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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An NYT article on the stock market's plunge also noted that the yield curve, defined as the gap between the interest rate on 10-year Treasury bonds and two-year notes, is close to being inverted. The interest rate on 10-year bonds was just 0.12 percentage points higher than the interest rate on 2-year notes. The piece points out that an inverted yield curve has historically been associated with a recession in the near future.

While I would not rule out a recession (we will have another recession someday), I am less impressed by this signal than the NYT. The longer-term rates tend to follow the expected path of the short-term rate with a longer yield providing a greater premium since the holder of a long-term bond suffers a substantial capital loss if the price goes down.

For example, if I'm holding a 10-year Treasury bond and the interest rate increases from 3.0 percent to 4.0 percent in a relatively short period of time, the price would fall by close to 9.0 percent. To cover that risk, I will want a premium over the short-term rate. The same logic applies to a 2-year note, except that the potential loss from a rise in interest rates is much smaller so the necessary premium is much smaller.

However, the risk in this story is that the Federal Reserve Board will raise interest rates. Currently, the federal funds rate is at 2.25 percent. While there is a good chance the Fed will raise rates by 0.25 percentage points at its meeting this month, Fed Chair Jerome Powell has made it clear that he thinks we are near the end of a cycle of rising rates. For this reason, holders of longer-term debt have less reason to fear that short-term rates will rise much from their current level. Therefore, they are not demanding large risk premiums.

Historically, we have reached this point where investors no longer saw much risk of further rate hikes after a period of aggressive rate increases by the Fed. In 1989, the peak of the federal funds rate was almost 4.0 percentage points above its cyclical low. In the mid-1970s, it was more than 8.0 percentage points, and in 1980 the federal funds rate peaked more than 14.0 percentage points above the low for the cycle. 

When the Fed engages in an aggressive round of rate hikes, it is reasonable to bet we will see a recession. In this case, the Fed has been much more modest in its rate increases. While there is little doubt that the rate hikes are having an effect in slowing the economy — housing has been hit hard and the rise in the dollar is causing the trade deficit to rise — these sources of weakness do not seem sufficient to throw the economy into a recession, even if the yield curve does invert. 

Note: I had earlier put the loss on a 10-year Treasury bond from a rise in the interest rate at 8.0 percent. Joe Emersberger corrected the mistake.

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This post is by Jason Hickel. He is responding to a post I did on the possibility of having growth in a sustainable economy. I will post a rejoinder later in the week. Jason will then get the last word in this exchange.

What do Keynesian Democrats think about the movement for post-growth and de-growth economics? Dean Baker, a senior economist at the Center for Economic Policy Research in Washington, DC, has given us some insight into this question. In a recent blog post, republished by Counterpunch, he takes aim at two articles that I wrote for Foreign Policy in which I argue that it is not feasible to reduce our emissions and resource use in line with planetary boundaries while at the same time pursuing exponential GDP growth.

Baker agrees — thankfully — that we need to dramatically reduce emissions and resource use to prevent ecological collapse. But he thinks that this is entirely compatible with continued GDP growth. 

Let’s imagine, he says, that a new government imposes massive taxes on greenhouse gas emissions and resource extraction while at the same time increasing spending on clean technologies, with subsidies for electric vehicles and mass transit systems. Baker believes that this will shift patterns of consumption toward goods that are less emissions and resource intensive. People will spend their money on movies and plays, for example, or on gyms and nice restaurants and new computer software. So GDP will continue growing forever while emissions and resource use declines.

It sounds wonderful, doesn’t it? I, for one, would embrace such an outcome. After all, if growth was green, why would anyone have a problem with it? Baker makes the mistake of believing that degrowthers are focused on reducing GDP. We are not. Like him, we want to reduce material throughput. But we accept that doing so will probably mean that GDP will not continue to grow, and we argue that this needn’t be a catastrophe — on the contrary, it can be managed in a way that improves people’s well-being.

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My friend, Jared Bernstein, laid out the case for a pause in the Fed's interest rate hikes at its meeting this month. I agree with pretty much everything Jared said, but want to push one point a bit further.

Jared raises the argument made by the more hawkish types that we have well-anchored inflationary expectations that we don't want to risk losing by allowing inflation to accelerate. This line is given as a rationale for hiking interest rates in a context where inflation even now is under the Fed's 2.0 percent target. And, this target is, of course, an average, meaning that to be consistent with the target we must have some periods with inflation above 2.0 percent.

Note how the threat we are supposed to fear has been pushed back. It is not actual inflation, that we are supposed to fear, or even potential inflation, which we have no reason to expect to jump in response to modest further reductions in the unemployment rate, it is now expectations that we should worry will become unanchored. This is getting pretty far removed from anything we see in the real world and very much into metaphysical land.

While there is nothing wrong with metaphysical speculation in many contexts, this is not one of them. We know that higher interest rates will slow the economy and keep people from getting jobs. The losers in this story are the most disadvantaged in society, blacks, Hispanics, people with less education, and others who face discrimination in the labor market.

