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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Let's see, cattle ranchers are against vegetarianism, coal companies are against restricting CO2 emissions, and the Davos crew is trying to combat populism, according to The Washington Post. It is kind of amazing that the rich people at Davos would not understand how absurd this is.

Yeah, we get that rich people don't like the idea of movements that would leave them much less rich, but is it helpful to their cause to tell us that they are devoting their rich people's conference to combating them? The real incredible aspect of Davos is that so many political leaders and news organizations would go to a meeting that is quite explicitly about rich people trying to set an agenda for the world.

It is important to remember, the World Economic Forum is not some sort of international organization like the United Nations, the OECD, or even the International Monetary Fund. It is a for-profit organization that makes money by entertaining extremely rich people. The real outrage of the story is that top political leaders, academics, and new outlets feel obligated to entertain them.

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There have been numerous articles in the news recently telling us about China's slowing economy (e.g. here and here). From the accounts I've seen, it does sound like China has problems, although we have heard this story before. (There have been China experts predicting a financial collapse since the late 1990s.)

But the striking part is that a slowing economy is treated as something unexpected. China had been maintaining extraordinary double-digit growth through the 1980s, 1990s, and 2000s. The idea that China could continue to grow at this rate seemed pretty far-fetched. In fact, if we go back to 2016 and look at the IMF's forecast for growth in China in 2018 and 2019, it was 6.0 percent for both years. The IMF's forecasts are generally in the middle of professional forecasts. For this reason, it is a bit strange to read an article in the NYT telling us that China's slowdown to 6.4 percent growth last year is really bad news for the world economy.

It is also worth noting the ostensible problem here. The idea is that if China's economy were growing more rapidly, it would be creating more demand for goods and services produced by other countries. This is true, but there is another way that the countries facing insufficient demand can generate it if China's economy is not cooperating. Their governments could spend money.

The problem of insufficient demand is best countered by more demand. Insofar as the US faces this problem right now (it may not), it can be remedied by doing things like extending access to health care and child care or starting a Green New Deal. It really is not that hard to find ways to spend money.

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The Washington Post had a piece on a new study finding a correlation between opioid overdoses and the money spent by drug companies marketing opioids to doctors. Of course, no one would spend large amounts of money promoting a drug without the huge profit margins they enjoy as a result of government-granted patent monopolies.

It is standard practice for pharmaceutical companies to push their drugs in contexts where they may be appropriate. The spread of opioids is simply an extreme case. Without the patent monopoly, this incentive disappears. 

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(This piece was originally posted on my Patreon page.)

Jim Tankersley had a nice piece in the New York Times last week pointing out that the tax cut pushed through by the Republicans in 2017 is leading to a sharp drop in tax revenue. While this was widely predicted by most analysts, it goes against the Trump administration’s claims that the tax cut would pay for itself.

Looking at full-year data for calendar year 2018, Tankersley points out that revenue was $183 billion (5.6 percent) below what the Congressional Budget Office (CBO) had projected for the year before the tax cut was passed into law. This is a substantial falloff in revenue by any standard, but there are two reasons the picture is even worse than this falloff implies.

The first is that we actually did see a jump in growth in 2018 pretty much in line with what the Trump administration predicted. The tax cut really did stimulate the economy. It put a lot of money in the economy (mostly going to those at the top) and people spent much of this money. The result was that the growth rate accelerated from around 2.0 percent the prior three years to over 3.0 percent in 2018. (We don’t have 4th quarter data yet, which may be delayed by the shutdown, but growth should be over 3.0 percent.)

The jump in growth in 2018 means that the drop in revenue was not due to the economy being weaker than expected, it was due to the fact that the tax rate had fallen by a larger amount than the boost to growth. In fairness to the Trump administration, they had also projected a falloff in revenue due to the tax cut in 2018, but not one that was as large as what we saw.

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We know that Republicans have trouble with arithmetic so I thought I would take a few minutes to help Mitch McConnell with some of the numbers in a column he wrote for The Washington Post complaining about a bill to protect voters' rights and limit the influence of money in elections.

The column complains

"...the legislation dedicates hundreds of pages to federalizing the electoral process. It would make states mimic the practices that recently caused California to incorrectly register 23,000 ineligible voters."

While 23,000 people would be a lot of people to have to a dinner party (or a Donald Trump inauguration), California has over 19 million registered voters. This means that the 23,000 ineligible voters who were wrongly registered constitute 0.12 percent of all registered voters.

The goal, of course, is to have as few improperly registered voters as possible, but also to have as many eligible voters registered as possible. California has more than 25 million eligible voters, which means that 24 percent of eligible voters are not registered. For some reason, Mitch McConnell is more concerned that 0.12 percent of registered voters were ineligible than almost one-quarter of eligible voters are not registered.

Then McConnell decides to strike out for the average taxpayer against the campaign finance legislation in the law.

