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).
That is the question millions are asking after she made this assertion in a segment on Morning Edition today. Economists would usually look to evidence that budget deficits are creating too much demand in the economy, such as a rising inflation rate and/or high interest rates. Both interest rates and inflation are at historically low levels, with inflation consistently running below the Federal Reserve Board's 2.0 percent target. Based on these facts, it is not clear what could be the basis of Liasson's assertion.
In some cases, people point to the interest on the debt as a burden placed on our children. This is misleading since some of our children (or at least Bill Gates' children) will be receiving this interest. However, even this measure does not suggest a major problem. Currently, interest payments on the debt, after netting out money refunded by the Federal Reserve Board (the government pays interest on the bonds held by the Fed, which is then refunded to the Treasury) are less than 0.8 percent of GDP. They were more than 3.0 percent of GDP in the early 1990s.
Also, if anyone is concerned about the burden imposed by these future payments, they should also be concerned about the much larger commitments the government makes when issuing patent and copyright monopolies in order to finance innovation and creative work. In the case of prescription drugs alone, the added expense of patents and related protections comes to close to $370 billion a year, or almost 2.0 percent of GDP.
Adding in the costs from these monopolies in medical equipment, software, and other sectors would almost certainly double this amount. Anyone seriously concerned about burdens on future generations would have to be noting the burdens created by patent and copyright monopolies, which swamp any plausible interest burden of the debt. The fact this is never mentioned suggests that burdens on our kids are not a major concern for people complaining about budget deficits.Add a comment
Since 47 percent of the benefits of the proposed tax bill go to the richest one percent, and the very rich, like Donald Trump, will get an enormous bonanza from ending the estate tax and other provisions, many people thought the goal of Republicans with this tax bill was to give more money to the rich people who finance their campaigns. Thankfully, the New York Times is there to correct this mistaken impression.
The NYT told readers that the Republican tax proposals are an:
"...effort to clean up the tax code, close loopholes and secure bigger tax cuts for all."
Fortunately, we have the NYT to explain the Republicans' motives. Certainly, based on the evidence in the public domain, almost everyone would have thought they were just trying to give money to the rich.Add a comment
Both the NYT and Washington Post articles on the battle over the succession and the Consumer Financial Protection Bureau (CFPB) neglected to mention the legislative history around the creation of the CFPB. There were competing sections on the order of succession in the event of the director's departure in the House and Senate versions.
One specified that the normal procedure on vacancies, in which the president gets to appoint an acting director, would be followed. The other had language indicating that the deputy director would become acting director until a new director was approved by Congress. This was the language that was used in the final bill. That supports the interpretation of the Democrats that the deputy director should fill in as acting director until Trump nominates a person to be director and that person is approved by Congress.Add a comment
It's amazing how so many reporters feel the need to tell us what politicians really think. Sorry, but I don't believe they know.
The example this time is a piece reporting on how 2018 may be a wave election with defeats for the Republicans comparable to what the Democrats experienced in 2010. It concludes by discussing the effort to shove through a tax bill before the end of the year:
"Republicans do not think the tax bill will be a political albatross once voters gain a fuller appreciation of its advantages. Of course, that is exactly what Democrats thought about the health care bill at this point in 2009."
It's entirely plausible that Republicans don't say that they think the bill is a political albatross. After all, what would that look like? Would members of the House and Senate be telling reporters:
"...we know the public hates this bill because it gives so much money to rich people, but these are our campaign contributors and we have to come through for them. Furthermore, even if we lose our election, they will pay us millions of dollars a year to work for them as lobbyists."
If something like this were, in fact, the case it is extremely unlikely that Republican politicians would be saying it to NYT reporters. It is far more likely that they would be uttering nonsense about how the tax bill is really good for the country and that people will come to realize this after it is approved.
Competent reporters would just tell readers what the politicians say. They would not try to tell us what the politicians actually believe, since they don't know.Add a comment
Okay, that's not quite what the NYT said. Instead, an article on the impact of ending the tax deduction for state and local income taxes told readers:
"Eliminating the deduction has long been a goal of many Republican lawmakers, who view the tax break as a subsidy that poorer red states provide to richer blue ones that spend heavily on government services."
Contrary to what the NYT tells us, their reporters really don't know how Republican lawmakers "view" the tax break. However, for some reason they couldn't just tell us what they say, they had to pretend to know what they think.
