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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When it comes to the budget deficit and programs like Social Security and Medicare, the Washington Post has had difficulty keeping its editorial views out of the news section. We see this again today in an article on the October jobs numbers that told readers:

"A growing number of Wall Street analysts and economists say that the tax cuts and additional spending caused a temporary boost that will fade and leave future generations with a substantially larger debt burden."

The piece actually doesn't cite a single economist who complains about the debt burden on future generations. The extent the debt imposes a burden is questionable since the interest is overwhelmingly paid to people in the United States. This means there could be a distributional issue within generations (from the group who pays taxes to the group getting interest), but not a generational issue.

There can be an issue that the deficits now being run will crowd out investment by raising interest rates. Less investment will mean the economy is less productive in the future. But this story is offset by the fact that more rapid growth tends to lead to more investment. In fact, the failure to run larger deficits earlier in the recovery slowed growth and investment, thereby imposing a huge burden on future generations in the form of a weaker economy. The Washington Post has literally never run a news story calling attention to the cost of austerity policies (which it supported) on future generations.

If the Post were to seriously discuss burdens on future generations it would also have to talk about government-granted patent and copyright monopolies. These monopolies are ways in which the government pays for research and creative work. In effect, the monopolies allow companies to impose large taxes on consumers. If a patent monopoly allows Pfizer or Merck to sell a drug for $30,000 that would sell for $300 in a free market, it imposes the same burden on future generations as a tax of 10,000 percent on the drug.

Again, the Post literally never mentions the burdens imposed by patent and copyright monopolies, even though these come to close to $1 trillion a year, swamping the size of the interest burden on the debt. It is probably worth noting in this context that pharmaceutical companies are major advertisers for the paper.

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The NYT published an oped last week by Jochen Bittner, a political editor for a major German newspaper, asking what is wrong with German's Social Democrats. The focus of the piece is the collapse of popular support for the party as shown by its poor performance in several recent elections.

Bittner attributes this drop in support to its unwillingness to push an agenda that combats Germany's rising inequality. As one example, he comments:

"Nor did the SPD [the German Social Democratic Party] seem to mind that the chief executive of Deutsche Post earns 239 times the salary of his average employee."

Deutsche Post is the privatized German postal and delivery company. A state-owned bank still has a 20 percent share of the company.

While Bittner's piece raises good questions (there is nothing in the rules of a market economy that says a CEO should be allowed to rip off the company they work for), he alludes at one point to the German unemployment rate. He notes that it has fallen by more than 50 percent to "around 5 percent."

In fact, Germany's unemployment rate according to the OECD's harmonized measure, which essentially uses the US methodology, is just 3.4 percent. Bittner's 5 percent figure refers to the official German measure of unemployment, which includes workers who are employed part-time as being unemployed.

The NYT should have adjusted the unemployment number in Bittner's piece to the OECD measure to avoid giving readers a misleading picture of Germany's economy. Unfortunately, this is a common problem in the NYT and elsewhere. If the point is to convey information to readers, then the terms should be adjusted to measures readers would understand. 

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CEPR was selected as one of the organizations to get a share of CREDO’s November givings. The size of our share will depend on how many people vote for CEPR here.

I am really proud of all the issues where CEPR has been ahead of everyone else. We were saying that Social Security did not have to be cut at a time when even many Democrats said the program faced a crisis. We were warning that the I.M.F.’s structural adjustment programs were stifling growth and increasing inequality at the high point of the Washington Consensus. We were yelling about the housing bubble and the dangers it posed to the economy when politicians in both parties were celebrating the rise in homeownership rates.

And, we were warning of the dangers of private equity before people saw the wreckage of Toys "R" Us and other retail icons brought down by financial engineering. I should also mention our contribution to getting Fed Up off the ground, a fantastic coalition of community and labor organizations that has had a huge impact on the Federal Reserve Board.

I’ll spare people the full boast list, but as the saying goes in Washington, the only thing worse than being wrong is being right. And, with CEPR’s track record, funding is naturally very difficult.

We welcome the direct contributions from many of our readers, which make a big difference to our finances. The funding from CREDO can also be a big help, and in this case, it is just a question of taking a few seconds to vote here.  

Thanks for your support.

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It’s a bit less than a year since Congress passed the Trump tax cut, but we are far enough along that we can be fairly confident about its impact on the economy. There are three main lessons we can learn:

  • The tax cut is to not leading to the promised investment boom;

  • The additional demand generated by the tax cut is spurring growth and reducing the unemployment rate;

  • The Federal Reserve Board’s interest rate hikes are slowing the economy in a way that is unnecessary given current inflation risks.

