco. Amazon, along with other Internet only retailers, has been able to escape this requirement in most states through most of its existence.
While Amazon was acting legally, this loophole in the law makes zero sense from an economic perspective, and even less from a moral perspective. From an economic perspective, it makes no sense for the government to effectively subsidize on-line businesses that operate out of state at the expense of businesses that operate and employ people in the state.
And, make no mistake; the exemption from the requirement to collect sales tax is a subsidy. The tax is directed at the customer, the retailer is performing a service for the government. Effectively, the exemption is allowing the retailer to profit by charging a price that is equal to the price a competitor charges plus the tax. For example, if a television sells for $400 in a state with a 5 percent sales tax, the Internet competitors can sell the same television for $420 and be charging no more than its brick and mortar competitors. They then put the extra $20 in their pockets.
This is the story of duty-free shops at airports. Generally the price on tobacco and liquor at these stores is comparable to prices in other stores. The difference is that the money the other stores pay to the government in taxes instead goes into the pockets of the owners of the duty-free stores.
This is the same story with Internet retailers. Amazon has effectively been subsidized by the amount of the sales tax that it would have been required to collect had it been subject to the same rules as its brick and mortar competitors. Instead of putting the extra profits into its pockets, it appears that Amazon has largely followed the strategy of passing on the savings to win market share at the expense of its competitors. This has proven to be an effective strategy, as its sales volume has made it the world’s most valuable retailer by market capitalization.
It is worth knowing how much taxpayers have given through the tax subsidy route to Jeff Bezos, now one of the world richest people. We calculated the amount that Amazon saved on sales tax through its existence. While many states no longer exempt Internet retailers from collecting taxes, 20 states still do. We added up the amount of tax that Amazon would have been required to collect in each state had it been subject to the same rules as it competitors for each year that it was able to avoid this requirement. The total amount through 2014 comes to $20.4 billion. Bezos has gradually reduced his stake in the company over this period, but he still own close to 20 percent. If we apportion the subsidy accordingly, taxpayers have effectively handed $4.1 billion to Jeff Bezos over the last two decades.
In order to put this in perspective, the average monthly TANF payment to a family with one child is roughly $400. This means that taxpayers have given Jeff Bezos the equivalent of 10 million monthly TANF checks. The average food stamp payment is $127 per person per month. Jeff Bezo’s $4.1 billion in tax subsidies would amount to 31.5 million person months of food stamps.
Source: authors' calculations, see text.
So, as we prepare to celebrate this holiday season, we should keep in mind one person, Jeff Bezos, to whom the rest of us have been very generous.
 For simplicity, the calculation assumes that Amazon’s sales in each state were proportional to the state’s share in 2014 GDP. It applies a 5 percent real discount rate to past savings.Add a comment
Adam Davidson has an interesting piece in the NYT Magazine on the effectiveness, or lack thereof, of U.S. foreign aid. He discusses various models of aid, noting that none of them has been a clear success.
In commenting on the issue, the article says in passing that the United States spends $30 billlion a year to help the world's poor. This figure could be misleading. Most readers are probably unaware of the size of the overall budget, therefore they may think that $30 billion involves a major committment of federal dollars. In fact, since we are spending $3.5 trillion a year in total, this sum comes to less than 0.9 percent of the total federal budget.
In discussing foreign aid, it is probably also worth mentioning the risk of corruption in the aid granting agencies. Foreign aid is a substantial source of money. For this reason it attracts not only people interesting in helping the world's poor, it also attracts contractors looking to line their pockets. As a result, much of the spending may not end up being very helpful for its intended targets. This has likely been an especially serious problem in Haiti, which is the focus of the piece.
Note: Typos corrected, thank Joe E. and Robert Salzberg.Add a comment
I’ve been asked why I focus so much on restructuring the market as a way to address problems of inequality and poverty as opposed to tax and transfer programs. There are ideological, economic, and political reasons for this focus, which I will take in order.
On the ideological side, there is a commonly held view that the winners in the economy got there through a combination of luck, skill, and hard work. The losers scored less well in these categories. The central question from the standpoint of public policy then ends up being whether we should feel sorry for the losers, or at least sorry enough to take something away from the winners. Conservatives are mostly comfortable leaving distribution where it is, while liberals have guilty consciences so they feel we should help out the people at the bottom.
Rejecting loser liberalism means not accepting this framing. The winners did not win just by luck, skill, and hard work, but also by rigging the deck. For example, they construct trade deals to make U.S. manufacturing workers compete with low-paid workers in the developing world. The predicted and actual consequence is to reduce the employment and wages of U.S. manufacturing workers. Meanwhile, they maintain or increase the protections that make it difficult for people from developing (or developed) countries to train to U.S. standards and work as doctors, lawyers, and other highly paid professions in the United States.
The winners also made patent and copyright protection stronger and longer, with the predicted and actual effect of shifting more money to the small segment of the population that benefits from these forms of protection. And the winners have conducted a monetary policy, through their control of the Federal Reserve Board, which sustains higher than necessary rates of unemployment. The effect of excessive unemployment falls disproportionately on those at the middle and bottom of the wage distribution, not only increasing their risk of unemployment, but lowering the wages of those who do have jobs.
The point is that we did not just end up with a situation where some people are extremely wealthy and many people have little or nothing, we have policies that were designed to bring about this result. We don’t have to ask the wealthy to feel compassion for the poor or have guilty consciences over their good fortune. We need to stop the wealthy from rigging the game so they continue to end up with all the money.Add a comment