To my view, the Fed has an absolute duty to push the unemployment rate as low as it can go until we see real evidence of inflationary pressures. Any honest economist has to admit we don't know what this level is. Just five years ago, the median estimate at the Fed was 5.4 percent. That clearly was wrong. I would have said something like 4.0 percent, but even this now looks too high. 

The unemployment rate looks likely to get still lower in the months ahead, probably crossing 3.5 percent and likely getting lower. Can it hit 3.0 percent? I don't know, but let's see what happens if we try. The potential benefits are enormous and the downsides are shall we say, speculative.

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There have been several analyses of the 2018 election results showing that the Republican regions are disproportionately areas that lag in income and growth. In response, we are seeing a minor industry develop on what we can do to help the left behinds. 

The assumption in this analysis is that being left behind is the result of the natural workings of the market — developments in technology and trade — not any conscious policy decisions implemented in Washington. This is quite obviously not true and it is remarkable how this assumption can go unchallenged in policy circles.

Just to take the most obvious example, the natural workings of the market were about to put most of the financial industry out of business in the fall of 2008. In the wake of the collapse of Lehman, leaders of both the Republican and Democratic parties could not run fast enough to craft a government bailout package to save the big banks, almost all of which were facing bankruptcy due to their own incompetence and corruption. 

It is worth contrasting this race to bailout with the malign neglect associated with loss of 3.4 million jobs in manufacturing (20 percent of the total) between 2000 and 2007 (pre-crash). This job loss was primarily due to an explosion in the trade deficit. The latter was due to an overvalued dollar, which in turn was attributable to currency management by China and other countries, that kept their currencies below the market level. 

While most economists now acknowledge the impact of China’s currency management, at the time there was a great effort to pretend that this was all just the natural workings of the market. The loss of jobs, and the destruction of families and communities, was not a major concern in elite circles, unlike the prospect of Goldman Sachs and Citigroup going bankrupt.

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In the middle of a useful article on the trade deficit, the Post told readers:

"Last year’s $1.5 trillion Republican cut in corporate and personal income taxes, along with the decision to eliminate congressional limits on government spending, has revved up the economy and created nearly $1 trillion budget deficits for the coming years that require financing from abroad."

This is not exactly true.

When the government borrows more money, it pushes upward pressure on interest rates, other things equal. At higher interest rates, foreign investors may choose to buy more US government bonds, but it is also possible that domestic investors will opt to buy more US bonds, as opposed to other assets. This is the reason that interest rates on mortgages and corporate debt have risen in the last year. Investors who might have otherwise held these assets are instead choosing to buy government bonds.

If no foreigners opted to buy the newly issued debt, interest rates would rise to the point where enough US investors were willing to hold the debt. The fact that foreigners are willing to buy US bonds means that interest rates would not rise as much as would otherwise be the case (holding the response of the Fed constant), but the US does not need foreigners to buy our debt.

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The Washington Post told readers that when the deficit figures for 2018 were released last month:

"The announcement unnerved Republicans and investors, helping fuel a big sell-off in the stock market."

The claimed impact on the market seems implausible. In April, after analyzing the effect of the tax cuts, the Congressional Budget Office (CBO) projected the deficit for the 2018 fiscal year would be $804 billion. The figure for the deficit that was reported last month was $779 billion, $25 billion less than what CBO had projected six months earlier. It is hard to believe that a deficit that was slightly lower than projected could cause a big sell-off in the stock market.

It is also worth noting that this piece makes zero effort to put any numbers in context. Since almost none of the Post's readers has any idea of the meaning of the deficit and debt numbers used in the piece, it is difficult to see why they would use them. It is not hard to express these numbers as a share of GDP and relative to the size of past deficits, measured as a share of GDP. In fact, CBO actually expressed the deficits and debt as shares of GDP in its report, so it is not even necessary to do the arithmetic.

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Jim Tankersley had a very interesting piece in the NYT on how clothing manufacturers manage to minimize the impact of tariffs. The gist of the piece is that the tariffs led to very few jobs in the United States, but instead cause companies to spend lots of time gaming the system. We would presumably rather see them spend their time trying to design better products and production techniques.

While this a very interesting piece, that is written in reference to Donald Trump's latest and future rounds of tariffs, it would be interesting to see a similar piece in reference to patent monopolies, especially in the case of prescription drugs. While the tariffs discussed in the piece range from 7 percent to 27 percent, in the case of prescription drugs, patent protection often raises the price by a factor of 100 or even more. This is equivalent to tariffs of 10,000 percent. The vast majority of drugs would sell for ten to twenty dollars per prescription in a free market, instead of the hundreds or thousands of dollars that are charged as a result of patent protection.

Patents have a purpose (as does all protection), providing an incentive for researching new drugs. But there are other mechanisms for financing research (see chapter 5 of Rigged and this paper). To have a basis for assessing the merits of the different systems we need to know the costs they imply.

