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).
Washington Post economics reporter Max Ehrenfreund featured a piece highlighting former Donald Trump adviser Steven Moore's views of Trump's recent shifts on economic policy. In particular, Moore took issue with Trump's desire to see the value of the dollar fall. He argued that the dollar rose with strong economies under President Reagan and Clinton, while it was weak under Nixon, Ford, and Carter.
Actually, it is not especially accurate to claim the dollar rose under President Reagan. Using the Federal Reserve Board's broad real index, it was trivially higher in January of 1989 than it was when Reagan took office in January of 1981 (91.3 in 1989 compared to 89.7 in 1981). The comparison goes the other way if we use December of 1988 (89.8) and December of 1989 (90.6), the last full month of Carter and Reagan's terms.
As a practical matter, the run-up in the dollar in the first part of the Reagan administration led to a large trade deficit, causing serious hardship in manufacturing sectors. In response, Reagan's Treasury secretary negotiated an orderly decline in the value of the dollar to bring down the deficit, which it did.
Also, if we are using the value of the dollar as a measure of the strength of the economy under different presidents, we find that it was virtually unchanged through President George H.W. Bush's presidency and Clinton's first term. The former was a period of weak growth, while the latter was a period of strong growth.Add a comment
The business media routinely feature stories about employers' difficulty in getting qualified workers. These pieces often leave economists scratching their heads, since the usual way to get better workers is to offer higher pay. And, the workers are almost invariably out there, most likely working for a competitor.
This means that if there were really shortages of workers with specific skills then we should see pay for workers with these skills rising rapidly. Since there is no major segment of the labor market where we see rapidly rising real wages, it is difficult to take the story of a skills shortage seriously.
This naturally brings us to ask questions about United Airlines and CEO pay because it is always interesting to ask what justifies the high pay at the top. Ostensibly, CEOs have compensation packages that run into the tens of millions a year because that is what you have to pay to attract and keep these extraordinarily talented individuals.
United's CEO, Oscar Munoz, is targeted to receive pay of $14 million this year, with a potential $500,000 bonus depending on customer satisfaction surveys. So we should assume that United has to pay this sort of money (roughly the pay of 1000 minimum wage workers) in order to attract a person with Mr. Munoz's skills.
While it would take more work than I am going to do just now to evaluate Mr. Munoz's overall performance for the company's shareholders (I'm ignoring the issue of the sort of corporate citizen United might be to its workers, customers, and the environment), his performance surrounding the forcible removal of Dr. David Dao from a United plane earlier this week hardly seems worth $14 million a year.Add a comment
I don't generally comment on pieces that reference me, but Jordan Weissman has given me such a beautiful teachable moment that I can't resist. Weissman wrote about Donald Trump's reversal on his campaign pledge to declare China a currency manipulator. Weissman assures us that Trump was completely wrong in his campaign rhetoric and that China does not in fact try to depress the value of its currency.
"It's pretty hard to argue with that. Far from devaluing its currency, China has actually spent more than $1 trillion of its vaunted foreign reserves over the past couple of years trying to prop up the value of the yuan as investors have funneled money overseas. There are some on the left, like economist Dean Baker, who will argue that Beijing is still effectively suppressing the redback's value by refusing to unwind its dollar reserves more quickly. But if China were really keeping its currency severely underpriced, you'd expect it to still have a big current account surplus, reminiscent of 10 years ago, which it doesn't anymore."
Okay, to start with, I hate the word "manipulation" in this context. China isn't doing anything in the dark of the night that we are trying to catch them at. The country pretty explicitly manages the value of its currency against the dollar, that is why it holds more than $3 trillion in reserves. So let's just use the word "manage," in reference to its currency. It is more neutral and more accurate.
It also allows us to get away from the idea that China is somehow a villain and that we here in the good old U.S. of A are the victims. There are plenty of large US corporations that hugely benefit from having an under-valued Chinese currency. For example, Walmart has developed a low-cost supply chain that depends largely on goods manufactured in China. It is not anxious for the price of the items it imports to rise by 15–30 percent because of a rise in the value of the yuan against the dollar.Add a comment
It is remarkable how the protectionist measures that redistribute income upward remain largely invisible to the folks who write about things like the upward redistribution of income. Thomas Edsall gave us a priceless example of this sort of oversight in a column talking about how non-metropolitan areas are losing out to major cities.
The gem apperars in a quote from Andrew McAfee, the co-author The Second Machine Age. McAfee is warning about the course of future technology.
