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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News must travel slowly to corporate headquarters these days. How else can we explain the fact that corporate America isn't rushing out to invest in response to the big tax cut Congress voted them last year?

According to data released by the Commerce Department, orders for non-defense capital goods fell by 1.5 percent in January after dropping 0.4 percent in December. We get the same story even if we pull out volatile orders for aircraft: a drop of 0.2 percent in January after a fall of 0.6 percent in December.

While these declines would not be a big story in normal times (the economic impact is very limited), they are huge in the context of the tax cuts. The main rationale for the cut in corporate tax rates was that it was supposed to lead to a surge in investment.

While investment takes time to put in place, these data are showing us orders. Orders can be made over the Internet or an old-fashioned landline telephone. They don't take a lot of time.

And keep in mind, while the bill just passed in late December, the basic outlines had been known since early September. Fast-moving companies will begin to make plans from the day the bill seemed likely to pass, they aren't going to wait until Donald Trump puts his pen to it and then start asking what they should do.

The businesses in Pyeongchang didn't just start making plans for the Olympics the week the games opened, the hotels and restaurants began their expansion plans as soon as they knew Korea had landed the Olympics. We should expect the same story with corporate investment.

If the tax cuts matter for investment, then companies like GE, Microsoft, and Amazon were making plans as soon as it became clear that the Republican majority in Congress was serious about passing a tax bill. The fact that we are seeing zero evidence of an uptick in investment suggests that tax cuts don't have much impact on investment. 

Rather than being about promoting economic growth that would lead to productivity gains and higher wages for ordinary workers, the tax cuts were actually just another way to redistribute more money upward. As Speaker Ryan always says: #RichPeopleNeedTaxCuts.

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For those following such things, the strike by West Virginia school teachers, with an average annual pay of $45,700, is rather impressive. Yes, they want decent pay for themselves, but this is also about the quality of education for students in West Virginia.

We know that rich people think that teachers should be willing to educate children for nothing, but that is not the way the world works, at least in an economy where the government has not acted to ensure that unemployment is very high. Good teachers will look to the better-paying jobs in other states, or leave the profession altogether.

Even someone very committed to teaching would like to be able to have a decent home, be able to pay for their own kids upbringing, and also have some money for retirement. If the pay in West Virginia is not enough to allow for this, they won't stay. This will leave the state with high turnover and teachers who don't care much about educating children.

It is also worth noting that this strike is taking place at the same time the Supreme Court is hearing the Janus case, which is a right-wing effort to deny public employees' freedom of contract. (If Janus wins, they will not be able to have contracts that require everyone who is represented by a union share in the cost of representation.) This is yet another effort to tilt the playing field so that workers have less power, and presumably, will have to accept lower pay and benefits.

For those who like to make such comparisons, the average West Virginia teacher makes less than 20 percent of the average doctor, less than 10 percent of what many highly paid specialists earn, and probably around 1 percent of the salary of the hedge fund and private equity crew that get paid to lose money for university endowments. There's nothing like a system where people are rewarded on merit. 

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That is the implication of an NYT article reporting on the fact that the returns on university endowments trailed a simple index mix of either 60 percent stock and 40 percent bonds or 70 percent stock and 30 percent bonds. According to the article, university endowments had an average nominal return over the last decade of 4.6 percent. This compares to a return of 5.3 percent for a 60–40 stock/bond index mix and 5.4 percent for a 70–30 stock/bond index fund.

This means that universities were throwing billions of dollars in the toilet in order to invest with hedge funds and private equity funds rather than going with a simple index. It is worth noting that the managers of these funds routinely earn salaries of millions of dollars a year. Paychecks in the tens of millions and even hundreds of millions are not uncommon.

It will be interesting to see if universities will continue with an investment strategy that has the effect of losing them money while making a tiny group of people incredibly rich, especially in a context where so many have refused demands to divest holdings in fossil fuel corporations, claiming the need to maximize returns. This article implies there is less concern about maximizing returns when it comes to investing with hedge funds and private equity.

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We would usually expect that a 12-year-old kid would be taller than a 6-year-old kid. However, if a 12-year-old had only grown one inch over their last six years, we would probably be somewhat worried.

David Brooks devotes his most recent column, "the virtue of radical honesty" to presenting data from Steven Pinker's new book, Enlightenment Now, which purports to show that things are better than ever. Most of the data has the character of boasting over our 12-year-old's one inch of growth over the last six years.

