Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.
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A couple of days ago, Treasury Secretary Steven Mnuchin touched off a firestorm by saying something that is obviously true. He said that a lower-valued dollar would reduce the trade deficit.
As I pointed out yesterday, this is based on the radical concept of downward sloping demand curves. The idea is that when the dollar falls in value relative to other currencies, it makes goods and services produced in the United States cheaper for people living in other countries. This means that they will buy more of our exports.
On the other side, a lower-valued dollar means that we will pay more for imports. This means that we would buy fewer goods and services from other countries and instead buy domestically produced goods and services.
With fewer imports and more exports, we have a smaller trade deficit. It's all pretty straightforward. But for some reason, Mnuchin's comments prompted widespread outrage, with former Treasury Secretary Larry Summers leading the charge.
For the most part, the complaints don't make much sense (yeah, a lower-valued dollar raises the price of imports — that's the point), but one of the central lines seems to be the idea that the Treasury Secretary is not supposed to try to talk down the value of the dollar. I'm not sure where that appears in the Constitution, but others have violated this sacred principle.
For example, Lloyd Bentsen, one of Summers' predecessors as Treasury Secretary in the Clinton administration, quite openly suggested that the US would benefit from a lower-valued dollar. Going back a little further, James Baker, who was Treasury Secretary during the Reagan administration, negotiated a decline in the value of the dollar with our major trading partners in the 1985 Plaza Accord. In short, the idea that the Treasury secretary has some obligation to blather about the virtues of a "strong dollar" has no basis in either economics or history.Add a comment
The level of ignorance among people who report on economic issues can really be astounding sometimes. Steven Mnuchin made a statement about trade that is almost definitionally true. He said a weaker dollar would improve the trade balance.
This is associated with the idea that a low price increases demand. When the US dollar falls, our exports are cheaper to people living in other countries. Fans of economics believe this will cause them to buy more US exports.
On the other side, imports are more expensive for people in the United States. This will mean that we will buy fewer imports and instead purchase more domestically produced items.
Somehow, the fact that Mnuchin accepts this simple economics is deemed major economic news. Of course, it does follow from this that a lower valued dollar would reduce the trade deficit. Mnuchin did not go so far as to argue for a lower valued dollar, unlike some prior Treasury Secretaries, but if the Trump administration actually cared about the trade deficit, this would be the logical way to go.Add a comment
Morning Edition had a lengthy segment telling us that most workers are not worried about automation, even though we hear so much about it. Insofar as this is accurate, these workers are in agreement with the bulk of the economics profession.
Productivity growth (the rate at which technology is displacing workers) had slowed to roughly 1.0 percent annually in the years since 2005. This compares to a 3.0 percent growth rate in the decade from 1995 to 2005 and the long Golden Age from 1947 to 1973. Most economists expect the rate of productivity growth to remain near 1.0 percent as opposed to returning back to something close to its 3.0 percent rate in more prosperous times.
This difference is actually central to the disputes between the Trump administration and Democrats over the tax cuts. The Trump administration argued that the economy could grow at 3.0 percent annually, which would imply productivity growth somewhat over 2.0 percent. Most Democrats derided this view.
If we see a more rapid pace of automation then a 3.0 percent growth rate should be possible. If we actually got back to a 3.0 percent rate of productivity growth, then we could see GDP growth of close to 4.0 percent.
It is also worth noting that the high productivity growth in the period from 1947 to 1973 was associated with low unemployment and rapid wage growth. If another productivity upturn instead leads to high unemployment and weak wage growth it will be the result of deliberate policy to shift the benefits of productivity growth to those at the top end of the income distribution (e.g. government-granted patent and copyright monopolies, high interest rates by the Fed, and trade policy that protects doctors and other highly paid professionals from competition — all discussed in Rigged [it's free]). It will not be the fault of the robots.Add a comment
That seems like a reasonable question to ask. After all, we spend far more on prescription drugs, probably more than $470 billion or 2.4 percent of GDP this year, than we do on washing machines. And the protectionist barriers are far larger with drugs than with washing machines. Rather than adding 20 percent or 50 percent to the price of a washing machine, government-granted patent monopolies typically raise the price by around 1000 percent and sometimes more than 10,000 percent. And people don't die due to lack of access to washing machines. And just as tariffs lead to economic waste and corruption, so do patent monopolies, except on a hugely greater scale.