"We’ll continue to see the middle class hollowed out and will see growth at the low and high ends. Really good executives, entrepreneurs, investors, and novelists — they will all reap rewards. Yo-Yo Ma won’t be replaced by a robot anytime soon, but financially, I wouldn’t want to be the world’s 100th-best cellist."
Okay, let's get out the scorecards. People have always been prepared to pay lots of money to see top notch musicians. They also have been willing to pay to see very good, but less than the very best musicians, as in the world's 100th-best cellist. What has changed is not the willingness for people to pay for live performances, or at least not in any obvious way, but rather the ability of a small group of performers to completely dominate the market in recorded music.
This is not a function of technology, but rather a result of copyright protection. The government has made copyright protection both longer (extending it from 55 years to 95 years) and stronger. It has extended copyright protection to the web and also made everyone with a website into a copyright cop, with responsibility to make sure that copyright protected material is not distributed through their site. (The law makes a website liable if material is not removed after being notified by the copyright holder, thereby requiring the website owner to side with the copyright holder against its client. By contrast, in Canada, a website owner must notify the person who is alleged to have posted infringing material of the complaint.)Add a comment
The Washington Post and other major news outlets are strong supporters of the trade policy pursued by administrations of both political parties. They routinely allow their position on this issue to spill over into their news reporting, touting the policy as "free trade." We got yet another example of this in the Washington Post today.
Of course the policy is very far from free trade. We have largely left in place the protectionist barriers that keep doctors and dentists from other countries from competing with our own doctors. (Doctors have to complete a U.S. residency program before they can practice in the United States and dentists must graduate from a U.S. dental school. The lone exception is for Canadian doctors and dentists, although even here we have left unnecessary barriers in place.)
As a result of this protectionism, average pay for doctors is over $250,000 a year and more than $200,000 a year for dentists, putting the vast majority of both groups in the top 2.0 percent of wage earners. Their pay is roughly twice the average received by their counterparts in other wealthy countries, adding close to $100 billion a year ($700 per family per year) to our medical bill.
While trade negotiators may feel this protectionism is justified, since these professionals lack the skills to compete in the global economy, it is nonetheless protectionism, not free trade.
We also have actively been pushing for longer and stronger patent and copyright protections. While these protections, like all forms of protectionism, serve a purpose, they are 180 degrees at odds with free trade. And, they are very costly. Patent protection in prescription drugs will lead to us pay more than $440 billion this year for drugs that would likely sell for less than $80 billion in a free market. The difference of $360 billion comes to almost $3,000 a year for every family in the country.
It is also worth noting patent protection results in exactly the sort of corruption that would be expected from a huge government imposed tariff. (When patents raise the price of a drug by a factor of 100 or more, as is often the case, it is equivalent to a tariff of 10,000 percent.) The result is that pharmaceutical companies often make payoffs to doctors to promote their drugs or conceal evidence that their drugs are less effective than claimed or even harmful.Add a comment
The Federal Reserve Board has more direct control over the economy than any other institution in the country. When it decides to raise interest rates to slow the economy, it can ensure that millions of workers don't get jobs and prevent tens of millions more from getting the bargaining power they need to gain wage increases. For this reason, it is very important who is making the calls on interest rates and who they are listening to.
Robert Rubin, who served as Treasury secretary in the Clinton administration, weighed in today in the NYT to argue for the status quo. There are a few important background points on Rubin that are worth mentioning before getting into the substance.
First. Robert Rubin was a main architect of the high dollar policy that led to the explosion of the trade deficit in the last decade. This led to the loss of millions of manufacturing jobs and decimating communities across the Midwest. Second, Rubin was a major advocate of financial deregulation during his years in the Clinton administration. Finally, Rubin was a direct beneficiary of deregulation, since he left the administration to take a top job at Citigroup. He made over $100 million in this position before he resigned in the financial crisis when bad loans had essentially put Citigroup into bankruptcy. (It was saved by government bailouts.)
Rubin touts the current apolitical nature of the Fed. He warns about:
"Efforts to denigrate the integrity of the Fed’s work, and to inject groundless opinion, politics and ideology, must be rejected by the board — and that means governors and other members of the Federal Open Market Committee must be willing to withstand aggressive attacks."