Brooks tells us:

"For example, we’re all aware of the gloomy statistics around wage stagnation and income inequality, but Pinker contends that we should not be nostalgic for the economy of the 1950s, when jobs were plentiful and unions strong. A third of American children lived in poverty. Sixty percent of seniors had incomes below $1,000 a year. Only half the population had any savings in the bank at all.

"Between 1979 and 2014, meanwhile, the percentage of poor Americans dropped to 20 percent from 24 percent. The percentage of lower-middle-class Americans dropped to 17 from 24. The percentage of Americans who were upper middle class (earning $100,000 to $350,000) shot upward to 30 percent from 13 percent."

The problem with the Brooks–Pinker story is that we expect the economy/people to get richer through time. After all, technology and education improve. In the fifties, we didn't have the Internet, cell phones, and all sorts of other goodies. In fact, at the start of the fifties, we didn't even have the polio vaccine.

The question is not whether we are better off today than we were sixty years ago. It would be incredible if we were not better off. The question is by how much. In the fifties, wages and incomes for ordinary families were rising at a rate of close to two percent annually. In the last forty-five years, they have barely risen at all.

This fact can be seen even looking at the numbers that Brooks is bragging over. While it's not clear where they got their poverty data, the child poverty rate comes closest to the numbers in the article. This was at 22.3 percent in 1983. It was down to 21.1 percent in 2014 and fell further to 18.0 percent in 2016.

Should we celebrate this reduction in poverty rates over the last 33 years? Well, the poverty rate had fallen from 27.3 percent in 1959 (the first year for this data series) to 14.0 percent in 1969. That's a drop of 13.3 percentage points in just ten years. The net direction in the last 47 years has been upward.

It's true that a larger share of the population is earning over $100,000 a year. This is due to some growth in hourly wages, but also due to more work per family. A much larger share of women are working today than fifty years ago and a larger share of the women working are working full-time. If family income had continued growing at its pace from 1967 to 1973 (the last years of the Golden Age), median family income would be almost $150,000 today.

There are a whole a range of other measures which leave real enlightenment-types appalled by the state of the country today. While Brooks–Pinker tell us "only half the population had any savings at all" in the 1950s, a recent survey found that 63 percent of the country could not afford an unexpected bill of $500. The homeownership rate is roughly the same as it was sixty years ago. Life expectancy for those in the bottom 40 percent of the income distribution has barely budged in the last forty years.

In short, a serious analysis of data shows that most people have good grounds for complaints about their situation today since they have not shared to any significant extent in the economic growth of the last four decades. But apparently, there is a big market for the sort of dog and pony show that Brooks and Pinker present trying to argue the opposite.

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When it comes to talking honestly about the impact of trade on the labor market few papers flunk the test as badly as the Washington Post. It is a consistent and unreflective supporter of the pro-business trade policy that has been pursued by administrations of both parties for the last four decades.

Regular Beat the Press readers know how in an editorial defending NAFTA the paper absurdly claimed that Mexico's GDP quadrupled between 1987 and 2007. According to the I.M.F., the actual growth figure was 84.2 percent. More than ten years later the paper still has not corrected this error.

Given the paper's bias, it was not surprising to see a headline in the print edition that noted the loss of jobs over the last two decades and told readers, "it's the robots." The reason why this headline is out of line is that the article actually said the opposite. (The headline of the online version is identical, but excludes the reference to robots.)

The article is reporting on new research by Katharine Abraham and Melissa Kearney which examines the factors that might have led to the drop in employment rates since 2000. (I have not yet read the paper, but Katharine Abraham is one of the best labor economists anywhere, so I take seriously anything she does.) The article lists the factors in order of importance. It reports Abraham and Kearney's assessment:

"Abraham and Kearney estimate that this competition [from Chinese imports] cost the economy about 2.65 million jobs over the period."

The next paragraph is about robots:

"...the duo estimated that robots cost the economy another 1.4 million workers."

So Abraham and Kearney very clearly see robots as being considerably less important in causing job loss than trade. In fact, their assessment implies the impact of trade was almost twice as large as the impact of robots.

To put it as simply as possible, the Post's headline directly contradicts the information presented in the article. I suppose that Washington Post headline writers are not allowed to say anything that might reflect negatively on our patterns of trade.

And, just to be clear, this is not about pushing some seemingly noble goal like "free trade." The Post has no problem with protectionist barriers that raise the pay of doctors and keep drug prices high. This is about pushing trade policies that redistribute income upward.

