The New York Times had an article on the downsizing of Citigroup in the wake of the passage of Dodd-Frank. The piece twice refers to the “vise of regulation” in discussing the pressures created by the law to downsize. While one use of the expression appears in a quote from an industry friendly source, the other use is the paper’s own characterization of the law.
It seems unlikely that the NYT would say that a vise of regulation is preventing Pfizer from marketing unsafe drugs. This is clearly an expression of disapproval implying that the regulations are excessive and unnecessary. That is the sort of thing that belongs in an opinion piece, not a news article.Add a comment
Charles Lane used his op-ed column in the Washington Post to repeat the line that is now quite popular in elite circles: the stagnating wages and worsening living standards of large segments of the U.S. working class were a necessary price for lifting hundreds of millions of people in the developing world out of poverty. Oh yeah, and also the richest one percent happened to get unbelievably rich in the process as well. So people like Bernie Sanders, who want trade policies that will help U.S. workers, are actually being selfish. It's the one percent who are really serving the poor.
This argument is incredibly wrongheaded for many reasons, but let's just focus on its basic structure. The story goes that in the last three and a half decades we have seen substantial growth in the incomes of the poor in the developing world. (Actually the bulk of this story is in East Asia, but we'll leave that aside for the moment.) During this period incomes of ordinary workers in the United States, and to a lesser extent Europe and Japan, have stagnated. Therefore, stagnating wages for rich country workers was a necessary condition for hundreds of millions of people to escape poverty.
Obviously there was a link between these events, but the serious question (okay, that leaves the WaPo folks out) is whether it was a necessary link. Suppose that a natural disaster, like a flood or earthquake, devastates a major city. In response the federal government throws in tens of billions in assistance to rebuild the city. Ten years later, the city has a thriving economy.
In Charles Lane Eliteland the disaster was a good thing, because otherwise the city never would have been revitalized. But that is not the real question. The question is whether we could have had a path that allowed developing countries to prosper without impoverishing U.S. workers.
The simple answer is we certainly could have gone a different route and most of the story is textbook economics. I lay this out more fully in a piece that was solicited for the Post Outlook/Post Everything section, but never run there because they lost the ability to reply to e-mails.
The basic story is that there is no reason that we had to run large trade deficits with developing countries like China. In the economics textbooks, capital is supposed to flow from rich countries to poor countries to finance their development. That would mean we run trade surpluses with developing countries. Furthermore, the reason that our autoworkers compete with low-paid autoworkers in the developing world, but our doctors don't compete with their much lower paid counterparts (trained to U.S. standards), is that doctors have much more power than autoworkers. And, we enriched our one percent, while making developing countries poorer, by making patent and copyright monopolies stronger and longer.
Anyhow the story that U.S. workers had to suffer to help the world's poor is very comforting for the country's elite, and let's face it, they own the media outlets. This means that we can look forward to hearing it repeated endlessly, no matter how little sense it makes.Add a comment
Some readers may have been misled by a statement in a NYT article on the Verizon strike that the union members at Verizon receive an average of $130,000 a year in wages and benefits. This is what the company pays in labor costs per worker. This includes not only straight pay, but also overtime pay, employer-side Social Security and Medicare taxes, health insurance, and pension benefits. The pension payments are everything that Verizon pays into its pension, including payments to cover costs of retired employees, averaged over the size of its current unionized workforce.
While the $130,000 number would imply an average hourly wage of $65. The average non-overtime pay of Verizon's workers is probably in the range of $35 to $40 an hourly. While this is still a relatively good wage in the U.S. economy, it is considerably lower than the $65 an hour that readers may have inferred from too quickly reading the article.Add a comment
I'm glad to see that Paul Krugman has the same story about falling oil prices, inflation, and real interest rates as me. He pointed out that to the extent that falling oil prices reduce the overall rate of inflation it should not matter for real interest rates. What matters for the real interest rate is the expected rate of inflation for goods and services in general. Lower oil prices will matter for energy investment, but not for the vast majority of goods and services in the economy.
I made this point a couple of months back, although probably many times before that as well.Add a comment
There has been a flurry of recent articles touting recent work by Stanford Business School Professor Joshua Rauh, arguing that state and local pension fund liabilities are far larger than generally reported. Rauh puts the unfunded liabilities of state and local pension funds at $3.4 trillion, more than three times the figures that the pensions themselves calculate. He predicts looming crises with many local governments driven into bankruptcy.
