Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR).
On Morning Edition yesterday, Representative Jeb Hensarling, the chair of the House Financial Services Committee, was interviewed by David Greene. At one point, Greene asked him about the Republican tax cut proposal. After blaming President Obama for the slow growth of the last eight years, Hensarling commented:
"Every time we've had a pro-growth fundamental tax reform, be it under President Reagan, President Kennedy — you can even go all the way back to President Coolidge. We have seen paychecks increase, economic growth be ignited and actually more revenues come into the government."
It would have been helpful for Greene to have corrected Hensarling here. We had a big tax cut that was sold as "pro-growth" under President George W. Bush. This was not followed by strong growth and, in fact, the recovery following the tax cuts ended with the collapse of the housing bubble that gave us the Great Recession. This was the basis for the weak growth that Hensarling was complaining about in his prior comment.
The strongest period of growth since the 1960s followed a tax increase put in place by the Clinton administration in 1993. While it is not plausible to attribute this growth to the tax increase, obviously it did not prevent the growth.
It would have been helpful to point these facts out to listeners, some of whom might have been misled into believing Hensarling's claims.Add a comment
The Washington Post proudly told readers that the economy had reached potential GDP in the third quarter of 2017 and therefore future GDP growth will have to be far slower than in the recent past, averaging just 1.8 percent over the next decade. While this is true based on the projections of the Congressional Budget Office (CBO) and most independent forecasters, it would have been worth noting that these projections have been very far from the mark frequently in the past.
CBO and other forecasters completely missed the economic crash caused by the collapse of the housing bubble. At the time, they projected potential productivity growth of 1.9 percent annually, rather than the roughly 1.0 percent rate we have seen over the last decade. CBO also completely missed the upturn in productivity growth that began in 1995. They had thought the slowdown rate of roughly 1.4 percent would continue indefinitely, instead productivity growth increased to close to a 3.0 percent annual rate over the next decade.
It is highly misleading to imply that these productivity growth projections are hard and fast numbers, given the dismal track record of the recent past. In this respect, it is worth noting that productivity growth was over 3.0 percent in the third quarter. If fourth quarter GDP is in line with the most recent projections, it will be well over 2.0 percent for the fourth quarter as well. While it is far too early to say that we are on a higher productivity track, it is certainly a possibility given these numbers.
If productivity growth remains over 2.0 percent, then 3.0 percent is perfectly plausible growth target for reasons that have nothing to do with the proposed tax cut. The rise in productivity growth is more likely due to a tightening of the labor market leading businesses to make greater efforts to economize on their use of labor. This means both that the least productive jobs go unfilled (e.g. greeters at Walmart and the midnight shift at convenience stores) and firms invest more in labor saving technology.
It is also worth noting that the "robots taking our jobs" folks have to believe that the Washington Post is spewing nonsense in this piece. Robots taking our jobs is a story of very rapid productivity growth. The Post is giving us a story of extremely slow productivity growth. Rapid is the opposite of slow — but many of our leading public intellectuals have not yet been able to grasp this fact.Add a comment
The New York Times discussed the prospects for the Republican tax bill, comparing the difference in Republican attitudes towards the tax bill and the efforts to repeal the Affordable Care Act. In its effort to explain this difference, it told readers:
"But lowering taxes is, at heart, what makes a Republican a Republican."
The problem with this assertion is that the Republican plans actually raise taxes for close to half of middle-income families, as the New York Times has reported. Given the structure of this tax cut and prior Republican tax cuts it would seem more accurate to say that cutting taxes for rich people is what makes a Republican a Republican.Add a comment
In the bizarre world of Washington economics, where patent monopolies are "free trade" and projections of Social Security shortfalls decades in the future are a "crisis," it's perhaps not surprising to see reality turned on its head in the debate over the Republican tax bill. The Washington Post had a major article on Wisconsin senator Ron Johnson's objections to the tax bill.
According to the article, Johnson's is objecting because he wants a lower tax rate on income that individuals receive from pass-through corporations. In presenting Johnson's case, the article gets the issue completely backward by telling readers:
"Johnson wants 'pass-through' companies to be treated more like other corporations that are seeing their rates reduced from 35 percent to 20 percent under the GOP legislation."