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That's a bit of background that might have been helpful for people reading this Washington Post article on Disney's threat to withhold a $1,000 bonus from union workers unless they accept a contract offer from the company. According to the article, the company will be paying out a total of $125 million in one-time bonuses.

Last year, the company paid $4,422 million in taxes on $13,788 million in pre-tax income for an effective tax rate of 31.9 percent. If the new tax law lowers Disney's tax rate to 21 percent (this assumes it pays the statutory rate, without being able to benefit from various special provisions in the tax code), it would save just under $1.5 billion based on its 2017 income. It would presumably save comparable or larger amounts in future years as its profits grow. By contrast, the bonuses are being offered to workers are a one-time event which may not be repeated.

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In the last six months, Republicans gave up being a party that pretends to care about budget deficits as they happily pushed through large tax cuts (roughly 0.7 percent of GDP over the next decade) and big increases in spending (roughly 0.7 percent of GDP over the next two years). The deficit picture looks much worse today than it did a year ago.

While the few remaining deficit hawks at the Washington Post and the Peter Peterson–funded organizations are screaming, the question serious people should be asking is: why don't the markets don't share their concerns? In particular, the bond market, where the "bond vigilantes" live, should be going nuts with much larger deficits now being projected for as far as the eye can see.

It is true that rates have gone up. At just under 2.9 percent, the interest rate on 10-year Treasury bonds is almost half a percentage point higher than it was a year ago. But a 2.9 percent rate is still very low by any reasonable standard. After all, it was over 3.0 percent at the end of 2013 and it was over 5.0 percent in the late 1990s as the deficits were turning to surpluses.

The current 2.9 percent rate is also well below what the Congressional Budget Office (CBO) had projected just a couple of years ago when it expected deficits to stay on their prior no tax cut path. In January of 2016, CBO projected that the interest rate on 10-year Treasury bonds would be 3.7 percent by now. This means that even with the recent run-up, long-term interests are still 0.8 percentage points below what CBO had projected without any major increases in the budget deficit.

This might suggest that the concerns that deficits would send interest rates through the roof have little basis in reality. After all, long-term interest rates are driven by expectations, and unless investors in the bond market have hugely different expectations about the size of deficits than folks in Washington, they apparently don't believe that the larger deficits we are now looking at are that big a deal.

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It is amazing how frequently we hear people asserting that the massive inequality we are now seeing in the United States is the result of an unfettered market. I realize that this is a convenient view for those who are on the upside of things, but it also happens to be nonsense.

Today's highlighted nonsense pusher is Amy Chua, who warns in an NYT column about the destructive path the United States is now on where a disaffected white population takes out its wrath on economic elites and racial minorities. The key part missing from the story is that disaffected masses really do have a legitimate gripe.

We didn't have to make patent and copyright monopolies ever longer and stronger, allowing folks like Bill Gates to get incredibly rich. We could have made Amazon pay the same sales tax as their mom and pop competitors, which would mean Jeff Bezos would not be incredibly rich. We could subject Wall Street financial transactions to the same sort of sales taxes as people pay on shoes and clothes, hugely downsizing the high incomes earned in this sector. And, we could have rules of corporate governance that make it easier for shareholders to rein in CEO pay.

None of the rules we have in place that redistribute upward were given to us by the market. They were the result of deliberate economic policy. (Yes, this is the topic of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) It is understandable that the losers from this upward redistribution would be resentful and they likely are even more resentful when the beneficiaries of the rigging just pretend that it was just a natural outcome of the market.

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An NYT Magazine piece does a very nice job laying out the argument as to how platform monopolies like Google could be engaging in anti-competitive practices.

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An NYT article discussed a plan being pushed by Ivanka Trump and several Republicans in the Senate which would allow for new mothers to take up to twelve weeks of paid family leave. This would be paid for by delaying their Social Security retirement benefits beyond age 67, which would be when they would now be able to collect full benefits.

The piece quotes Carrie Lucas, the President of the Independent Women's Forum saying:

"Sixty-seven is really late middle age, and many people are really happy to continue working."

We actually have data on the percentage of women age 65 to 69 who are now in the labor force and continuing to work, happy or not. In the most recent data, less than 28 percent of women in the age group were in the labor force. The share is considerably lower for less-educated workers, who would be the ones most in need of paid leave. The share falls off rapidly as women age so that the labor force participation rate for women between the ages of 70 and 74 is less than 16.0 percent.

It also worth noting that a large percentage of these women work at physically demanding jobs like housekeepers or table servers. These women are likely to find it quite difficult to add another six months or year to their working careers.