It is important to recognize that the Fed is currently dominated by people with close ties to the financial industry. The Fed Open Market Committee (FOMC) which determines interest rate policy has 19 members. While 7 are governors appointed by the president and approved by Congress (only 4 of the governor seats are currently filled), 12 are presidents of the district banks. These bank presidents are appointed through a process dominated by the banks in the district. (Only 5 of the 12 presidents have a vote at any one time, but all 12 participate in discussions.)
It seems bizarre to describe this process as apolitical or imply there is great integrity here. Rubin's claim is particularly ironic in light of the fact that one of the bank presidents was just forced to resign after admitting to leaking confidential information on interest rate policy to a financial analyst.
There is good reason for the public to be unhappy about the Fed's excessive concern over inflation over the last four decades and inadequate attention to unemployment. This arguably reflects the interests of the financial industry, which often stands to lose from higher inflation and have little interest in the level of employment. It is understandable that someone who has made his fortune in the financial industry would want to protect the status quo with the Fed, but there is little reason for the rest of us to take him seriously.Add a comment
It is unfortunate that Donald Trump seems closer to the mark on China and trade than many economists and people who write on economic issues for major news outlets. Today, Eduardo Porter gets things partly right in his column telling readers "Trump isn't wrong on China currency manipulation just late." The thrust of the piece is that China did in fact deliberately prop up the dollar against its currency, thereby causing the U.S. trade deficit to explode. However, he argues this is all history now and that China's currency is properly valued.
Let's start with the first part of the story. It's hardly a secret that China bought trillions of dollars of foreign exchange in the last decade. The predicted and actual effect of this action was to raise the value of the dollar against the yuan. The result is that the price of U.S. exports were inflated for people living in China and the price of imports from China were held down.
Porter then asks why the Bush administration didn't do anything when this trade deficit was exploding in the years 2002–2007. We get the answer from Eswar Prasad, a former I.M.F. official who headed their oversight of China:
"'There were other dimensions of China’s economic policies that were seen as more important to U.S. economic and business interests,' Eswar Prasad, who headed the China desk at the International Monetary Fund and is now a professor at Cornell, told me. These included 'greater market access, better intellectual property rights protection, easier access to investment opportunities, etc.'"
Okay, step back and absorb this one. Mr. Prasad is saying that millions of manufacturing workers in the Midwest lost their jobs and saw their communities decimated because the Bush administration wanted to press China to enforce Pfizer's patents on drugs, Microsoft's copyrights on Windows, and to secure better access to China's financial markets for Goldman Sachs.
This is not a new story, in fact I say it all the time. But it's nice to have the story confirmed by the person who occupied the I.M.F.'s China desk at the time.Add a comment
The Washington Post editorial page is of course famous for absurdly claiming that Mexico's GDP had quadrupled between 1987 and 2007 in an editorial defending NAFTA. (According to the I.M.F, Mexico's GDP increased by 83 percent over this period.) Incredibly, the paper still has not corrected this egregious error in its online version.
This is why it is difficult to share the concern of Fred Hiatt, the editorial page editor, that we will see increasingly dishonest public debates. Hiatt and his team at the editorial page have no qualms at all about making up nonsense when pushing their positions. While I'm a big fan of facts and data in public debate, the Post's editorial page editor is about the last person in the world who should be complaining about dishonest arguments.
Just to pick a trivial point in this piece, Hiatt wants us to be concerned about automation displacing workers. As fans of data know, automation is actually advancing at a record slow pace, with productivity growth averaging just 1.0 percent over the last decade. (This compares to 3.0 percent in the 1947 to 1973 Golden Age and the pick-up from 1995 to 2005.)
If Hiatt is predicting an imminent pick-up, as do some techno-optimists, then he was being dishonest in citing projections from the Congressional Budget Office showing larger budget deficits. If productivity picks up, so will growth and tax revenue, making the budget picture much brighter than what CBO is projecting.
It is also striking to see Hiatt warning about automation, the day after the Post editorial page complained that too many people have stopped working because of an overly generous disability program. That piece told readers:
"...at a time of declining workforce participation, especially among so-called prime-age males (those between 25 and 54 years old), the nation’s long-term economic potential depends on making sure work pays for all those willing to work. And from that point of view, the Social Security disability program needs reform."
Okay, so yesterday we had too few workers and today we have too many because of automation. These arguments are complete opposites. The one unifying theme is that the Post is worried that we are being too generous to the poor and middle class.Add a comment
The Republicans have been working hard to find a way to repeal the Affordable Care Act (ACA) that doesn't leave most of their members of Congress unemployed. The basic problem is that their campaign against the ACA for the last seven years was a complete lie. They claimed that people were paying too much money for policies that were inadequate, leading people to believe that they had a way to provide better coverage for less money. They don't.
