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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I am really proud of all the issues where CEPR has been ahead of everyone else. We were saying that Social Security did not have to be cut at a time when even many Democrats said the program faced a crisis. We were warning that the I.M.F.’s structural adjustment programs were stifling growth and increasing inequality at the high point of the Washington Consensus. We were yelling about the housing bubble and the dangers it posed to the economy when politicians in both parties were celebrating the rise in homeownership rates.

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It’s a bit less than a year since Congress passed the Trump tax cut, but we are far enough along that we can be fairly confident about its impact on the economy. There are three main lessons we can learn:

  • The tax cut is to not leading to the promised investment boom;

  • The additional demand generated by the tax cut is spurring growth and reducing the unemployment rate;

  • The Federal Reserve Board’s interest rate hikes are slowing the economy in a way that is unnecessary given current inflation risks.

The Investment Boom: Just Like Jared Kushner’s Hidden Genius, No One Can See It

Taking these in turn, it is pretty clear at this point that we will not see the investment boom promised by proponents of the tax cut. This point really has to be front and center in any discussion of the benefits of the tax cut. By far, the largest chunk of the tax cut was the reduction in the corporate tax rate from 35 percent to 21 percent, along with various other measures lowering corporate taxes.

The immediate impact of a corporate tax cut is to give more money to the richest people in the country since stock ownership is highly skewed towards the top 10 percent of the income distribution and especially the top one percent.

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In an article on the decline in the Chinese yuan against the dollar, the NYT gave as one explanation:

"Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive."

That one really doesn't seem plausible to me. In the most recent data, China's year-over-year inflation rate was 2.5 percent, virtually identical to the US rate. If we look to 2019, the I.M.F. actually projects China's inflation rate will fall slightly to 2.3 percent, a hair lower than the rate projected for the US.

In assessing whether China is holding down the value of its currency, it is important to note that the country holds more than $4 trillion in foreign reserves through its central bank and sovereign wealth fund. This holds down the value of its currency compared to a more normal level of holdings for a country with an economy the size of China, which would likely be in the range of $1–$2 trillion.

This is the same logic as the belief that the Fed is holding down US interest rates by virtue of the fact that it holds $4 trillion in assets as a result of its quantitative easing policy. A more normal level would be around $1 trillion.

The vast majority of economists believe that the Fed's asset holdings keep down US interest rates. It is inconsistent to believe that the Fed's holdings of US assets keep down interest rates here, but China's holding of foreign assets does not keep down the value of its currency.

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The discussion of health care has been badly warped ever since the debate over the Affordable Care Act (ACA) in 2009. A central feature of the ACA was the requirement that everyone get insurance, or pay a penalty if they don’t. While many resented having the government force them to buy insurance, especially in a context where they had to buy it from a private insurance company (i.e. there was no public option), this was actually a central feature of the ACA.

The main point of the ACA was to make it possible for people with serious health issues to get coverage. Insurers are happy to cover healthy people. For the most part, covering a healthy person means insurers get a check every month for nothing. It’s good work, if you can get it.

People with health problems are a different story. They actually do cost the insurers money. This is why insurers either charged people with health problems very high premiums or didn’t allow them to buy insurance at all, in the years before we had the ACA.

The ACA prohibited discrimination based on pre-existing conditions. It only allowed insurers to vary premiums based on age, not health. But, as several states discovered, a ban on discrimination based on health will not work by itself. This means that the average cost of insurance will be much higher.

That makes it a bad deal for relatively healthy people, many of whom will then decide not to buy insurance. With fewer healthy people in the pool, the average cost per person rises. This leads to higher premiums, which leads to more relatively healthy people leaving the pool. You go through a few rounds of this process and you end up with an insurance pool with relatively few healthy people and very high premiums.

This is why the ACA came with a mandate for buying insurance. The point was to keep healthy people in the pool to ensure that health insurance would be affordable. Of course, even without discrimination based on health, insurance would still be very expensive. This was the reason for the subsidies.

Unfortunately, the subsidies were not very generous and they phased out at levels that left many middle-income families with very high insurance costs.  Still, many more people had access to insurance than before the ACA.

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Matt O'Brien had a good piece on yesterday's GDP numbers noting that we are not seeing the investment boom promised by promoters of the tax cut. However, he argued that growth was likely to remain close to 3.0 percent based on the 3.1 percent growth rate reported in final sales to private domestic purchasers. In my GDP write-up, I was somewhat less optimistic about near-term growth prospects, pointing to the 1.4 percent growth rate in final sales.