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This is an assertion in a major Post article on infrastructure, but it doesn't fit with the evidence. Trump is actually only proposing to put up $200 billion (0.09 percent of GDP) over the next decade towards his infrastructure initiative.

The rest is supposed to come from state and local governments and private investors. As the piece notes, many are dubious whether anything like this amount will be forthcoming. Also, Trump is proposing large cuts to Amtrak and a wide range of other areas of infrastructure spending, so his proposed increase in spending is far less this $200 billion figure.

While the Post wants to assure readers that Trump really expects that his proposal might lead to an increase in infrastructure spending of $1.5 trillion (0.7 percent of GDP) over the next decade, let me suggest an alternative possibility. Trump made big promises about infrastructure spending during the campaign. It is likely that many of his supporters took these promises seriously.

However, Trump really doesn't give a damn about infrastructure and the Republicans in Congress are not willing to increase the deficit, give back part of their tax cut, or reduce military spending to accommodate additional infrastructure spending. Therefore, Trump goes out and touts a plan that everyone knows doesn't add up but still allows him to pretend to be meeting his commitment to his base.

I have no idea if my alternative scenario is accurate, but I would argue that it is at least as plausible as the Post's claim that Trump or anyone else actually expects this plan to produce $1.5 trillion in additional infrastructure spending. Since neither the Post nor I know what is in the heads of Trump and his top aides, how about they just report the plan and what Trump's people say about it, and not claim to know what anyone's real "aims" are.

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As the saying goes, writing for Washington Post means never having to say you're sorry. Hence, the paper never apologized for saying NAFTA had caused Mexico's GDP to quadruple when the true growth was just 84.2 percent. And Robert Samuelson needs never apologize for silly warnings about run away inflation.

The latest line is that we are supposed to be scared about the 0.5 percent inflation rate shown in the Consumer Price Index (CPI) for January. He begins his piece telling readers:

"Anyone looking for good economic news will be disappointed by the latest inflation report, which showed the consumer price index (CPI) advancing by 0.5 percent in January. By itself, this isn’t especially alarming — prices jump around month to month — but it has troubling implications for the future. To some economists, it suggests the possibility of another financial crisis on the order of the 2008-2009 crash.

"Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission. It was beaten down by cost-saving technologies and a caution against raising wages and prices instilled by the Great Recession. From 2010 to 2015, annual inflation as measured by the CPI averaged about 1.5 percent, often too small to be noticed. In 2016 and 2017, the annual rates inched up to 2.1 percent. On an annualized basis, January’s 0.5 percent would be 6 percent."

Sound scary?

Actually, monthly CPI data are pretty erratic. If we are supposed to be scared by January's 0.5 percent figure, we should also have been bothered by the 0.5 percent figure for last September as well the 0.5 percent rate for January of 2017. We also hit 0.5 percent in February of 2013 and again in September of 2012, which followed a 0.6 percent rise in August. In short, the 0.5 percent CPI inflation rate for January really doesn't provide us much basis for concern about rising inflation.

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It seems that bad guys (Russians and others) are using Facebook to spread all sorts of nonsense under false identities. Mark Zuckerberg, Facebook's CEO and very rich person, tells us that he is very concerned about the problem but doesn't know exactly what to do. Congress can help out Facebook and Zuckerberg.

Back in the late 1990s, when the Internet was rapidly becoming an important means of communication, the entertainment industry became concerned about people transferring copies of copyrighted music without permission. It got Congress to pass the Digital Millennium Copyright Act of 1998 (DMCA).

There are many aspects to the DMCA, but the key part is that it imposes harsh punitive damages for anyone who allows copyrighted material to be transferred through their site. If a copyright holder notifies the owner of the site that they have posted their material without authorization, the owner of the site must remove it within 48 hours or face steep penalties.

The site owner is liable for damages even if a third party posted the infringing material. This means that if someone were to post a copyrighted song in the comments section to this blog, CEPR would be liable if it was not removed after notification.

It is important to note that the damages are punitive, not just actual. Suppose someone posts a minor hit from thirty years ago that 20 people download from this site. Given the prices commanded for downloads of old music, the actual damages would be a few cents. Nonetheless, under the DMCA, CEPR could be liable for thousands of dollars in damages. This can be a great model for Facebook and other potential purveyors of fake news.

Here's how it would work. Imagine that I get a posting on my Facebook feed from something that looks dubious. I send a note to Facebook indicating that I don't think that this posting is from a real source. Facebook then has 48 hours to investigate and determine if the source is real. If it determines that it is not real it must notify every person who received the posting, either directly or through its sharing system, that the source was fake.