How about if reporters just stuck to telling us what politicians say and do and not pretend to read their minds? Then, we would all have something to be thankful for next Thanksgiving.Add a comment
The NYT had a good piece discussing the potential impact of capping the mortgage interest deduction and property taxes on the housing market; however, the piece missed an important way in which the Republican tax bills would reduce the benefits of the mortgage interest deduction. The piece notes that doubling the standard deduction will reduce the number of people who itemize and therefore benefit from the mortgage interest deduction.
But both bills also end the deduction for state and local income taxes. Without this deduction, most homeowners will have few other deductions apart from their mortgage interest and whatever is allowed for property taxes. These deductions will be less for almost everyone than their standard deduction ($24,000 for a couple). This means that they would just take the standard deduction and the mortgage interest deduction would be of no value to them. (The Tax Policy Center projects that just over 5 percent of tax filers would still itemize their deductions if these changes in the tax code are put into effect.)
In fact, even if they still chose to itemize the mortgage interest deduction will be far less valuable under this new code. Suppose that they had $10,000 in property taxes that are deductible and pay $15,000 a year in mortgage interest and have no other deductions. Since the combined total of $25,000 exceeds the $24,000 standard deduction, it would pay for this couple to itemize; however, the benefit is much smaller.
Their benefit from itemizing is just the difference between their itemized deductions and the standard deduction. In this case, this difference reduces their taxable income by $1,000, saving them $250 on their taxes if they are in the 25 percent bracket. If we still had a $12,000 standard deduction, their itemized deductions would be reducing their taxable income by $13,000, saving them $3,250 on their taxes.
In short, by raising the standard deduction and reducing the number of itemized deductions that are available, the Republican tax proposals will be hugely reducing the value of the mortgage interest deduction even if they follow the Senate bill and don't reduce the cap on deductible interest.
Thanks to Robert Salzberg for calling my attention to the Tax Policy Center projection.Add a comment
Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.
"In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle."
There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.Add a comment
Yes, David Brooks actually said this. The context is his column noting the complaints against the big tech companies. After going through the list Brooks tells readers:
"The political assault on this front [against the monopoly power of the big tech companies] is gaining steam. The left is attacking tech companies because they are mammoth corporations; the right is attacking them because they are culturally progressive. Tech will have few defenders on the national scene."
It is hard to believe that anyone with even a passing knowledge of U.S. politics could say something so ridiculous. Tech has hundreds of billions of dollars to throw at politicians, think tanks and other academics, and to buy media outlets in addition to the Internet sites it already controls.
Everywhere outside of David Brooks' World, people respond to money. The one thing we can be absolutely certain of is that there will no shortage of prominent individuals happy to defend tech on the national scene. My guess is that the tech giants won't see the need to follow Brooks' agenda as the only road to salvation. They are more likely to just buy up another think tank or two.Add a comment
Robert Samuelson comes in behind Donald Trump when it comes to mastering the logic of international trade. In his column telling readers that "Trump gets the trade problem all wrong," Samuelson gets three really big things about trade wrong:
1) The dollar's status as the major global currency is not a major factor in the trade deficit;
2) In contrast to Samuelson's trade agenda, most workers have no reason to want the U.S. government to devote greater efforts to enforcing patent and copyright protection elsewhere; and
3) The Trans-Pacific Partnership (TPP) was not about free trade; in fact, it can with more legitimacy be called a protectionist pact.
On the first point, the dollar has long been the major global currency. That did not lead the United States to run trade deficits in the 1950s and 1960s. In fact, through most of the next three decades, it ran considerably smaller deficits than it is running now.
The reason the U.S. is running such large trade deficits was the decision by many developing countries to accumulate huge amounts of reserves following the botched bailout from the East Asian financial crisis in 1997. This was a serious failure of the international financial system, managed by the United States. (That would be Clinton, Rubin, and Summers if we want to name names.)Add a comment
There may be no other person who has done as much harm to the world in this century as Peter Peterson, the Wall Street billionaire. Peterson has used his money to promote his complaints about excessive budget deficits. Due to his ability to fund a wide range of organizations, he has helped to keep these concerns at the center of public debate.
Back in the last decade, when some of us were trying to raise the alarm about the housing bubble and the economic damage that would be caused by its collapse, Peterson's crew were keeping the budget deficit front and center. News outlets like the Washington Post, New York Times, and National Public Radio had any number of news stories and columns raising concerns about the budget deficit. There was virtually nothing discussing the housing bubble and the risks it posed.