Unfortunately, NPR might have led listeners to believe otherwise in an interview with Mike Johnson, a Republican representative from Louisiana. Johnson explained that they would get premiums down by allowing insurers to exclude people with health conditions from their pool. This is more or less the situation we had before the ACA.
Most people are healthy and have few medical bills. Insurers are very happy to insure these people, since they essentially are just sending the companies money. The problem has always been the the roughly 10 percent of the population with substantial medical bills. Insurers don't want to insure these people, since their health care costs serious money. Of course, these are the people who most need insurance.
Johnson acknowledged that these people will face higher premiums under his plan, but then said that they had set aside $15 billion in their bill for subsidies for these people. Was this information helpful to you?
It didn't do much for me, since he didn't even tell us the time frame for this $15 billion. Budget numbers are often expressed over ten year periods reflecting the Congressional Budget Office's 10-year planning horizon. Was this a ten year number or a one year number? My guess is the former, but I really don't know. Hey, so we're off by a factor of ten, what's the big deal?
But it gets worse. What's the need here? Anyone know how far $15 billion will go over either a one year or ten year horizon?
To fill in the perspective a serious reporter would have given, the average annual health care costs for the 10 percent most costly patients is more than $50,000 a year. We're talking about 32 million people, so that comes to more than $1.5 trillion a year.
Many of these people are on Medicare, and some are covered by employer provided insurance, so many will not end up in these high risk pools and need subsidies. But, let's say that one third of them do end up in these pools. That means the cost would be $500 billion a year for these folks' health care. Mr. Johnson is proposing a subsidy of between $1.5 billion and $15 billion to help these people cover their insurance.
Got the picture now?Add a comment
At a time of unprecedented inequality, the Washington Post is quick to seize on the country's real problems: a Social Security disability program that is too generous. The editorial was good enough not to get bogged down in phony arguments. It tells readers explicitly that rampant fraud is not a problem:
"Nor is the program’s growth the result of rampant fraud, as sometimes alleged; structural factors such as population aging explain much recent growth. Nevertheless, at a time of declining workforce participation, especially among so-called prime-age males (those between 25 and 54 years old), the nation’s long-term economic potential depends on making sure work pays for all those willing to work. And from that point of view, the Social Security disability program needs reform."
So the problem is that the program is too generous for people who might still be able to work in spite of a disability.
Just to get some orientation, the benefit that the Post considers to be too generous averages $1,170 a month. This was roughly six minutes of pay for our current Secretary of State, in his former job as the head of Exxon-Mobil.
The concern about the low employment rates (EPOP) in the United States is reasonable, but it bears no obvious relationship to the Social Security disability insurance program. The EPOP for prime-age workers (ages 25–54) has fallen by almost four percentage points since 2000, with no increase in the generosity of the disability program. In fact, if we combine the number of workers receiving disability and workers compensation, there has been little change in the share of the working-age population receiving benefits over this period.
In fact, the United States ranks near the bottom of OECD countries in the generosity of its benefits, yet it also ranks near the bottom in the employment rate for prime-age workers. In its most recent data, the OECD put the EPOP for prime-age workers in the United States at 78.2 percent. This compares 83.3 percent for the Netherlands, 84.2 percent for Germany, and 86.0 percent for Sweden, all countries that spend considerably more money on disability benefits than the United States.
The most obvious way to increase employment for prime-age workers is to deal with the demand side of the story. For example, it might be a good idea if the Fed stopped trying to slow the economy by raising interest rates. It would also be good if the pay of ordinary workers were increased by measures that reduce the pay of those at the top. Free trade in prescription drugs and free trade for doctors are near the top of my list. (Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer gives more of the story. [It's free].) We can also follow the path of other countries and have more work supports, like access to low cost quality child care.
But in Donald Trump's America, the priority is to take away as much as possible from those at the middle and bottom so the rich can have more. And the Washington Post is determined to do its part.
Addendum: Where are the Robots?
I forgot to ask this important question. Just last week the Post ran a column that had us terrified that the robots were going to take all the jobs. Now they want us to worry that we don't have enough workers because they are all living on their $1170 a month disability benefit. In economics this is known as the "which way is up problem?" Ostensibly intelligent people don't have the slightest clue what they are talking about when it comes to the economy.