The reason for the difference between Rauh’s $3.4 trillion number and the shortfall of roughly $1 trillion using the pension fund’s methodology is the rate of discount used to evaluate pensions’ liability. Pension funds calculate their liability using their expected rate of return as the rate of discount. This currently averages just over 7.0 percent on their assets. In contrast, Rauh uses the risk-free rate of interest for discounting, using the current 2.5 percent yield on 30-year Treasury bonds. The lower interest rate puts a much higher value on projected funding shortfalls 20-30 years in the future.
While many would like the public to be scared by Rauh’s calculations, there are a few points worth keeping in mind. First, the return numbers that pension funds use are not pulled out of the air. They reflect projections of investment returns based on actual experience and a range of standard economic projections. They will of course not be exactly right, but they are also unlikely to be hugely wrong.
As a recent report from Pew Research Center points out, the main reason that some pension funds are in serious trouble is not that they were overly optimistic about investment returns, the pensions that are into serious trouble were the ones that failed to make their required contributions. In states like New Jersey and Illinois, not making pension contributions became almost a sport among politicians. The same was true for the city of Chicago under Mayor Richard M. Daley. If governments don’t contribute to their pensions, they will be underfunded regardless of what returns are assumed.
Olivier Blanchard is one of the world’s leading macroeconomists. In addition to a long and distinguished academic career, in his tenure as the chief economist at the I.M.F. he turned its research department into a major producer of cutting edge research. In particular, the research department was instrumental in producing work that undermined the case for austerity that was being widely pushed across the globe. Unfortunately, politics was able to overcome the research, and austerity won.
But that is the past. In an interview with the Telegraph, Blanchard warned that Japan will soon switch from combating deflation to a struggle to contain inflation. The core problem is its debt burden, which now stands at almost 250 percent of GDP.
This concern seems more than a bit bizarre, especially coming from an economist as knowledgeable as Blanchard. The first point is that, in spite of the high ratio of debt to GDP, Japan actually has a low interest burden. According to the OECD, Japan’s net interest payments on its debt were 1.0 percent of GDP in 2015. By contrast, U.S. payments were well over 3.0 percent of GDP in the 1990s.
This matters, not only because the interest payments represent the actual drain on resources, but also because the value of the debt is largely arbitrary. If that sounds strange, it’s worth thinking about what happens to the value of debt when interest rates rise. The current interest rate on a 10-year Japanese government bond is -0.09 percent. On a 30-year bond it’s 0.41 percent. Suppose that the interest rate on a 10-year bond rose to a still historically low 4.0 percent and the 30-year bond to 5.0 percent.
According to my bond calculator, the market price of a newly issued 10-year bond would drop by almost one-third and the price of a newly issued 30-year bond would fall by more than 75 percent. Of course not all Japanese debt is long-term, nor is it all newly issued, but the point is that the market value of its outstanding debt would drop sharply if interest rates rose to even modest levels. If the 30-year rate got as high as 7.0 percent (lower than the U.S. rate in much of the 1990s), then the market price of the newly issued 30-year bond would drop by more than 85 percent from its current level.
The way governments typically keep their books, this plunge in the market price would not affect Japan’s debt to GDP ratio. But if the markets were actually troubled by the high ratio of debt to GDP, Japan could simply issue new debt to buy up old debt at a fraction of its face value. This would quickly send its debt to GDP ratio plunging. (This is why the Reinhart-Rogoff 90 percent cliff story never should have passed the laugh test even before the exposure of the famous Excel spreadsheet error.)Add a comment
The Obama administration is starting its full court press to get Congress to approve the Trans-Pacific Partnership. Yesterday, Secretary of State John Kerry gave a speech in support of the pact according to the Washington Post.
According to the Post, in his speech blamed technology rather than trade for eliminating jobs in manufacturing. It is easy to show that this is mistaken. The number of jobs in manufacturing was little changed, apart from cyclical fluctuations from the early 1970s to the late 1990s. From the late 1990s to 2006 we lost more than 3.5 million manufacturing jobs, almost 20 percent of employment in the sector, as the trade deficit exploded.
Source: Bureau of Labor Statistics.
There had been large gains in productivity due to technology throughout this period. It was only when the trade deficit soared from just over 1.0 percent of GDP in 1996 to almost 6.0 percent of GDP in 2005 that we saw massive job loss in manufacturing. It would have been helpful if the Washington Post had corrected Mr. Kerry's misstatement, as it might have done for other public figures, like Senator Bernie Sanders.Add a comment
Eduardo Porter had an interesting piece discussing the extent to which patents can pose an obstacle to the diffusion of technology, especially in the case of drugs and clean energy. The piece points out that some folks have suggested alternatives to patent financing for drug research, generously linking to a CEPR paper. However, the piece only mentions the routes of buying up patents and placing them in the public domain and paying drug makers based on how much their drugs increased quality adjusted life-years.
