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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That is in effect what Steven Hill argues in his NYT column today. While the column makes many useful points about Uber's impact on the environment and its treatment of its drivers, the underlying issue is that Uber is hugely subsidizing its rides, causing it to lose $4.5 billion in 2017. Hill proposes that the government either require Uber to raise its fees or that it impose a tax to offset the loss.

While the idea of leveling the playing field is appealing, it is worth asking why a company has a business model that involves losing massive amounts of money. The logic is presumably that Uber expects to drive out competition so that at some point in the future it can jack up its prices and make large profits. Back in the old days, we had something called "anti-trust" policy which would prevent something like this.

If the government treated the anti-trust laws seriously (they are still there), instead of seeking campaign contributions from the biggest violators (e.g. Facebook and Google), Uber's strategy would make zero sense. The company would be losing large amounts of money today, with the prospect of losing even more in the future as its money-losing business model continued to expand. As we know, investors aren't always too sharp, but most aren't willing to throw their money down the toilet forever. (There is a similar story with Amazon, which is barely profitable on the whole and loses money in most of its lines of business.)

The Uber huge loss model only makes sense in a context where people don't think anti-trust law will be enforced. If we had an administration in Washington that made it very clear that it would not tolerate Uber taking advantage of its market position to jack up prices, the company would likely have to change its practices very quickly or end up in bankruptcy.

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Several press accounts have fingered John Williams, currently president of the San Francisco Federal Reserve Bank, to be the next president of the New York Fed. There are several reasons why this should be upsetting.

First, while the NY Fed had committed itself to an open process in selecting its new president, the turn to Williams seems to have taken place in the dark of night. He had not been mentioned as being one of the people in contention until just the last week.

It is also upsetting to see yet another white male picked for one of the top positions at the Fed so recently after Jerome Powell replaced Janet Yellen as chair. The president of the New York Fed, unlike the other Fed presidents, has a vote at every meeting. The New York bank president sits aside the chair and the vice-chair as one of the three most important members of the Fed’s Open Market Committee, which sets monetary policy.

The labor and community coalition Fed Up (with which I work) had submitted a diverse list of potential candidates to be considered for this position. The list included current and former Fed bank presidents and governors, members of the President’s Council of Economic Advisers, and heads of government statistical agencies. It appears that almost none of these people were even considered for the position.

An open process would have involved a public listing of names of people who were being considered and then a short list of finalists. This would have provided an opportunity for interested parties to assess the individuals’ qualifications and views. That is not what we saw here.

The selection of Williams specifically raises serious concerns about both his views on monetary policy and his responsibilities as one of the country’s most important financial regulators. Williams has repeatedly indicated a desire to raise interest rates and slow job growth, even when the economy was still far from full employment.

For example, in May of 2015, he said the economy was “nearing full employment” when the unemployment rate was still 5.5 percent. He said the same thing the following year when the unemployment rate was 4.7 percent. Last fall he complained that, “[...]we’ve not only reached the full employment mark, we’ve exceeded it.”

While Williams has thankfully modified his views as the unemployment rate has dropped without leading to inflation (in 2012, he put the floor for non-inflation unemployment at 6.5 percent), he has been all too willing to sacrifice jobs out of fears of inflation that proved to be unfounded. Had he been able to get the Fed to act based on his views, the unemployment rate today would almost certainly be considerably higher than its current 4.1 percent level.

This would mean that millions of today’s workers would be without jobs, with the losers being disproportionately blacks, Hispanics, and other relatively disadvantaged groups. In addition, the tightening of the labor market has allowed of tens of millions of workers at the middle and bottom end of the wage distribution to see real wage gains for the first time since the 1990s boom.

In addition to his problematic views on monetary policy, there are also grounds for being concerned about his effectiveness as a regulator. The New York Fed has responsibility for overseeing the Wall Street banks. Its failure to take this responsibility seriously was a major factor in the build-up to the financial crisis. (Timothy Geithner, who had been New York Fed bank president during the build-up of the housing bubble, famously once commented in subsequent congressional testimony that he had never been a regulator. A statement that was unfortunately close to being true.)

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Neil Irwin had an interesting piece arguing that Trump is fighting the last battle on trade in worrying about imports of steel and aluminum. His main point, that the millions of jobs we lost in manufacturing to trade in the last decade are not coming back, is largely correct. But there are a few points worth adding.