Correction: An earlier version put the monthly benefit at one hour of pay for Secretary of State Rex Tillerson. That would imply annual pay in the range of $2 million a year. In fact, his pay came to more than $20 million a year.Add a comment
Justin Wolfers had a piece in the NYT today warning that we face a situation in which the Fed may often find itself facing the zero lower bound, where it is unable to stimulate the economy further by lowering the short-term federal funds rate that is directly under its control. Wolfers notes that this can mean that growth ends up being slower and unemployment higher than would otherwise be the case. He argues that it should be possible to counteract this weakness with more aggressive use of countercyclical fiscal policy, which means increasing government spending during downturns.
While Wolfers' argument for the merits of countercyclical fiscal policy is reasonable, it is worth stepping back and asking about the origins of secular stagnation. The basic story is that we are looking at an economy in which investment spending is weak, partly due to low labor force growth, and consumption spending is also weak, in part due to the upward redistribution of income. (Rich people spend a smaller share of the their income than the middle class and poor.)
However, an important part of the demand story is net exports. Back in the old days, economists used to argue that rich countries should run trade surpluses. The idea is that capital is relatively abundant in rich countries, while it is relatively scarce in developing countries. This meant that capital would get a higher return in developing countries than in rich countries, so that we should expect rich nations to be net lenders of capital to developing countries. This lending would facilitate their growth.
The implication of being net lenders is that rich countries would run trade surpluses with developing countries. This would allow them to feed and house their populations, even as they built up their infrastructure and capital stock.
As it turns out, the world economy has not followed this course. While the rich countries as a whole (not the United States) were big net lenders in the 1990s, after the East Asian financial crisis in 1997, the flows switched course. Developing countries became big net lenders, as they began to run large trade surpluses especially with the United States. (The harsh terms of the I.M.F. bailout, engineered by Larry Summers, Robert Rubin, and Alan Greenspan, deserves the blame here.)Add a comment
There was probably too much made out of the slowing in payroll employment growth in the March jobs numbers reported yesterday. This was likely driven in large part by the unusually good weather in January and February that brought a lot of spring hiring forward. However, there were a couple of items that did not get the attention they deserve.
First, there is some limited evidence that wage growth is slowing. Typically, the year-over-year change in the average hourly wage is reported. While the growth in this measure slowed slightly last month, a problem with the year-over-year rate is that it reflects wage growth over the last year, not just recent months. I prefer taking the annualized rate of growth for the average of the last three months compared with the average of the prior three months. This measure can be sensitive to erratic month-to-month changes, but at least it focuses on a more recent period, rather than telling us about the wage growth from nine or ten months ago.
Here's the picture using this series since the start of 2013.
Source: Bureau of Labor Statistics.
As the figure shows, there was some very modest increase in the rate of wage growth in early 2016, with a peak of 3.1 percent in May of 2016. Since then, the general direction has been downward, with the rate over the last three months being less than 2.5 percent. This matters hugely for the Fed's interest rate policy, since a main issue for those looking to raise rates is that inflation could start rising above target levels. That seems unlikely if the rate of wage growth is stable or slowing.
In this respect it is also worth noting that the Employment Cost Index (ECI), a broader measure of compensation that includes non-wage benefits like health care, shows zero evidence of acceleration over this period. Over the last twelve months the ECI has risen 2.2 percent. That is the same rate of increase as we saw in this index three years earlier.
In short, you really can't find any evidence of accelerating wage growth in the data. The evidence of deceleration is too weak to say anything conclusive, but if anything, wage growth is going in the wrong direction to make the case for the inflation hawks.
The other item that deserved more attention in the jobs report was the rise in the employment rate (EPOP) of prime-age workers. This rose by 0.2 percentage points to 78.5 percent. This number is 0.5 percentage points above its year-ago level, although still 1.8 percentage points below the pre-recession peak and almost 4.0 percentage points below the 2000 peak. This suggests that the EPOP could still rise much further before we can say that we have reached full employment.
There was also an interesting gender split to the rise in the EPOP. While the EPOP for prime-age women is up a full percentage point from its year, the EPOP for prime-age men is unchanged. This could begin to look like the widely hyped problem with men story, if the trend continues.
However, there are two important caveats. First, the monthly data are erratic. If we take three month averages, the year over year increase in EPOPs for men would be 0.2 percentage points and for women it would be 0.8 percentage points. This is still a substantial difference, but at least the rate for men is moving in the right direction.