It is probably worth noting that the people who benefit from protectionist measures on prescription drugs are overwhelmingly higher income and well-educated. The people who are ostensibly supposed to benefit from Trump's tariffs are manufacturing workers, most of whom do not have college degrees.Add a comment
Actually, I really have no idea how hard Marvin Goodfriend works, but he did get everything wrong. Paul Krugman has a nice piece on Goodfriend, who is Trump's nominee to be a governor of the Federal Reserve Board.
In this position, Goodfriend will have a major role in setting the country's monetary policy. Goodfriend had been a persistent critic of the Fed's efforts to boost the economy, expressing serious concerns about runaway inflation in the early days following the crash. He also thought it was pointless for the Fed to try to get the unemployment rate much below 8.0 percent.
But, America's a great country. Driving a school bus into oncoming traffic shouldn't ruin one's career as a bus driver and not having a clue on monetary policy shouldn't keep you from being put in the driver's seat at the Fed.Add a comment
The 750 is a rough guess, but the NYT touted Macron's commitment to "invest more than €15 million" in retraining programs. If we assume that a program cost 20,000 euros per worker (about $24,000), then 15 million euros should be enough to retrain somewhere around 750 workers. Since France's labor force is almost 30 million, it may not be surprising that the French unions are not overly impressed with this commitment.
The piece presents France's economy as lacking dynamism. This is not consistent with most data comparing France to other countries. According to the Conference Board, France's GDP per hour of work was near the top in Europe in 2012 (the last year for which this series is available), slightly above Germany.
The piece notes that France's unemployment rate has been "persistently stuck at more than 9 percent for nearly a decade." However, its employment rate for prime-age (ages 25 to 54) workers is 80.2 percent, 1.7 percentage points higher than in the United States.
It also includes a reference to France's rough unemployment rate "of more than 25 percent." This is misleading since, unlike in the United States, most French young people are not in the labor force. Since college is nearly free and students get stipends to cover their cost of living, most colleges students don't work. The percent of the youth population in France that is unemployed is close to 9.0 percent, not much higher than in the United States.Add a comment
It didn't actually directly say this, but that is certainly a likely outcome of one of the scenarios it describes in its description of some of the possible effects of ending NAFTA. After describing the ways in which the US and Canadian pork industries have become integrated and the possible impact of the end of NAFTA on this integration it tells readers:
"But this agricultural supply chain would be disrupted in other ways. American pork would face a tariff of 20 percent when moving into Mexico, which generally has higher tariffs. That would hurt American farmers."
If Mexico did, in fact, impose a tariff on imports of American pork it would lower the price of pork in the United States. (That's what it means to hurt American farmers.) Lower pork prices are of course bad news for those in the industry (and those who care about animal rights) but are good news for the vast majority of people in the United States who are not employed in the industry.
The point here is that the effort to imply that repealing NAFTA would be an economic disaster is largely overblown. Most of the likely impacts would be small and in most cases, there would be gains offsetting the losses, even if the latter might be larger than the former.
Also, the repeal of NAFTA does not mean that all three countries would adopt the highest possible tariffs allowed under the WTO. It's not clear that Mexico's government would think that it would improve its popularity if it made people in Mexico pay 20 percent more for pork due to a tariff. Presumably, US pork would eventually be replaced by pork from other countries, but the net effect will still almost certainly be higher pork prices for Mexican consumers. That is both bad economics and in all probability bad politics.
