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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A friend called my attention to this Project Syndicate piece by Kenneth Rogoff, a Harvard economics professor and former chief economist at the IMF. Rogoff argues that Russia will need major economic reform and political reform in order for its economy to get back on a healthy growth path.

In the course of making his argument, Rogoff makes a quick and dirty case that the fact Putin was able to win re-election despite the economic downturn in 2015–2016 resulting from the collapse of world oil prices, shows that the country is not a western democracy.

"The shock to the real economy has been severe, with Russia suffering a decline in output in 2015 and 2016 comparable to what the United States experienced during its 2008–2009 financial crisis, with the contraction in GDP totalling about 4 percent. ...

"In a western democracy, an economic collapse on the scale experienced by Russia would have been extremely difficult to digest politically, as the global surge in populism demonstrates. Yet Putin has been able to remain firmly in control and, in all likelihood, will easily be able to engineer another landslide victory in the presidential election due in March 2018."

First, the IMF data to which Rogoff links does not support his story of an economic collapse in Russia. The reported decline in GDP is 2.7 percent, not the 4.0 percent claimed by Rogoff. And, it is more than reversed by the growth in 2017 and projected growth in 2018. In other words, there does not seem to be much of a story of economic collapse here.

But the idea that a Russian government could not stay in power through an economic downturn, if it were democratic, is an interesting one. According to the IMF, Russia's economy shrank by more than 25 percent from 1992 to 1996 under Boris Yeltsin, a close US ally. Yet, he managed to be re-elected in 1996 despite an economic decline that was an order of magnitude larger than the one under Putin from 2014 to 2016. By the Rogoff theory, we can infer that Yeltsin should not have been able to win re-election through democratic means.

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There is a popular theme in the media these days that the Trump administration is leaving us poorly prepared for the next recession. The basic story is that high deficits and debt will leave us less room to have a large stimulus when the next recession hits. This is wrong, at least if we are talking about the economics.

Before laying out the argument, let me first say that I do not see a recession as imminent. The recent plunge in the stock market means that the rich have less wealth, not that we will have a recession.

Okay, I realize that not everyone with money in the stock market is rich, but the impact on spending is going to be barely noticeable to the economy. Furthermore, while middle class people are going to be upset to see their 401(k)s fall by 15 percent, they were fortunate to see the sharp rise the prior two years. Long and short, this is just not a big deal.

As far as other factors pushing us into a recession, I don't see it for reasons explained here. So I am not writing this because I think we are about to see a recession, but rather because I am trying to clear the path for when we eventually do.

The complainers in this picture say that because Trump's tax cuts mean the deficits are large even when the economy is near full employment, we won't be able to have even larger deficits when we are in a recession. They also say that high debt levels are leaving us near our borrowing limits. Both claims are just plain wrong.

First, as good Keynesians have long argued, our ability to run deficits is limited by the economy's economic capacity. This means that if we run very large deficits when the economy is near full employment, we would be seeing higher inflation as excess demand pushes up wages, which get passed on in prices.

We may be close to this point now, but higher interest rates, at least partly as a result of Federal Reserve Board policy, are leading to classic crowding out. Housing is falling and the value of the dollar has risen against other currencies, crowding out net exports. But inflation remains low and stable, so there is still likely room to expand further even with the unemployment rate at 3.7 percent.

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The New York Times highlighted the findings of a remarkable study last week. The study, by Markov Processes International, examined the 10-year returns of the endowments of the eight Ivy League schools. The study found that all eight endowments had lower returns than a simple mix of 60 percent stock index funds and 40 percent bonds. In some cases, the gap was substantial. Harvard set the mark with its annual returns lagging a simple 60/40 portfolio by more than 3.0 percentage points. 

This finding is remarkable because these endowments invest heavily in hedge funds and other “alternative” investments. A main feature of these alternative investments is the high fees paid to the people who manage them. A standard hedge fund contract pays the fund manager 2 percent of the assets under management every year, plus 20 percent of returns over a target rate.

If Harvard’s $40 billion endowment was entirely managed by hedge funds, they would get $800 million in fees, plus 20 percent of the endowment’s earnings over some threshold. This means that even if the hedge funds completely bombed, as seems to have been the case over the last decade, they would be pocketing $8 billion over the decade for costing the school money.

