Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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We are seeing many terrible pictures from Houston as a result of Hurricane Harvey. People with young children and pets are wading through high water in the hope of being rescued by boat or helicopter. Elderly people in nursing homes are sitting in waist high water waiting to be rescued. It's a pretty horrible story.

One thing we can feel good about is that because the United States is a wealthy country, we do have large numbers of boats and helicopters and trained rescue workers able to assist the victims of the storm. We also have places where we can take these people where they will have shelter, as well access to food and medical care. However bad the human toll will be from Harvey, it would be hugely worse without these resources.

This might be a good time for people to take a moment to think about Bangladesh, a densely populated country on the other side of the world. More than 160 million people live in Bangladesh. Almost half of these people live in low-lying areas with an elevation of less than 10 meters (33 feet) above sea level.

Bangladesh experiences seasonal monsoon rains which invariably lead to flooding, as well as occasional cyclones. The monsoon rains and cyclones are likely to get worse in the years ahead, as one of the effects of global warming. This will mean that the flooding will be worse.

Bangladesh does not have large amounts of resources to assist the people whose homes are flooded. It does not have the same number of boats and helicopters and trained rescue workers to save people trapped by rising water. Nor can it guarantee that people who do escape will have access to adequate shelter, medical care, or even clean drinking water. This means many more people are likely to be dying from floods in Bangladesh in part as a result of the impact of global warming.

Emissions of the greenhouse gases responsible for global warming are often treated as a natural market outcome, whereas efforts to restrict emissions are viewed as government intervention. This is nonsense.

Allowing people to emit greenhouse gases without paying for the damage done is like allowing them to dump their sewage on their neighbor's lawn. Everyone understands that we are responsible for dealing with our own sewage and not imposing a cost on our neighbor. It's the same story with greenhouse gases.

It is understandable that a rich jerk like Donald Trump might not want to pay for the damage he does to the world, especially when the people most affected are dark-skinned, but it is not a serious position. The emissions from the United States and other wealthy countries will result in a lot of Harvey-like disasters in Bangladesh and elsewhere in the developing world. We have to take responsibility for this human catastrophe.

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Someone who had no knowledge of trade deals like NAFTA and the TPP would be justified in thinking they must be really bad news since their supporters have to make up obviously absurd claims to push their position. George Will is on the job this morning in his Washington Post column.

"Mark Perry of the American Enterprise Institute says that in the past 20 years the inflation-adjusted value of U.S. manufacturing output has increased 40 percent even though — actually, partly because — U.S. factory employment decreased 5.1 million jobs (29 percent). Manufacturing’s share of gross domestic product is almost unchanged since 1960. 'US manufacturing output was near a record high last year at $1.91 trillion, just slightly below the 2007 level of $1.92 trillion, and will likely reach a new record high later this year,' Perry writes. That record will be reached with about the same level of factory workers (fewer than 12.5 million) as in the early 1940s, when the U.S. population was about 135 million. Increased productivity is the reason there can be quadrupled output from the same number of workers. According to one study, 88 percent of manufacturing job losses are the result of improved productivity, not 'rapacious' Chinese."

Okay, this one is in "how stupid do you think we are?" department. Guess what, the tree in my backyard is taller than ever before. Imagine that?

Yes, economies grow through time and so does productivity. That means that, in general, we expect output in most areas, like cell phones, haircuts, and manufactured goods to increase through time. So telling us we are near record levels of manufacturing output is basically telling us absolutely nothing. It is the sort of thing that only a cheap demagogue or someone totally ignorant of economics would do.

The basic story is that we have seen productivity growth in manufacturing as in all areas. Since growth has been somewhat faster in manufacturing, it has meant that manufacturing jobs have declined as a share of total employment, but generally, the increase in demand has been enough to keep employment in the sector roughly constant. The big exception was the period when our trade deficit exploded at the start of the last decade, eventually reaching almost 6.0 percent of GDP.

Here's the picture.

Manufacturing Jobs

manu empl

Source: Bureau of Labor Statistics.

As can be seen, there is relatively little change, apart from cyclical ups or downs, in manufacturing jobs from 1970 until the late 1990s. Employment then plunges in the first half of the 2000s (before the Great Recession) due to the explosion of the trade deficit. This job loss was due to trade, but George Will and other supporters of U.S. trade policy think they have to lie to people and deny this fact.