First, it would be worth having a little honesty about the impact of trade on the country’s workers. It is standard wisdom in political circles to say that trade really wasn’t what caused job loss in manufacturing, the real cause of job loss was productivity growth. This is true, but only in a way that is incredibly misleading.

Suppose a factory that was the major employer in a small city burned down, leaving all the workers unemployed. An economist can truthfully say that the major cause of the loss of manufacturing jobs in the city was productivity growth since over the last five decades the city almost certainly lost more manufacturing jobs from productivity growth than due to fire. At the same time, the people who are newly out of work are 100 percent right in blaming the fire.

This pretty well describes how many economists have been talking about the impact of trade in the last decade. Manufacturing has been falling as a share of total employment since the 1970s, but the total number of jobs in manufacturing had changed little, apart from cyclical ups and downs, until our trade deficit exploded in the last decade. (The sharp rise in the trade deficit actually began in 1997, but its impact was offset by the late 1990s boom.) In December of 1970, there were 17,300,000 jobs in manufacturing. In December of 2000 there 17,180,000, a drop of just 120,000. By comparison, in December of 2007, before the start of the Great Recession, manufacturing employment was down to 13,750,000, a drop of 3,430,000 jobs in just seven years.

This was overwhelmingly due to the rise in the trade deficit, which peaked at almost 6.0 percent of GDP in 2005 and 2006. We were seeing productivity growth in manufacturing during this whole time, so that was not something that was new in the years 2000 to 2007. What was new was the large trade deficit. The manufacturing job loss also had a secondary impact on communities across the Rust Belt where it was a major employer.

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The Washington Post might have confused some readers in a piece on how many highly paid professionals are looking to form new S corporations to game the new tax law. Most people who own S corporations will get a 20 percent tax savings on the income they get from these corporations.

At one point the piece told readers:

"Millions of American businesses pay taxes through the individual tax code, known in tax parlance as 'pass-through' businesses. [These are S corporations.] They’ve historically done that so they could pay taxes below the 35 percent corporate tax rate, which was reduced to 21 percent in the December tax law."

This is incorrect. If the businesses were chartered as normal corporations, they would pay the 35 percent corporate tax rate. Then the money paid out to their owner or owners as dividends or as realized capital gains would be taxed as individual income, with a top rate of 20 percent.

Until the change in the tax law, many owners of S corporations were in the top 39.6 percent bracket, so they actually faced a tax rate on their income from S corporations that was higher than the 35 percent corporate tax rate. The advantage of the S-corporation was that it allowed the owners of corporations to escape the corporate income tax, not the lower tax rate. 

The separate corporate tax rate was justified by the fact that the government gives corporations special benefits, most importantly limited liability. It was always a voluntary tax in the sense that anyone who did not feel the benefits of corporate status were worth the tax could just form a partnership instead of a corporation. However, the tax law has been changed over the years so that people can now form an S-corporation to get the benefits of corporate status, without having to pay the corporate income tax.

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It said this clearly in a front page article. The piece tells readers how Republicans are falling in line behind Trump's agenda. After noting that the new budget passed by Congress will lead to a deficit of more than $1 trillion in 2019, the article comments:

"It was another example of how Trump seems to have overtaken his party’s previously understood values, from a willingness to flout free-trade principles and fiscal austerity to a seeming abdication of America’s role as a global voice for democratic values."

Since this is an economics blog, I'll leave it to others to speculate how anyone might have understood a party that led the invasion of Iraq under a false pretext to be a global voice for democratic values. I'll instead focus on the Republican Party's alleged commitment to "free trade and fiscal austerity."

I may have missed it, but I never heard a single prominent Republican propose any measure that would reduce the protectionist rules that limit the number of foreign doctors, allowing our doctors to earn twice as much on average as their counterparts in other wealthy countries. This difference in doctors pay costs us $100 billion annually or approximately $800 per household. There is ten times as much money at stake with doctors alone as with the steel tariffs that have gotten so much attention. Protection for other professionals could easily double this number.