Johnson absolutely does not want pass-through corporations to be treated like other corporations. Pass-through corporations by definition pay zero tax. Their profits are passed through to their owner(s), who then pay tax on it as normal income under current law.
Johnson has no interest in seeing the tax rate on pass-through corporations (which enjoy the privilege of limited liability like other corporations) raised to the same levels as other corporations. Instead, Johnson is arguing that individuals who get income from pass-through corporations should pay a lower tax rate than other people. This is an argument about the tax rate individuals face, it has nothing to do with corporate tax rates.
This is also considered textbook bad tax policy, since it means taxing income at different rates, depending on its source. If there is a big difference in the tax rate that people pay on income they get from pass-through corporations, as opposed to say working as a lawyer or doctor, then they have a large incentive to have their income come from a pass-through corporation. As a result, people will be spending lots of money creating pass-through corporations and misrepresenting the source of their income.
This is a great policy if the point is to promote the tax shelter industry, it is terrible policy if the goal is increasing economic growth and a fair tax code.Add a comment
I am a big fan of Dani Rodrik's writings on trade, and I agree with most of what he says in his NYT column today, but I do have one major disagreement. However, before going there let me emphasize some of the key points he makes in the piece.
First, Rodrik is very much on the mark in arguing that recent trade deals, like the Trans-Pacific Partnership, have very little to do with free trade. As he says, these deals are about imposing a corporate-friendly structure of regulations on both our trading partners and the U.S. (The deals have the effect of locking in laws that could otherwise be more easily altered.)
He also is right in singling out the pharmaceutical industry as the biggest villain in this story. We have been using these trade deals to ensure ever longer and stronger patents and related protections. The result is to make drugs, which would otherwise be cheap, extremely expensive. The price of drugs can be a serious burden even in rich countries, but patent protection can make life-saving drugs altogether unaffordable in developing countries. We should be looking to foster alternative, more efficient, mechanisms for financing research, not using trade deals to impose patent monopolies everywhere.
It's worth mentioning in this context the effort to impose rules on digital commerce in these trade deals. Folks following the scandals related to Facebook and Twitter's involvement in the presidential election know that we don't really have the rules down ourselves. In other words, we do not have a system in place that prevents both foreign and domestic actors from using dishonest means to influence public opinion and interfere with the democratic process. We also don't have effective systems in place to ensure the privacy of our personal data. These are really big issues that are probably worth getting sorted out before we try to shove a one-size-fits-all model on the rest of the world.Add a comment
That is the question millions are asking after she made this assertion in a segment on Morning Edition today. Economists would usually look to evidence that budget deficits are creating too much demand in the economy, such as a rising inflation rate and/or high interest rates. Both interest rates and inflation are at historically low levels, with inflation consistently running below the Federal Reserve Board's 2.0 percent target. Based on these facts, it is not clear what could be the basis of Liasson's assertion.
In some cases, people point to the interest on the debt as a burden placed on our children. This is misleading since some of our children (or at least Bill Gates' children) will be receiving this interest. However, even this measure does not suggest a major problem. Currently, interest payments on the debt, after netting out money refunded by the Federal Reserve Board (the government pays interest on the bonds held by the Fed, which is then refunded to the Treasury) are less than 0.8 percent of GDP. They were more than 3.0 percent of GDP in the early 1990s.
Also, if anyone is concerned about the burden imposed by these future payments, they should also be concerned about the much larger commitments the government makes when issuing patent and copyright monopolies in order to finance innovation and creative work. In the case of prescription drugs alone, the added expense of patents and related protections comes to close to $370 billion a year, or almost 2.0 percent of GDP.
Adding in the costs from these monopolies in medical equipment, software, and other sectors would almost certainly double this amount. Anyone seriously concerned about burdens on future generations would have to be noting the burdens created by patent and copyright monopolies, which swamp any plausible interest burden of the debt. The fact this is never mentioned suggests that burdens on our kids are not a major concern for people complaining about budget deficits.Add a comment
Since 47 percent of the benefits of the proposed tax bill go to the richest one percent, and the very rich, like Donald Trump, will get an enormous bonanza from ending the estate tax and other provisions, many people thought the goal of Republicans with this tax bill was to give more money to the rich people who finance their campaigns. Thankfully, the New York Times is there to correct this mistaken impression.