In the case of patent monopolies, these costs are enormous. The NYT piece goes through the efforts companies will go through to avoid tariffs of 20 percent — think of the efforts that people can and do go through to avoid patent monopolies that are equivalent to tariffs of 1000 percent.

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This piece originally appeared on my Patreon page.

A friend recently sent me a piece by Jason Hickel, arguing that growth can’t be green and that we need to move away from growth-oriented economics. I am not convinced. It strikes me both that the piece misrepresents what growth means and also confuses political obstacles with logical ones. The result is an attack on a concept that makes neither logical nor political sense.

In the piece, Hickel points out the enormous leaps that will be required to keep our greenhouse gas emissions at levels that will prevent irreversible environmental damage. He then hands us the possibility, that even if through some miracle we can manage to meet these targets with the rapid deployment of clean energy, we still have the problem of the use of other resources that is wiping out species and wrecking the environment.

Hickel’s points about the imminent dangers to the environment are very much on the mark, but it is not clear that has anything to do with the logic of growth. Suppose the Sustainable World Party (SWP) sweeps to power in the next election. They immediately impose a massive tax on greenhouse gas emissions, which will rise even further over time. They also inventory all the resources that are in limited supply and impose large and rising taxes on them.

Furthermore, they pay developing countries large sums to protect regions that are important for sustaining species facing extinction and for the global environment. The new administration also hugely increases spending on research on clean technologies and has massive subsidies for zero-emission vehicles and even more importantly for mass transit. As the SWP implements this policy, it has very stimulative fiscal and monetary policies.

Will the economy continue to grow through this transition? That’s hard to say. If the price of gas quadrupled people would obviously drive less and buy fewer cars. On the other hand, since the government is throwing money at them with its fiscal and monetary policy, they may choose to spend more money on things that are not inherently research. They may spend more money on education, seeing movies and plays, gym memberships, eating at restaurants, better software for their computer and other types of spending that don’t either directly involve the use of resources or at least not obviously more than the alternative. (Eating at a restaurant obviously involves consuming food, but it doesn’t necessarily mean consuming more food than eating at home.)

But whatever happens in the transition period, what would keep the economy from growing in subsequent years? We have locked down all the resources in short supply and preserved large chunks of the world from encroachments by roads and settlements, but it is hard to see why we would not be developing better health care technology, better software, more types of cultural output, better housing (in the sense of being more pleasant — not necessarily larger) and other improvements in living standards, all of which count as growth in GDP.[1] Where is the war with growth?

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The media have been touting a new foreign aid initiative by the Trump administration which will create an agency that will provide $60 billion worth of loans, loan guarantees, and insurance for investments in developing countries. This is portrayed as an effort to counter China's growing influence in the developing world.

It would have been helpful to put this number in some context. First, if this is an effort to counter China, it is likely to come up short. China has already paid out more than $900 billion as part of its "One Belt, One Road" initiative. Presumably, its spending will increase in this area in the decade ahead.

The second point is that news articles should put the number in some context for readers who are concerned that all their tax dollars are going to foreign aid. This money is being dispensed to subsidize loans, guarantees, and insurance. It is not a handout. If we assume that 20 percent of the money is a subsidy (i.e. allowing below market rates), this would amount to $12 billion. That would come to a bit more than 0.2 percent of federal spending, at the point where it reaches the $60 billion mark, presumably in around five years.

Note: This is corrected from an earlier version, which did not treat the $12 billion as an annual subsidy.

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The NYT reported that the Trump administration is considering replacing the tariffs it imposed on aluminum and steel imports from Mexico and Canada with a system of quotas. There is an important economic dimension to such a shift that was left out of the piece.

If the US imposes a tariff on an import then it is effectively imposing a tax on US consumers. The government gets to keep the revenue. For example, if steel is imported at a price of $700 a ton and we impose a 10 percent tariff, then the price of steel to consumers rises to $770 a ton with the government getting $70 for each ton that is imported. (For simplicity, this assumes that the tariff does not affect the price of the steel. In reality, it will fall somewhat in response to the tariff.) 

If we impose a quota that leaves imports at the same volume as with the tariff, then the price of steel will rise to the same level, or $770 a ton. However, in this case, while steel consumers are paying the same higher price, the money is not going to the government. The extra $70 a ton is going to the steel producers.

While restricting the volume of their sales, the US government is allowing foreign producers to get more profit on each ton of steel they expect to sell to the United States. For this reason, quotas are generally much more acceptable to our trading partners than tariffs.

When the United States imposed quotas on Japanese car exports in the 1980s (actually "voluntary export restraints") Japanese manufacturers used it as an opportunity to move into more upscale cars. Originally, Toyota and Honda made large inroads into the US market by competing in the bottom segment of the market. Since they were limited in the quantities they could sell, they could make more money per car competing in the higher end of the market.

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