No one committed to free trade could find this protectionism acceptable. The "free trade" Republicans have generally supported has been about removing barriers that protect less highly educated workers, putting downward pressure on their pay. That implies a commitment to redistributing income upward (one shared by the Washington Post), not free trade.

The Republican trade agenda also involves making patent and copyright monopolies longer and stronger and spreading these rules internationally. These are incredibly costly forms of protectionism. In the case of prescription drugs alone, patents and related protections add more than $370 billion (almost 2.0 percent of GDP) to what we pay for prescription drugs each year.

The commitment to fiscal austerity is equally absurd. The deficit exploded in the Reagan years due to his tax cuts and increases in military spending. It also exploded under George W. Bush due to his tax cuts and wars. Why on earth would anyone think that the Republican Party had a commitment to fiscal austerity?

So, the take away from this piece is the Washington Post wants its readers to believe that the Republicans had been committed to free trade and fiscal austerity before Trump. That might be true in Washington Postland, where NAFTA caused Mexico's GDP to quadruple, but not in the real world.



An earlier version had an incorrect number for the per household cost of excess payments to doctors. Thanks to Robert Salzberg for calling my attention to the error.

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If anyone took the rationale for the Republican tax cuts seriously, the key measure is investment. The promise was that lower corporate tax rates would provide a huge incentive for investment, causing the capital stock to increase by roughly one-third over its baseline growth path within a decade.

As I have pointed out, the early numbers were not good. Capital goods orders fell in both December and January. The National Federation of Independent Businesses reports no notable uptick in the investment plans of its members.

The new numbers from the Commerce Department today look a bit better. Overall capital goods orders were up 4.5 percent in February from January levels. If we pull out erratic aircraft orders there was still an increase of 1.8 percent. That's a pretty good one month jump, but it follows declines in the last two months that totaled 0.9 percent. That leaves growth of 0.9 percent in the last three months or 0.3 percent a month.

The increase over the last year is 7.4 percent. That is roughly the same as the rate of growth before the tax cut. In other words, we're pretty much on the baseline path, with no obvious tax cut induced jump.

This may not be a great story for tax cut proponents, but at least investment is now moving in the right direction.  

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Paul Krugman used his column this morning to go after Donald Trump for rushing blindly into a trade war. While I agree with Krugman's basic points, Trump does not seem to know what he is doing and therefore this is not likely to end well, I would disagree with Paul on a few points.

First, Krugman makes the point that the Commerce Department's measure of our trade deficit with China is overstated because it counts the full value of exports from China as coming from China, even though most of the value added may come from elsewhere. This could mean, for example, we count the full value of an iPhone exported from China as a Chinese export, even though the vast majority of the price is attributable to components made elsewhere.

Krugman is clearly right on this but ignores the flip side. When we import goods from Japan, Korea, Germany and other countries, some of the price will reflect the value of parts that were manufactured in China. My guess is the amount of foreign value added in our imports from China is probably larger the amount of Chinese value added in our imports from third countries, but the latter is clearly not zero.

If we want to do an honest accounting to determine our true trade deficit with China, we have to look at both sides of this issue. It is interesting to note the lack of interest in this value-added issue when it comes to our trade with Canada.

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It is striking how the media universally accept the idea that patent and copyright monopolies are somehow free trade. We get that the people who own and control major news outlets like these forms of protection, but it is incredibly dishonest to claim that they are somehow free trade.

We get this story yet again in an NYT piece complaining about China's "theft" of intellectual property while telling readers about how Trump's proposed tariffs show his:

"[...]resolve to turn away from a decades-long move toward open markets and integrated world economies and toward a more starkly protectionist approach that erects barriers around a Fortress America."

While we are supposed to be alarmed about tariffs of 10 percent and 25 percent on steel and aluminum, patents and copyrights are effectively tariffs of many thousand percents, often raising the price of protected items tenfold or even a hundredfold. The economic impact of increased protectionism of this type has been enormous.

This can be seen clearly in the case of prescription drugs, where spending went from around 0.4 percent of GDP in the 1960s and 1970s to 2.4 percent of GDP ($450 billion) in 2017, as shown below.

Book3 4096 image001

Source: Bureau of Economic Analysis.

Since drugs are almost invariably cheap to manufacture, we would likely be spending less than $80 billion a year in the absence of patent and related protections, implying a cost of protectionism of more than $370 billion, and this is just from drug patents. Adding in costs in medical equipment, software, and other areas would likely more than double and quite possibly triple this amount.

