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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Just thought people may be interested since Trump has made the trade deficit such a central issue in his campaign and his presidency. The deficit for the first seven months of 2018 was $337.9 billion, that is an increase of 17.1 percent from the trade deficit of $288.5 billion in the same months of 2016. The trade deficit has been running at an annual rate of $579.3 billion so far this year, or just under 2.9 percent of GDP.

There are many factors that affect the deficit, including more rapid growth and the increase in the value of the dollar. But the followers of Donald Trump who see this as the main measure of the success of the country's trade policy may be interested in this number.

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The new trade agreement with Canada that the Trump administration announced yesterday has rules on drugs patents and related protections which are likely to cost the jobs of US manufacturing workers. The deal includes a number of provisions that are explicitly designed to raise drug prices in Canada.

These provisions include a requirement of a period of ten years of marketing exclusivity for biotech drugs before a biosimilar is allowed to enter the market. The deal also requires Canada to grant a period of exclusivity for existing drugs when new uses are developed. In addition, it requires that the period of patent monopoly be extended beyond 20 years when there have been "unreasonable" delays in the granting of the patent.

The intended purpose of these provisions is clearly to make Canada pay more money to US drug companies. Insofar as it achieves this result, it will mean that the United States has a larger surplus on intellectual products. That would imply a larger trade deficit in manufactured goods and therefore less employment in US manufacturing.

A basic accounting identity in economics is that the overall US trade deficit is equal to the gap between domestic savings and domestic investment. This identity means that if this domestic balance is not changed, the overall trade deficit is not changed.

When the US economy is below its potential level of output, a lower trade deficit can lead to more employment and income, which typically also leads to more domestic savings. However, economists typically analyze trade as though the economy is always at or near its potential level of output. If this is the case, the trade deficit is fixed by the balance of domestic investment and savings. In that case, if the trade surplus rises in one area, like intellectual products, then the trade deficit must rise to offset this increase in other areas, like manufactured goods.

The mechanism through which this would occur is, other things equal, more licensing payments to Pfizer, Merck, and other US companies for their drugs will mean a rise in the value of the US dollar against the Canadian dollar. If the US dollar increases in price relative to Canada's dollar, it makes goods and services produced in the United States relatively less competitive, leading to a larger trade deficit in areas other than prescription drugs.

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I'm just asking. It seems more than a bit bizarre that a news article would be declaring winners and losers from a major trade pact, the details of which have not yet been made public. Usually, news articles focus on reporting the news.

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Neil Irwin had a nice piece picking up an issue that I have raised repeatedly (e.g. here, here, and here). The slowdown in investment in 2015 and 2016 was primarily driven by a plunge in world energy prices. The more recent pick-up is mostly a result of the partial reversal of this plunge, not excitement over Donald Trump's election.

The aspect of the issue that Irwin neglects to mention in this piece is that the plunge in energy prices in 2015, and its partial reversal the last two years explain most of the variation in real wage growth in the recovery, as shown below.

12-Month Change in Average Hourly Wage

CES0500000013 188066 1538221313885

Source: Bureau of Labor Statistics.

This flip side is important since it explains both why consumption was relatively strong in 2015 and 2016 and why real wage growth has fallen to near zero in the last year and a half.

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I have pasted below a post from Patreon page. I had planned to wait a little longer, but this NYT piece convinced me to post it now.

Debt and Deficits, Again

With the possibility that the Democrats will retake Congress and press demands for increased spending in areas like health care, education, and child care, the deficit hawks (DH) are getting prepared to awaken from their dormant state. We can expect major news outlets to be filled with stories on how the United States is on its way to becoming the next Greece or Zimbabwe. For this reason, it is worth taking a few moments to reorient ourselves on the topic.

First, we need some basic context. The DH will inevitably point to the fact that deficits are at historically high levels for an economy that is near full employment. They will also point to a rapidly rising debt-to-GDP ratio. Both complaints are correct, the question is whether there is a reason for anyone to care.

Just to remind everyone, the classic story of deficits being bad is that they crowd out investment and net exports, which makes us poorer in the future than we would otherwise be. The reason is that less investment means less productivity growth, which means that people will have lower income five or ten years in the future than if we had smaller budget deficits. Lower net exports mean that foreigners are accumulating US assets, which will give them a claim on our future income.

