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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The NYT ran a piece on China's economy implying that it is reeling from the tariffs that Donald Trump has imposed on imports from China. The article outlined China's economic problems and then told readers that China's President Xi:

"...has been forced to make concessions to the United States as President Trump’s trade war intensifies."

The problem with the claim that Xi has been "forced" is that China's trade surplus with the United States is actually considerably larger in 2018 than it was in 2017. For the first ten months of this year, its surplus in goods has been $344.5 billion. That compares to surplus last year of $309.2 billion. While it is possible that China's surplus would be even larger without the trade war, it doesn't make much sense to say that a trade surplus that is up by 11 percent over the last year is a major cause of China's current economic problems.


In comments, Ibout rightly takes me to task for not putting the trade surplus figure in context. China's 2018 GDP measured in dollars (the appropriate denominator for this issue) is a bit more than $14 trillion. This means the surplus this year, which is likely to be a bit over $400 billion, would be a bit less than 2.8 percent of China's GDP. If this were to fall sharply it would surely be a hit to China's economy, but the surplus fell by much more following the 2008 recession and China's economy continued to grow rapidly. 

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This is Dawn Niederhauser, CEPR’s Development Director, taking over Beat the Press to say thanks to all of you who have signed up to support Dean and BTP on Patreon. We really appreciate it! If you haven’t signed up to become a patron yet, please click here to join. Dean often posts extra content on Patreon, but primarily it’s a way for CEPR to fund Dean’s work (he tends to speak his mind in case you haven’t noticed. Which is great for you, but it can make my job very difficult).

We purposely set the minimum pledge at the lowest amount allowed, just $1 per month. That’s in keeping with Dean’s other position that makes my job very difficult — just about all of his work is available for FREE. Hopefully, $12 per year is affordable to all, but for those of you who can, adding just a few more dollars per month to your pledge would be a big help to us, and would enable Dean to continue to Beat the Press for years to come.

And now back to your regularly scheduled program. As Dean would say, don’t believe everything you read in the papers. Happy holidays from all of us at CEPR!

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(This is the last piece in an exchange with Jason Hickel on growth. My last piece is here.)

Baker says “I am at a loss to understand why we would have a war on growth.” I don’t know why he is at a loss. I explained the reasons for this in my previous post. There are two I focus on. 

  1. Because growing the GDP means growing energy demand, and this makes the task of switching to renewable energy significantly more difficult (nearly three times more difficult between now and 2050, which virtually rules out success). 
  2. Because our preoccupation with growth makes it extremely difficult to get the regulations we need to avert ecological breakdown. Politicians resist such measures precisely because of the risks they pose to growth

Baker has, unfortunately, not engaged with these arguments.

Next, Baker says that “if we spend enough in other areas, it is possible to offset sharp reductions in the sectors of the economy that are heavy users of fossil fuels.” This argument is central to the standard vision of the Green New Deal (i.e., massive public investment in clean energy, which will generate millions of well-paid jobs and increase GDP growth). Again, there are two problems with this. 

  1. Even if we do manage to switch the entire energy system over to renewables, that might help us with emissions but it doesn’t help us with resource use. If we keep growing GDP, resource use will keep going up — even if the economy is powered by clean energy. And let’s not kid ourselves: to the extent that resource use is driving mass species extinction, this is an existential threat that we have to take seriously.
  2. Why does the Green New Deal have to be focused on aggregate GDP growth? Why not just stick with the bits about public investment and jobs and leave it at that? The last New Deal was growth-oriented, sure. But that doesn’t mean that this one has to be. Again — and this is a crucial point — Baker has not made a positive argument for growth. He just for some reason assumes that we must have it, but he never says why. This is odd, because as he himself points out, the problem is not that we don’t have enough income; the problem is that it’s all locked up at the top. 
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The New York Times reported on an analysis of returns on the endowments of the Ivy League schools over the last decade. It found that all the schools' endowments lagged a portfolio that was 60 percent stock index funds and 40 percent bond funds. (The gap with index funds would be even larger if the mix were 70 percent stock, 30 percent bonds.)

The Ivies invest heavily in hedge funds, which typically charge fees equal to 2 percent of the money invested plus 20 percent of returns over a benchmark. It seems that this pattern of investment is not doing very well for the schools, although some of the richest people in the country run hedge funds.

