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 highlighting the latest Beat the Press posts.

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An otherwise useful NYT article on the ending of Mario Draghi's tenure as the president of the European Central Bank (ECB) included the bizarre assertion that restraining inflation is "traditionally a central bank’s only task." This is not at all true, as central banks around the world have often acted to increase employment and maintain financial stability. In fact, the Federal Reserve Board quite explicitly has a dual mandate for price stability and high employment.

The piece is correct in asserting that the ECB charter makes price stability the bank's only goal, but the ECB is an outlier in this respect. It also is worth remembering that the ECB is a relatively new institution, just coming into existence in 1998, so it was not long able to stick to the single goal of price stability laid out in its charter. (In one of the great absurd moments in history Jean Claude Trichet, Draghi's predecessor, praised himself at his retirement event for keeping inflation under the ECB's 2.0 percent target. At the time, the euro was on the edge of collapse, with Greece, Italy, and Spain on the verge of being forced out of the euro.) 

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People may not have gotten that immediately picked this up from Ruchir Sharma's column complaining that not enough companies are going bankrupt, but this is the gist of the argument. Sharma complains that because of continuing fiscal stimulus (large budget deficits) and low-interest rates from central banks, too many zombie companies are able to survive.

He tells us:

"The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans.

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s."

Then we get to the meat of his argument:

"Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials, and labor."

Okay, so the argument is that healthy companies are being prevented from growing because they have to pay too much for capital, materials, and labor due to the zombie companies. Well, we can quickly dismiss the claim on capital and materials.

The cost of capital has never been lower, precisely because of low interest rates from central banks. In the United States, the interest rate on high yield bonds is just over 6.0 percent at present, compared to the rate of close to 9.0 percent in the boom years of the late 1990s.

Sharma's story is that if the Fed and other central banks raised interest rates, the interest rate for more marginal borrowers would fall? That might pass muster in the opinion pages of the NYT, but probably not anywhere else.

The same story applies to materials. What materials does Sharma think are excessively priced? Most major commodities are not above their inflation-adjusted prices from pre-recession levels. In the case of an important one, oil, the inflation-adjusted price is considerably lower than it was in 2007.

This just leaves labor. Certainly, if Sharma's zombies, comprising 16 percent of exchange-listed companies, went out of business we would have higher unemployment, which would in fact put downward pressure on wages. It is a bit hard to believe that this would lead to a surge of investment and productivity growth, but this is effectively Sharma's argument. Anyhow, most workers in the United States will likely be happier if no one in a policy position decides to test Sharma's argument.

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We know that because of the way it presented the results of a study of the impact of rent control in New York City. The article showed the average savings on rent-controlled units by borough, by income quartiles, and by race and ethnic group. It showed that the average savings were by far the largest on rent-controlled units in Manhattan, renters in the top quartile had the largest average savings, and that white beneficiaries of rent control saved far more on average than black, Hispanic, or Asian beneficiaries. It also showed that older tenants had higher average savings than younger ones.

While this makes rent control in New York City look like a bonanza for rich renters, and a nothing for everyone else, we actually cannot conclude this from the data the WSJ presented. The big problem is that it doesn't tell us the numbers in each group.

Suppose that a grand total of three white people, all high income and living in Manhattan, benefit from rent control. Everyone else is more moderate income and either black, Hispanic, or Asian. The results shown in the article would be entirely consistent with this picture, even if 1 million non-white, mostly low and moderate income people benefited from rent control.

While the number of wealthy white people who benefit from rent control is surely much more than 3, the WSJ chose not to tell us how many relatively well-to-do white people benefit from rent control, even though it has this data from its study. That could have been an oversight by the paper, or alternatively, it may have decided not to tell us how many wealthy white people benefited, relative to non-whites because the number was not very large.

In any case, without knowing the relative size of the groups, we have no basis for saying that wealthy whites are the main beneficiaries of rent control, as the piece implies. We do know that the ones living in rent-controlled units benefited most. However, the piece does tell us that people in the bottom quartile living in rent-controlled units saved an average of $2,400 a year on their rent and people living in the next quartile saved more than $2,700 a year. This is not a trivial sum to low and moderate-income households.


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Either that, or everyone else is. The centerpiece of Yang’s campaign is that technology is rapidly displacing labor, creating the prospect of mass unemployment in the not distant future.

As a factual matter, this is wrong about the present and recent past. Productivity growth, which measures the rate at which technology is displacing human labor, has averaged just 1.3 percent annually since 2005, the slowest pace on record. This compares to an annual growth rate of 3.0 percent in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. Furthermore, official projections, like those from the Congressional Budget Office and the Social Security Administration, show that productivity growth rates will remain slow for the indefinite future.

While it is possible that these projections will prove wrong, and that productivity growth will accelerate rapidly Yang is going against the overwhelming majority of economists with his view. It is also worth noting that the periods of rapid productivity growth, especially the Golden Age, were periods of low unemployment and rapid increases in wages. So, even if productivity growth did accelerate rapidly, there is little reason to believe it will lead to the sort of mass unemployment that Yang warns against.