NAFTA was originally sold to the public with a slew of completely dishonest arguments about how it would lead to a boom in exports to Mexico and be a massive source of job creation. This was not at all what economic theory predicted and of course, it is not what happened. It would be nice if the argument for retaining NAFTA was not based on the same sort of deceptions.Add a comment
In a Washington Post column this morning, Larry Summers rightly points out that there is little reason to believe that President Trump has much to do with the US economy's relatively good performance over the last year. As he notes, most other major economies have seen even larger upturns relative to their predicted growth path.
In addition, it is worth noting that some of the uptick in the US may simply be due to the continuation of the Obama–Yellen recovery. As Jared Bernstein and I pointed out last month, there is reason to believe that the tightening of the labor market may lead to an uptick in productivity growth. There is some preliminary evidence that we are now on a trend of faster growth.
The place where I would differ with Summers is his dire warnings about the next recession, which surely will come at some point.
"If and when recession comes, the world will have much less room than usual to maneuver. From a narrow economic perspective, there will be much less room than the usual 500 basis points of space to bring down interest rates. There will also be much less space for fiscal expansions than there was when countries were less indebted."
Summers is right that the Fed will again have to rely on unorthodox monetary policy, such as quantitative easing, to provide a boost in the next recession. (This is why many of us have argued for an inflation target higher than 2.0 percent.) However, it is not clear that there actually will be less space for fiscal expansion.
The limit for countries like the United States, which have their own currency, is the point at which spending overheats the economy and leads to inflation. Since the point of stimulus is to boost the economy out of a recession, there is no reason we would want to get to this point in any case.Add a comment
We all know about the skills shortage. Many employers can't find workers with the necessary skills. For example, the NYT can't find columnists who understand economics, so they had to hire Bret Stephens instead.
Mr. Stephens is angry that many people won't join him in celebrating the decision by Apple and other big companies to repatriate foreign earnings back to the United States. He tells readers in his column, "Clueless Versus Trump":
"Apple’s announcement on Wednesday that it will repatriate most of the estimated $274 billion that it holds in offshore earnings is great news for the United States. Uncle Sam will get a one-time $38 billion tax payment. The company promises to add 20,000 jobs to its U.S. work force, a 24 percent increase, and build a new campus. Another $5 billion will go toward a fund for advanced manufacturing in America.
"C’mon. What’s with the long face?"
There is some real world confusion here, most of it on the tax side. The basic point here is that Stephens doesn't seem to have a clue why the government taxes in the first place. He wants us to celebrate the fact that Apple is paying $38 billion to the Treasury. Wow, are we all rich now?
How would the world be different if Apple still held its money overseas and we had the Fed credit the government with another $38 billion to count against its debt? If Mr. Stephens can see the difference, perhaps he can use another column to tell us, but the reality is the world would be little different in that scenario.Add a comment
The Bureau of Labor Statistics released its eagerly awaited data on usual weekly earnings for the 4th quarter last week. The data for the 4th quarter were actually not very good, but the quarterly data are erratic. If we look at the full year data, we get a pretty good story. Real median weekly earnings were up 1.2 percent. Earnings for workers at the cutoff for the first quartile (earning more than 25 percent of workers and less than 75 percent) were up 2.9 percent. For workers at the cutoff for the first decile (earning more than 10 percent of workers and less than 90 percent), earnings were up 1.4 percent.
This means we have seen three years of pretty decent wage growth for those at the middle and bottom of the wage distribution. Here's the picture since the Great Recession began in 2007.
Source: Bureau of Labor Statistics.
In the last three years, earnings for the median worker have risen by 5.3 percent, for workers at the first quartile cutoff 7.1 percent, and by 5.0 percent at the first decile cutoff. This is pretty good evidence of the effect that a tight labor market has on the earnings of workers at the middle and bottom of the pay ladder. Even low-paying employers are finding that they have to raise wages to get and keep workers. (Note that this is all before the impact of the Trump tax cuts.)
This shows the importance of keeping the Fed from raising interest rates aggressively. There were many economists, including some at the Fed, who argued that the Fed should have raised interest rates to keep the unemployment rate from dipping much below 5.5 percent or 5.0 percent. With an unemployment rate now at 4.1 percent, not only do millions more workers have jobs, but tens of millions have higher pay because they have more bargaining power in the labor market.