On the plus side for these schools, by promoting upward redistribution, they are creating more opportunities for their economics, sociology, and other programs, that try to design policies to reduce inequality and increase mobility.

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Okay, that's not exactly what it said. Instead, the headline of an article on the protests in France told readers "Unrest in France hinders Macron’s push to revive economy."

The policies in question include ending a wealth tax on the rich, cutting retirees' Social Security benefits, and a series of measures designed to reduce the power of unions. While it is possible that Macron has taken these steps because he really does believe that this is the best way to boost economic growth, it is also possible that he has taken these steps because he wants to give more money to rich people.

In this respect, it is worth noting that Macron is a former investment banker. Therefore he is likely to be very rich and to have rich friends.

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Sorry, I misread that one. This is what he quoted my friend Steve Rose saying about the people who disagree with him on income stagnation. Yes, it's Monday and Robert Samuelson is once again trying to insist that everyone's income is rising just fine.

The bizarre part of the story is that no one is really disagreeing on the facts, just how we talk about them. Before-tax income has been largely stagnant over the last four decades. For families at the middle and bottom, there has been some rise, but this has largely been because there are more earners per family, not rising hourly wages.

This is primarily the story of women entering the labor force. That was mostly a 1979–2000 story, since women's employment rates have actually slipped somewhat in the last two decades. It's great that barriers to women working are lower today than four decades ago (although discrimination is still huge), but saying that a two-earner family typically has higher income than a one-earner family doesn't really contradict the stagnation story.

The way Samuelson shows larger gains for families at the middle and bottom is by including government transfers, most importantly health care programs like Medicaid and SCHIP, in the story. As I pointed out in the past, the value of these transfers increases every time the pay of a heart surgeon or the cost of drugs increase, so people can be excused for not seeing this as a rise in their income.

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This piece was originally posted on my Patreon page.

While most of us don’t have access to the inner workings of the Trump administration to know exactly what is going on with its negotiations with China, given the public accounts and statements, it seems workers have clearly lost. Trump seems to have made the concerns of companies like Boeing, who want more help maintaining their control over technology, his top priority. The impact of an undervalued Chinese currency, which has led to a large US trade deficit, seems to have been dropped from discussion.

The disappearance of currency “manipulation” from the discussion is more than a bit ironic since Trump made this a centerpiece of his presidential campaign. He ran around the country complaining that China was a world-class currency manipulator. He pledged that he would declare China a currency manipulator on day one of his administration and apply corresponding trade sanctions.

We’re getting close to day 700 and there is still no declaration on China’s currency practices. Furthermore, the topic has been virtually dropped from public discussions.

What is highlighted is that Trump is pressing China to end practices that require US companies to transfer technology to Chinese partners and also to stop corporate espionage (where Chinese companies infiltrate US companies to obtain their latest technology).[1] Most of the media cover this as though Trump is pursuing a genuine national interest in pressing this issue, as opposed to the interest of a small number of large corporations.

This is seriously wrong. In fact, if Trump is successful in pushing his “anti-intellectual property theft” agenda with China, it will actually be bad for most of the nation’s workers.

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This is the third piece in an exchange with Jason Hickel on growth. Hickel's response will be the last piece in the series.

Jason Hickel responded to my earlier piece on degrowth arguing that in fact, economic growth is inconsistent with a sustainable environment and that we have to get people to reject growth as an economic goal if we are going to limit the damage from climate change and excessive resource use more generally.

First, let me point out where we do agree. It is necessary to take drastic measures to reduce greenhouse gas emissions quickly. The world is falling far behind a path of emissions reductions (they are still rising) that will prevent excessive damage to the planet. Going beyond the issue of greenhouse gas emissions, we also have to take steps to reduce resource use more generally. The planet is rapidly losing habitat and species in ways that are irreversible.

I’m sure Hickel knows the data in these areas better than me, but I would not argue on the basic point. The question is whether degrowth needs to somehow fit into the picture. I will raise two points, one a question of logic and one a practical political issue.

On the logical point, I am at loss to understand why we would have a war on growth. Granted, we need to massively reduce our consumption of fossil fuels and over time other material inputs, but I am afraid I don’t see how that this precludes growth.