"They’re also taking aim at your wallet. Pelosi and company are pitching new taxpayer subsidies, including a 600 percent government match for certain political donations and a new voucher program that would funnel even more public dollars to campaigns. Maybe that’s why every Democrat opposed our tax cuts for middle-class families and small businesses. They’d rather use your money to enrich campaign consultants."

Roughly 30 million people contributed to political campaigns in 2016. Let's say the average matchable contribution is $50. (Only contributions of less than $200 are eligible for the match.) This implies $1.5 billion in matchable contributions or a total tab of $9 billion.

Is this $9 billion a big deal? Well, it's roughly 0.2 percent of the annual federal budget. It would be enough to give 100 million middle-class taxpayers $90 each or $45 annually since this is an every-other-year expenditure. It is equal to less than 3.0 percent of what the federal government gives each year to the pharmaceutical industry through patent monopolies and related protections. And it is less than 1.4 percent of the annual military budget.

I'm sure Senator McConnell appreciates my effort to clarify the points in his op-ed.

 

Correction:

As Curt Adams points out in his comment, the linked article in the McConnell column did not say that any ineligible voters were registered. It referred to errors in the registration process, such as wrong party identification or preferred language for ballots. McConnell seriously misrepresented this part of the story. Apparently, the Post's fact checkers either didn't look at the linked article or chose to ignore the misrepresentation.

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Seriously, this is a topic of a major article in the paper. The story is that low birth rates over the last four decades mean that fewer people will be entering the labor force and this is supposed to be really bad news.

"The declining population could create an even greater burden on China’s economy and its labor force. With fewer workers in the future, the government could struggle to pay for a population that is growing older and living longer.

"A decline in the working-age population could also slow consumer spending and thus have an impact on the economy in China and beyond.

"Many compare China’s demographic crisis to the one that stalled Japan’s economic boom in the 1990s."

The overwhelming majority of China's extraordinary growth over the last four decades has been due to increased productivity, not more workers in the workforce. According to data from the International Labor Organization, China's productivity growth averaged 8.9 percent annually between 1991 and 2018. If China can sustain productivity growth at just one-third of this rate, its output per worker will be 90 percent higher in 2040 than it is today.

This means that even if the ratio of workers to retirees falls from 3 to 1 at present to 1.5 to 1 in 2040, both workers and retirees could still see a 60 percent increase in their real income. (This assumes that the average income of a retiree is 75 percent of an average worker. It also does not take account of the smaller number of dependent children.) That does not seem like a crisis.

The example of Japan as a demographic horror story also does not fit the data. According to the IMF, Japan's per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States. 

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It doesn't as far as I can tell. Cohan has been on a rant for years about how high-risk corporate bonds are going to default in large numbers and then...something. It's not clear why most of us should care if some greedy investors get burned as a result of not properly evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of defaults leading to a collapse of the financial system.

But even the basic proposition is largely incoherent. Cohan is upset that the Fed has maintained relatively low, by historical standards, interest rates through the recovery. He seems to want the Fed to raise interest rates. But then he tells readers:

"After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might slow growth or even tip the economy into recession, complained that Mr. Powell would 'turn me into Hoover.' On Jan. 3, the president of the Federal Reserve Bank of Dallas said the Fed should assess the economic outlook before raising short-term interest rates again, a signal that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning more cautious."

It's not clear whether Cohan is disagreeing with the assessment of the impact of higher interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome Powell, and dozens of other economists.

Higher interest rates will slow growth and keep people from getting jobs. The people who would be excluded from jobs are disproportionately black, Hispanic, and from other disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining power of tens of millions of workers who are currently in a situation to secure real wage increases for the first time since the recession in 2001.

If Cohan had some story of how bad things would happen to the economy if the Fed doesn't raise rates, then perhaps it would be worth the harm done by raising rates, but investors losing money on corporate bonds doesn't fit the bill.

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The Washington Post had an article about how Republicans and right-wingers have become obsessed with trying to attack Alexandria Ocasio-Cortez, the newly elected representative from New York. At one point it refers to former Wisconsin governor Scott Walker's attack on Ocasio-Cortez's position advocating a high marginal tax rate on high-income individuals.

"Former Wisconsin governor Scott Walker, a Republican who was defeated in November, on Tuesday mocked Ocasio-Cortez for her tax proposal and suggested it was an elementary-school understanding of the issue. 'Even fifth graders get it,' he tweeted."

While the piece noted part of Ocasio-Cortez's response, that rich people are the ones with the money, it left out the more important part: Walker misled the fifth graders he refers to in his tweet. In his tweet, Walker confuses a marginal tax rate with an average tax rate:

"Explaining tax rates before Reagan to fifth graders: 'Imagine if you did chores for your grandma and she gave you $10. When you got home, your parents took $7 from you.' The students said: 'That’s not fair!' Even fifth graders get it."