One final point: while the last three years do look like good news for the bottom half of the labor market, we shouldn't spend too much time celebrating. We're still looking at a decade in which real wage growth has averaged just 0.5 percent annually. And this follows three decades of wage stagnation for the bottom half of the labor market. That is not a happy story, even if things are moving in the right direction now.Add a comment
Actually, it's not clear that the 200 jobs were due to Trump since the biggest factor appears to be higher world energy prices. Trump is not obviously responsible for rising oil and gas prices, but I suppose there is some way that his administration can take the credit/blame for people paying more for their gas and heat. Even with the new jobs, employment in the sector is still down by almost one-third from its average under President Obama.
In any case, the new coal mining jobs bring the total in Pennsylvania to 5000, according to the Bureau of Labor Statistics. Total employment in Pennsylvania is 6,043,000 jobs, which means that the coal industry accounts for 0.08 percent of total employment in the state. Given its limited importance to the state's economy, it is difficult to see why NPR would devote so much attention to the industry.Add a comment
This is what bringing money back to the United States means. Under the old tax law, companies often attributed legal control of profits to foreign subsidiaries, so that they could defer paying taxes on this money. However, the money was often actually held in the United States since Apple could tell the subsidiary to keep the money wherever it wanted.
For this reason, the economic significance of bringing the money back to the United States is almost zero. The legal change of ownership is leading to the collection of taxes, but this is in lieu of the considerably larger tax liability that Apple faced under the old law.
It would have been helpful if these points were made more clearly in this NYT piece. It does usefully point out that we don't know the extent to which the expansion plans announced by Apple would have occurred even without the tax cut.
It is probably worth also mentioning that the $2,500 one time bonuses that Apple said it is giving its workers (paid in stock) is a bit less than 0.5 percent of the tax savings on their foreign earnings as calculated by the Institute on Taxation and Economic Policy, which is cited in the article. This assumes that all 84,000 Apple workers get the bonus.Add a comment
The NYT printed a Reuters article which included the bizarre assertion that the United States would be in some way threatened if China stopped buying US government bonds. The assertion is bizarre because for years many people (included me) complained that China was deliberately keeping down the value of its currency against the dollar in order to support its exports.
Depressing the value of the Chinese currency resulted in the country building up a huge trade surplus with the United States. This led to the loss of millions of manufacturing jobs, largely in Rust Belt states like Pennsylvania and Ohio.
The way China kept down the value of its currency was by buying up government bonds with the dollars it acquired instead of just selling them in the open market. If China now decides to sell these bonds, it should mean that its currency will rise, thereby reducing the US trade deficit. It's hard to see what the problem is here.Add a comment
Friedman probably doesn't realize it, but in his column he is describing an economy with soaring productivity growth. That is what it means when robots, artificial intelligence, and other new technologies displace workers in large numbers. If productivity growth takes off (contradicting the projections of the Congressional Budget Office and most other forecasters) then GDP growth will also increase (barring especially awful macroeconomic policy), which means that the 3.0 percent growth rate targeted by the Trump administration should be easily reached.
It is striking that so many people who write on economic issues apparently don't have the most basic understanding of the economy. If we see rapid job displacement, then we will see rapid economic growth and things like budget deficits and Social Security's finances are not problems. This is not a debatable point, it is a matter of logic.Add a comment
That is a fairly important point that somehow was missing from an NYT article telling readers that the UK's National Health System (NHS) is in crisis. The Conservative government has cut back spending on NHS from levels that were already very low by international standards. According to the OECD, the UK spends a bit more than 40 percent as much per person as the United States.