Debt is bad because it means a larger portion of future income will go to people who own the debt. This means that the government has to use up a larger share of the money it raises in taxes to pay interest on the debt rather than for services like health care and education. Or, to put it in a more Keynesian context, there will be more demand coming from people who own the debt, which means the government would need higher taxesnto support the same level of spending than would otherwise be the case.

There is an important intermediate step in the deficit-crowding out story that is worth stating explicitly. The Federal Reserve Board could opt to keep interest rates low by buying up debt directly. The assumption in the crowding out story is that the Fed allows interest rates to rise or even deliberately raises them, presumably because it is concerned about inflation.

If there is no basis for inflationary concerns, there is no reason that the Fed could not simply keep interest rates low in spite of a large deficit, and therefore prevent any crowding out. The question then is whether a budget deficit is pushing the economy up against its limits, leading to inflationary pressures. When we look at the various sources of demand in the economy, there are two reasons for thinking that a larger budget deficit would be needed today to sustain something close to full employment than would have been true four decades ago.

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The NYT ran a piece saying that the Federal Reserve Board is raising interest rates, in spite of weak wage growth, because of the more rapid growth in non-wage compensation. If this is true, then its policy is badly mistaken.

The piece tells readers:

"The average worker received 32 percent of total compensation in benefits including bonuses, paid leave and company contributions to insurance and retirement plans in the second quarter of 2018. That was up from 27 percent in 2000, federal data show."

While there has been a substantial rise in the non-wage share of compensation over this period, that is not true in the last three years. The Bureau of Labor Statistics reports the non-wage share of compensation was on average 31.7 percent in the second quarter of 2018. That is the same as it was in the first quarter of 2017 and in fact the first quarter of 2015. There has been no clear upward movement in this measure in the last three years. This means that if the Fed is claiming that growing non-wage compensation is making up for a lack of wage growth, then it is not relying on the data.

The piece also tells readers:

"The White House Council of Economic Advisers calculates that increasingly generous paid leave benefits mean that the average American worker is getting an additional half-day of paid leave each year, compared with five years ago."

Assuming this calculation is correct, if we start with a 250 day work year (50 weeks at five days a week), an extra half day of paid leave would be equivalent to a 0.2 percent increase in pay. Since this rise in paid leave took place over five years, it would mean that the move to more paid time off would add 0.04 percentage points to reported wage growth.

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The Washington Post ran a very confused piece on how China perceives Donald Trump's trade war. First of all, it hugely exaggerated how much is at stake for China. It implied that China's economy could take a serious hit if Trump's trade war substantially reduces U.S. imports from China.

At the moment, Trump is putting tariffs on $300 billion of exports from China. If this lead to a 50 percent reduction of China's exports of these items to the U.S. (a huge reduction) that would be $150 billion. This is approximately 1.5 percent of China's GDP measured in U.S. dollars. Since a substantial portion of China's exports to the U.S. have value-added from other countries (e.g. the Apple iPhone), perhaps two-thirds of this loss would be value-added in China.

That means that the loss of exports to the U.S. would be equal to 1.0 percent of GDP. By comparison, China's trade surplus fell by 8.0 percentage points of GDP between 2007 and 2011, a period in which China sustained double-digit economic growth.

This reduction in China's trade surplus also directly contradicts the piece's claim that:

"But it [China] has made precious little progress on any of these goals [towards liberalizing trade]."

In fact, the huge reduction in China's trade surplus (equivalent to $1.6 trillion in the U.S. economy today) indicates it has made enormous progress.

The piece also wrongly tells readers:

"Although China’s once-booming growth rates have slowed markedly in recent years, it is still on track to overtake the United States as the world’s largest economy some time around 2030, according to a raft of respected researchers."

Actually, by the measure most widely used by economists, purchasing power parity GDP, China's economy is already 20 percent larger than the U.S. economy.

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The failure of economics reporters in major news outlets to make simple logical connections is truly astounding. The Washington Post gave us another great example of this failure in a piece on robots replacing workers in a Chinese warehouse.

The gist of this story is that this warehouse, which only has four workers overseeing dozens of robots, could be the wave of the future. At one point the piece tells us that the consulting firm McKinsey projects that almost one-third of jobs could be replaced by automation by 2030.