The supporters of this protectionism argue that we need patent and copyright monopolies to provide an incentive for innovation and creative work. However, there are two major flaws in this argument.

First, while these monopolies are one way to finance research, they are not the only way. There are other mechanisms, such as direct government funding (we already spend more than $30 billion a year on biomedical research through the National Institutes of Health). Given the enormous cost associated with this protectionism, it would be reasonable to be debating the relative merits of alternatives. (See also Chapter 5 of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

The other point is even simpler. We have been making patent and copyright protection stronger and longer for the last four decades. We know that this shifts more money from the rest of us to those who benefit from these protections. Even if we decide that these mechanisms are the best way to finance innovation and creative work, it does not mean that making them stronger and longer is always justified.

We should be asking the question of how much additional innovation or creative work do we get for an increment to strengthen and lengthen. This debate never takes place.

This creates the absurd situation where we put in place policies that are designed to transfer money from the rest of us to people like Bill Gates and then we wonder why we have so much income inequality. And the best part of the story is that some of the big gainers from these protections will even finance research as to why we have so much inequality, as long as it doesn't ask questions about patent and copyright protection.

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No, they are not endorsing his tariffs on steel and aluminum, but the paper is very concerned that Trump is not effectively protecting US intellectual property claims. The Post ran a piece that made it appear that a lack of protection for these claims should be a major concern for the public, as opposed to just the corporations that stand to lose profits.

The ostensible issue is that China allegedly doesn't respect US claims to intellectual property in a variety of areas. The piece tells readers:

"Trade secret theft — most from China — costs the U.S. economy $225 billion to $600 billion annually, a blue-ribbon commission on intellectual property concluded last year."

By contrast, it argues that Trump's proposed tariffs on China's electronic goods are misdirected:

"If Trump opts for a 25 percent tariff on all Chinese electronics, the cost to the U.S. economy over 10 years would total $332 billion, according to the nonprofit [corporate backed] Information Technology and Innovation Foundation."


"China’s treatment of foreign intellectual property may have been only an irritant when it manufactured low-tech products such as toys or clothing and assembled electronics for export. As Beijing covets global leadership in advanced technology, its industrial policies have grown into a threat to American economic and military pre-eminence."

In contrast to the $332 billion ten-year cost to the US economy that the Information Technology and Innovation Foundation (ITIF) calculated for Trump's tariffs, the cost of the intellectual property protections over this period would run well into the trillions of dollars. In the case of prescription drugs alone, the United States will spend more than $450 billion for drugs which would almost certainly cost less than $80 billion in a free market. The difference of $370 billion a year is more than the ten-year total cost of tariffs on electronics calculated by ITIF.

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Not deliberately of course, but the NYT had this great piece on how the junk food industry is trying to limit required warnings on junk food as part a renegotiated NAFTA. The issue is that our trading partners are looking to take measures to discourage people from eating foods that are high in sugar, fat, and salt. Several cities and states are considering similar measures. The junk food industry is looking to block such measures by getting a ban included in the new NAFTA.

If you're wondering what this has to do with free trade, the answer is nothing. However, it is a beautiful example of an industry working to use a trade agreement to subvert the democratic process to advance its interests in a trade deal. If the junk food industry gets its way, the resulting pact will then be blessed as a "free trade" deal. The Washington Post and all the other beacons of the establishment will the proclaim their support for the new NAFTA and denounce opponents as Neanderthal protectionists.

Many of us have long been making the point that recent trade deals like the Trans-Pacific Partnership have little to do with trade and are more about locking in place a business-friendly structure of regulation. But it took the clumsy ineptitude of the Trump Administration to remove any veneer. Thank you, President Trump. 


Thanks to Robert Salzberg for corrections from an earlier version.

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Yes, things could really nasty. In discussing the ways in which China might retaliate against tariffs, the Post told readers:

"China is also the largest foreign holder of U.S. government debt. It holds $1.17 trillion of U.S. Treasury securities, down about $33.5 billion since last August. The U.S. government faces huge borrowing needs, not only to finance new deficits but also to refinance past securities now coming due, so a drop in China’s appetite for that debt could nudge interest rates up in the United States."