In purchasing power parity terms, the UK spent $4,200 per person in 2016. This compares to $9,900 per person in the United States. If the UK increased its spending by 20 percent, it would still be spending just over half as much per person as the United States. The enormous disparity in spending is an important fact that should be included in any serious discussion of the quality of care in the UK system.Add a comment
That's one of the things we learn from reading Robert Samuelson's Washington Post column today, although Samuelson identifies Feldstein only by his professorship at Harvard, not his moonlighting work on AIG's board. (In addition to requiring a massive government bailout during Feldstein's tenure as a director, AIG was also rocked by an accounting scandal that forced the resignation of Maurice Greenberg, its longtime CEO.) I'm one of those old-fashioned types who think that track records should matter in assessing the accuracy of economists' assessments, which is why it is appropriate to mention AIG here.
While it would have been enormously valuable if a person of Feldstein's prominence had warned of the housing bubble back in 2003 or 2004, before it had grown so large as to pose a major threat to the economy, his warning now is off the mark according to some of us who did see the earlier bubbles. High stock prices and housing prices are justified by extraordinarily low interest rates we have been seeing in the last decade.
While this could change (interest rates could rise) it would not be nearly as harmful to the economy as the collapse of the housing bubble in 2007–2009 or the collapse of the stock bubble in 2000–2002. Unlike in those two earlier periods, the high asset prices in these markets are not driving the economy. Investment and housing construction are not especially strong, so there is no reason to think they would plummet even if prices in both markets were to fall 20 or 30 percent. Consumption is somewhat high and could fall back 1–3 percentage points of GDP in response to the loss of wealth implied by these sorts of declines. That would slow growth, but need not lead to a recession.Add a comment
At a time when the inflation rate has been consistency been well below the Federal Reserve Board's 2.0 percent target, Donald Trump has nominated Marvin Goodfriend to fill one of the Fed's vacant governor positions. Goodfriend argues that the Fed's major policy failure has been that it has inadequately convinced the public of its commitment to fighting inflation.
This seems more than a bit otherworldly, but in the era of Donald Trump, anything is now possible. In Congressional testimony given last year Goodfriend complained:
"If in years past the Fed had been fully committed to price stability as embodied in an inflation target, retirees would be in a much better position today. Years ago, households would have been advised and willing to hold a significant share of their lifetime savings in long-term nominal bonds paying a safe nominal rate of interest. Households could have counted upon the fact that the nominal return would have been locked in purchasing power terms. The promised nominal interest rate, having incorporated a 2% inflation premium to offset the steadily depreciating purchasing power of money at the Fed's inflation target, would have delivered a safe long-term real return upwards of 3% per annum.
"Instead, the Great Inflation called the Fed's commitment to price stability into question as it decimated the real return on long term nominal bonds. Responsible households have since steered away from saving in long-term nominal bonds to protect themselves from inflation risk. To avoid inflation risk, households have shortened the maturity of their interest-earning savings and reached for more return in equity products, forced to accept the risk of ultra-low short-term interest rates and volatile equity prices in the bargain."
This one is worth stepping back from and taking a deep breath for a moment. We have just gone through a long period following the Great Recession in which the unemployment rate was needlessly kept higher than necessary primarily due to lack of adequate fiscal stimulus, but also a monetary policy that was less aggressive than it could have been in trying to boost demand.Add a comment
Treasury Secretary Steven Mnuchin is apparently confused about rule by governments and rule by rich people. In response to questions about whether Donald Trump was catering to elitists by attending the World Economic Forum in Davos Switzerland, he said that he didn't think the group of people there was any more elite than the group attending the Group of 20 finance ministers meetings.
The Group of 20 meetings of finance ministers are meetings of people who are there because they represent governments, most of which were democratically elected. The people at Davos are there because they are rich. Apparently, Mr. Mnuchin does not recognize this distinction.
It might have been worth pointing this out to readers.Add a comment
Actually, we don't know the extent to which the tax cut was a factor in Walmart's decision to close 63 stores, as it announced it was doing yesterday. Nor do we know the extent to which the tax cut was responsible for the increases in wages and benefits that the company also announced yesterday, although the company did claim a direct relationship in this case. Walmart's competitors, like Target, had been raising wages months before the tax bill was even public, so it is entirely possible that Walmart would have been forced to raise pay due to a tighter labor market, even if there had not been a tax cut.