After the bubble burst and the economy desperately needed stimulus in the form of larger budget deficits, the Peterson organizations were still pressing their concern about exploding deficits. At a time when millions of people were needlessly unemployed, and millions more underemployed, Peterson's crew pressed the case for reducing the deficit. They were so successful they got the Obama administration to appoint the Bowles–Simpson commission on the deficit just as the recession was hitting its trough in terms of unemployment. This deficit fanaticism probably had an even more negative impact in Europe where the European Union and the European Central Bank imposed austerity on the countries of southern Europe that have led to downturns comparable to the Great Depression (much worse in the case of Greece).Add a comment
I had a post that took issue with a WaPo Fact Checker saying that the Republican tax plan will not actually kick 13 million people off insurance. Rather, they will opt not to buy it if they are not required to. I had misunderstood the Congressional Budget Office's analysis and thought it projected premiums would rise 10 percent a year as a result of this change. In fact, they project a cumulative increase of 10 percent.Add a comment
Tyler Cowen tells us in this Bloomberg piece that the Republicans are right to say that their plans for a big cut in the corporate tax will boost investment. (He is still opposed to the overall package.) I've had several people ask me about this one. I'll give the usual economists' answer: it depends.
If the argument is that other things equal, more cash in corporate coffers means more investment, I'm with Tyler. If we throw a huge pile of money at corporate America, at least some of it has to end up being invested, so Tyler is right on this point.
On the other hand should we expect the investment boom projected by the White House and Tax Foundation, where the capital stock will be 30 percent higher in ten years as a result of the tax cut? That one seems pretty nutty. (Tyler doesn't endorse this view.) There are and have been large disparities in after-tax rates of return between countries. The argument for an investment boom depends on an equalization in after-tax rates of return across countries. (I know, we can wave our hands and explain that by risk premia, but that is just hand waving.) There is little reason to believe that a change in the corporate income tax rate will have a huge effect on investment, even if we can say the direction is to raise it.
It is also worth asking about the other things equal assumption. Suppose that the Fed sees higher projected deficits and decides it has to raise interest rates faster and further. It is entirely possible that these interest rate hikes more than offset any positive effect that the tax cuts have on investment, resulting in a net negative.
Another possibility is that the larger deficits embolden the deficit hawks who then take the hatchet to transfer programs like Social Security, Medicare, and food stamps. The vast majority of this money is spent quickly by the people who get it. The reduction in demand from cuts to these programs could lead to a fall in demand in the economy, thereby reducing the incentive for firms to invest.
We can also envision a story in which state governments are forced to reduce taxes, since their residents can no longer deduct state and local taxes from their federal income taxes. This could lead to a reduction in spending on infrastructure and education, which could also have a negative effect on private investment.
In addition, taxing tuition waivers for grad schools could drastically reduce the supply of new graduates in computer sciences, biotech, and other areas requiring highly skilled workers. This could also lead to less investment.
In all of these cases, the net effect of the Republican tax package could be to reduce investment, but Tyler is right that the immediate effect of a cut in corporate taxes should be to raise investment.Add a comment
After having a horde of angry doctors attack me (and my wife) for suggesting that they face market competition, I was happy to see Jonathan Rothwell make the same point in a NYT Upshot piece. However, when running through the causes of runaway income at the top, he gives short shrift to the excessive pay of CEOs and other top executives.
"Most top earners in the United States are neither executives nor even managers. People in those occupations make up just over one-third of all top earners in the United States. This share has been falling — particularly for corporate executives — and is lower than in many other advanced countries. In Denmark, Canada and Finland, close to half of top earners are in managerial occupations, according to my analysis of data from the Luxembourg Income Study."
Well, one-third is a very large percentage of top earners, more than the share of doctors, lawyers, and other highly paid professionals taken together. Also, even if the share of top executives in the one percent fell somewhat, the percent of income going to CEOs soared as the share of income going to the one percent doubled.
Also, CEOs are far more likely to be in the upper reaches of the one percent. Many CEOs are earning paychecks in the tens of millions. Very few doctors or lawyers pocket much over one or two million.Add a comment
Reductions in Social Security benefits are extremely unpopular across the political spectrum. The program enjoys enormous support among both Democrats and Republicans and people are far more likely to say that benefits should be raised than cut. For this reason, the public should be paying attention to a little noticed provision in the tax bill passed by the House today and which also appears in the bills under consideration in the Senate.