The purchasing of US government bonds by China's central bank was the main tool through which it propped up the dollar against the yuan. The high-valued dollar makes Chinese goods cheaper relative to US goods, allowing it to run a large trade surplus with the United States.

If China were to sell some of the US bonds it holds, it would raise the value of the yuan, making US goods and services relatively more competitive. This is supposedly what both the Bush and Obama administrations wanted China to do. (I said "supposedly" because this was their public position. I don't know what happened in their private discussions.)

It is also worth noting that it appears Trump's major complaint is that he wants more protectionism in the form of stronger patent and copyright protections in China. If he succeeds in this effort, it will mean higher prices for consumers in both the United States and China. For some reason, the Post is not as concerned about the impact of these potential price increases as it is about the impact of higher steel and aluminum prices.

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Eswar Prasad makes the case in an NYT column that we should be paying attention to the selection of Yi Gang to head China's central bank as a result of China's status as the world's second-largest economy. Prasad is right about the importance of China's central bank in the world economy, but it is worth noting that by purchasing power parity (PPP) measures China is already by far the world's largest economy.

Purchasing power parity calculations of GDP attempt to measure all the goods and services produced by a country with a common set of prices. This means we add up all the cars, tables, haircuts, knee surgeries etc. produced in both the US and China and assume that each item costs the same in both countries.

According to the projections from the IMF, China's GDP is already 25 percent larger by this measure and will be almost 50 percent larger by the end of the projection period in 2022, as shown in the figure below.

Book3 11021 image001

Source: International Monetary Fund.

The US economy is still considerably larger using the exchange rate measure of GDP, but for many purposes, the PPP measure is more appropriate. For example, if we want to gauge the extent to which China's exports of steel or other items may affect world markets, we would want to know the PPP measure of output, not the exchange rate. Also, if we are looking at living standards, we would want to look at per capita GDP using the PPP measure. (Since China has four times the population of the US, it is still less than one third as rich on a per person basis.)

The PPP measure is also not subject to wild swings like the exchange rate measure. This means, for example, if the Chinese currency were to rise by 20 percent against the dollar, the exchange rate measure of GDP would rise by 20 percent. The PPP measure would not be affected.

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It's hard not to have a certain attachment to the Post's longstanding crusade against Social Security and Medicare. After all, it has been pushing for cuts to these programs at least since I came to town in 1992. They did in the high deficit years of the early 1990s, the boom times of the late 1990s, the housing bubble years of the 2000s, and through the Great Recession. So the Post calling for cuts to these programs is pretty much as predictable as the sun coming up. So this morning's call for "reform" is a bit like the morning coffee, although somewhat less pleasant.

At the most basic level, you sort of have to love the Post criticizing politicians for not wanting to go on record for cuts to these programs even when the editorial writers, who don't have to run for office, are scared to say what they actually want and instead use the euphemism "reform" when they mean cuts. But, the substance is also a bit hard to take.

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We all know about the skills shortage. Employers just can't find workers with the skills necessary for the jobs that are available. As a result, jobs go wanting and many workers remain unemployed.

Samuelson gives us yet another example of the skills shortage in his column titled, "Don't deny the link between poverty and single parenthood." Apparently, Samuelson was irked by a column in the NYT last month that told readers "Single mothers are not the problem."

The piece argues that there are not enough single mothers to explain child poverty. Therefore as Samuelson puts it:

"[...]let’s put the Times essay in context. Its policy agenda is candid. 'We should stop obsessing over how many single mothers there are and stop shaming them,' write sociologists David Brady of the University of California at Riverside, Ryan M. Finnigan of the University of California at Davis and Sabine Hübgen of WBZ Berlin Social Science Center."

Samuelson tells us:

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It is amazing how otherworldly seemingly intelligent people can sometimes be. The NYT ran a column by Alec Schierenbeck arguing that fines for things like parking and traffic violations should be progressive.

The point is that a $150 speeding ticket is no big deal to a high-priced doctor or lawyer, whereas it is a huge deal to a mother working at a near minimum wage job. This fine may be an impossible for burden for the latter, possibly leading to eviction or even imprisonment in some cases for failing to make court appearances connected with non-payment.