The Investment Boom: Just Like Jared Kushner’s Hidden Genius, No One Can See It

Taking these in turn, it is pretty clear at this point that we will not see the investment boom promised by proponents of the tax cut. This point really has to be front and center in any discussion of the benefits of the tax cut. By far, the largest chunk of the tax cut was the reduction in the corporate tax rate from 35 percent to 21 percent, along with various other measures lowering corporate taxes.

The immediate impact of a corporate tax cut is to give more money to the richest people in the country since stock ownership is highly skewed towards the top 10 percent of the income distribution and especially the top one percent.

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In an article on the decline in the Chinese yuan against the dollar, the NYT gave as one explanation:

"Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive."

That one really doesn't seem plausible to me. In the most recent data, China's year-over-year inflation rate was 2.5 percent, virtually identical to the US rate. If we look to 2019, the I.M.F. actually projects China's inflation rate will fall slightly to 2.3 percent, a hair lower than the rate projected for the US.

In assessing whether China is holding down the value of its currency, it is important to note that the country holds more than $4 trillion in foreign reserves through its central bank and sovereign wealth fund. This holds down the value of its currency compared to a more normal level of holdings for a country with an economy the size of China, which would likely be in the range of $1–$2 trillion.

This is the same logic as the belief that the Fed is holding down US interest rates by virtue of the fact that it holds $4 trillion in assets as a result of its quantitative easing policy. A more normal level would be around $1 trillion.

The vast majority of economists believe that the Fed's asset holdings keep down US interest rates. It is inconsistent to believe that the Fed's holdings of US assets keep down interest rates here, but China's holding of foreign assets does not keep down the value of its currency.

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The discussion of health care has been badly warped ever since the debate over the Affordable Care Act (ACA) in 2009. A central feature of the ACA was the requirement that everyone get insurance, or pay a penalty if they don’t. While many resented having the government force them to buy insurance, especially in a context where they had to buy it from a private insurance company (i.e. there was no public option), this was actually a central feature of the ACA.

The main point of the ACA was to make it possible for people with serious health issues to get coverage. Insurers are happy to cover healthy people. For the most part, covering a healthy person means insurers get a check every month for nothing. It’s good work, if you can get it.

People with health problems are a different story. They actually do cost the insurers money. This is why insurers either charged people with health problems very high premiums or didn’t allow them to buy insurance at all, in the years before we had the ACA.

The ACA prohibited discrimination based on pre-existing conditions. It only allowed insurers to vary premiums based on age, not health. But, as several states discovered, a ban on discrimination based on health will not work by itself. This means that the average cost of insurance will be much higher.

That makes it a bad deal for relatively healthy people, many of whom will then decide not to buy insurance. With fewer healthy people in the pool, the average cost per person rises. This leads to higher premiums, which leads to more relatively healthy people leaving the pool. You go through a few rounds of this process and you end up with an insurance pool with relatively few healthy people and very high premiums.

This is why the ACA came with a mandate for buying insurance. The point was to keep healthy people in the pool to ensure that health insurance would be affordable. Of course, even without discrimination based on health, insurance would still be very expensive. This was the reason for the subsidies.

Unfortunately, the subsidies were not very generous and they phased out at levels that left many middle-income families with very high insurance costs.  Still, many more people had access to insurance than before the ACA.

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Matt O'Brien had a good piece on yesterday's GDP numbers noting that we are not seeing the investment boom promised by promoters of the tax cut. However, he argued that growth was likely to remain close to 3.0 percent based on the 3.1 percent growth rate reported in final sales to private domestic purchasers. In my GDP write-up, I was somewhat less optimistic about near-term growth prospects, pointing to the 1.4 percent growth rate in final sales.

The difference between these two measures is that the final demand measure pulls out inventory changes from GDP. The logic is that changes in the rate of inventory accumulation are erratic and no one thinks that the rate of inventory accumulation will expand infinitely relative to the economy nor the rate at which they are being run down will continually accelerate. For this reason, the final demand measure, which leaves out inventories, seems like a better measure of growth.

The final sales to domestic purchasers measure pulls out government spending and net exports, following a similar logic. Government spending is often erratic, jumping or falling in a given quarter, often due to the timing of purchases, especially with the military. Pulling it out can give a better measure of underlying growth. Net exports are also erratic, but we don't expect the trade deficit to either continually expand or shrink relative to the overall size of the economy. Therefore pulling out the quarterly changes can give us a better measure of the underlying growth rate.  