While the trade deficit has declined somewhat in more recent years due to the drop in the value of the dollar, it is still near 3 percent of GDP (around $540 billion a year). The idea that it would not create more manufacturing jobs if we had more nearly balanced trade is absurd on its face (i.e. we could produce another $500 billion in manufactured goods every year without employing more workers), but apparently folks like George Will and the Washington Post editors want us to believe it.

Since we're on the topic of lying to promote trade deals designed to redistribute upward let's again note the famous 2007 Washington Post editorial touting NAFTA that told readers:

"Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987."

According to the IMF, Mexico's GDP grew by 83 percent over this period, which is pretty far from quadrupling. Honest newspapers correct their mistakes, but as the slogan at the Washington Post says, "lies in the service of giving more money to rich people are no vice."

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This point is worth mentioning in the context of a comment by Esther L. George, president of the Federal Reserve Bank of Kansas City, to CNBC yesterday. Ms. George said:

"While we haven’t hit 2 percent, I’m reminded that 2 percent is a target over the long term, and in the context of a growing economy, of jobs being added, I don’t think it’s an issue that we should be particularly concerned about unless we see something change."

Actually, the Fed's stated policy is that 2 percent is a target as a long-term average. This means that the periods of below 2 percent inflation should be roughly offset by periods of above 2 percent inflation.

Most forecasts show the inflation rate remaining under 2 percent for at least the near term future. At some point, the economy will have another recession, during which the inflation rate is almost certain to fall. This means that if the inflation rate is just reaching 2.0 percent at the point the economy enters a recession, the Fed will have seriously undershot its stated target.

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I appreciate the work that Glenn Kessler does as the writer of Washington Post's Fact Checker column. It's a difficult job. I don't always agree with his assessments, but I think he tries to be fair in his analysis. For this reason I was disappointed to see him max out with four Pinocchios over Donald Trump's trade representative Robert Lighthizer saying that NAFTA led to a government certified loss of 700,000 jobs.

According to Kessler, the basis for this figure is the 757,000 petitions for NAFTA-related trade adjustment assistance that were certified by the Labor Department between Jan. 1, 1994 and Jan. 1, 2001. Kessler raises three major objections to this figure.

First, he argues that the number is old. This is true, but it is difficult to see why that is relevant. There may have been some additional NAFTA related job loss in subsequent years, but that would make the number higher not lower. Complaining that the number is dated would be a bit like criticizing a figure for the number of traffic accidents in 1995. Presumably, there has been no major recalculation of the number of accidents that took place in 1995, so using the originally calculated number would be reasonable for most purposes, even though it is now more than twenty years old.

The second point is that the number could be overstated because the Labor Department was very generous in accepting petitions and likely gave assistance even in instances where the job loss had nothing to do with NAFTA. This is undoubtedly true, but there also had to be many cases where workers lost jobs due to NAFTA, who never filed a petition.

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I messed up earlier this week in discussing the possible impact of demographic changes in the composition of the labor force on the rate of wage growth, but this is an important issue that we should be able to think about clearly. The question is whether the slow pace of wage growth in the last year or two can be explained to any substantial degree by changes in the mix of workers, specifically lower paid younger workers taking the place of relatively higher paid workers who are retiring.

The backdrop is that we are seeing rates of unemployment that are below most estimates of the non-accelerating inflation rate of unemployment (NAIRU). This means that the rate of wage growth should be increasing. In fact, it seems to be slowing. The year-over-year increase in the average hourly wage did pick up a bit in the second half of 2016, going from 2.5 percent, taking the year from January 2015 to January 2016, to a peak of 2.9 percent taking the 12 months ending in December of 2016.

However, instead of rising further as the unemployment rate has continued to fall, the rate of wage growth has slowed modestly in 2017. It was just 2.5 percent in the 12 months ending in July of 2017. It's even a bit slower if we use my preferred measure, the average wage in the last three months compared to the prior three months. That gets you just a 2.3 percent annual rate of wage growth. So, wage growth is clearly going in the wrong direction from the standpoint of the accepted estimates of the NAIRU.