Schierenbeck is 100 percent right in this basic point, but in a country where the justice system is already so unbelievably tilted to favor the rich, the idea that we would make fines income-based is hopelessly utopian. Perhaps Schierenbeck is not old enough to remember the housing crash and the resulting financial crisis. This literally cost the country trillions in lost output, as millions lost their jobs and homes.

People in the financial industry committed serious crimes. They passed along mortgages they knew to be fraudulent in mortgage-backed securities. The credit rating agencies blessed these mortgage-backed securities as investment grade even though they knew they were garbage. No one went to jail because our country doesn't put rich people who commit financial crimes in jail.

And, this wasn't a one-off event. Let's see Donald Trump or Jared Kushner's tax returns. I would be willing to bet that there are bogus deductions that rip off more money from the taxpayers than the amounts that many convicted small thieves are sitting in jail for. And, this is a bi-partisan story. I'm sure there is lots of garbage on Robert Rubin's tax returns or Tony James'.

We live in a country where it is standard practice for rich people to get away with breaking the law in really big ways and facing, at worst, a slap on the wrist if they get caught. So yes, it would be fairer if the fines for minor offenses were income-based, but we don't live in a country where fairness between the rich and poor is taken seriously, and it is an insult to NYT readers to pretend we are.

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Many large companies managed to get some good publicity by announcing bonuses for their workers which they said were the fruits of the tax cuts. We, of course, have no way of knowing the extent to which these bonuses were due to the tax cut or were simply a story of companies trying to retain workers in a tighter labor market. 

In that context, it would have been better to see pay increases, which presumably will be in place in subsequent years and provide a higher basis for future pay raises. Of course, some companies did announce that they were raising workers pay also, in addition to some who improved retirement and other benefits.

All of that is good, but it does still miss the point of the Republican tax cut story. Their claims of workers getting $4,000 to $9,000 more in annual income did not depend on companies sharing their tax cuts. Rather it is a story that depends on a tidal wave of new investment increasing productivity. Higher productivity five or ten years out is supposed to mean higher wages.

The early returns on the investment-productivity story are not good, but we still can't say anything conclusive on the investment boom story. But we can join in the game to see what share of company tax cuts are being shared with workers through the much-hyped bonuses.

I did a quick calculation where I used the income and taxes reported in companies' 2016 annual report and compared it to what they would be paying at the new 21 percent tax rate, to calculate companies' tax savings. This likely understates the tax savings since many companies will undoubtedly find ways to pay less than the 21 percent statutory rate. Also, presumably their profits and therefore savings will be higher in 2018 than in 2016. It is also important to remember that their tax savings will be an annual deal, recurring for the indefinite future, whereas the workers' bonuses are a one-time event.

The figure below gives the picture.

Book1 221 image002

Source: Author's calculations.

The bonus figures are taken from The Americans for Tax Reform "list of tax reform good news." I did make some assumptions to get the ratios. For example, in the case of Walmart, they reported giving a maximum bonus of $1,000 which went to a full-time worker who had been with the company for 20 years. I assumed that the average bonus for its 1.6 million workers would be half of this amount. I generally tried to be generous in these assumptions.



I forget to mention that the Republicans effectively paid companies to announce bonuses before the end of last year. A bonus announced in 2017 could be deducted against 2017 profits, even though it may not be paid until 2018. This makes a big difference since companies faced a 35 percent tax rate in 2017, compared with a 21 percent tax rate in 2018.

This means, for example, that the $800 million in bonuses that Walmart is promising only cost the company only cost the company $520 million (65 percent of $800 million) because they announced it in 2017. If they had waited until 2018 the bonuses would have cost them $632 million (79 percent of $800 million). In effect, Walmart was paid $112 million to announce its bonuses before the end of 2017. This is the same story for any company considering bonuses for its workers.

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As someone whose mother took him to Bargain Town (the original name for Toys 'R' Us) when I was a little kid, it's hard not to feel sad to see Toys 'R' Us being liquidated. There were obviously many factors involved in the company's collapse. It faced serious competition from first Walmart and then Amazon and other internet retailers in a rapidly changing environment.

This situation would have made prospering difficult for Toys 'R' Us in any case, but its takeover by private equity was what really pounded the nails in the coffin. In 2005, two private equity companies took over the company and immediately loaded it up with debt, a standard practice for private equity.