There is another route preferred by some of us, which would just pay for the research upfront. The United States already does this to a substantial extent with the National Institutes of Health, which funds over $30 billion annually in biomedical research. The advantage of paying for the research upfront is that the results can be fully public and available to other researchers from the beginning. Also, there is no need for complex calculations to determine how important a specific contribution was to the end product.
An obvious point of entry would be to finance clinical trials, which account for more than 60 percent of research costs. The trial results would be fully public with detailed data (consistent with anonymity) on individual outcomes. Also, the drugs themselves would be available as generics from the day they are approved. The trials would be paid for on a contract basis, similar to the way the Department of Defense pays contractors to develop new technologies, with the difference that everything is placed in the public domain.Add a comment
A popular theme in the media in recent days is that the world’s poor would face disaster if Bernie Sanders ended up in the White House. The story is that Sanders would try to protect jobs for manufacturing workers in the United States. The loss of these jobs has been a major source of downward pressure on the wages and living standards of a large portion of the working class over the last four decades.
While saving manufacturing jobs here may be good for U.S. workers, the media line is that by trying to block imports from the developing world, Sanders would be denying hundreds of millions of people their route out of poverty. This story may be comforting for elites in the U.S. and Senator Sanders’ political opponents, but it defies basic economics and common sense.
To see the problem in the logic, note that the essence of the Sanders as an enemy of the world’s poor story is that manufacturing workers in the developing world need people in the United States to buy their stuff. If people in the United States didn’t buy their stuff, these workers would be out on the street and growth in the developing world would grind to a halt.
In this story, the problem is that we don’t have enough people in the world to buy stuff — there is a shortage of demand. But is it really true that no one else in the world would buy the stuff produced by people in the developing world if they couldn’t sell it to consumers in the United States? Suppose people in the developing world bought the stuff they produced, you know, raising their living standards by raising their consumption.
That is actually the way the economics is supposed to work. In the standard theory, general shortages of demand are not a problem. Economists have traditionally assumed that economies tended toward full employment. The economic constraint was a lack of supply. The problem was that we couldn’t produce enough goods and services, not that we were producing too much and couldn’t find anyone to buy them.Add a comment
In addition to touting House Speaker Paul Ryan's policy wonkiness, the paper also applauded his fundraising prowess, telling readers:
"The National Republican Congressional Committee raised $185,000 from two emails from Mr. Ryan last month, more than the group’s entire haul in March 2014, during the last House races."
This would not be true unless March of 2014 was an extraordinarily bad month for the National Republican Congressional Committee (NRCC). According to its filings with the Federal Election Commission, the NRCC raised $118 million in total over 2013 and 2014, an average of just under $5 million a month. In order for Speaker Ryan's two emails to have beaten March 2014's total, it would have been necessary for the RNCC to have pulled in less than 4 percent of its monthly average over the two-year period. That seems unlikely.
Thanks to Robert Salzberg for calling this to my attention.Add a comment
Professor Andrew Levin (Dartmouth College), the former special advisor to Fed Chair Ben Bernanke and then-Vice Chair Janet Yellen, released a proposal for reform of the Federal Reserve Board’s governing structure in a press call sponsored by the Fed Up Campaign. The proposal has a number of important features, but the main point is to make the Fed more accountable to democratically elected officials and to reduce the power of the banking industry in monetary policy.
See the fuller story.
Add a comment
Some people may have failed to realize this fact when a NYT article profiling Speaker Ryan told readers:
"Mr. Ryan is the architect of his party’s plan to rein in spending on entitlement programs."
"Entitlement programs" is a popular euphemism used by politicians who want to cut Social Security and Medicare. The phrase is likely to mislead many readers.
The piece also asserts that:
"For example, if the Republican nominee does not provide an alternative to the Affordable Care Act — something Republicans have failed to do since it passed in 2010 — Mr. Ryan intends to do so, just as he will lay out an anti-poverty plan."