The difference between these two measures is that the final demand measure pulls out inventory changes from GDP. The logic is that changes in the rate of inventory accumulation are erratic and no one thinks that the rate of inventory accumulation will expand infinitely relative to the economy nor the rate at which they are being run down will continually accelerate. For this reason, the final demand measure, which leaves out inventories, seems like a better measure of growth.

The final sales to domestic purchasers measure pulls out government spending and net exports, following a similar logic. Government spending is often erratic, jumping or falling in a given quarter, often due to the timing of purchases, especially with the military. Pulling it out can give a better measure of underlying growth. Net exports are also erratic, but we don't expect the trade deficit to either continually expand or shrink relative to the overall size of the economy. Therefore pulling out the quarterly changes can give us a better measure of the underlying growth rate.  

While the decision to pull government expenditures out of the GDP figure makes little difference in the most recent quarter (they grew at a 3.3 percent rate, almost the same as the 3.5 percent overall growth rate), the decision on net exports does. The increase in the trade deficit subtracted 1.78 percentage points from growth in the quarter. That is the explanation for the difference between the 3.1 percent growth rate in final sales to domestic purchasers and the 1.4 percent rate of growth of final demand.

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The wages of a typical worker have barely risen in four decades, many recent college grads are facing unbearable student loan burdens, housing costs are hugely outpacing inflation in many cities, making life especially hard for low- and moderate-income households. Naturally, the problem is the Social Security and Medicare received by baby boomers.

That's what Glenn Kramon, a former assistant managing editor at The New York Times, would have us believe according to his NYT column, seriously. He tells readers:

"My generation will say we paid into the system for decades and deserve our entitlements. But the one-earner baby boomer couple my age who have earned the average wage every year have paid less than $100,000 in Medicare taxes but are taking out benefits worth more than $400,000, after adjusting for inflation, according to C. Eugene Steuerle, a former Treasury official now at the Urban Institute.

"He also found that the couple will receive half a million dollars in Social Security after paying in little more than a quarter million."

Kramon even speculates that Medicare might have been responsible for Trump's victory in 2016.

"I even wonder whether increased Medicare spending is partly responsible for the election of Donald Trump, whose margin of victory came from voters in our generation. Without that spending, might enough of us have died sooner and tipped the balance in favor of Hillary Clinton?"

Before showing why this story is total nonsense, it is worth noting that the story that Social Security and Medicare are somehow responsible for all evil is a recurring theme at respectable news outlets like the NYT and National Public Radio. Just to give a few examples, we had this one last year in the Boston Globe on how the baby boomers are destroyed everything. (That's the title.) We had Abby Huntsman, whose main claim to fame is being born into a rich family, telling us on MSNBC how unfair these programs are to her generation. We have Thomas Friedman who periodically uses his NYT column for this purpose (e.g. here). And, we have Robert Samuelson who does it all the time with his Washington Post column.

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New house sales were down 5.5 percent in September from their August level and by 13.2 percent from year-ago levels. This is pretty much the textbook story of crowding out from the tax cut.

The story holds that if the government runs large deficits when the economy is near full employment, it will lead to higher interest rates. Higher rates then discourage home buying and construction, investment, and raise the value of the dollar, thereby increasing the trade deficit. These factors together offset the stimulus from the tax cut and eventually leave GDP pretty much the same as it would be without the tax cut, and possibly lower over the long-run.

Of course, it is important to note the role played by the Federal Reserve Board in this story. It has raised repeatedly, partly in response to the boost to growth caused by the tax cut. It has also indicated that it intends to continue to raise rates unless growth slows substantially.

The Fed would justify its rate hikes by claiming the need to prevent a rise in the inflation rate. While this could be right, there is a huge amount of uncertainty about the risk of inflation. To my view, we would be much better off waiting with the rate hikes, and seeing how low the unemployment rate could go, and only begin to raise rates after there is clear evidence of rising inflation. But, I'm not running the Fed.

Anyhow, we are clearly seeing the impact on housing. Mortgage interest rates were just over 3.9 percent last October. Today they are 4.7 percent. This is the main factor weakening the housing market.

And, while the monthly sales data are erratic, we have developed a large backlog of unsold houses, so that the inventory is now equal to 7.1 months of sales. This is the highest inventory since early 2011. This is virtually certain to lead to further declines in construction in the months ahead.

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The NYT had an interesting piece noting the differences between the way Sears and other large employers of the last century treated their workers and the way Amazon treats its workers. The focus of the piece is a profit sharing plan which gave 10 percent of Sears before-tax profits to workers in the form of a retirement fund that purchased company stock.

