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.

Please also consider supporting the blog on Patreon.

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

I asked that question about Washington Post reporters about a year ago, it turns out I have to ask the same question about New York Times reporters. It turns out it comes up in the exact same context, an effort to blame Trump's trade war for the plight of U.S. farmers.

The issue here is a very simple one that is completely non-controversial among economists. Other things equal, a dollar that has a higher value in currency markets will mean lower prices for U.S. farmers. The logic on this one is straightforward.

Suppose that milk sells in Europe for 2.5 euros a gallon. If there are 1.2 dollars to a euro, then a U.S. dairy farmer will get $3.00 for a gallon of milk sold in Europe. Now suppose the dollar rises in value so that it a euro is only worth 1.0 dollars. In this case, the U.S. dairy farmer will only get $2.50 for a gallon of milk sold in Europe. In the real world, things will always be a bit more complicated, but that basic logic still holds, a higher valued dollar means lower farm prices measured in dollars.

For this reason, it is mind-boggling that the NYT could tell us "the price of milk has dropped by roughly a third in the last five years," without mentioning that the trade-weighted value of the dollar has risen by more than 20 percent over this period.

There are lots of very good reasons not to like Donald Trump and his trade policy, but the NYT shouldn't be in the business of making stuff up.

Add a comment

Hawaii Senator Brian Schatz recently introduced a bill proposing a 0.1 percent tax on financial transactions. This means that when people trade a share of stock or a bond, they would pay a tax rate of 0.1 percent ($1 on $1,000), on their trades. According to the Congressional Budget Office, this tax can raise more than $80 billion a year in revenue, somewhat more than the entire annual budget for the food stamp program.

Not surprisingly, the financial industry doesn’t like the idea. It has argued that this tax would be a big hit to retirees and pension funds. While it is understandable that the industry would try to raise such fears to protect its profits, its claims have little basis in reality, as a bit of arithmetic can quickly show.

Suppose that a worker has $100,000 in a retirement fund. If 40 percent of the fund turns over every year, then this worker would be a 0.1 percent tax on the $40,000, if all of the tax is passed on to investors. This is a strong assumption, since it is likely that the industry would have to absorb some of the cost of the tax in lower fees, but even in this extreme case where they can make investors pay the full tax, this worker would be paying $40 a year from their retirement account to the government as a result of the tax.

While no one will be happy to pay an extra $40 a year in taxes, it is worth putting this in some context. The average fees charged by the financial industry to manage a 401(k) account are in the neighborhood of 1.0 percent annually. Many charge as much as 1.5 percent or even 2.0 percent.

But if we use this 1.0 percent figure, this worker with $100,000 in their retirement account is paying the financial industry $1,000 a year from their account. By comparison, the $40 from the financial transactions tax may not seem like a very big deal.

Add a comment

I'm just asking because that's what the Washington Post told readers in an article on the 2019 Social Security and Medicare Trustees reports. The piece noted that the Medicare program is first projected to face a shortfall in 2026. It would take an increase in the payroll tax of 0.91 percentage points (0.455 percentage points on both employees and employers) to fill the projected gap. The piece tells readers this is "a measure that could hurt business development and growth."

It's not clear why it would have such a negative effect on business development and growth. The conventional view in economics is that the worker pays this tax out of their wages, so essentially it means that after-wages will be 0.91 percent lower with the tax increase. While that will moderately reduce the incentive to work, most studies show this should have little effect on employment.

We have seen much larger tax increases in prior decades, for example the payroll tax rose by 4.8 percentage points from 1959 to 1969, with little obvious negative effect. It is also worth noting that the slower pace of health care cost growth over the last decade has slowed or even reversed the rise in the percentage of compensation going to health insurance. This means that wages have risen more rapidly than if health care costs had continued to grow at their prior pace. In its impact on the labor market this is equivalent to a cut in the payroll tax. The impact of this slower health care growth over the last decade has been considerably larger than the 0.91 tax increase that is projected to be necessary to fund Medicare after 2026.