This should have people connected with Harvard and the other Ivy League schools up in arms. It is common for hedge fund partners to make more than $10 million a year and some pocket over $100 million. These exorbitant paychecks are justified by the outsized returns they get for university endowments and other investors. But how do you justify this sort of pay when they are making bad investment calls that actually lose the universities money?

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When the columnist with the longest tenure at the country's leading newspaper has no clue on the biggest issues facing the world, then it is a good sign that the elites, in general, have no idea what they are doing. He notes the disaffection of large numbers of middle class people in both Europe and the United States with the status quo.

Friedman correctly observes that "average work no longer returns an average wage that can sustain an average middle-class lifestyle." However, he absurdly blames this on "rapid accelerations in technology and globalization."

This is the big lie. Bill Gates is not incredibly rich because of rapid accelerations in technology and globalization, he is incredibly rich because the government gives Microsoft patent and copyright monopolies on Windows and other software. It will arrest people who make copies without his permission. In fact, it negotiates trade deals (wrongly called "free trade" deals) that require other countries to arrest people too. Patent and copyright monopolies may transfer as much as $1 trillion a year from average workers to people who have these forms of property in the United States alone. That's 5 percent of GDP or 60 percent of after-tax corporate profits.

The reason there are very rich people in finance, who can bid up property prices in major cities to make them unaffordable to the middle class, is that we coddle the financial industry. Remember when the market was about to work its magic on Goldman Sachs, Citigroup, and the rest back in 2008? The leaders of both parties could not run fast enough to rescue these bloated turkeys from being destroyed by their own greed and stupidity.

And the reason globalization puts downward pressure on the pay of factory workers, but not doctors and dentists, is that we have protection for doctors and dentists. We make it very difficult for foreign professionals to practice their professions in the United States.

There is a longer list, but the point is that we have screwed middle class workers by deliberate policy, it was not just something that happened, as in "rapid accelerations in technology and globalization." The fact that our elites refuse to acknowledge this reality and treat the plight of the middle class as a result of personal failings, as in not the right skills, will inevitably cause many to be angry, like yellow vest protestors in France. As long as this is the standard line in policy debates, their anger is not likely to go away.

(Yes, this is the theme of my [free] book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

 

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Two commenters on my previous post on a New York Times op-ed, which asserted that one-fifth of the federal budget went to farm subsidies pointed out the error can be partly attributed to a linked article in the Washington Post. (The actual figure is less than 0.5 percent.)

That piece includes the sentence:

"At close to $1 trillion a year, the farm bill’s price tag is high."

Incredibly, the next sentence directly contradicts this assertion correctly pointing out that:

"But the bill’s drafters used the baseline set by the Congressional Budget Office under existing spending levels of $867 billion over the next 10 years, meaning it will not increase the federal deficit from prior projections."

Fans of arithmetic would catch that $867 billion over ten years is less than one-tenth of the $1 trillion a year claimed in the prior sentence. Unfortunately, the Post's copy editors apparently didn't catch this one. It is again important to note that the vast majority of this money is for nutrition programs, not farm subsidies.

Anyhow, it would be nice if the Post and Times both took their responsibility to inform the public seriously. Dishwashers and truck drivers get fired when they don't do their jobs. Unfortunately, we don't have the same standards of accountability for the people who write for newspapers.

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That's what New York Times readers are likely to believe after seeing this op-ed by Gracy Olmstead. The piece is an argument against farm subsidies, or at least their current form, which primarily benefit wealthy farmers. 

It referred to these subsidies in 2018, as being "nearly $900 billion worth." The link provided in the piece is to an article on the new farm bill. It covers ten years. More importantly, the vast majority of the money in the bill is not for farm subsidies but for the Supplemental Nutrition Assistance Program or food stamps. The amount going to farm subsidies is around $20 billion a year. Instead of being 20 percent of the budget, as this piece implies, farm subsidies are actually less than 0.5 percent of the federal budget.

There is zero excuse for allowing such a grossly mistaken number into the paper. The piece is an op-ed, not a news story, but the paper does fact check op-eds. (I can vouch for that. I have had several columns very carefully fact-checked.)

A newspaper's job is to inform its readers. In this case, the NYT flunked badly.

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The NYT ran a piece on China's economy implying that it is reeling from the tariffs that Donald Trump has imposed on imports from China. The article outlined China's economic problems and then told readers that China's President Xi:

"...has been forced to make concessions to the United States as President Trump’s trade war intensifies."