One response to this seeming anomaly is to argue that wages would be growing more rapidly, except for the high-paid older workers being replaced by lower paid younger workers. I got sloppy on this in my earlier post, but I will try to be clear on the point here. If we are looking to explain a change in a growth rate (an increase or decrease in the rate of wage growth) with a demographic change (the rate at which younger workers are replacing older workers) then we need to see a change in the rate of demographic change. Specifically, if we are arguing that the reason wage growth has slowed rather than increased between 2016 and 2017 we need to show a faster pace of demographic change in 2017 than in 2016. The data will not support this story.

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As history fans everywhere know, the owners of coal mines have not always been the best friends of the miners who work for them. This is why so many miners ended up dead when they tried to do things like form unions.

For this reason it was somewhat jarring to read in a Washington Post article reporting on the Trump administration's decision to end funding for a study on the health effects of mountaintop mining:

"But Trump has declared himself a friend of coal miners and coal mining companies. In March, he issued an executive order that lifted a ban on leases for coal excavation on federal land, making good on a vow to revive the struggling industry and create thousands of jobs."

Canceling the study is clearly a friendly gesture towards the coal mining companies. They do mountaintop mining, in which they blow the top off a mountain and throw the debris in the streams below, because it is cheaper than underground mining. The study may have been used in court cases by people who suffered from cancer or other diseases in part due to the effects of this dumping. It may also have led to fewer permits being issued in the future.

By contrast, coal miners are likely to be hurt by this outcome. This is in part due to the fact that many miners and their families face greater health risks from living in the vicinity of mountaintop mines. 

However, it is also likely the case that more mountaintop mining will mean fewer jobs for miners. While lower cost production can have some impact on the demand for coal, the bigger impact in terms of employment for miners is likely to be the replacement of underground mining jobs with mountaintop mining. Since it takes many fewer workers to blow the top off a mountain than to dig the coal out by hand in an underground mine, actions to promote mountaintop mining are likely to destroy jobs in the coal industry, even if they increase the profits of the coal companies.

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There is a recurring theme in public discussions, seemingly embraced by everyone from Steve Bannon to columnists at the New York Times and Washington Post, that we should use protectionist measures to try to keep China from overtaking the U.S. as the world’s leading economic power. This effort is both incredibly wrongheaded and doomed to failure.

In terms of it being wrongheaded, the people doing the China bashing don’t even understand that they are being protectionist. Heather Long tells readers in the Washington Post:

“The real issue is that the Chinese are pirating American ideas and technologies. In the 1990s and early 2000s, people were worried about China illegally copying movies, music and books. The stakes are a lot higher now as the world's top economies compete on groundbreaking technologies in cloud computing, robotics, artificial intelligence and gene editing. Whoever controls these technologies will dominate global business — and more.”

Okay, great diatribe here, but let’s try some serious thinking instead. What exactly makes them “American ideas and technology?”

I know, we say so. But once an idea comes into the world or technology is developed, it is really there for the taking. We have rules on patent and copyright protection that say they are “American,” but why should China or anyone who believes in free markets give a damn?

Bannon, Long, and others want the United States to get tough with China (trade war!) to make it honor our protectionist rules on ideas and technology, but there is no obvious reason that most of us should go along with this crusade. Suppose we sit back and let China continue with its evil plans. In a few years, they will be flooding the world with low-cost cloud computing, robots, airplanes and who knows what else? The horror, the horror!

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When workers are doing badly you can always count on a large number of economists to come forward with ways to argue it really ain't so. For example, we have heard endless stories about how our price indices hugely overstate inflation — we're actually way better off than we think we are. Or, they point to the growth in non-wage benefits. One problem with that story is that non-wage benefits have been shrinking as a share of total compensation in recent years, not growing, but whatever.

One recent effort along these lines, which got mentioned in a NYT article, is the argument that aggregate wage growth is being depressed by the retirement of older, more highly paid workers. The argument is that individual workers are actually seeing a healthy pace of wage growth, but the change in composition leads to the aggregate growing more slowly.

While this argument has been given credence by many, it suffers from a simple logical flaw. It is not the change in the age composition of the work force that matters for the aggregate rate of change in wage growth, but the change in the change (the second derivative for calculus fans).

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In an article on the effort to renegotiate the terms of NAFTA, the NYT noted the Trump administration's plan to put in language that would prohibit currency management. (The article uses the term "manipulation," which implies an action being done in secret. In fact, large-scale efforts to affect the value of a country's currency will almost always be open, since they are almost impossible to conceal.) The piece then notes that since both Canada and Mexico have freely floated their currencies for decades, this is a "symbolic gesture."