Add a comment

(This post originally appeared on my Patreon page.) U.S. trade policy is truly fascinating. Probably more than in any other area of public policy, trade agreements are structured by corporate interests behind closed doors. Then when a deal is produced, the establishment media and economists insist that we have to support the deal behind the important principle of “free trade.” The opponents are treated as knuckle-dragging Neanderthals who just can’t understand how the economy works.

We got another episode in this long-running show last week when the United States International Trade Commission (USITC) came out with its assessment of the United States, Mexico, Canada Agreement (USMCA), also known as the new NAFTA. It came as a surprise to virtually no one that the USITC study showed economic gains from the deal. The study projected that the deal would lead to an increase in GDP of 0.35 percent when its effects are fully felt. However, the real impressive part of the story is how it got this result.

Before getting to the particulars, it’s worth putting some perspective on the character of the report. The USITC was obviously determined to make the USMCA look good. One reason this is clear is the failure to put a date for the year for which their projections are made. The model that the USITC used to project gains, the model from the Global Trade Analysis Project (GTAP), assumes a long period through which the economy gradually adjusts to the changes put in place from a trade deal. The projected impact refers to the end year, which is around 16 years in the future.[1]

Incredibly, the UISTC study projecting the impact of USMCA neglects to mention the end year for its projections, which presumably would be something like 2034. The end year is presumably left out because a gain of 0.35 percentage points of GDP over sixteen years looks rather pathetic. It comes to just over 0.02 percentage points a year, an increment that would be essentially invisible.

Add a comment

Jim Tankersley had a piece in the NYT yesterday on the cost per job saved of Trump's tariffs on Chinese washing machines. According to the study, the cost per job saved was $817,000. While that is a steep tab, there are a few points that should be added to this sort of analysis.

First, if the point of the tariffs is to benefit workers, part of this $817,000 cost is going to higher pay to workers who would have jobs with or without the tariff. The study doesn't look at the impact on wages of workers in the industry, but if the goal is to help workers who make washing machines, then this should be factored into the assessment.

The second point is that this is a partial equilibrium analysis. It doesn't look at the overall effect on the economy of a reduction in the money we spend on importing washing machines. While this can be hard to assess, since imports of washing machines from China are a very small part of the total economy, other things equal we would expect that less money spent on imported washing machines would translate into a higher-valued dollar. (We are reducing the supply of dollars on world markets, thereby raising the price of dollars.)

This effect is almost certainly very small, but suppose that the reduced payments for imported washing machines raised the value of the dollar by just 0.01 percent. If this rise in the dollar were fully passed on in lower import prices (it isn't), that would translate in a reduction in the cost of imports to US consumers of $320 million, more than 20 percent of the cost of the tariffs estimated in this study. Even if it would be hard to get any sort of precise numbers, the point is that this is an offsetting effect which could be large relative to the estimated cost of the tariffs.

The third point is that tariffs can sometimes make sense if they allow an industry breathing space to reorganize and regain competitiveness or serve some other goal (e.g. persuading a country to raise the value of its currency). In 1983, Ronald Reagan imposed tariffs on Japanese motorcycles in order to help out Harley Davidson. In 2006, when President George W. Bush wanted to tout the virtues of free trade, he visited a Harley Davidson factory in Pennsylvania which was a major producer of motorcycles for exports. It is unlikely that Harley Davidson would have been exporting motorcycles in 2006 without the tariffs that allowed it some breathing space in 1983.

Of course, none of this means that Trump's washing machine tariffs are a good idea. If they are in fact part of a well-crafted trade and industrial policy strategy, he is managing to keep this strategy secret from just about everyone. It looks mostly like the main effect will just be that we pay more for washing machines, even if the story may not be quite as bad as advertised.

Add a comment

In keeping with accepted standards in debates on economic policy, we are now getting a debate on Medicare for All that is doing a wonderful job of ignoring the relevant issues. The focus of this debate is what Medicare for All will pay hospitals. As The New York Times tells us, if Medicare for All pays hospitals at Medicare reimbursement rates, many will go out of business.