It is worth noting that by Walmart's own estimate the pay increases will only cost it $300 million a year. This is roughly 15 percent of the $2 billion a year that it should save from the tax cut. This is in line with most economists estimates of the share of the tax cuts that would go to wages. By contrast, the administration had claimed that the wages would rise by more than the full amount of the tax cuts, although this impact would only be seen after a number of years as increased investment led to higher productivity.Add a comment
The Washington Post had an editorial titled "Trump is trying to dismantle free trade. That is almost impossible." Of course, the Post is not actually talking about free trade, it is talking about a policy of selective protectionism.
This is the policy of deliberately exposing less-educated workers to competition with low paid workers in the developing world while protecting the most highly educated workers like doctors and dentists. It also involves increasing protectionism in the form of longer and stronger copyright and patent monopolies.
The predicted and actual effect of the Post's selective protectionism is to redistribute money from most workers to the richest people in the country. The Post uses both its news and opinion pages to try to convince people that this was a natural outcome (and then it wrings its hands over this unfortunate situation) rather than the result of deliberate government policy that it strongly supports.
(Yes, this is the topic of my [free] book Rigged: How Globalization and the Modern Economy Were Structured to Make the Rich Richer.)Add a comment
That's what the numbers look like to me. This is the money that could be at stake if the state switches from its state income tax, much of which can no longer be deducted under the Republican tax plan, to an employer-side payroll tax, which would be fully deductible.
The idea is that the state pick a number, say 5 percent, which would make the payroll tax roughly equal to the state income tax for most workers. To protect low-end workers, it should have a zero bracket below which employers would not owe the tax. A reasonable figure would be $15,000 so that employers only start deducting the tax on annualized pay in excess of $15,000. (The state would still have its earned income tax credit in place to ensure that workers with families are not hurt.) To preserve progressivity the state should supplement the payroll tax with an income tax on the most highly paid workers (e.g. 3.0 percent on wages in excess of $250,000). It also leaves in place its income tax on capital income in the form of dividends, interest, rent, etc.
Here's what the numbers look like. According to the Commerce Department's data, wages in NY will be around $910 billion in 2017. If we raise this by 3.5 percent for 2018 to account for wage and employment growth, then we get a total wage bill of $941.9 billion, as shown in the first row of the table. If we deduct $15,000 for each of New York's 9.5 million workers, that comes to $142.9 billion as shown in the second row. This leaves $798.9 billion subject to the payroll tax as shown in row 3. Using the 5.0 percent rate, that translates into total payroll tax revenue of $39.9 billion, as shown in row 4.
|New York state wage bill (2018)||$941.9|
|Minus $15,000 per worker exemption||$142.9|
|Amount Subject to Payroll Tax||$798.9|
|Revenue from 5% Payroll Tax||$39.9|
|Saving on Federal Income Tax||$8.0|
|Savings on FICA||$4.0|
Source: Bureau of Economic Analysis, Bureau of Labor Statistics and author's calculations.
This is the reduction in the amount of wage income that is subject to federal taxes, assuming that this tax is passed on dollar-for-dollar to all workers. In this case, if we assume an average federal income tax of 20 percent, the savings on federal income taxes would be $8 billion a year, as shown in the fifth row. There would also be savings on Social Security and Medicare taxes since the wages subject to these taxes will also be reduced by $39.9 billion. I have assumed the average savings is 10 percent. While the 2.95 percent Medicare tax applies to all wage income, the 12.4 percent Social Security tax is capped at $128,400. This gives the savings of $4 billion shown in row 6. (One downside, is that by lowering wages subject to the Social Security tax, this is likely to lead to somewhat lower Social Security income when workers retire.)
The total savings come to $12 billion a year, or a bit more than $1,200 per worker. That seems like a pretty good payback for a little bit of tax planning. And, of course, it completely undermines the Republican effort to screw blue states.Add a comment