This is not true. Many people in trade debates have claimed that it is impossible to have currency rules in a trade agreement. They have argued that it is impossible to identify steps to manage currency and distinguish them from the normal conduct of monetary policy. Having solid language on currency management in a revised NAFTA would show that it is possible. Also, since the original NAFTA served as a model for many future trade deals, a currency provision in a revised NAFTA could be the basis for similar provisions in other trade deals.

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The NYT had a piece discussing Sinclair Broadcasting's plans for expansion and the apparent green light coming from the Federal Communications Commission (FCC). As the piece explains, the FCC is now headed by Ajit V. Pai. Mr. Pai apparently met with David D. Smith, the chairman of Sinclair, just before he became chair. Shortly thereafter, the FCC weakened a rule that may have slowed Sinclair's plans for expansion.

At one point the piece describes Mr. Pai as "an enthusiastic purveyor of free-market philosophy."

This is not at all clear from the description of his views in the piece. In a true free market, the government would not be allocating air waves. The assignment of frequencies to specific companies by the government, with the threat of arrest for interfering, is not a free market. This is government intervention.

It is possible to argue that this government intervention is necessary to make the airwaves usable (if dozens of people tried to broadcast on the same frequency, no one would be able to hear or see anything), but people who support the assignment of frequencies are not in favor of a free market. Even if we accept the need to assign frequencies, there are an infinite number of ways this can be done.

A frequency can be parceled out by the hour, with individuals or companies only getting claims to short periods. To broadcast a longer show or movie it would then be necessary to buy up enough slots from others to allow for the necessary time. The slots can also be auctioned off rather than given away for free to private companies. This way, the government, rather than private companies, would benefit from the monopolization of the airwaves.

It is understandable that owners of television and radio stations would like to pretend that they support the free market when they want the government to just turn over exclusive use of frequencies, with no questions asked, but this is not true.

Note: Thanks to Keane Bhatt for calling this to my attention.

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When you're rich and powerful in the United States you get to lie freely to advance your position in public debate, including the opinion page of The New York Times. This is why the paper ran an anti-free trade diatribe against China, insisting that the country respect patent and copyright protections claimed by U.S. companies.

The column, by two former U.S. intelligence officials, asserted:

"Chinese companies, with the encouragement of official Chinese policy and often the active participation of government personnel, have been pillaging the intellectual property of American companies. All together, intellectual-property theft costs America up to $600 billion a year, the greatest transfer of wealth in history. China accounts for most of that loss."

Hmmm, $600 billion a year? That's more than 3 percent of U.S. GDP, it's more than 25 percent of all U.S. exports, it's roughly 30 times what we spend each year on TANF. Does that make sense?

The column doesn't give the source for this number, but when the industry groups have come up with these sorts of figures in the past, it is usually by assigning the retail value of their product in the United States to every unauthorized copy everywhere in the world. Let's say that there are 100 million unauthorized versions of Microsoft Windows in China. (I have no idea if this is a reasonable number.) If the retail price of Windows is $50 a copy, then the industry group writes down $5 billion as the theft, even if most of these people would switch to a decent operating system even if they were just charged a couple of dollars for Windows.

We get the same story for prescription drugs. A generic version of a drug like the Hepatitis C drug Sovaldi may sell for a few hundred dollars in the developing world. Gilead Sciences has a retail price of $84,000. If there are a million treatments in India and elsewhere, this comes to $84 billion in "theft." We, of course, have to skip the fact that Gilead Sciences doesn't have clear patent rights to this drug in much of the world. If they say so, it is good enough for the debate and The New York Times.

Anyhow, it is striking that this sort of nonsense is supposed to be treated respectfully by serious people. We expect President Trump and other political figures to go to bat with China and other countries to enforce the claims of Microsoft, Pfizer, and other companies whining about their intellectual "property," but when it comes to adjusting currency values to address the trade deficit — well, then we are all really wimpy and can't do anything. After all, that is just about the income of manufacturing workers (you know uneducated people), not the money of people who really matter.

So, there you have it. The folks who matter have a right to expect the president to massively interfere in the internal affairs of China and other countries to make them richer. But, ordinary workers? Well, let's twiddle our thumbs and pretend to give a damn. 

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Yep, the senator from Oklahoma says it is good in a Washington Post column. Most of Senator Lankford's confusions are pretty standard, but he does come up with an original one.