The other issue is that, at least from the summary data, it does not appear to be an issue with less-educated men. Over the last year, the EPOP for people with college degrees is actually down by 0.3 percentage points in the first three months of 2017 compared to 2016. By contrast, the EPOP for people with just a high school degree is up by 0.3 percentage points. It is possible that a further analysis would show large gender differences, but it seems unlikely that the weakness in EPOPs could be concentrated among less educated men, given these numbers. This seems especially unlikely given that the retirement of baby boomers would be primarily affecting the EPOPs of people with just a high school degree.Add a comment
It will be great when the NYT and other news outlets stop feeling the need to misrepresent the promoters of the standard trade agenda as "free traders" as they did in a news article discussing Donald Trump's latest actions on trade. In fact, these people are selective protectionists.
While they are happy to reduce barriers that might protect manufacturing workers from competition with low-paid workers in the developing world, they are fine with the protectionist barriers that maintain the high pay of doctors, dentists, and other highly paid professionals. (For example, a foreign doctor cannot practice in the United States unless they complete a U.S. residency program.)
They also support longer and stronger patent and copyright protections. These protections are equivalent to tariffs of thousands of percent on the protected items, most importantly prescription drugs.
The predicted and actual effect of this policy of selective protectionism is to redistribute income upward. Calling it "free trade" gives it a justification it does not deserve.Add a comment
There have been several news accounts in recent days of plans for the Federal Reserve Board to reduce the amount of assets on its balance sheets. It currently holds close to $4 trillion in assets as a result of the quantitative easing policies pursued to boost the economy in the years following the collapse of the housing bubble. It is now making plans to reduce these holdings.
One implication of this reduction in holdings would be a lower amount of money refunded to the Treasury each year. The Fed keeps some of the interest from these holdings to pay operating expenses and pay a dividend to its members, but the overwhelming majority is refunded back to the Treasury.
Last year, the Fed refunded $113 billion or 0.6 percent of GDP to the Treasury (Table 4-1). According to the projections from the Congressional Budget Office, this figure is projected to fall sharply to 0.2 percent of GDP in the next couple of years as the Fed reduces its holdings. Over the course of a decade, the difference in the amount rebated to the Treasury between a scenario where the Fed continues to hold $4 trillion in assets and one in which most of the assets are sold to the public would be on the order of $900 billion.
Deficit hawks routinely get very excited over sums that are less than one tenth of this size. For this reason it seems worth mentioning the budgetary implications of the Fed's decision to offload its asset holdings. (For those keeping score, having the Fed keep the assets is equivalent to financing the debt in part by printing money, a position advocated by several prominent economists, including Ben Bernanke.)Add a comment
NPR had a somewhat confused piece on the trade deficit this morning that was headlined "Economists Say Trump Seems To Misunderstand Significance Of Trade Deficit." The piece basically tells listeners that Trump is mistaken for claiming the trade deficit is a problem.
To make this point, the piece quotes Peterson Institute economist Chad Brown:
"Trade isn't a zero-sum endeavor. It's win-win. And I think that's a different framework than he's used to dealing with - you know, coming from the world of real estate where if I get something out of a deal, you know, it's something that you don't get."
The piece then points out that the U.S. trade deficit hit its recent low in 2008, at the start of the Great Recession. It then features a comment from Larry Kudlow:
"I don't understand it. Trade deficit is a terrible gauge of the economy. Or let me put it in reverse. If we're in a position of having a large trade deficit that means we're growing, and we're growing faster than the rest of the world."
Okay, here's the way economists familiar with economics would talk about a trade deficit. If the economy is below full employment, then the trade deficit is a drag on demand. It represents spending that could be taking place in the United States, and creating demand and employment here, which is instead created demand and employment in other countries.
Lack of demand in the U.S. economy has actually been a large problem in recent years. Some folks may have heard economists like Paul Krugman, Larry Summers, Ben Bernanke, and Olivier Blanchard talk about "secular stagnation." That means that the economy does not have enough demand to sustain full employment.
While they often recommended increased government spending to offset secular stagnation, a reduced trade deficit would have the same effect. In other words, if we reduce the annual trade deficit by $380 billion, it would have roughly the same effect on demand and employment as increasing government spending by $380 billion.Add a comment
The Washington Post is always open to plans for taking money from ordinary workers and giving it to the rich. For this reason it was not surprising to see a piece by Robert Atkinson, the head of the industry funded Information Technology and Innovation Foundation, advocating for more protectionism in the form of stronger and longer patent and copyright monopolies.