In both cases, the basis for indexing tax brackets would be shifted from Consumer Price Index (CPI) to the Chained Consumer Price Index (CCPI). The difference is that the CCPI takes account of when people change their consumption patterns in response to changes in relative prices.
The classic example is that beef rises in price and chicken falls, we would expect people to consume less beef and more chicken. The CPI assumes that people don't change their consumption patterns while the CCPI adjusts its basket to assign less importance to beef and greater importance to chicken.
For this reason, the CCPI shows a somewhat lower rate of inflation than the CPI. Typically the gap is 0.2–0.3 percentage points. This matters in the tax bill because the cutoff for the tax brackets is adjusted each year by the CPI. If the CCPI is used rather than CPI, then the cutoffs would rise less rapidly.
For example, if the cutoff for the 25 percent bracket is $40,000 for a single individual and the CPI showed 2.0 percent inflation, then it would rise to $40,800 for the next year. This means a single person would face a tax rate of 25 percent on income above $40,800. If the CCPI showed an inflation rate of 1.7 percent, then the cutoff would rise to $40,680. This means a single person would face a tax rate of 25 percent on income above $40,680.
In a single year, this difference will not mean much, but after 10 years, the difference in the indexes would be between 2.0–3.0 percent and it would grow more through time. This will add a fair bit to many people's tax bills.Add a comment
Okay, that's not quite what the article said. Instead it told readers:
"Republicans have long championed free trade, believing that by allowing markets to operate unhindered, nations can boost domestic industries, lift their wages and improve living standards."
Wow, so Republicans are motivated by a concern over workers' living standards. It's good we have the NYT to tell us this because we certainly wouldn't know about Republicans' concern for workers based on their behavior. (Yes, Democrats are politicians too and it is reasonable to assume that politicians of both parties are first and foremost concerned about their re-election, which means appeasing powerful interest groups.)
The piece misrepresents many other issues, especially with its repeated use of the term "free trade." What exactly about longer and stronger patent and copyright protection is "free trade?" It's fine that the NYT likes these forms of protectionism and apparently approves of the massive upward redistribution that results from these market interventions, but it is a lie of Trumpian proportions to call them "free trade."
Also our "free trade" deals have done almost nothing to free up trade in highly paid professional services, like those offered by doctors and dentists. As a result our doctors and dentists are paid roughly twice as much as their counterparts in other wealthy countries.
The piece also notes the rise of populism on the left and right and then incredibly tells readers:
"The fissures over trade are a product of a surge in populism on both the political right and left. ...
"Growing anxieties about the unforeseen costs of globalization, the overhang of the financial crisis and the stagnation of the middle class have deeply damaged voters’ faith in the ability of free markets to deliver prosperity — and fractured the Republican Party in the process."
The costs of globalization were hardly "unforeseen." Many of us tried as hard as we could to warn of the costs of exposing large segments of the U.S. workforce to competition with much lower paid workers in the developing world. The more appropriate word here would be "ignored," as in the people in positions of authority deliberately chose to ignore both evidence and the predictions of standard trade theory in pushing trade deals that had the predicted effect of redistributing income upward.
It is also misleading to refer to "free markets" in this context. Trade deals that protect the most highly paid workers, longer and stronger patent and copyright protection, and bailouts of the financial industry when it faces bankruptcy are not characteristics of a free market.
(Yes, all this is covered in my (free) book Rigged: How Globalization and the Rule of the Modern Economy Were Structured to Make the Rich Richer.)Add a comment
Everyone knows that Amazon founder Jeff Bezos is a genius. After all, he made himself one of the richest people in the world by avoiding the requirement that retailers collect state sales taxes. Yes, Amazon now collects these taxes, but the savings on tax collections in the years it didn't collect taxes almost certainly exceed Amazon's cumulative profits since it's been in business.
While Amazon's tax avoidance may have been legal, it was 100 percent brain-dead as public policy. In effect, state and local governments were directly subsidizing an Internet giant at the expense of their homegrown mom and pop retail stores. It is very difficult to imagine a world in which this policy makes sense.