Actually, the reporter who wrote this article has no idea what Mr. Ryan "intends." Mr. Ryan says that he "intends" to develop an alternative to the Affordable Care Act, whether he actually does, or whether his proposal will actually pass the laugh test remains to be seen. It is important to remember that Mr. Ryan proposed a budget that would eliminate most of the federal government by 2050. This would have been a useful piece of information to provide readers when they are trying to assess his intentions.Add a comment
We know that the Washington Post editors really hate Bernie Sanders and rarely miss an opportunity to show it. Dana Milbank got in the act big time today as he once again denounced Sanders (along with Donald Trump and Ted Cruz) in his column.
There was much good stuff in the column but my favorite was when he told readers:
"MacGuineas's group [the Committee for a Responsible Federal Budget] calculates that Sanders would increase government spending to unimaginable levels: to as much as 35 percent of gross domestic product, from the current 22 percent."
The key word here is "unimaginable." Most western European governments have ratios of government spending to GDP of more than 40 percent and some have ratios of more than 50 percent. Apparently, Mr. Milbank finds the whole European continent unimaginable.
What is especially striking is that most of the increase in government spending would be the result of the government diverting payments for employer provided health insurance to a government-run universal Medicare system. Apparently, Milbank thinks it intolerable that the money taken out of workers' paychecks to be sent to private insurers would instead be taken out of workers paychecks to be sent to the government, even if it would lead to savings of several hundred billion dollars a year in administrative costs and insurance industry profits. In Dana Milbank-land this is the height of irresponsibility.
What is perhaps most incredible is Milbank's notion of irresponsible. His sole measure of responsibility is the size of the government budget deficit and debt, which are for all practical purposes meaningless numbers. (If the government puts in place patent protection that requires us to pay an extra $400 billion a year for prescription drugs, this adds zero to the budget deficit or debt and therefore doesn't concern Milbank. However, if it borrowed an extra $400 billion a year to pay for developing new drugs, he would be furious.)
On the other hand, forcing millions of people to be out of work because of deficits that are too small apparently does not bother Milbank in the least. Since the crash in 2008 we have needlessly foregone more than $7 trillion in potential output. Millions of people have been kept out of work with their children thereby growing up in families that were in or near poverty levels. We also have the stories like the children in Flint exposed to lead, all because Milbank and his friends want to whine about budget deficits.
Many might view this set of policies as being irresponsible. But in Milbank's worldview, which is widely shared in Washington policy circles, it doesn't matter what you do to the country as long as you keep the deficit down.Add a comment
The Washington Post is well known as a hotbed of protectionist sentiment, at least when it comes to policies that redistribute income upward. For that reason it was not altogether surprising that the paper never once mentioned the role of patent monopolies and related protections in a front page article on the difficulties cancer patients face in dealing with the high price of drugs.
The article begins by talking about a patient, Scott Steiner, who needed the cancer drug Gleevec. The manufacturer, Novartis, charges $3,500 a month for the drug. The article tells readers that the Mr. Steiner's insurer was unwilling to pay for the drug and there was no way that he and his family could afford this expense. Fortunately, an oncology social worker (the hero of this article) was able to negotiate a free supply of the drug from the manufacturer.
While this is good news for Mr. Steiner, what the article neglected to mention is that the only reason Gleevec costs $3,500 a month is because the government granted the company a patent monopoly. A high quality of generic version is produced by Indian manufacturers for $2,500 a year.
This difference in prices is equivalent to the United States imposing a 1,600 percent tariff on Gleevec. This patent monopoly leads to all the waste and economic distortions that economists would predict from massive tariffs. Undoubtedly many cancer patients don't get Gleevec because they can't afford its patent protected price and are not as lucky as Mr. Steiner in having a social worker who can work out an arrangement with Novartis.
In addition, the whole struggle to get a drug whose price is artificially inflated is a needless waste that is being imposed on people facing a potentially fatal disease. And of course the time spent by a third party is a total waste of resources that would not be necessary if Gleevec were sold at its free market price. In addition, the enormous mark-up received by Novartis gives it an incentive to oversell its drug, promoting it in cases where it may not be the best treatment. (Yes, we have to finance the research, but there are far more efficient mechanisms than this relic of the middle ages.)
While economists have written endless articles and books on the costs of protectionism, none of this information finds its way into the Post's article. It is probably worth noting that drug companies are a major source of advertising revenue for the Post.Add a comment
As we all know, one of the major recreational sports of media outlets is finding new and innovative ways to scare people about Social Security. One of my favorites is "infinite horizon accounting." This is when you project out Social Security spending and revenue into the infinite future and then calculate the difference. It gives you a REALLY BIG NUMBER.