While this is presented as something ominous, this replacement of workers by technology is known as "productivity growth." The loss of one-third of all jobs in 12 years would translate into productivity growth of just over 3.0 percent annually. This is roughly the pace of productivity growth we saw in the long Golden Age from 1947 to 1973, a period of low unemployment and rapid wage growth.

Also, if the McKinsey projection on productivity growth proves correct, then the Trump administration's growth target of 3.0 percent annually will be easily reached. (The Congressional Budget Office projects productivity growth around 1.7 percent annually.) GDP growth is the sum of productivity growth and labor force growth. With the latter likely to be in the range of 0.4 to 0.6 percent annually, GDP growth will be well in excess of 3.0 percent if the McKinsey projection on productivity growth proves correct.

It is absolutely astounding that the Post somehow does not connect predictions of rapid automation with projections of GDP growth. This is definitional, it is not something subject to debate. In its defense, the Post is hardly alone in this failure.

This piece also includes a bizarre discussion of China's "labor shortage."

"The country’s one-child policy, which was in place from 1979 to 2016, shaved down today’s number of young job seekers, giving workers more leverage to ask for higher pay and better benefits. 

"Government officials have admitted the policy stifled population growth, making it tougher and more expensive for companies to fill vacancies."

Why should China's government have to "admit" that it pursued a policy that has helped to give workers more bargaining power so that they can share in the country's economic gains? Many people might think this is the goal of economic policy.

 

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I have repeatedly said over the last few weeks (and ten years) that bailing out the banks was not necessary to prevent a second Great Depression. While I think this is absolutely true for reasons I have laid out many times, let me make a couple of additional points.

I think a bailout that imposed stringent conditions on the financial industry, essentially requiring a downsizing and restructuring, would have been better than just letting the banks fail. That would have been the best possible outcome. But given that this sort of bailout was not on the table, I think no bailout would have been a better option than the one we got, which largely left the structure of the industry intact.

Also, I have no doubt that the downturn in 2008–-09 would have been worse if the banks had been allowed to fail. But I think the short-term pain would have been more than compensated for by eliminating the albatross of a bloated financial sector. A downsized financial sector would have freed up tens of billions annually (perhaps more than a hundred billion) for productive uses like education and health care. It also would have eliminated a major driver of inequality in the economy, since many of the highest incomes in the economy are generated by the financial industry.

Of course, the idea of having more short-term pain, which I would likely not experience, is not an argument to be made lightly. If the unemployment rate had risen by another half or full percentage point due to the failure of the banks, that means millions more people would be suffering as a result.

That is a very bad story, but one that economists often advocate under other circumstances. Specifically, any economist who has ever advocated that the Federal Reserve Board raise interest rates is effectively making the short-term pain for long-term gain argument. Usually, the case for higher rates would be that preventing spiraling inflation and the associated costs are worth the job loss (or slower job growth) that will be associated with the Fed's rate hike. 

In both the case of letting banks collapse and a Fed rate hike, people can have reasonable differences on the terms of the tradeoffs and therefore come to different conclusions on the best policy. But any economist who argues that we had to bail out the banks because any additional short-term pain was unacceptable, does not deserve to be taken seriously. 

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Ben Bernanke responded to Paul Krugman's post last week, which agreed with my argument that the main cause of the Great Recession was the collapse of the housing bubble rather than the financial crisis. Essentially, Bernanke repeats his argument in the earlier paper that the collapse of Lehman and the resulting financial crisis led to a sharp downturn in non-residential investment, residential investment, and consumption. I'll let Krugman speak for himself, but I see this as not really answering the key questions.

I certainly would not dispute that the financial crisis hastened the decline in house prices, which was already well underway by September of 2008. It also hastened the end of the housing bubble-led consumption boom, which again was in the process of ending already as the housing wealth that drove it was disappearing.

I'll come back to these points in a moment, but I want to focus on an issue that Bernanke highlights, the drop in non-residential investment following the collapse of Lehman. What Bernanke seemed to have both missed at the time, and continues to miss now, is that there was a bubble in non-residential construction. This bubble essentially grew in the wake of the collapsing housing bubble.

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

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