This can be a profitable strategy, since the interest payments are tax-deductible for the company, whereas dividends paid out to shareholders are not. Private equity companies also often use debt to pay out dividends to themselves so they can quickly recover much of what they spent to purchase the company. (To get the full story on private equity read Private Equity at Work: When Wall Street Manages Main Street, by my colleague Eileen Appelbaum and Rose Batt.)

Essentially, what the debt does is create a highly leveraged bet where the private equity company stands to make a huge return on its investment if the company survives and can again be taken public. If it fails, as was the case with Toys 'R' Us, they may still come out ahead from the dividend payouts and various management fees charged to the company.

If this strategy is good for private equity, then who ends up as losers? Well, most obviously the 33,000 workers who stand to lose their jobs with the liquidation. Apparently, there is a possibility that some of the stores may be sold off and operated by a competitor, so perhaps some of these jobs can be saved, but clearly, most of these people will be looking for new work.

The people who lent Toys 'R' Us money also stand to lose, as the bankruptcy likely means they will only be repaid a small part of their loans. There should not be too many tears shed here. Presumably, the lenders understand the risk of giving money to a highly indebted company. They should have charged a high-interest rate to compensate for the risk.

The more serious issue is with the inadvertent creditors. These are the suppliers that may have sold the company merchandise on credit. It may also include companies that provide services to Toys 'R' Us, such as a trucking company or a cleaning service. These companies didn't intend to make loans to Toys 'R' Us, they just were following normal business practices in providing goods and services in advance of payment. Perhaps they should have been more careful, given the financial situation of Toys 'R' Us, but businesses don't always do credit checks on their customers in advance of making sales. Anyhow, in addition to losing an important customer, these suppliers are likely to see big losses from the money owed to them by Toys 'R' Us.

There are things that can be done to rein in private equity. First, the asymmetric treatment of interest and dividend payments in the tax code makes little sense. One of the positive items in the Republican tax bill last fall was a cap on the deductibility of interest at 30 percent of profits. (The bill includes the Donald J. Trump exception for real estate.) This should provide less incentive for private equity companies to go the high debt route in the future.

It is also important to follow the assets. In many cases, the private equity company effectively shifts the profitable assets, like real estate, to other corporations under their control, so that creditors have no assets to seize. Bankruptcy courts have to police this shuffle the asset routine and hold the private equity company itself liable when a company under its control has not been properly compensated for the loss of an asset.

Most importantly, long-term workers should be compensated for their time with the company. The United States is the only wealthy country that allows workers to be fired at will with no compensation. 

Some reasonable compensation, say two weeks of pay per year of work, would provide long-term workers with help transitioning to new employment. More importantly, it changes the incentive for companies. If they know they will have to pay 40 weeks of severance pay to a worker who has been with the company for 20 years, they will think more about keeping this worker on the payroll and training them to be more productive, rather than just dumping her.

While the Republican Congress is not likely to be interested in taking a step like this to help workers, severance pay is something that can be put in place at the state level. (Montana already has a law requiring compensation for long-term workers who are dismissed without cause.) More progressive states like California, New York, or Washington can take the lead here, as they have on other issues.

As long as we will have a capitalist economy, we will have companies that go out of business. But we should not structure our tax and bankruptcy laws to make going out of business profitable. And, we should ensure that workers end up treated fairly in the process.

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It would be interesting to know how the paper made that determination, but it referred to "China’s theft of American intellectual property" as a matter of fact. China is bound by the TRIPS provisions in the WTO, but there are many different interpretations of these rules.

Perhaps the NYT has analyzed China's practices and determined they violate TRIPS. If so, they should share this analysis with its readers.

It is also worth noting that the enforcement of intellectual property rules in China is a factor increasing inequality. The overwhelming beneficiaries of these rules are at the top end of the income distribution. On the other hand, if China doesn't have to pay royalties and licensing fees to Bill Gates and his ilk, the items China produces will be available for lower costs to US consumers.

This is the same argument that "free traders" always make about how tariffs are bad, except the beneficiaries from the protection of intellectual property are almost exclusively people at the top end of the income ladder, and there is much more money involved than with tariffs. Of course, if we have longer and stronger protections for intellectual property then liberal foundations can give more money to economists to figure out the causes of inequality.