These monopolies, legacies from the medieval guild system, can raise the price of the protected items by one or two orders of magnitudes making them equivalent to tariffs of several hundred or several thousand percent. They are especially important in the case of prescription drugs.
Life-saving drugs that would sell for $200 or $300 in a free market can sell for tens or even hundreds of thousands of dollars due to patent protection. The country will spend over $440 billion this year for drugs that would likely sell for less than $80 billion in a free market. The strengthening of these protections is an important cause of the upward redistribution of the last four decades. The difference comes to more than $2,700 a year for an average family. (This is discussed in chapter 5 of Rigged, where I also lay out alternative mechanisms for financing innovation and creative work.)
Atkinson makes this argument in the context of the U.S. relationship with China. He also is explicitly prepared to have ordinary workers pay the price for this protectionism. He warns that not following his recommendation for a new approach to dealing with China, including forcing them to impose more protection for U.S. patents and copyrights, would lead to a lower valued dollar.
Of course, a lower valued dollar will make U.S. goods and services more competitive internationally. That would mean a smaller trade deficit as we sell more manufactured goods elsewhere in the world and buy fewer imported goods in the United States. This could increase manufacturing employment by 1–2 million, putting upward pressure on the wages of non-college educated workers.
In short, not following Atkinson's path is likely to mean more money for less-educated workers, less money for the rich, and more overall growth, as the economy benefits from the lessening of protectionist barriers.Add a comment
The New York Times told readers that Mexico is preparing to "play the corn card" in its negotiations with Donald Trump. The piece warns:
"Now corn has taken on a new role — as a powerful lever for Mexican officials in the run-up to talks over Nafta, the North American Free Trade Agreement.
"The reason: Much of the corn that Mexico consumes comes from the United States, making it America’s top agricultural export to its southern neighbor. And even though President Trump appears to be pulling back from his vows to completely overhaul Nafta, Mexico has taken his threats to heart and has begun flexing its own muscle.
"The Mexican government is exploring buying its corn elsewhere — including Argentina or Brazil — as well as increasing domestic production. In a fit of political pique, a Mexican senator even submitted a bill to eliminate corn purchases from the United States within three years."
It then warns of the potential devastation from this threat:
"The prospect that the United States could lose its largest foreign market for corn and other key products has shaken farming communities throughout the American Midwest, where corn production is a vital part of the economy. The threat is particularly unsettling for many residents of the Corn Belt because much of the region voted overwhelmingly for Mr. Trump in the presidential election.
"'If we lose Mexico as a customer, it will be absolutely devastating to the ag economy,' said Philip Gordon, 68, who grows corn, soybeans and wheat on a farm in Saline, Mich., that has been in his family for 140 years."
Okay, I hate to spoil a good scare story with a dose of reality, but let's think this one through for a moment. According to the piece, instead of buying corn from the United States, Mexico might buy it from Argentina or Brazil. So, we'll lose our Mexican market to these two countries.Add a comment
The New York Times had an interesting piece that reported on the ways in which Uber uses techniques learned from behaviorial economics to get drivers to work longer hours than they might want. The article concludes by saying that with changes in the economy, many workers may have no choice but to rely on Uber jobs.
In this context, it is worth mentioning the Federal Reserve Board. The Federal Reserve Board has raised interest rates twice in the last four months because it is concerned that the economy is creating too many jobs. It is expected to raise interest rates three more times this year.
If people consider it bad that workers have few options other than working for Uber, they should be very upset that the Fed is raising interest rates. These interest rates are helping to ensure that millions of workers have limited job opportunities.Add a comment
Most people involved in economic policy debates have derided Donald Trump's claims that he would boost the U.S. growth rate from its recent 2.0 percent annual rate to 4.0 percent or even 3.0 percent. However the Washington Post featured a column today that insists such a pickup is imminent and derides policy types for not being prepared.
The article insists that we are about to see massive job displacement with robots and artificial intelligence radically reducing the need for human labor. If it is not immediately clear that this is a prediction that growth is about to boom, then you must be as ignorant as a Washington Post editorial page writer.
Job displacement means productivity growth. If the piece is correct then we are about to see a massive upsurge in productivity growth. The recent pace has been just 1.0 percent annually. The authors presumably envision productivity growth rising to something like the 3.0 percent annual rate we had in the long Golden Age from 1947 to 1973, a period of low unemployment and rapidly rising real wages.