It would have been worth some mention of these facts in this lengthy piece on Yang since it is likely that many Washington Post readers were unaware of them.

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That’s what Robert Samuelson tells us today in his column. That might seem a strange concern for a country that is ten times as densely populated as the United States, but Samuelson apparently sees it as a real nightmare.

After all, if its population keeps shrinking, Japan will face a severe labor shortage. They may have a hard time getting people to fill lower paying lower productivity jobs. For example, it might be hard to find workers to shove people onto Toyko’s overcrowded subways.

But it gets worse. As a result of the social services required by the elderly Japan has been running large deficits and built up an enormous debt.

“The mounting deficit spending has in turn ballooned Japan’s government debt to 226 percent of GDP — ‘the highest ever recorded in the OECD area’ and roughly twice the U.S. level.”

Yes, and the burden of this debt is absolutely crushing to the Japanese people. According to the I.M.F., Japan’s debt service burden will be equal to 0.1 percent of GDP this year, which is equal to roughly $20 billion in the U.S. economy. If the country continues on its current course, its debt service burden will turn negative in two years.

The issue here is that Japan has negative (nominal) interest rates. Lenders pay the Japanese government to borrow their money. As a result, the interest burden on Japan’s “higher recorded” debt is no burden whatsoever.

But wait, it gets worse. Samuelson tells us (citing economist Timothy Taylor):

Half of Japanese children born in 2007 are expected to live to 107.”

As we can see, the situation in Japan is pretty bad. Samuelson warns us that it could be our future too, which I suppose might be possible if we fix our health care system.

Anyhow, I will have more to say about Japan next week, but Samuelson and his clique really need to do a better job of finding a bogey man.

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Elizabeth Warren’s proposal to raise the value of the Chinese yuan and other currencies against the dollar is not getting good reviews in the media from economists. As can be expected, some of the arguments are pretty strange.

As the usually astute Noah Smith tells it in his Bloomberg piece, the problem with the trade deficit is:

“U.S. consumers are consistently living beyond their means, which seems unsustainable.”

The implication is that if the trade deficit were lower than we would be forced to cut back consumption. But the major problem the United States has faced over the last decade, according to many economists, is “secular stagnation,” which is an obscure way of saying, not enough demand.

Contrary to what Smith tells us, U.S. consumers are not living beyond their means, rather we actually need them to spend more money to bring the economy to full employment. To be more precise, we need them to spend more in the domestic economy, to increase demand here as opposed to in our trading partners. (We can also bring the economy to full employment by having the government spend more money on things like health care or a green new deal.)

Smith also disagrees with Warren’s mechanism for getting the dollar down, which involves a mixture of negotiations and threats of countervailing measures. The idea is that the biggest actor is China, who for some reason it is assumed would never agree to raise the value of its currency. CNN raises similar concerns. This view seems badly off the mark.

First, it is assumed in both pieces that China is no longer acting to deliberately keep down the value of the yuan against the dollar, even though most economists now concede that it deliberately depressed the value of its currency to maintain large trade surpluses in the last decade. (They did not acknowledge China’s currency management at the time.)

It is wrong to claim that China is not now acting to keep down the value of the yuan. While it is no longer buying large amounts of dollars and other currencies, it holds a stock of more than $3 trillion in reserves, which is well over $4 trillion if we add in its sovereign wealth fund.

This huge stock of foreign assets has the effect of depressing the value of the yuan against the dollar in the same way that the Fed’s holding of more than $3 trillion in assets helps to keep down interest rates. While few economists question that the Fed’s holding of assets leads to lower long-term rates than would otherwise be the case, they seem to deny that China’s holding of a large stock of foreign assets has similar effects in currency markets.

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Robert Samuelson complains in his column that people want too much from government and that the Democratic presidential candidates are being unrealistic in promising them more. He begins the piece with John Kennedy’s famous “ask not what your country can do for you” line, then tells readers:

“Anyone who has paid the slightest bit of attention knows that government has expanded substantially over the past half-century.”

He’s of course right about this, but not in the way he discusses in his column, which is a diatribe against government social programs.

The main way government has expanded over the last half-century is through interventions that redistribute trillions of dollars every year upward to people at the top of the income distribution.

The most obvious mechanism is through government-granted patent and copyright monopolies, which make items that would otherwise be cheap very expensive. This is most obvious in the case of prescription drugs, where drugs that would likely sell for less than $80 billion a free market will cost the country more than $460 billion this year.

This gap of $380 billion annually, is equal to 1.8 percent of GDP. It is five times the size of the food stamp program. And, that is just prescription drugs. Throw in at least $100 billion a year for medical equipment and other medical supplies, hundreds of billions more for computers and software, and you’re talking real money.

And Robert Samuelson has literally never said a word about these government-granted monopolies in any of his columns. I guess they are too big to worry about.