I am certainly willing to believe that a period of rapid increases in carbon taxes may lead to a recession, although I would not even take this as a foregone conclusion. If we spend enough in other areas, it is possible to offset sharp reductions in the sectors of the economy that are heavy users of fossil fuels. (Yes, I know people have modeled this scenario, but I’m afraid that I don’t view such modeling as sacrosanct. Almost no economic models projected the collapse of the housing bubble and the Great Recession. I don’t think economists who can’t tell us what will happen next year in ordinary times suddenly have perfect foresight when we talk about an unprecedented transition in energy use.)

But let’s say that the transition brings about a recession. How does that preclude further subsequent growth? The Federal Reserve Board has brought on nine recessions since World War II. Would anyone say the Fed precludes growth?

Concretely, when we get to our sustainable level of resource use, I assume we will still have clothes, shelter, computers, etc. These items all wear out. When we replace them, is there some reason the new items would not be better (e.g. longer lasting, clothes that are warmer or cooler etc.) than the ones they replaced? If so, that sure sounds like growth to me.

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Right, I meant "patents," but the logic is the same. When you have a government intervention that raises the price above the free market price then you provide a lot incentive for gaming and corruption. The NYT had a very good piece on this topic just last week. Of course the tariffs on clothes that were being evaded/avoided in that piece were just 10-25 percent. By contrast, patent monopolies raise the price of drugs by the equivalent of several thousand percent. Therefore the incentive for corruption is correspondingly larger.

The NYT gives us the latest example in an article on Actelion Pharmaceuticals agreeing to a $360 million settlement in a case being investigated by the Justice Department. The accusation is that the company, which makes a drug to treat a rare lung condition, was making payments to a patient assistance charity as a way of giving kickbacks on its drug.

This is a mechanism that drug companies can effectively use to entice patients to use their drugs. If they give the money to an intermediary like the charity allegedly used in this case, the charity can then use the money to give patients a discount on the company's drug. This can increase their sales without a general price reduction.

There would be no incentive for this sort of corruption if drugs were sold in a free market. Unfortunately there are not powerful interest groups to oppose patent monopolies as there are with tariffs on clothes, so we don't see this sort of analysis in major media outlets.

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An NYT article on the stock market's plunge also noted that the yield curve, defined as the gap between the interest rate on 10-year Treasury bonds and two-year notes, is close to being inverted. The interest rate on 10-year bonds was just 0.12 percentage points higher than the interest rate on 2-year notes. The piece points out that an inverted yield curve has historically been associated with a recession in the near future.

While I would not rule out a recession (we will have another recession someday), I am less impressed by this signal than the NYT. The longer-term rates tend to follow the expected path of the short-term rate with a longer yield providing a greater premium since the holder of a long-term bond suffers a substantial capital loss if the price goes down.

For example, if I'm holding a 10-year Treasury bond and the interest rate increases from 3.0 percent to 4.0 percent in a relatively short period of time, the price would fall by close to 9.0 percent. To cover that risk, I will want a premium over the short-term rate. The same logic applies to a 2-year note, except that the potential loss from a rise in interest rates is much smaller so the necessary premium is much smaller.

However, the risk in this story is that the Federal Reserve Board will raise interest rates. Currently, the federal funds rate is at 2.25 percent. While there is a good chance the Fed will raise rates by 0.25 percentage points at its meeting this month, Fed Chair Jerome Powell has made it clear that he thinks we are near the end of a cycle of rising rates. For this reason, holders of longer-term debt have less reason to fear that short-term rates will rise much from their current level. Therefore, they are not demanding large risk premiums.

Historically, we have reached this point where investors no longer saw much risk of further rate hikes after a period of aggressive rate increases by the Fed. In 1989, the peak of the federal funds rate was almost 4.0 percentage points above its cyclical low. In the mid-1970s, it was more than 8.0 percentage points, and in 1980 the federal funds rate peaked more than 14.0 percentage points above the low for the cycle. 

When the Fed engages in an aggressive round of rate hikes, it is reasonable to bet we will see a recession. In this case, the Fed has been much more modest in its rate increases. While there is little doubt that the rate hikes are having an effect in slowing the economy — housing has been hit hard and the rise in the dollar is causing the trade deficit to rise — these sources of weakness do not seem sufficient to throw the economy into a recession, even if the yield curve does invert. 

Note: I had earlier put the loss on a 10-year Treasury bond from a rise in the interest rate at 8.0 percent. Joe Emersberger corrected the mistake.

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