"For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that."

Okay, we have a trade deficit simply because we are a rich country. I suppose someone forgot to tell Germany that it is a rich country since it has a massive trade surplus of more than 8 percent of GDP (roughly $1.6 trillion in the U.S. economy.)

He then tells us that our imports frrom Mexico will help it to grow and eventually make Mexico a better market for U.S. products. While this is true, Mexico's economy has actually grown less rapidly on a per person basis than the U.S. since NAFTA went into effect in 1994. While NAFTA may not be the cause of weak growth in Mexico, it apparently has not prevented the two economies from diverging further.

Then we get some of the standard confusion pushed by denialists:

"Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.

"When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy.

"It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers."

Actually, there is no direct relationship between the decision to invest in a U.S. company by buying its stock and bonds and investment in the economy. The stock market has soared in the recovery, but investment is at best mediocre. Companies invest when they see more demand for their output, not when their stock price rises.

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When it comes to critics of globalization with standing in the mainstream of the economics profession, few are better than Dani Rodrik. Nonetheless, when it comes to laying out the indictment of the path pursued over the last three decades in a Washington Post interview even he largely accepts the story that the basic story is that “globalization” has some specific direction attached to it.

The point here is that globalization, meaning the greater integration of economies across the world, could have been designed an infinite number of ways. The way it was designed was intended to redistribute income upward, with those at the top of the income distribution using their political power to make changes that enhanced their wealth and power. The upward redistribution was not an accidental outcome of a process of economic integration: it was the purpose of this process.

I will restate some of the points I have made thousands of times before. (See my book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free]) To start, we didn’t have to make removing trade barriers in manufactured goods a central focus of trade deals. It would be every bit as much a step toward greater integration if we had focused on removing professional licensing barriers to make it as easy as possible for doctors, dentists, and other highly paid professional to train to U.S. standards and practice in the United States. This would have provided enormous gains to consumers in the form of lower costs for health care and other services while redistributing income downward, since these professionals are almost all in the top 5 percent and often top 1 percent of the income distribution.

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President Trump has made a point of very publicly donating his $400,000 annual salary as president to various civic minded efforts. He recently announced the donation of $100,000 to a camp run by the Department of Education to encourage women to enter science, technology, education, and math. He donated his first quarter's pay of $100,000 the National Park Service to help pay for the cost of the restoration of the Civil War battlefield at Antietam.

While these contributions will likely support socially useful activities, people should not be misled into thinking the national budget has benefited by having a billionaire business person in the White House. According to the New York Times, Congress had to appropriate an additional $120 million to cover the additional security costs required by Trump as a result of the unusual security demands that he and his family have placed on the Secret Service and government agencies.

To be clear, these are not the normal costs of protecting the president. This $120 million is additional spending that was needed as a result of factors unique to Trump. This includes the Secret Service protection for his adult children (adult children of prior presidents have not been protected), his decision to have his wife and one of his sons stay in New York for the first six months of his presidency, and his habit of visiting Trump properties rather than vacationing at Camp David, like prior presidents. Camp David is already well-secured, and therefore does not require much additional spending when the president visits. This is not the case with Mar-a-Lago and various other Trump properties.

The chart below gives the relative costs of the additional security spending required by the Trump family and the value of his donated salary, net of taxes. (It assumes that he would pay 40 percent of his $400,000 annual salary in taxes.)

Book5 1607 image001

Source: New York Times and CNN.

As can be seen, the additional cost of security for President Trump and his family is more than 400 times the net value of the contribution of his presidential paycheck. The public would be considerably better off with a president who pocketed his paycheck and made less extravagant security demands on the Secret Service and other governmental agencies.

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I had a blog post a couple of days back in which I argued that rising stock prices reflected expectations of higher future corporate earnings, at least insofar as they were not just driven by irrational exuberance. Since no one seems to be expecting higher growth, the expectation of higher corporate profits presumably means that investors are expecting a redistribution of income away from workers and consumers to corporate profits. This is actually a plausible scenario given Donald Trump's proposed tax cuts and his plans for changing regulations in ways that will benefit corporations.

This is good news for the 10 percent or so of the population that holds substantial amounts of stock. It is pretty bad news for everyone else. In other words, you probably wouldn't want to be boasting about a run-up in stock prices unless you think it's good news to redistribute money from everyone else to the richest 10 percent and especially the richest one percent.