The problem with the claim that Xi has been "forced" is that China's trade surplus with the United States is actually considerably larger in 2018 than it was in 2017. For the first ten months of this year, its surplus in goods has been $344.5 billion. That compares to surplus last year of $309.2 billion. While it is possible that China's surplus would be even larger without the trade war, it doesn't make much sense to say that a trade surplus that is up by 11 percent over the last year is a major cause of China's current economic problems.

Addendum:

In comments, Ibout rightly takes me to task for not putting the trade surplus figure in context. China's 2018 GDP measured in dollars (the appropriate denominator for this issue) is a bit more than $14 trillion. This means the surplus this year, which is likely to be a bit over $400 billion, would be a bit less than 2.8 percent of China's GDP. If this were to fall sharply it would surely be a hit to China's economy, but the surplus fell by much more following the 2008 recession and China's economy continued to grow rapidly. 

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This is Dawn Niederhauser, CEPR’s Development Director, taking over Beat the Press to say thanks to all of you who have signed up to support Dean and BTP on Patreon. We really appreciate it! If you haven’t signed up to become a patron yet, please click here to join. Dean often posts extra content on Patreon, but primarily it’s a way for CEPR to fund Dean’s work (he tends to speak his mind in case you haven’t noticed. Which is great for you, but it can make my job very difficult).

We purposely set the minimum pledge at the lowest amount allowed, just $1 per month. That’s in keeping with Dean’s other position that makes my job very difficult — just about all of his work is available for FREE. Hopefully, $12 per year is affordable to all, but for those of you who can, adding just a few more dollars per month to your pledge would be a big help to us, and would enable Dean to continue to Beat the Press for years to come.

And now back to your regularly scheduled program. As Dean would say, don’t believe everything you read in the papers. Happy holidays from all of us at CEPR!

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(This is the last piece in an exchange with Jason Hickel on growth. My last piece is here.)

Baker says “I am at a loss to understand why we would have a war on growth.” I don’t know why he is at a loss. I explained the reasons for this in my previous post. There are two I focus on. 

  1. Because growing the GDP means growing energy demand, and this makes the task of switching to renewable energy significantly more difficult (nearly three times more difficult between now and 2050, which virtually rules out success). 
  2. Because our preoccupation with growth makes it extremely difficult to get the regulations we need to avert ecological breakdown. Politicians resist such measures precisely because of the risks they pose to growth

Baker has, unfortunately, not engaged with these arguments.

Next, Baker says that “if we spend enough in other areas, it is possible to offset sharp reductions in the sectors of the economy that are heavy users of fossil fuels.” This argument is central to the standard vision of the Green New Deal (i.e., massive public investment in clean energy, which will generate millions of well-paid jobs and increase GDP growth). Again, there are two problems with this. 

  1. Even if we do manage to switch the entire energy system over to renewables, that might help us with emissions but it doesn’t help us with resource use. If we keep growing GDP, resource use will keep going up — even if the economy is powered by clean energy. And let’s not kid ourselves: to the extent that resource use is driving mass species extinction, this is an existential threat that we have to take seriously.
  2. Why does the Green New Deal have to be focused on aggregate GDP growth? Why not just stick with the bits about public investment and jobs and leave it at that? The last New Deal was growth-oriented, sure. But that doesn’t mean that this one has to be. Again — and this is a crucial point — Baker has not made a positive argument for growth. He just for some reason assumes that we must have it, but he never says why. This is odd, because as he himself points out, the problem is not that we don’t have enough income; the problem is that it’s all locked up at the top. 
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The New York Times reported on an analysis of returns on the endowments of the Ivy League schools over the last decade. It found that all the schools' endowments lagged a portfolio that was 60 percent stock index funds and 40 percent bond funds. (The gap with index funds would be even larger if the mix were 70 percent stock, 30 percent bonds.)

The Ivies invest heavily in hedge funds, which typically charge fees equal to 2 percent of the money invested plus 20 percent of returns over a benchmark. It seems that this pattern of investment is not doing very well for the schools, although some of the richest people in the country run hedge funds.

On the plus side for these schools, by promoting upward redistribution, they are creating more opportunities for their economics, sociology, and other programs, that try to design policies to reduce inequality and increase mobility.

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