While this plan did allow many employees to accumulate substantial assets to support themselves in retirement, it is worth noting that a similar commitment would not have the same impact for Amazon workers. Amazon made $3 billion in profit last year. Ten percent of this figure would be $300 million. If it divided this sum equally among its 500,000 employees, that would come to $600 each.

While this is not an altogether trivial sum, it is not likely to provide for a very generous retirement. It amounts to 2.0 percent of the annual earnings of a full-time worker getting $15 an hour.

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Ernie Tedeschi has a very useful piece in the NYT Upshot section noting that wage growth is still far below its 1990s boom pace, even though unemployment is actually slightly lower. He notes that the slowdown is pretty much across the board, hitting all demographic groups and industries and occupations. This rules out stories that seek to explain this slowdown as a result of some group of workers lacking the right skills.

He notes three plausible stories that could explain weaker wage growth. One is that the labor market still does not look as tight as the late 1990s if we look at employment rates of prime-age workers (ages 25 to 54) instead of unemployment rates. This reflects people dropping out of the labor force who may still want to work.

The second is weaker productivity growth. Productivity increased at close to a 3.0 percent annual rate in the 1990s boom. In recent years, it has been just over 1.0 percent. It is worth noting that a tight labor market could itself lead to more productivity growth as employers feel more need to economize on labor. We did see strong productivity growth in the second quarter and are likely to see another strong quarter in the third quarter, but these numbers are erratic, so we can't celebrate just yet.

The third point is the weakening of workers bargaining power, first and foremost from a decline in unionization rates. The fact that the national minimum wage has not been increased for almost a decade would also be a factor.

There is one other point on this topic that is worth mentioning. As Joe Gagnon has pointed out, if we look at acceleration rather than rates of growth, the current period does not look that different than the 1990s boom. In the 1990s, year-over-year wage growth bottomed out at 2.3 percent in 1993, they peaked at 4.3 percent in 1997 and at several subsequent points. This is an increase of 2.0 percentage points, as seen below.

Percentage Increase in Average Hourly Wage for Production and Non-Supervisory Workers

wage growthSource: Bureau of Labor Statistics.

By comparison, year-over-year wage growth bottomed out at 1.2 percent in 2012. It peaked at 2.9 percent in August, an increase of 1.7 percentage points. That is still less than the 2.0 percentage point increase in the rate of wage growth in the nineties boom, but not very much less.

It is also worth noting that the annualized rate of growth comparing the last three months (July, August, September) with the prior three months (April, May, June) is 3.3 percent. This measure is erratic, but I would be willing to bet on some modest acceleration, which will make the increase in wage growth in the current period almost identical to the rise in the 1990s. None of this should make workers feel great, there is still lots ground to make up from the Great Recession, but we may be moving in the right direction.

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Note: This post first appeared on my Patreon page.

Last week Roger Lowenstein had a piece in the Post about GE's hiring of a new CEO after the prior one served less than a year. According to Lowenstein, the new CEO's contract will give him incentives worth $300 million over the next four years if he does well by the shareholders. He will walk away with $75 million if he does poorly. This follows the hiring of an inept CEO who was dumped in less than a year and long-term CEO Jeffrey Immelt, who pocketed hundreds of millions of dollars during his tenure while giving shareholders returns averaging 1.0 percent annually, according to Lowenstein.

This raises the obvious question: What is GE's board is doing? I haven't looked at their forms, but I am quite certain these people get paid well over $100k a year and quite possibly over $200k for a job that requires perhaps 200 to 300 hours a year of work. That comes to an hourly pay rate in the $300 to $1,000 range. The primary responsibility of directors is picking top management and making sure that they don't rip off the shareholders.

How could you possibly fail worse in this job than GE's board? Yet, my guess is that there has been very little turnover in the board.

As a practical matter, it is difficult for shareholders, even large shareholders, to organize to remove board members. More than 99.0 percent of the incumbents who are nominated by the board for re-election win.

This is the classic problem of collective action. It is almost always much easier to simply exit as a shareholder and sell your stock than to organize and try to change the way the company operates. For this reason, CEOs are able to make out like bandits, getting pay in the tens of millions of dollars, even when they do poorly by shareholders.

It is common for progressives to condemn the outrageous pay of CEOs. However, they rarely move beyond condemnation to point out that the CEOs are ripping off their companies. This means first and foremost the shareholders. 

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