The NYT told readers that the Republican tax proposals are an:
"...effort to clean up the tax code, close loopholes and secure bigger tax cuts for all."
Fortunately, we have the NYT to explain the Republicans' motives. Certainly, based on the evidence in the public domain, almost everyone would have thought they were just trying to give money to the rich.Add a comment
Both the NYT and Washington Post articles on the battle over the succession and the Consumer Financial Protection Bureau (CFPB) neglected to mention the legislative history around the creation of the CFPB. There were competing sections on the order of succession in the event of the director's departure in the House and Senate versions.
One specified that the normal procedure on vacancies, in which the president gets to appoint an acting director, would be followed. The other had language indicating that the deputy director would become acting director until a new director was approved by Congress. This was the language that was used in the final bill. That supports the interpretation of the Democrats that the deputy director should fill in as acting director until Trump nominates a person to be director and that person is approved by Congress.Add a comment
It's amazing how so many reporters feel the need to tell us what politicians really think. Sorry, but I don't believe they know.
The example this time is a piece reporting on how 2018 may be a wave election with defeats for the Republicans comparable to what the Democrats experienced in 2010. It concludes by discussing the effort to shove through a tax bill before the end of the year:
"Republicans do not think the tax bill will be a political albatross once voters gain a fuller appreciation of its advantages. Of course, that is exactly what Democrats thought about the health care bill at this point in 2009."
It's entirely plausible that Republicans don't say that they think the bill is a political albatross. After all, what would that look like? Would members of the House and Senate be telling reporters:
"...we know the public hates this bill because it gives so much money to rich people, but these are our campaign contributors and we have to come through for them. Furthermore, even if we lose our election, they will pay us millions of dollars a year to work for them as lobbyists."
If something like this were, in fact, the case it is extremely unlikely that Republican politicians would be saying it to NYT reporters. It is far more likely that they would be uttering nonsense about how the tax bill is really good for the country and that people will come to realize this after it is approved.
Competent reporters would just tell readers what the politicians say. They would not try to tell us what the politicians actually believe, since they don't know.Add a comment
Okay, that's not quite what the NYT said. Instead, an article on the impact of ending the tax deduction for state and local income taxes told readers:
"Eliminating the deduction has long been a goal of many Republican lawmakers, who view the tax break as a subsidy that poorer red states provide to richer blue ones that spend heavily on government services."
Contrary to what the NYT tells us, their reporters really don't know how Republican lawmakers "view" the tax break. However, for some reason they couldn't just tell us what they say, they had to pretend to know what they think.
How about if reporters just stuck to telling us what politicians say and do and not pretend to read their minds? Then, we would all have something to be thankful for next Thanksgiving.Add a comment
The NYT had a good piece discussing the potential impact of capping the mortgage interest deduction and property taxes on the housing market; however, the piece missed an important way in which the Republican tax bills would reduce the benefits of the mortgage interest deduction. The piece notes that doubling the standard deduction will reduce the number of people who itemize and therefore benefit from the mortgage interest deduction.
But both bills also end the deduction for state and local income taxes. Without this deduction, most homeowners will have few other deductions apart from their mortgage interest and whatever is allowed for property taxes. These deductions will be less for almost everyone than their standard deduction ($24,000 for a couple). This means that they would just take the standard deduction and the mortgage interest deduction would be of no value to them. (The Tax Policy Center projects that just over 5 percent of tax filers would still itemize their deductions if these changes in the tax code are put into effect.)
In fact, even if they still chose to itemize the mortgage interest deduction will be far less valuable under this new code. Suppose that they had $10,000 in property taxes that are deductible and pay $15,000 a year in mortgage interest and have no other deductions. Since the combined total of $25,000 exceeds the $24,000 standard deduction, it would pay for this couple to itemize; however, the benefit is much smaller.