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It was widely reported that Donald Trump confronted Canada's prime minister Justin Trudeau over his country's trade surplus with the United States. Trump was mocked in these stories since they claimed that Canada actually has a trade deficit with the United States. When confronted with this alleged fact, Trump boasted about just making up numbers in his exchange with Canada's prime minister.

It turns out that Trump is actually correct about Canada's trade surplus with the United States. The Commerce Department data that reporters used to show a trade surplus includes re-exports. These are items that are shipped through the United States, but are not produced in the United States. For example, if a German car company ships 1000 cars through New York, and 100 of these end up in Canada, the 100 cars would be counted as US exports even though they were not produced in the United States.

The United Nations has a database which separates out re-exports. When this is done, Canada's deficit turns into a surplus in the neighborhood of $20–$30 billion. This means that Trump was correct in his charge.

To be clear, this doesn't excuse the president meeting another head of government and not knowing what he is talking about. Nor does it necessarily mean Canada is doing anything wrong because it has a trade surplus with the United States. (We could address this by reducing our oil consumption.) Donald Trump may not care about getting his numbers right but the rest of us should.

Thanks to Lori Wallach of Public Citizen for calling my attention to this point.

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A lot of folks are running around making a big point of the fact that Larry Kudlow, Trump's new head of the National Economic Council, has gotten a lot of things about the economy wrong, and in particular missed the coming of the Great Recession. For example, here's Dana Milbank's column in the Washington Post this morning.

While Kudlow has gotten a lot of things wrong and completely missed the housing bubble and the implications its collapse would have for the economy, he was hardly alone in this category. Just about the whole economics profession was there along with Kudlow, even if they may not have been quite as outspoken in their optimism. 

In January of 2008 the Congressional Budget Office, which consciously tries to place itself in the center of professional opinion, projected 1.7 percent economic growth for 2008 and 2.8 percent for 2009. Even a year later, Christina Romer and my friend Jared Bernstein hugely underestimated the severity of the recession in their report outlining President Obama' stimulus package. 

The commentary of the time is full of great lines from distinguished economists. My favorite was when then Federal Reserve Chair Ben Bernanke said that the problems in financial markets will be restricted to the subprime market. After Bear Stearns went under he also famously commented that he didn't see another Bear Stearns out there. It subsequently turned out that there were nothing but Bear Stearns out there, as virtually the whole banking system faced collapse as trillions of dollars of mortgage debt went bad.

I could go on, but the point is that Kudlow was hardly alone in his mistake here. I spent years being derided by many of the country's leading economists for suggesting that there was a housing bubble and its collapse could sink the economy. So yes Kudlow really blew it, but so did pretty much the whole economics profession. (Fortunately for economists, economics is not a profession where people are evaluated based on their performance.)

To Kudlow's credit, he was at least prepared to allow people like me, who warned of the bubble, appear on his show. That was not the case with Mr. Milbank's paper, The Washington Post, which pretty much excluded anyone warning of the bubble until after it burst. (The Post was busy hyping fears about the budget deficit.)

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Thomas Friedman used his column today to trash Trump for protecting old-line industries like steel and aluminum and argued instead that US trade policy should be, "[...]focused on protecting what we do best — high-value-added manufacturing and intellectual property." In this vein, he argued for rejoining the Trans-Pacific Partnership and very high tariffs on China unless it respects our protectionist policies in these areas. Oh yeah, Friedman also wants to toss a few bones to the less-educated workers who might lose jobs but will pay higher prices for prescription drugs, software, and a wide range of other items with Friedman's agenda.

Just to get our eyes on the ball, if anyone were approaching these issues seriously, they would be asking how much additional innovation we get for how much additional patent and copyright protection. (Anyone seen any analysis on this one?) The question would then be both, is the additional inequality from stronger and longer protections justified by the additional innovation and is there an alternative mechanism (e.g. direct public funding) that could be comparable efficient and yield less inequality. (This is discussed in my [free] book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, chapter 5.)

For some reason, it seems no one likes to talk about the link between patent and copyright protection and inequality. Remember, Bill Gates would probably still be working for a living without these government-granted monopolies.

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