The reason why this is a bizarre way to frame the issue is that the payments to hospitals are not going to buildings. They are going to pay for prescription drugs (close to $100 billion a year), for medical equipment and supplies, for doctors and other health care personnel. They also pay for hospital administrators, and in the case of for-profit hospitals, some of the money goes to profits. Also, in recent years a growing chunk of the money has gone to buildings, as many hospitals have sought to attract high-end patients by making themselves more upscale than a facility that exists primarily to provide health care.

Anyhow, a serious discussion of payments to hospitals should focus on the costs that hospitals face. There are enormous potential savings on prescription drugs and medical equipment and supplies if the government were to pay for research upfront and allow these items to be sold at free market prices, rather than granting patent monopolies that allow manufacturers of these products to charge prices that are tens or hundreds of times their cost of production.

We could save close to $100 billion a year if we allowed free trade in physicians services (i.e. remove the barriers that prevent qualified foreign doctors from practicing in the United States). We could also save some money on the high pay received by hospital administrators, especially if we reformed the corporate governance structure so that seven and eight-figure salaries were less common. A Medicare for All system also would presumably not be reimbursing hospitals for lavish facilities.

Anyhow, if we are going to have a serious debate on what Medicare for All would pay hospitals then it must focus on the prices and wages that hospitals pay for goods and services. Debating what the government pays hospitals without asking about the cost of these inputs is entirely pointless.

Add a comment

Economists pride themselves on being the serious social science, the one most deserving of status as an actual science. I will let others make the comparative assessment, but there is an awful lot of nonsense that passes as serious analysis within economics. For cheap fun, I thought I would use a nice spring afternoon to highlight some of my favorites.

Myth 1: The Robots Are Taking All the Jobs

The "robots taking the jobs" story gets top place both because it is completely ridiculous and it is widely taken seriously in policy discussions. The story is ridiculous because it is directly contradicted by the data. Robots taking all the jobs is a story of rapid productivity growth. It means that we can produce the same output with fewer workers because the robots are doing work that used to be done by people. That is the definition of productivity growth.

But the productivity data refuse to cooperate with this story. This is not hard to discover. The Bureau of Labor Statistics releases data on productivity every quarter. The data show that productivity growth has been very weak in recent years, averaging just 1.3 percent annually since 2005. This compares to a rate of productivity growth of 3.0 percent in both the period from 1995 to 2005 and the long Golden Age from 1947 to 1973.

The job-killing robots story is sometimes diverted into a scenario that is just around the corner instead of being here today. Of course, we can’t definitely rule out that at some point in the future productivity will not accelerate sharply, but it is worth noting that this pickup does not seem to be on the immediate horizon. Investment is not especially high as a share of GDP, averaging 13.4 percent over the last three years. That compares to 14.2 percent from 1999 to 2001, and 14.4 percent from 1980 to 1982, its post-war peak.

Add a comment

The New York Times told its readers that the government plans to spend $37.2 million ("nearly $40 million" in first sentence) on two new tent cities for migrants coming over the border and applying for asylum. Most readers probably have no idea how much money this is to the federal government. If the paper was actually trying to provide information, it would have told readers that this is equal to approximately 0.0008 percent of spending this year.

Add a comment

The push for universal Medicare was given new momentum by Bernie Sanders campaign for the 2016 Democratic nomination. While it is still quite far from becoming law in even an optimistic scenario, it is certainly now treated as a serious political position. This is probably best demonstrated by the fact that the Medicare for All (M4A) bill put forward by Washington representative Pramila Jayapal has 107 co-sponsors, nearly half of the Democratic caucus in the House.

As much progress as M4A has made, it will still be a huge lift to get it implemented. A universal Medicare system would mean shifting somewhere around 8 percent of GDP ($1.6 trillion at 2019 levels) from the private system to a government-managed system. It would also mean reorganizing the Medicaid program and other government-run health care programs, as well as the Medicare program itself. The current system has large co-pays and many gaps in coverage, such as dental care, that most proponents of M4A would like to fill. It also has a large role for private insurers in the Medicare Advantage program, as well as the Part D prescription drug benefit.