Just as is the case with the DMCA, Facebook could face stiff penalties, say $10,000 a shot, for failing to act within the 48-hour time frame. This would ensure that Facebook would have a powerful incentive to move quickly to prevent the spread of fake news and false stories.

My guess is that Facebook has the technical expertise to meet this requirement. But if it doesn't, who gives a damn? This is a reasonable expectation of a system like Facebook and if Mark Zuckerberg and his crew lack the competence to meet it, then a better run competitor will take its place.

See, this is all fun and easy. It just requires a Congress that cares as much about protecting democracy as the copyrights of Disney and Time-Warner.

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Donald Trump is proposing to eliminate the National Endowments for the Arts and Humanities, as noted in an NYT column today. Each agency received just under $150 million in the 2017 budget, an amount that is equal to just under 0.004 percent of total spending. Another way to think about the money the government spends promoting the arts and the humanities is comparing it to spending on Donald Trump's golfing trips.

According to calculations from the Center for American Progress Action Fund, we were on a path to spend $59.25 million on Donald Trump's golfing for each year he is in the White House. This means that by ending funding for either the Endowment for the Arts or the Endowment for the Humanities we can pay for two and a half years of Donald Trump's golf trips. If both are shut down, it would cover the cost of five years of Donald Trump's golf trips.

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Source: See text.

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In an NYT Upshot column, Neil Irwin correctly points out that the Trump administration is very optimistic about GDP growth, it then adds that it shouldn't be. Irwin is certainly right about the optimistic part but should be more cautious in declaring the optimism wrong.

Irwin breaks down the factors that contribute to growth, labor, capital, and multifactor productivity growth. Labor growth is likely to be slow for the simple reason that the baby boom generation is moving into its sixties and seventies. They are now retiring in large numbers. This will seriously dampen the pace of labor force growth. While there is some room for more people to come into the labor market, even getting back to the peak prime-age (ages 25 to 54) employment to population ratios of 2000 would only around 0.3 percentage points to rate of labor force growth. We could have more immigrant workers, but that doesn't seem likely in the current political environment.

There could be an uptick in investment, which is the ostensible rationale for the big corporate tax cut. Irwin rightly is skeptical on this prospect. Historically, investment has not been very responsive to tax rates or the after-tax rate of profit, which in theory should be the key factor. The latter was already at post-World War II highs even before the tax cut, while the investment share of GDP has been mediocre.

The key issue is multifactor productivity. This is the increase in productivity that is the result of better organizing workplaces and introducing new technologies. Multifactor productivity growth has been very weak in recent years. It has averaged just over 0.4 percent a year since 2005. That compares to 1.6 percent annually from 1995 to 2005.

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The Washington Post has long had a hostile attitude toward unions, which it expresses in both its opinion and news sections. (As an example of the latter, this front page article complaining about high pensions for public sector workers in California, highlighted the case of Bruce Malkenhorst Sr., a retired city administrator, who received a pension of more than $500,000 a year. Only after reading down in the piece do readers discover that Mr. Malkenhorst was awaiting trial for misusing public funds. Of course, as an administrator, he was not a typical public employee or a union member.)

The latest expression of hostility is from editorial writer Charles Lane. Lane is upset that public sector employees can be required to pay representation fees to the unions that represent them as a condition of working in a unit that is represented by a union. There is much about the current situation that draws his wrath.

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The Washington Post reported on new health care spending projections from the Centers for Medicare and Medicaid Services (CMS) which show spending rising to almost 20 percent of GDP by 2026 compared to 17.9 percent in 2016. It is worth noting that these projections have consistently overstated cost growth. For example in 2005, CMS projected that health care costs would rise to 19.6 percent of GDP in 2016.

The piece also notes that prescription drugs are projected to be the most rapidly growing component of health care costs. It is worth mentioning that prescription drugs are only expensive because of government-granted patent monopolies. The free market price is typically less than 10 percent of the patent monopoly price and often less than 1 percent. The generic versions of drugs that sell for tens of thousands of dollars or even hundreds of thousands of dollars in the United States often cost just a few hundred dollars.

A number of Democratic senators have proposed legislation that would have the government pay for research upfront. This would mean that new drugs could sell at generic prices. This would eliminate all the corruption associated with the current system, including the incentive to lie about the effectiveness and safety of drugs. It would likely save more than $380 billion a year (just under 2.0 percent of GDP) on prescription drug expenditures.