Anyhow, the NYT apparently feels some need to carry water for Amazon, implying there is some ambiguity about state efforts to require Amazon to collect taxes for sales of its affiliates. It tells us that states are "thirsty" for unpaid sales taxes, as opposed to trying to correct an abuse of the law that benefits a huge company and one of the richest people in the world at the expense of their own retailers.
It is also very generous in presenting Amazon's case, explaining that the company is concerned that it could be held liable for taxes that its affiliates fail to properly assess. This is called "too damn bad." Amazon is making money off its affiliates sales. This means that it carries certain responsibilities for those sales, including that taxes are properly collected. In a market economy, if a company like Amazon can't conduct its business competently, then it should go under and be replaced by businesses run by people who know what they are doing.Add a comment
University of Maryland economics professor Peter Morici misrepresented the Republican's proposed change in the mortgage interest deduction in a debate with my friend Jared Bernstein on Morning Edition. Morici said that the proposed cap would only hit people paying more than $500,000 in interest on their mortgage. In fact, it would cap the amount of principal on which interest could be deducted at $500,000.
Morici is correct that this would hit very few people, since it means having an outstanding balance on a mortgage of more than $500,000. Furthermore, the cap only applies to the margin over $500,000. This means that someone with outstanding principal of $540,000 would still be able to deduct the interest on $500,000 or more than 90 percent of their interest payment.
It is only the interest on the last $40,000 that would no longer be deductible. If they are paying 4.0% interest on their mortgage this would mean they are missing a deduction of $1,600, which translates into a tax increase of $400 for someone in the 25 percent tax bracket.
Budget Geek reminds me in a comment below that current mortgages are grandfathered so they would still be able to deduct interest on principal in excess of $500,000. (There is already a cap at $1 million.) It is only newly issued mortgages that would be subject to the $500k cap.Add a comment
The Washington Post may have misled readers on the Trump administration's claims about the impact of its proposed cut in the corporate income tax. It noted the claim that "that more than 70 percent of the corporate tax burden is passed on to U.S. workers." In fact, it is assuming an amount of growth that would vastly exceed the size of the tax cut. If workers get their share of this growth, well over 100 percent of the tax cut would be passed on in higher wages.
That is how it gets the figure of a $4,000 average gain per household. That would come to approximately $560 billion a year, as compared to a tax cut that will average around $150 billion a year.Add a comment
Eduardo Porter had a good piece noting that the United States is an outlier among rich countries in that it takes in far less tax revenue each year than other wealthy countries. As a result, it provides less in public services like health care and higher education. However, this is an incomplete story.
Tax collections are only one way in which the government pays for goods and services. There are three other important mechanisms:
1) patent and copyright monopolies;
2) tax expenditures, and;
3) loan guarantees.
While tax collections have increased little over the last three decades, the money committed in these three categories has expanded hugely relatively to the size of the economy over this period.
In the case of patent and copyright monopolies, these are mechanisms that the government uses to pay for innovation and creative work as an alternative to direct spending. For example, the United States could spend another $50 billion a year on biomedical research (in addition to the $32 billion it spends through the National Institutes of Health) and take responsibility for developing and testing new drugs. Instead, it tells the pharmaceutical industry to develop drugs and it will give it patents and other types of monopolies so it can recoup its costs.Add a comment
The NYT gave us yet another account of an industry that apparently can't get enough workers:
"Trucking is a brutal job. Drivers endure long, tedious stretches where they are inactive but have to stay focused, and they spend weeks at a time away from home. For those and other reasons, the industry’s biggest problem has been the scarcity and turnover of drivers, making it hard to keep up with shipping demand."
According to the Bureau of Labor Statistics, the average hourly wage for production and nonsupervisory employees in the trucking industry went up 2.4 percent. If it is really the case that the industry can't get enough drivers, they may try raising the pay. This is at least what the intro econ textbooks would say.Add a comment
The NYT had a lengthy article reporting on the Trump administration's efforts to reverse the movement away from fee for service payments to doctors initiated by the Obama administration. Tom Price, who had been head of the the Department of Health and Human Services, was a central figure in this effort.
At one point the piece tells readers that Price:
"...had fought against what he saw as unnecessary government intervention since his days as a surgeon in the suburbs north of Atlanta."
While it is possible that Price "saw" the new payment structures as a "unnecessary" government intervention, we might also think that Price was primarily upset about a payment system that would lower his pay and that of other doctors. It's good that the NYT was able to determine Price's true motives for us.Add a comment