The difficulty of a transition is demonstrated by the fact that there is no agreed-upon mechanism for paying for this expansion of Medicare. Instead of a specific financing mechanism, the Jayapal bill features a menu of options. Actual legislation, of course, requires specific revenue sources, not a menu. The fact, that even the most progressive members of the House could not agree on a financing proposal that they could put their names to, shows the difficulty of the transition.

If it is not likely that we will get to M4A in a single step, then it makes sense to find ways to get there piecemeal. There have been a variety of proposals that go in this direction. Many have proposed lowering the age of Medicare eligibility from the current 65 to age 50 or 60. The idea is that we would bring in a large proportion of the pre-Medicare age population, and then gradually go further down the age ladder. (We can also start at the bottom and move up.)

Add a comment

Neil Irwin had a New York Times article warning readers of the potential harm if the Fed loses its independence. The basis for the warning is that Donald Trump seems prepared to nominate Steven Moore and Herman Cain to the Fed, two individuals with no obvious qualifications for the job, other than their loyalty to Donald Trump. While Irwin is right to warn about filling the Fed with people with no understanding of economics, it is wrong to imagine that we have in general been well-served by the Fed in recent decades or that it is necessarily independent in the way we would want.

The examples Irwin gives are telling. Irwin comments:

"The United States’ role as the global reserve currency — which results in persistently low interest rates and little fear of capital flight — is built in significant part on the credibility the Fed has accumulated over decades.

"During the global financial crisis and its aftermath, for example, the Fed could feel comfortable pursuing efforts to stimulate the United States economy without a loss of faith in the dollar and Treasury bonds by global investors. The dollar actually rose against other currencies even as the economy was in free fall in late 2008, and the Fed deployed trillions of dollars in unconventional programs to try to stop the crisis."

First, the dollar is a global reserve currency, it is not the only global reserve currency. Central banks also use euros, British pounds, Japanese yen, and even Swiss francs as reserve currencies. This point is important because we do not seriously risk the dollar not be accepted as a reserve currency. It is possible to imagine scenarios where its predominance fades, as other currencies become more widely used. This would not be in any way catastrophic for the United States.

On the issue of the dollar rising in the wake of the financial collapse in 2008, this was actually bad news for the US economy. After the plunge in demand from residential construction and consumption following the collapse of the housing bubble, net exports was one of the few sources of demand that could potentially boost the US economy. The rise in the dollar severely limited growth in this component.

The other example given is when Nixon pressured then Fed Chair Arthur Burns to keep interest rates low to help his re-election in 1972. This was supposed to have worsened the subsequent inflation and then severe recessions in the 1970s and early 1980s. The economic damage of that era was mostly due to a huge jump in world oil prices at a time when the US economy was heavily dependent on oil.

While Nixon's interference with the Fed may have had some negative effect, it is worth noting that the economies of other wealthy countries did not perform notably better than the US through this decade. It would be wrong to imply that the problems of the 1970s were to any important extent due to Burns keeping interest rates lower than he might have otherwise at the start of the decade.

It is also worth noting that the Fed has been very close to the financial sector. The twelve regional bank presidents who sit on the open market committee that sets monetary policy are largely appointed by the banks in the region. (When she was Fed chair, Janet Yellen attempted to make the appointment process more open.) This has led to a Fed that is far more concerned about keeping down inflation (a concern of bankers) than the full employment portion of its mandate.

Arguably, Fed policy has led unemployment to be higher than necessary over much of the last four decades. This has prevented millions of workers from having jobs and lowered wages for tens of millions more. The people who were hurt most are those who are disadvantaged in the labor market, such as black people, Hispanic people, and people with less education.

Insofar as the Fed's "independence" has meant close ties to the financial industry, it has not been good news for most people in this country.

Add a comment