While the decision to pull government expenditures out of the GDP figure makes little difference in the most recent quarter (they grew at a 3.3 percent rate, almost the same as the 3.5 percent overall growth rate), the decision on net exports does. The increase in the trade deficit subtracted 1.78 percentage points from growth in the quarter. That is the explanation for the difference between the 3.1 percent growth rate in final sales to domestic purchasers and the 1.4 percent rate of growth of final demand.

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The wages of a typical worker have barely risen in four decades, many recent college grads are facing unbearable student loan burdens, housing costs are hugely outpacing inflation in many cities, making life especially hard for low- and moderate-income households. Naturally, the problem is the Social Security and Medicare received by baby boomers.

That's what Glenn Kramon, a former assistant managing editor at The New York Times, would have us believe according to his NYT column, seriously. He tells readers:

"My generation will say we paid into the system for decades and deserve our entitlements. But the one-earner baby boomer couple my age who have earned the average wage every year have paid less than $100,000 in Medicare taxes but are taking out benefits worth more than $400,000, after adjusting for inflation, according to C. Eugene Steuerle, a former Treasury official now at the Urban Institute.

"He also found that the couple will receive half a million dollars in Social Security after paying in little more than a quarter million."

Kramon even speculates that Medicare might have been responsible for Trump's victory in 2016.

"I even wonder whether increased Medicare spending is partly responsible for the election of Donald Trump, whose margin of victory came from voters in our generation. Without that spending, might enough of us have died sooner and tipped the balance in favor of Hillary Clinton?"

Before showing why this story is total nonsense, it is worth noting that the story that Social Security and Medicare are somehow responsible for all evil is a recurring theme at respectable news outlets like the NYT and National Public Radio. Just to give a few examples, we had this one last year in the Boston Globe on how the baby boomers are destroyed everything. (That's the title.) We had Abby Huntsman, whose main claim to fame is being born into a rich family, telling us on MSNBC how unfair these programs are to her generation. We have Thomas Friedman who periodically uses his NYT column for this purpose (e.g. here). And, we have Robert Samuelson who does it all the time with his Washington Post column.

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New house sales were down 5.5 percent in September from their August level and by 13.2 percent from year-ago levels. This is pretty much the textbook story of crowding out from the tax cut.

The story holds that if the government runs large deficits when the economy is near full employment, it will lead to higher interest rates. Higher rates then discourage home buying and construction, investment, and raise the value of the dollar, thereby increasing the trade deficit. These factors together offset the stimulus from the tax cut and eventually leave GDP pretty much the same as it would be without the tax cut, and possibly lower over the long-run.

Of course, it is important to note the role played by the Federal Reserve Board in this story. It has raised repeatedly, partly in response to the boost to growth caused by the tax cut. It has also indicated that it intends to continue to raise rates unless growth slows substantially.

The Fed would justify its rate hikes by claiming the need to prevent a rise in the inflation rate. While this could be right, there is a huge amount of uncertainty about the risk of inflation. To my view, we would be much better off waiting with the rate hikes, and seeing how low the unemployment rate could go, and only begin to raise rates after there is clear evidence of rising inflation. But, I'm not running the Fed.

Anyhow, we are clearly seeing the impact on housing. Mortgage interest rates were just over 3.9 percent last October. Today they are 4.7 percent. This is the main factor weakening the housing market.

And, while the monthly sales data are erratic, we have developed a large backlog of unsold houses, so that the inventory is now equal to 7.1 months of sales. This is the highest inventory since early 2011. This is virtually certain to lead to further declines in construction in the months ahead.

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The NYT had an interesting piece noting the differences between the way Sears and other large employers of the last century treated their workers and the way Amazon treats its workers. The focus of the piece is a profit sharing plan which gave 10 percent of Sears before-tax profits to workers in the form of a retirement fund that purchased company stock.

While this plan did allow many employees to accumulate substantial assets to support themselves in retirement, it is worth noting that a similar commitment would not have the same impact for Amazon workers. Amazon made $3 billion in profit last year. Ten percent of this figure would be $300 million. If it divided this sum equally among its 500,000 employees, that would come to $600 each.

While this is not an altogether trivial sum, it is not likely to provide for a very generous retirement. It amounts to 2.0 percent of the annual earnings of a full-time worker getting $15 an hour.

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