Their benefit from itemizing is just the difference between their itemized deductions and the standard deduction. In this case, this difference reduces their taxable income by $1,000, saving them $250 on their taxes if they are in the 25 percent bracket. If we still had a $12,000 standard deduction, their itemized deductions would be reducing their taxable income by $13,000, saving them $3,250 on their taxes.
In short, by raising the standard deduction and reducing the number of itemized deductions that are available, the Republican tax proposals will be hugely reducing the value of the mortgage interest deduction even if they follow the Senate bill and don't reduce the cap on deductible interest.
Thanks to Robert Salzberg for calling my attention to the Tax Policy Center projection.Add a comment
Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.
"In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle."
There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.Add a comment
Yes, David Brooks actually said this. The context is his column noting the complaints against the big tech companies. After going through the list Brooks tells readers:
"The political assault on this front [against the monopoly power of the big tech companies] is gaining steam. The left is attacking tech companies because they are mammoth corporations; the right is attacking them because they are culturally progressive. Tech will have few defenders on the national scene."
It is hard to believe that anyone with even a passing knowledge of U.S. politics could say something so ridiculous. Tech has hundreds of billions of dollars to throw at politicians, think tanks and other academics, and to buy media outlets in addition to the Internet sites it already controls.
Everywhere outside of David Brooks' World, people respond to money. The one thing we can be absolutely certain of is that there will no shortage of prominent individuals happy to defend tech on the national scene. My guess is that the tech giants won't see the need to follow Brooks' agenda as the only road to salvation. They are more likely to just buy up another think tank or two.Add a comment
Robert Samuelson comes in behind Donald Trump when it comes to mastering the logic of international trade. In his column telling readers that "Trump gets the trade problem all wrong," Samuelson gets three really big things about trade wrong:
1) The dollar's status as the major global currency is not a major factor in the trade deficit;
2) In contrast to Samuelson's trade agenda, most workers have no reason to want the U.S. government to devote greater efforts to enforcing patent and copyright protection elsewhere; and
3) The Trans-Pacific Partnership (TPP) was not about free trade; in fact, it can with more legitimacy be called a protectionist pact.
On the first point, the dollar has long been the major global currency. That did not lead the United States to run trade deficits in the 1950s and 1960s. In fact, through most of the next three decades, it ran considerably smaller deficits than it is running now.
The reason the U.S. is running such large trade deficits was the decision by many developing countries to accumulate huge amounts of reserves following the botched bailout from the East Asian financial crisis in 1997. This was a serious failure of the international financial system, managed by the United States. (That would be Clinton, Rubin, and Summers if we want to name names.)Add a comment
There may be no other person who has done as much harm to the world in this century as Peter Peterson, the Wall Street billionaire. Peterson has used his money to promote his complaints about excessive budget deficits. Due to his ability to fund a wide range of organizations, he has helped to keep these concerns at the center of public debate.
Back in the last decade, when some of us were trying to raise the alarm about the housing bubble and the economic damage that would be caused by its collapse, Peterson's crew were keeping the budget deficit front and center. News outlets like the Washington Post, New York Times, and National Public Radio had any number of news stories and columns raising concerns about the budget deficit. There was virtually nothing discussing the housing bubble and the risks it posed.
After the bubble burst and the economy desperately needed stimulus in the form of larger budget deficits, the Peterson organizations were still pressing their concern about exploding deficits. At a time when millions of people were needlessly unemployed, and millions more underemployed, Peterson's crew pressed the case for reducing the deficit. They were so successful they got the Obama administration to appoint the Bowles–Simpson commission on the deficit just as the recession was hitting its trough in terms of unemployment. This deficit fanaticism probably had an even more negative impact in Europe where the European Union and the European Central Bank imposed austerity on the countries of southern Europe that have led to downturns comparable to the Great Depression (much worse in the case of Greece).Add a comment
I had a post that took issue with a WaPo Fact Checker saying that the Republican tax plan will not actually kick 13 million people off insurance. Rather, they will opt not to buy it if they are not required to. I had misunderstood the Congressional Budget Office's analysis and thought it projected premiums would rise 10 percent a year as a result of this change. In fact, they project a cumulative increase of 10 percent.Add a comment
Tyler Cowen tells us in this Bloomberg piece that the Republicans are right to say that their plans for a big cut in the corporate tax will boost investment. (He is still opposed to the overall package.) I've had several people ask me about this one. I'll give the usual economists' answer: it depends.