Narayana Kocherlakota, the former president of the Minneapolis Federal Reserve district bank, and a very good economist, disagreed with my assessment. He cited work by John Cochrane arguing that stock market movements could be explained primarily by changes in risk premia. When I questioned whether risk premia had fallen since Trump was elected Kocherlakota tweeted back an index showing the spread between high yield (i.e. risky) corporate bonds and Treasury bonds. This index had indeed fallen since Donald Trump's election.

Breitbart decided to write up this exchange and expound on how Donald Trump was indeed making America great again and therefore reducing the risk that investors perceived in the economy. The only problem is that they left out my response tweet to Kocherlakota. In this tweet, I pointed out that the spread had just fallen back to its 2014 level.


This matters because if we think this index is a good measure of perceived risk, and if we think risk premia explain movements in the stock market, then we would expect the stock market in 2014 to have been close to its current level and we would have expected sharp declines in 2015 and 2016 as risk premia were rising. Of course, the market was considerably lower in 2014 than it is today. It rose throughout the next two years even as risk premia by this measure were increasing.

That would indicate that a fall in risk premia is not a good explanation of the run-up in stock prices in the last six months. The shift of income from workers and consumers to corporate profits is still the leading candidate.

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The Washington Post had a column by Ohio attorney general Mike DeWine explaining why he was suing five opioid manufacturers. Dewine explains:

"We believe evidence will show that they flooded the market with prescription opioids, such as OxyContin and Percocet, and grossly misleading information about the risks and benefits of these drugs. And as a result, we believe countless Ohioans and other Americans have become hooked on opioid pain medications, all too often leading to the use of cheaper alternatives such as heroin and synthetic opioids. Almost 80 percent of heroin users start with prescription opioids."

The incentive to distribute "grossly misleading" information about their products comes from the government-granted patent monopolies which allow companies to charge prices that can be several thousand percent above the free market price. This is straight textbook economics. Corporations are motivated by profit. If they can sell a pill for five dollars that costs them a few cents to manufacture, they have an enormous incentive to market it as widely as possible.

This is a problem with prescription drugs more generally. Manufacturers often exaggerate the effectiveness and safety of their drugs. While it is illegal to knowingly misrepresent the quality of a drug, it is extremely difficult to prove this in court, which means a company has a big incentive to do so. The cost to the public from such misrepresentations is enormous, and unfortunately, it gets very little attention from the media even in the context of the opioid crisis where it is quite obvious.

In the case of opioids, it is true that some of the villains are generic manufacturers. When a drug comes off patent, it is subject to competition. However, even the generics benefit from the high prices that result from patent and related protection. The first generic in a market gets six months of exclusivity, which means that no other generic is allowed to enter the market. Over time more generics will typically enter bringing the price closer to the free market price, but there will be a substantial period in which prices remain inflated, compared to a scenario in which all drugs could be produced as generics on the day they were approved by the Food and Drug Administration.



Since some folks don't think the pharmaceutical industry has been deliberately pushing opioids, here a good WaPo piece on the topic.

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The usually sensible Brad DeLong is very unhappy with those who oppose the agenda that has passed for globalization over the last three decades. He argues that people are foolish for believing that globalization has had a major impact on employment and the distribution of income in recent years. I'll take the side of Brad's "fools" in this matter.

First, Brad is well aware that the economy has operated well below full employment at least since the collapse of the housing bubble, I would argue this has been the case for almost all of the period since the collapse of the stock bubble in 2001. But he attributes this to a simple failure of the government to run full employment policies, rather than the large trade deficits we saw develop following the East Asian financial crisis in 1997.

While Brad is right, the government could maintain full employment by running much larger budget deficits, as he is well aware, that does not appear to be politically feasible. Even among Democrats, very few are willing to say that we should have larger budget deficits to bring the economy to full employment and some even insist on balanced budgets. There is no need to talk about Republican ideas on stimulus here.

It's also worth noting that the costs of being below full employment are disproportionately borne by disadvantaged groups in the labor market, especially African Americans and Hispanics.