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That's what careful readers of the administration's budget must assume. After all, the budget tells us that we should expect savings of $59 billion in 2028 from reducing "improper payments Government-wide" (Table S-2). However, we build up to these large annual savings very gradually. There is nothing noted for savings in 2019 and just $1 billion in 2020. Even in 2024, the last year of a hypothetical second Trump administration, the projected savings are only $6 billion. 

If we assume that these improper payments were always there, but it will take vigilant effort and ten years to weed out the full $59 billion (and even in 2028 there could still be more improper payments) it means that we could be improperly spending more than $50 billion a year throughout the Trump administration. And that is their assessment.

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Hey, I thought it was just a way to give a middle finger to low-income people for getting government aid, but the Washington Post tells readers that the plan to provide baskets of food in place of the current cash-like system where we allow people to buy the food they want:

"It would do this [hugely cut spending on food stamps] in part by requiring many beneficiaries to accept food deliveries in addition to financial assistance, a change the White House believes will improve nutrition quality and cut back on costs."

It's good we have the Post to tell us what the White House really believes. Otherwise, we might think bad things about them.

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Most newspapers try to reserve such editorializing for the opinion pages, but a NYT article on the Trump budget told readers:

"Yet for all of the talk of fiscal restraint, Mr. Trump’s budget also amounted to an institutional surrender to the free-spending ways of Capitol Hill, which Mr. Mulvaney said had surprised the president and prompted him to refrain from even bothering to advocate deficit reduction."

This is far from the only issue with this piece. The headline tells readers that the budget would "[add] $7 trillion to deficits." This is the cumulative deficit projected over the 10-year budget horizon. It should be described as the addition to the "debt." The amount is equal to 21.4 percent of the end of period GDP.

There are some other items worth noting. My additions are in parentheses.

"The White House budget request would add $984 billion (have a deficit of 4.7 percent of GDP) to the federal deficit next year..."

"Last week, Mr. Trump signed a two-year bipartisan budget deal, struck by congressional leaders largely without his involvement, to boost both domestic and military spending by $300 billion (0.74 percent of GDP)."

"That law increases military spending by $195 billion (0.48 percent of GDP) over the next two years and nondefense spending by $131 billion (0.32 percent of GDP) over the same period. The White House is proposing $540 billion (2.6 percent of GDP) in nondefense spending for 2019 — $57 billion below the new spending cap set by Congress."

"The plan contains at least $1.8 trillion (0.8 percent of GDP) in cuts to federal entitlement programs such as Medicaid, Medicare and food stamps."

"The centerpiece of Mr. Trump’s budget is a plan to devote $200 billion (0.09 percent of GDP) over the next decade in new spending to improve the country’s crumbling infrastructure, starting with $44.6 billion in 2019 (0.21 percent of GDP)."

"Mr. Trump’s plan would also allocate $13 billion in new spending to tackle opioid abuse through prevention, treatment and recovery support services as well as mental health programs."

The $13 billion is a five year total which is equal to 0.00012 percent of projected GDP or 0.059 percent of the budget over this period.

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One of the major changes in the Republican tax plan that became law at the end of last year was a limit of $10,000 on the deduction for state and local income taxes. This was explicitly designed as an attack on liberal states like California and New York, which provide relatively high quality services for their residents, and therefore have higher taxes. Many Republicans openly boasted that these states would face pressure to reduce their taxes, and therefore also cut funding in areas like education and health care, if state and local taxes were not deductible for all of their residents.

Republicans may exaggerate the effect of imposing a higher tax burden on these states. (For those keeping score, there was already a net outflow of money from states that tend to vote Democratic to those that vote Republican.) However, there is no doubt that it is harder for state and local government to raise revenue in a context where state and local taxes are not fully deductible than in a context where they are. In other words, Republicans are absolutely right in believing that they are hurting the finances of liberal states.

There have been various plans put forward to counter the Republican tax plan, but New York’s governor, Andrew Cuomo, is taking the lead with his proposal for an employer-side payroll tax that will substitute for a portion of the state income tax. This is a way to preserve the deductibility of a substantial portion of the tax revenue the state raises.

Cuomo proposes to have a 5 percent payroll tax on wage incomes in excess of $40,000. This tax would be phased in over a three-year period. It would also be voluntary so that companies did not want to go this route would not be required. Workers at companies that did go the payroll tax route would be subject to a different tax schedule that took account of the payroll tax paid by their employer.

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