If the argument is that other things equal, more cash in corporate coffers means more investment, I'm with Tyler. If we throw a huge pile of money at corporate America, at least some of it has to end up being invested, so Tyler is right on this point.
On the other hand should we expect the investment boom projected by the White House and Tax Foundation, where the capital stock will be 30 percent higher in ten years as a result of the tax cut? That one seems pretty nutty. (Tyler doesn't endorse this view.) There are and have been large disparities in after-tax rates of return between countries. The argument for an investment boom depends on an equalization in after-tax rates of return across countries. (I know, we can wave our hands and explain that by risk premia, but that is just hand waving.) There is little reason to believe that a change in the corporate income tax rate will have a huge effect on investment, even if we can say the direction is to raise it.
It is also worth asking about the other things equal assumption. Suppose that the Fed sees higher projected deficits and decides it has to raise interest rates faster and further. It is entirely possible that these interest rate hikes more than offset any positive effect that the tax cuts have on investment, resulting in a net negative.
Another possibility is that the larger deficits embolden the deficit hawks who then take the hatchet to transfer programs like Social Security, Medicare, and food stamps. The vast majority of this money is spent quickly by the people who get it. The reduction in demand from cuts to these programs could lead to a fall in demand in the economy, thereby reducing the incentive for firms to invest.
We can also envision a story in which state governments are forced to reduce taxes, since their residents can no longer deduct state and local taxes from their federal income taxes. This could lead to a reduction in spending on infrastructure and education, which could also have a negative effect on private investment.
In addition, taxing tuition waivers for grad schools could drastically reduce the supply of new graduates in computer sciences, biotech, and other areas requiring highly skilled workers. This could also lead to less investment.
In all of these cases, the net effect of the Republican tax package could be to reduce investment, but Tyler is right that the immediate effect of a cut in corporate taxes should be to raise investment.Add a comment
After having a horde of angry doctors attack me (and my wife) for suggesting that they face market competition, I was happy to see Jonathan Rothwell make the same point in a NYT Upshot piece. However, when running through the causes of runaway income at the top, he gives short shrift to the excessive pay of CEOs and other top executives.
"Most top earners in the United States are neither executives nor even managers. People in those occupations make up just over one-third of all top earners in the United States. This share has been falling — particularly for corporate executives — and is lower than in many other advanced countries. In Denmark, Canada and Finland, close to half of top earners are in managerial occupations, according to my analysis of data from the Luxembourg Income Study."
Well, one-third is a very large percentage of top earners, more than the share of doctors, lawyers, and other highly paid professionals taken together. Also, even if the share of top executives in the one percent fell somewhat, the percent of income going to CEOs soared as the share of income going to the one percent doubled.
Also, CEOs are far more likely to be in the upper reaches of the one percent. Many CEOs are earning paychecks in the tens of millions. Very few doctors or lawyers pocket much over one or two million.Add a comment
Reductions in Social Security benefits are extremely unpopular across the political spectrum. The program enjoys enormous support among both Democrats and Republicans and people are far more likely to say that benefits should be raised than cut. For this reason, the public should be paying attention to a little noticed provision in the tax bill passed by the House today and which also appears in the bills under consideration in the Senate.
In both cases, the basis for indexing tax brackets would be shifted from Consumer Price Index (CPI) to the Chained Consumer Price Index (CCPI). The difference is that the CCPI takes account of when people change their consumption patterns in response to changes in relative prices.
The classic example is that beef rises in price and chicken falls, we would expect people to consume less beef and more chicken. The CPI assumes that people don't change their consumption patterns while the CCPI adjusts its basket to assign less importance to beef and greater importance to chicken.
For this reason, the CCPI shows a somewhat lower rate of inflation than the CPI. Typically the gap is 0.2–0.3 percentage points. This matters in the tax bill because the cutoff for the tax brackets is adjusted each year by the CPI. If the CCPI is used rather than CPI, then the cutoffs would rise less rapidly.