Anyhow, if the political reality is that we will not have full employment fiscal policies, does it take a "fool" to argue that big trade deficits are a real problem? The cost of the shortfall in demand that we have seen over the last decade almost certainly exceeds $10 trillion by now and it is enduring, as we have seen lasting reductions in capacity, as Brad has written about himself. And millions have seen their lives and families disrupted by long periods of unemployment. Should we not worry about this damage from the demand shortfall created by trade deficits because there is in principle an economic fix, even though everyone knows it is not politically feasible?

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I was listening to a BBC radio news show this morning in which they proclaimed today as the 10th anniversary of the beginning of the financial crisis based on the date in 2007 when the French bank BNP Paribas first blocked withdrawals from hedge funds that specialized in U.S. mortgage debt. The show then said that following this move house prices began dropping.

Really, folks? House prices began falling after this date? That's not what the data show.

At the most aggregate level, the Case-Shiller national index for the U.S. was already down 3.4 percent from its peak in 2006 by August of 2007, but there was enormous dispersion around this figure. House prices in Phoenix had fallen by almost 10.0 percent from their peak the prior year. Prices were down 7 percent in Los Angeles, 11 percent in San Diego, and 10 percent in Washington. And the momentum was clearly downward, with prices in many of these cities falling at the rate of more than 1.0 percent a month.

But wait, it gets better. If we turn to Case Shiller tiered indexes, we find that prices for homes in the bottom third of the San Diego had fallen by more than 13 percent, in San Francisco they were down 12 percent, and in Seattle, they were down 10 percent. 

In short, prices had already fallen sharply in many areas and there was every reason to think they would drop further. This is before we got to the official beginning of the financial crisis.

This is not a trivial point. The reversal of ordering matters because the key problem was an over-valued housing market. All of the fraudulent mortgages and exotic financing would not have given us a worldwide financial crisis if they had not been based on a hugely over-valued housing market. The key problem was the bubble. If we don't recognize this fact, then we have learned nothing.

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Donald Trump has been anxious to take credit for the sharp run-up in stock prices since his election. While it is not clear that anything really lies behind this run-up (remember Wall Street investors are the same folks who thought was worth $250 billion back in 2001 and that subprime mortgage backed securities were perfectly safe assets), in principle, stock prices are supposed to represent the present value of future corporate profits. If we assume that the rise in stock prices actually reflect something in the world, and not just Wall Street fantasies, then Trump has given these companies a reason to expect larger future profits.

Profits can rise for two reasons. Either they can be the same share of a larger economic pie or they can be a larger share of the same economic pie. There is no reason to believe that anyone is now expecting faster economic growth than before the election. In fact, the I.M.F. recently cut its growth projection for the U.S. If nothing Trump has done or given any indication of doing is likely to boost the U.S. growth rate then the higher expected profits must mean that investors anticipate that corporations will have a larger share of the economic pie.

There are several paths through which Trump's policies could have this effect. Most obviously, he has called for sharp reductions in the corporate tax rate. If his tax cuts go through, then after-tax corporate profits will be higher even if there is no change in before-tax profits.

A second route for higher corporate profits is by facilitating rip-offs of consumers. The Consumer Financial Protection Bureau (CFPB) was set up in large part to prevent predatory practices by the financial industry. For example, it has sought to make it more difficult for financial firms to slip conditions into contracts that no one would ever agree to if they understood them.

If the CFPB is prevented from protecting consumers then we can assume that financial firms will put more effort into ripping off their customers. This will actually reduce growth since the resources spent writing deceptive contracts could have otherwise been devoted to productive uses.

Another route in which corporate profits can be increased is by letting them destroy the environment at zero cost. For example, the Trump administration reversed an Obama administration executive order that required mining companies to restore hilltops after they did surface mining. By allowing these companies to mine areas without repairing the damage the Trump administration is saving them money. The people in the communities will suffer the consequences in the form of polluted streams and ruined forests, but this is still good news for corporate profits.

Lastly, Trump's regulatory changes might shift money from wages to profits. The most obvious example here is the plan to reverse the Obama administration's rule raising the cap under which salaried workers are automatically entitled to overtime pay. By allowing employers to require salaried workers to put in more than 40 hours a week, often without any additional pay, the Trump administration will be putting downward pressure on wages and boosting corporate profits.

For these reasons, investors might have some real cause for expecting higher corporate profits as a result of the Trump presidency. However, none of these reasons are good news for the 90 percent of the country that does not have substantial stock holdings.