We got an example of the casual use of this infinite horizon accounting in a column by Wharton Business School Professor Olivia Mitchell. The column was actually on a different topic, but towards the end the piece tells readers:
"The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S."
Note that there is no mention of the time horizon for the $28 trillion shortfall, so readers would have no way of knowing that it is for all future time. The comparison to current GDP is both wrong (GDP in 2016 will be over $18 trillion) and misleading. Why would we compare a deficit measured for all future time to this year's GDP? If we compared the deficit to future GDP it would be 1.3 percent, a bit more than one-third of the annual military budget.
It's also worth noting that the bulk of this deficit is for years after 2100. In other words, we are being cruel to children not yet born by writing down Social Security spending paths that exceed what they are projected to tax themselves. Can you envision anything so cruel? (The big problem is that the projections assume they will live longer and therefore have longer retirements.)Add a comment
The problem of deflation just refuses to go away. I don't mean the problem of weak economies with very low inflation rates, I mean the media's obsession with the idea that something really bad happens if the rate of price change crosses zero and turns negative.
We got another example of this strange concern in the NYT this morning. The piece noted the European Central Bank's (ECB) concern:
"Still, the central bank acknowledged its deep concern about the risk that the eurozone’s economic doldrums, characterized by a worrisomely low rate of inflation, could devolve into outright deflation, a vicious circle of falling prices and demand that can undercut corporate profits and cause unemployment to soar. ...
"Deflation sets in when falling prices prompt people to delay purchases because they expect prices to fall even further. Consumer spending and investment collapse, companies dismiss workers, and spending falls even further as people lose their jobs and incomes. Central bankers fear deflation because once it sets in, it is notoriously difficult to reverse."
To see the silliness of this line of argument, consider first what falling prices literally mean. Suppose that the price of shoes is declining at a 0.5 percent annual rate. How long will you put off a purchase of a $100 pair, knowing that it you wait a year it will save you 50 cents?Add a comment
Let me start this one by saying that I think Trump’s threats of a 45 percent tariff on Chinese imports are a bad idea. We should take steps to lower the value of the dollar against the yuan, but the public threat of large tariffs is probably not the best way to go. The route is obviously through negotiations where we would have to give up things, like protections for Microsoft’s copyrights and Pfizer’s patents.
But that aside, the fact that a particular policy is unwise should not be a license for the media to say absurd things to discredit it. The NYT seems to take this path in an Upshot piece by Michael Schuman that purports to tell readers, “how a tariff on Chinese imports would ripple through American life.”
The piece tells readers:
“But if there were a 45 percent tariff on Chinese goods, at least part of that would probably be passed onto consumers in the form of higher prices. Americans would end up buying fewer Chinese things, and fewer things from anywhere else. ...
“For this reason and others, quite a lot of the money spent on Chinese goods actually ends up in the wallets of Americans. A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers.
“In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States.”
Note what is being argued here. Higher prices on imports from China will lead to less consumption in the U.S. economy. That means an increase in the savings rate. (This is definitional. If you don’t consume you save.)
Many economists have been troubled by the low savings rate in the United States. I have never seen any models that try to explain low savings as the result of cheap imports from China and other countries, but apparently this is what Mr. Schuman and the NYT would have us believe. I look forward to article writing up this theory linking savings rates to import prices.
If it’s not clear, this argument is silly. People will likely spend the same with the tariffs as they did without the tariffs. They will buy fewer goods imported from China, end of story. No need for the truck drivers to fear mass layoffs.Add a comment
The Washington press corps has gone into one of its great feeding frenzies over Bernie Sanders' interview with New York Daily News. Sanders avoided specific answers to many of the questions posed, which the D.C. gang are convinced shows a lack of the knowledge necessary to be president.
Among the frenzied were the Washington Post's Chris Cillizza, The Atlantic's David Graham, and Vanity Fair's Tina Nguyen, and CNN's Dylan Byers telling about it all. Having read the transcript of the interview I would say that I certainly would have liked to see more specificity in Sanders' answers, but I'm an economist. And some of the complaints are just silly.
When asked how he would break up the big banks Sanders said he would leave that up to the banks. That's exactly the right answer. The government doesn't know the most efficient way to break up JP Morgan, JP Morgan does. If the point is to downsize the banks, the way to do it is to give them a size cap and let them figure out the best way to reconfigure themselves to get under it.
The same applies to Sanders not knowing the specific statute for prosecuting banks for their actions in the housing bubble. Knowingly passing off fraudulent mortgages in a mortgage backed security is fraud. Could the Justice Department prove this case against high level bank executives? Who knows, but they obviously didn't try.