For example, if the cutoff for the 25 percent bracket is $40,000 for a single individual and the CPI showed 2.0 percent inflation, then it would rise to $40,800 for the next year. This means a single person would face a tax rate of 25 percent on income above $40,800. If the CCPI showed an inflation rate of 1.7 percent, then the cutoff would rise to $40,680. This means a single person would face a tax rate of 25 percent on income above $40,680.
In a single year, this difference will not mean much, but after 10 years, the difference in the indexes would be between 2.0–3.0 percent and it would grow more through time. This will add a fair bit to many people's tax bills.Add a comment
Okay, that's not quite what the article said. Instead it told readers:
"Republicans have long championed free trade, believing that by allowing markets to operate unhindered, nations can boost domestic industries, lift their wages and improve living standards."
Wow, so Republicans are motivated by a concern over workers' living standards. It's good we have the NYT to tell us this because we certainly wouldn't know about Republicans' concern for workers based on their behavior. (Yes, Democrats are politicians too and it is reasonable to assume that politicians of both parties are first and foremost concerned about their re-election, which means appeasing powerful interest groups.)
The piece misrepresents many other issues, especially with its repeated use of the term "free trade." What exactly about longer and stronger patent and copyright protection is "free trade?" It's fine that the NYT likes these forms of protectionism and apparently approves of the massive upward redistribution that results from these market interventions, but it is a lie of Trumpian proportions to call them "free trade."
Also our "free trade" deals have done almost nothing to free up trade in highly paid professional services, like those offered by doctors and dentists. As a result our doctors and dentists are paid roughly twice as much as their counterparts in other wealthy countries.
The piece also notes the rise of populism on the left and right and then incredibly tells readers:
"The fissures over trade are a product of a surge in populism on both the political right and left. ...
"Growing anxieties about the unforeseen costs of globalization, the overhang of the financial crisis and the stagnation of the middle class have deeply damaged voters’ faith in the ability of free markets to deliver prosperity — and fractured the Republican Party in the process."
The costs of globalization were hardly "unforeseen." Many of us tried as hard as we could to warn of the costs of exposing large segments of the U.S. workforce to competition with much lower paid workers in the developing world. The more appropriate word here would be "ignored," as in the people in positions of authority deliberately chose to ignore both evidence and the predictions of standard trade theory in pushing trade deals that had the predicted effect of redistributing income upward.
It is also misleading to refer to "free markets" in this context. Trade deals that protect the most highly paid workers, longer and stronger patent and copyright protection, and bailouts of the financial industry when it faces bankruptcy are not characteristics of a free market.
(Yes, all this is covered in my (free) book Rigged: How Globalization and the Rule of the Modern Economy Were Structured to Make the Rich Richer.)Add a comment
Everyone knows that Amazon founder Jeff Bezos is a genius. After all, he made himself one of the richest people in the world by avoiding the requirement that retailers collect state sales taxes. Yes, Amazon now collects these taxes, but the savings on tax collections in the years it didn't collect taxes almost certainly exceed Amazon's cumulative profits since it's been in business.
While Amazon's tax avoidance may have been legal, it was 100 percent brain-dead as public policy. In effect, state and local governments were directly subsidizing an Internet giant at the expense of their homegrown mom and pop retail stores. It is very difficult to imagine a world in which this policy makes sense.
Anyhow, the NYT apparently feels some need to carry water for Amazon, implying there is some ambiguity about state efforts to require Amazon to collect taxes for sales of its affiliates. It tells us that states are "thirsty" for unpaid sales taxes, as opposed to trying to correct an abuse of the law that benefits a huge company and one of the richest people in the world at the expense of their own retailers.
It is also very generous in presenting Amazon's case, explaining that the company is concerned that it could be held liable for taxes that its affiliates fail to properly assess. This is called "too damn bad." Amazon is making money off its affiliates sales. This means that it carries certain responsibilities for those sales, including that taxes are properly collected. In a market economy, if a company like Amazon can't conduct its business competently, then it should go under and be replaced by businesses run by people who know what they are doing.Add a comment