Ocasio-Cortez correctly pointed out in her reply that the $10 the students earned for doing chores for their grandma would not be taxed because the 70 percent tax rate she proposes would only apply to incomes above $10 million.

"Explaining marginal taxes to a far-right former Governor:

'Imagine if you did chores for abuela & she gave you $10. When you got home, you got to keep it, because it’s only $10.

'Then we taxed the billionaire in town because he’s making tons of money underpaying the townspeople.'"

Ocasio-Cortez is right on this point and Walker is wrong. He either does not understand how our income tax system works or is deliberately lying to advance his agenda. Either way, the Post should have pointed out that Walker was wrong.

Many people are confused about the concept of a marginal tax rate (the higher tax rate only applies to the income above a cutoff). Opponents of high marginal taxes on the rich try to take advantage of this confusion in the way Scott Walker did with his class of fifth graders. It is the media's responsibility to try to inform people about how the tax system works and to expose politicians who misrepresent the issue.

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I generally don't get teary-eyed over the passing of a finance guy (or woman), but I make an exception in the case of John Bogle. Bogle was the founder of Vanguard funds, which now has over $5.1 trillion in assets. That would be roughly $16,000 for every person in the country.

Bogle's great innovation was to minimize the cost of managing individual accounts. The key Vanguard asset is an index fund. It does minimal trading, it just tracks the market. Bogle argued, supported by much evidence, that the vast majority of investors are not going to beat the market. This means trading costs are simply a transfer to the folks running the account. Since most of us have people we would rather give money to than our stockbroker, we are better off just having an index fund.

And it does make a huge difference. Many of Vanguard's index funds have costs of less than 0.1 percent annually. By contrast, many actively traded accounts will have fees and service charges in the range of 1–2 percent annually. This adds up over time. If you invested $1,000 that got a 6 percent nominal return, it would grow to $5,580 at Vanguard after 30 years. At a brokerage charging 1.0 percent in annual fees, it would grow to $4,320. At a brokerage charging 2.0 percent annual fees, it would only grow to $3,240. And the gap is all money in the pockets of the financial industry.

While his low-cost index fund was a great innovation in finance, he did not personally get rich from it. He organized Vanguard as a cooperative. The people who invest with the company effectively own it.

I once met John Bogel. We were having lunch before testifying on some financial issue. He was very soft-spoken and I originally didn't catch his full name. After our testimony, when I realized who he was, I told him that I tell everyone I know to give him all their money. That was true.

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By Eileen Appelbaum

In today’s column, Robert Samuelson attributes Sears bankruptcy and possible liquidation — the final chapter in a saga that has already cost 200,000 workers their jobs — to the department store chain’s inability to adapt to competition with big box stores and the Internet. Apparently, he has never heard of Eddie Lampert and his ESL hedge fund, which took over Sears and Kmart in 2006 and ran the company, now known as Sears Holdings as an ATM for himself and his investors. Lampert may not have known anything about retailing, but as Sears’ CEO he had no qualms about monetizing its assets for his own and his wealthy investors’ benefit — including Treasury Secretary Steve Mnuchin who was an investor in his hedge fund and served on the Sears board for 12 years as the retailer spiraled downward.

In its most egregious act of financial engineering, Lampert’s hedge fund set up a real estate company, Seritage Growth Properties, with Lampert as Chairman of Seritage’s board. In 2015, Lampert as CEO of Sears sold 266 Sears and Kmart stores located on prime real estate to Seritage, where he was Chairman of the Board. Seritage shuttered stores and developed the real estate into high-priced new developments — offices for the burgeoning high tech sector in Santa Monica, a luxury shopping center in Aventura, Florida. Sears creditors are in court over this self-dealing by Lampert, claiming he cheated them out of $2.6 billion.

If Samuelson took the time to read his own newspaper, he could have learned about the business model of investment funds — private equity and hedge funds — that take over Main Street companies from Peter Whoriskey’s investigative reporting on the bankruptcy of Marsh, a major mid-West grocery chain. Amazon, Walmart and the Internet certainly pose a challenge, but the inability of companies to respond can be laid squarely at the feet of investment funds that load the companies they own with unsustainable levels of debt and that take resources out of the company by selling off its real estate.

As I show in a comparison of the largest supermarket chain in America, the very successful publicly traded Kroger’s, and the second largest, floundering private equity-owned Albertsons, large, iconic retail companies can respond to competitive challenges when they control their own resources, own their own real estate, and keep their debt levels manageable.

Samuelson attributes the demise of Sears to changes in capitalism and competition without, apparently, having ever heard of hedge funds and private equity funds that take over the management of companies and run them in the interests of investors in their funds, with little regard for the companies’ ability to compete or its workers.

Perhaps The Washington Post should set as a minimum requirement for its columnists that they actually read the newspaper.

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