Then we get to trade. The reason why trade has depressed the wages of manufacturing workers (and workers without college degrees more generally) and not doctors is that we structured globalization to subject manufacturing workers to international competition, while protecting doctors and other highly paid professionals. Yes, the government did a lot over the last five decades to raise the pay of the most highly paid professionals, but Samuelson also didn’t notice this one.

And then there is the head I win, tails you lose way we structure financial markets. We rigged the system in a variety of ways to create a financial sector that sucks money from the rest of us to make a small number of Wall Street types very rich.   

Yes, this the topic of my book Rigged [it’s free], but don’t expect to see the issue of designing the market to redistribute upward discussed in the Washington Post. They only have room to print recycled pieces complaining about people wanting health care, education for their kids, and a planet that’s habitable for life.

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The Washington Post had another column telling us about the run-up in corporate debt and how this is going to be 2008 all over again.  This is a popular one with the media. William Cohan has a regular feature in the New York Times telling us how a collapse of the debt bubble is imminent, giving us another financial crisis.

While excessive corporate debt can pose problems, nothing we see now, or will plausibly see in the near future, looks anything like 2008. The fact that ostensibly knowledgeable people can say this shows that they not only missed the housing bubble as it was growing, ten years after it burst, they still don’t have a clue as to what happened.

So let’s try our Econ 101 lesson once again.

The reason the economy collapsed in 2008 was that the housing bubble that had been driving the economy collapsed. The financial crisis was lots of fun (always good to see billionaire types sweating), but it was very much secondary. The issue was that the housing bubble created a massive amount of demand in the economy, which disappeared when the bubble collapsed.

Most economists probably didn’t recognize the impact of the bubble because you would need access to GDP data, as in the data that is readily available on the Commerce Department’s website any time anyone cares to look. Those who did think that GDP data are useful in understanding the economy would see that residential construction, which had averaged a bit more than 4.0 percent of GDP in the 1980s and 1990s, soared to a peak of 6.7 percent of GDP in 2005.

This surge in construction spending was not associated with any developments in the fundamentals of the housing market. After all, the baby boomers, the largest demographic group, were seeing their children move away from home and downsizing. Rents were not sharing in the upswing in house prices, moving more or less in line with inflation. And, vacancy rates were hitting record highs.

All of this should have suggested that the surge in residential construction was transitory and likely to end when house prices came back down to earth. In fact, construction was likely to over-correct since the construction boom meant there was a lot of overbuilding. Construction ultimately bottomed out at 2.4 percent of GDP in 2010 and 2011. (It is 3.8 percent in the most recent data.)

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The Washington Post had an interesting article on how Pfizer learned that its arthritis drug, Enbrel, may be useful in slowing the onset of Alzheimer's disease. According to the article, Pfizer chose not to pursue any further testing of the usefulness of Enbrel as an Alzheimer's treatment, nor did it share its evidence with anyone else.

The most obvious reason why it did not pursue further testing itself is that the main patent on Enbrel was about to expire. This meant that if Pfizer invested the tens of millions, or possibly even hundreds of millions, needed for the clinical testing and FDA approval, it would likely be selling Enbrel as a generic competing with other companies who only have to cover their manufacturing cost. This means that Pfizer would never be able to recover the cost of the clinical tests and going through the FDA approval process.

The most obvious reason Pfizer didn't share its evidence with the scientific community is that it is a drug company that exists to make profits. It is not in the habit of making research publicly available to advance public health.

It is interesting to think of what this story might look like in a system of publicly funded research, where a condition of getting the money is that all findings are made available as soon as practical. (This system is described here and in chapter five of Rigged [it's free].)

In this case, the Pfizer equivalent that is finding evidence that the arthritis drug it developed would quickly post this on the web. Since its funding does not depend on patents, it may opt to pursue further research itself. However, if it is not well-situated to actually carry through the research on Alzheimer's, other researchers could pick up the ball and do the work themselves.

In the event that it proved to be a useful treatment for Alzheimer's the Pfizer equivalent would use this success as an argument for renewing and/or expanding its contract for research. While it is obviously better to actually test and prove the effectiveness of a new drug, finding an important discovery that laid the basis for further testing is a valuable contribution that should be rewarded. In this case, it doesn't seem the patent system would provide such a reward.

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Paul Krugman used his column today to criticize Donald Trump's tariffs for everything policy. While he provides a useful historical account of the abuse of tariffs in the 1920s, he left out one important reason why tariffs can be pernicious, especially in the hands of someone like Donald Trump.

Trump obviously views the presidency as a position to use for rewarding friends, punishing foes, and enriching his family. Tariffs give him a great opportunity to do this. 

Not only can he put a tariff on an essential imported input for a company that criticizes him, but he can also give exemptions to tariffs (they always have exemptions) for his friends. The NYT had a good piece on the issuing of exemptions last year.

The potential for abuse of the discretion associated with tariff policy is a cause for concern in general. However, with a president and a Republican party that have corruption as a guiding principle, this discretion is a very big deal. We should absolutely assume that Trump will abuse his tariff authority. It would probably never even occur to him that it is wrong.

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