Economic growth is the sum of productivity growth and labor force growth, so if we get productivity growth of 3.0 percent annually, then we are looking at GDP growth rates in line with Donald Trump's targets. Of course this would mean that the Congressional Budget Office and all the other forecasters are hugely off (hardly impossible, they all missed the collapse of the housing bubble as well as the weakness of the recovery that followed) and that concerns about large budget deficits are incredibly misplaced.
For my part, I am agnostic on these predictions of a massive surge in productivity growth. Our past efforts at predicting productivity growth have been virtually worthless. Economists completely missed the slowdown in 1973, almost completely missed the pickup in 1995, and totally missed the more recent slowdown in 2005.
I think much of the story is endogenous in the sense that a weak labor market forces workers to take low pay and low productivity jobs. In other words, if we pushed the economy with more spending (e.g. larger budget deficits or smaller trade deficits) we would see more productivity growth as workers shifted to better paying, higher productivity jobs, and firms adjusted to a more expensive workforce with labor saving innovations.
But speculation aside, we should at least be able to have clear thinking on the issue. If we actually face massive job displacement due to technology, then we are looking at a period of rapid growth in which budget deficits are not at all a problem. This is not a debatable proposition, it is true in the same way that 3+2 = 5 is true. It would be great if the people involved in policy debates understood this fact.Add a comment
Donald Trump's bluster about imposing large tariffs and forcing companies to make things in America has led to backlash where we have people saying things to the effect that we are in a global economy and we just can't do anything about shifting from foreign produced items to domestically produced items. Paul Krugman's blog post on trade can be seen in this light, although it is not exactly what he said and he surely knows better.
The post points out that imports account for a large percentage of the cost of many of the goods we produce here. This means that if we raise the price of imports, we also make it more expensive to produce goods in the United States.
This is of course true, but that doesn't mean that higher import prices would not lead to a shift towards domestic production. For example, if we take the case of transport equipment he highlights, if all the parts that we imported cost 20 percent more, then over time we would expect car producers in the United States to produce with a larger share of domestically produced parts than would otherwise be the case. This doesn't mean that imported parts go to zero, or even that they necessarily fall, but just that they would be less than would be the case if import prices were 20 percent lower. This is pretty much basic economics — at a higher price we buy less.
While arbitrary tariffs are not a good way to raise the relative price of imports, we do have an obvious tool that is designed for exactly this purpose. We can reduce the value of the dollar against the currencies of our trading partners. This is probably best done through negotiations, which would inevitably involve trade-offs (e.g. less pressure to enforce U.S. patents and copyrights and less concern about access for the U.S. financial industry). Loud threats against our trading partners are likely to prove counter-productive. (We should also remove the protectionist barriers that keep our doctors and dentists from enjoying the full benefits of international competition.)
Anyhow, we can do something about our trade deficits if we had a president who thought seriously about the issue. As it is, the current occupant of the White House seems to not know which way is up when it comes to trade.Add a comment
I don't like being in the position of saying Trump is right, but when it comes to trade, otherwise reasonable people often say things that are rather silly, which mean that Trump can be right. Matt O'Brien takes the silly route when he takes issue with the idea that our trade deficit in the last decade could have led to an economy-wide lost of jobs and also says that the story of the trade deficit and jobs is all history anyhow.
Before going to the woodshed, I'll give Matt credit for what he gets right. Matt acknowledges that the opening to China with its entry to the WTO had a devastating impact on millions of workers and their communities. For some reason, many economists and commentators feel a need to deny this fact. I suppose the flat earth society is larger than I imagined.
I will add one point to Matt's discussion of this issue. Matt notes that in principle, the gains to the winners from trade are larger than the losses to the losers. This means that we should be able to compensate the losers and make everyone better off.
Matt correctly points out that the compensation to the losers is invariably a joke. They don't get s**t, and then we call them names when they vote for Trump.
But there is an additional point on this compensation story that is worth throwing in. The claim that the gains exceed the losses and therefore we can have compensation to make everyone better off is only necessarily true if we have a costless compensation process.
In other words, if we can just vacuum up dollars from everyone who won and hand them out to the people who lost, then we can ensure that everyone is better off, but in the real world we don't actually have a costless process. In the real world we get money from the winners from things like income and sales taxes, which come with distortions. This means that for every dollar we collect in revenue, we are losing some amount of economic activity.Add a comment