And the fact that Sanders didn't know the specific statute, who cares? How many people know the specific statute for someone who puts a bullet in someone's head? That's murder, and if a candidate for office doesn't know the exact title and specific's of her state murder statute, it hardly seems like a big issue.Add a comment
Roger Cohen gave us yet another example of touching hand-wringing from elite types about the plight of the working class in rich countries. The gist of the piece is that in Europe and the U.S. we have seen growing support for candidates outside of the mainstream on both the left and the right. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However, Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world.
In Cohen's story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain "liberty" (he means the market) in order to protect it.
This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That's just the way it is. Cohen is smart and hard working, that's why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world's poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don't become fascists.
We all should be glad that folks like Cohen support a stronger welfare state, but let's consider his story. The basic argument is that poor countries have only been able to develop because their workers were able to displace the workers in rich countries. This lead to unemployment and lower wages in rich countries.
Let's imagine that mainstream economics wasn't a make-it-up-as-you-go-along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries. The idea is that capital is plentiful in rich countries and therefore gets a low rate of return. It is scarce in poor countries and therefore gets a high rate of return.Add a comment
Contrary to the robots taking our jobs story, Robert Samuelson gets the basic story right. Productivity growth has fallen through the floor, rather than going through the roof as the robot story would have us believe. Productivity growth has averaged just over 1.0 percent annually since the start of the recession in December of 2007. It has been less than 0.4 percent a year in the last two years.
Samuelson speculates that this slow growth might be due to the old economy competing with the new economy. His example is Walmart setting up an Internet based system to compete with Amazon. He argues that much of this will end up being wasted, as only one of the sellers will end up winning.
While Samuelson is right that this competition can lead to waste, but that is always true. Companies always are competing to gain or keep market share. Some end up losing, meaning that their investment was a waste from the standpoint of the economy as a whole. (The competition is nonetheless important in a dynamic sense in that it forces the winners to be more efficient.)
For Samuelson's story to be correct, we would have to be seeing much more of this competition today than in prior periods. That doesn't in any obvious way appear to be true. For example, investment is not especially high as a share of GDP.
My alternative explanation is that a weak labor market and low wages explain much of the slowdown in productivity. The argument is straightforward. When Walmart can hire people at very low wages, they are happy to pay people to stand around and do almost nothing. That is why many retailers now have greeters or sales people standing in aisles who contribute little to productivity.
If wages were higher, Walmart would not employ these people. This would make little difference in its sales, but would reduce the number of people they have working, thereby increasing productivity. If this phenomenon is common, it could be a factor in the productivity slowdown since the start of the Great Recession.Add a comment
The NYT article on the March jobs report featured several economists describing the current state of the economy in glowing terms. Scott Clemons, chief investment strategist at Brown Brothers Harriman, described the current economic situation as being a “near Goldlocks scenario.” He said the jobs and wage gains in March were healthy, but not so strong as to prompt the Federal Reserve Board to raise interest rates to slow growth.
Michelle Meyer, deputy head of United States economics at Bank of America Merrill Lynch, described the economic situation as “a best-case scenario.” Michael Gapen, chief United States economist at Barclays, also was very positive about the economy. This view seemed to be reflected in the first two paragraphs in the article which were also overwhelmingly positive about the current state of the economy.
(In fairness, the piece included several comments noting how far the economy has yet to go to recover to pre-recession levels. Also, in addition to the optimism from the bank economists, it included a comment from Claire McKenna, a senior policy analyst with the National Employment Law Project.)
While there is little doubt that the economy is doing much better in recent months than it had been earlier in the recovery and that workers are seeing some gains, it is important to ask about the implicit base of comparison in these comments.
The average hourly wage increased at a 2.3 percent rate over the last year. Its annualized rate of increase over the last three months compared with the prior three months is also 2.3 percent, which indicates no acceleration. Since inflation over the last year was only 1.0 percent, this translates into a 1.3 percent increase in real wages over this period. While this is a decent rate of increase, it is only roughly equal to the trend rate of productivity growth. In other words, this is the rate of wage growth that workers should be able to assume in a normal year.
However, there are two reasons to consider this rate inadequate. First, workers lost an enormous amount of ground in the downturn. The average real hourly wage did not pass its 2008 peak until November of 2014. (Workers had also seen almost no wage growth in the prior business cycle, so they had lots of ground to make up even in 2008.)