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Since several people have asked, I thought I would do some recycling. My plan (which I know I have stolen from someone) is to require companies to turn over an amount of stock, in the form of non-voting shares, roughly equal to the targeted tax rate. This means if we're shooting for a 28 percent tax rate, then the shares going to the government are equal to 28 percent of the total. If the target is 20 percent, then the government's shares are equal to 20 percent of the total.

From that point forward the government's shares are treated the same as the other shares of the company. If the company pays a $2 per share dividend, the government gets $2 for each of its shares. If the company buys back 10 percent of its shares at $100 a share, it buys back 10 percent of the government's shares at $100 per share. A company taking over the company at a $120 per share price has to also pay the government $120 per share. The basic story is that there is no way to cheat the government out of its tax revenue unless the corporation's management is also cheating its shareholders.

To be as clear as possible, this is not a government takeover of corporate America. As it stands now, the government makes a claim on corporate profits in the form of income taxes. This just changes the form of this claim on profits.

Some folks may want the government to run the whole economy. I don't. I value having firms compete in the market. This tax proposal doesn't change that story. In fact, it has the nice feature that companies will no longer make decisions with an eye toward reducing their tax liability, since the only way they can do that is by screwing shareholders. Instead, companies will make decisions that maximize their expected profits.

I should also point out that this can be done on a voluntary basis. Wherever the tax rate is set, companies can be given the option of issuing stock in the same amount (e.g. a 25 percent tax rate means 25 percent of shares). This would have the advantage from the company's perspective of ending the need to file tax returns. They just pay the government what they are paying shareholders.

From the government's standpoint it reduces the enforcement costs. The companies that go this route will require minimal enforcement resources. Meanwhile, the companies that don't opt to go this route will be telling the I.R.S. that they think they can reduce their tax liability substantially below the official rate. The I.R.S. can then focus its resources on policing these companies. That might not be as good as requiring all companies to go the stock route, but it would be a big step forward in my view.

Here are a couple of columns making the argument. Sorry, I've never written a longer piece making the case.



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I understand people can have reasonable differences of opinion on trade deals like the Trans-Pacific Partnership (TPP), but why is it that the proponents have to insist, with zero evidence, that not doing the deal was an economic disaster? Yes, I know the political argument, which seemed to arise late in the game, that U.S. standing in the world has collapsed because we didn't folllow through on the TPP. But, let's just stick with the economics.

Yesterday, Politico ran a lengthy piece saying that the U.S. pullout from the TPP undermined the hopes for a revival of rural America. It cited as evidence a report from the United States International Trade Commission that projected the deal would increase agricultural output by 0.5 percent when fully phased in 15 years from now. Seriously folks, a 0.5 percent increase in output is going to save rural America? That's 3 months of normal growth, who are you trying to fool?

The NYT joins the act this morning with a news article that starts out by pointing to the costs from the Trump adminstration's ambiguities on trade policy. While the piece makes many reasonable points, it then turns to the losses from pulling out from the TPP. It tells readers:

"One accomplishment that Mr. Trump has notched on trade has been an agreement with China that opened its market to American beef exports. For the beef industry, however, the benefits of that deal pale in comparison with the cost of abandoning the Trans-Pacific Partnership, which had been spearheaded by President Barack Obama. It would have provided access to the enormous Japanese market.

"Instead, Japanese tariffs on American frozen beef, which would have declined under Mr. Obama’s deal, are on the rise. Last week, they increased to 50 percent from 38 percent, making America’s meat even more vulnerable to competition from countries such as Australia.

"'TPP was fantastic,' said Kent Bacus director of international trade for the National Cattlemen’s Beef Association. 'When you walk away from it without a meaningful alternative, that causes a lot of alarm in the beef industry.'"

While the piece tells us how important the Japanese beef market is, it would have been useful to get some sense of proportion. According to the piece, Japan's entire market is $1.5 billion annually. U.S. beef production is currently $60 billion. This means that if U.S. producers were able to secure half of Japan's market, a very impressive accomplishment for a country halfway across the world, it would raise the demand for U.S. beef by 1.3 percent.

The piece also misleads readers on the nature of global markets. If Australia gets preferred access to Japan's beef market, then some of the beef that Australia used to export to other countries will be diverted to Japan. This will open up new export markets for U.S. beef. It is worth noting that, while the piece includes the exuberant praise of the TPP from Mr. Bacus, it does not quote or cite any critics of the deal.

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