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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The New York Times has an interesting piece on the flood of books that are about to come into the public domain now that the term for the last extension of copyright (from 75 to 95 years) is about to be reached. This extension was applied retroactively, so it meant that virtually no copyrighted works came into the public domain for 20 years.

As policy, making a copyright extension is rather bizarre, since it is impossible to provide incentives for things that happened in the past. As the piece notes, one of the main motivations was Disney's desire to keep some Mickey Mouse work under copyright protection, which is why the extension is sometimes referred to as the "Mickey Mouse copyright act."

Anyhow, the fact that the work is now coming into the public domain both means that new editions can be published at just the cost of printing, making them more widely available. In addition, people can now freely do derivative works, as well as play and movies, derived from these books, without paying and/or getting permission from the copyright holders. It will be interesting to see how this change affects the treatment of the work newly in the public domain, which includes books by Agatha Christie, F. Scott Fitzgerald, and Kahlil Gibran.

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The media continue to be in a panic over the drop in the stock market over the last few weeks. Fortunately for political pundits, there is no expectation that they have any clue about the subjects on which they opine.  For those more interested in economics than hysterics, the drop in the market is not a big deal.

The market is at best very loosely related to the economy. It generally rises in recoveries and falls in recessions, but it also has all sorts of movements that are not obviously related to anything in the real economy.

The most famous example of such an erratic movement was the crash in October of 1987. The market fell by more than 20 percent in a single day. There was no obvious event in the economy or politics that explained this fall, which hit markets around the world. Nor did the decline presage a recession. The economy continued to grow at a healthy pace through 1988 and 1989. It didn’t fall into a recession until June of 1990, more than two years later.

There is little reason to believe the recent decline will have any larger impact on the economy than the 1987 crash. As a practical matter, stock prices have almost no impact on investment. The bubble of the late 1990s was the major exception when companies were directly issuing stock to finance investment.

Stock prices do affect consumption through the wealth effect, but the recent decline is not large enough to have all that much impact. Also, since it was just reversing a sharp run-up in the prior 18 months, it essentially means that we will not see some of the positive wealth effect that the economy would have felt otherwise.

Basically, the hysteria over the drop in the stock market is either people in the media displaying their ignorance or a political swipe at Donald Trump by people who apparently don’t think there are substantive reasons to criticize him. This drop is not the sort of thing that serious people should concern themselves with.

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Justin Gillis argued in an NYT column that higher carbon taxes face too much political resistance to be a serious option in the near future. He points to the difficulties faced by politicians who have proposed such taxes, most recently the rise of the Yellow Vest movement in France in opposition to carbon taxes imposed by French President Emanuel Macron. Gillis instead proposes measures, such as increased public transit options, which will give people an incentive to use less energy.

While Gillis is right about the political opposition to carbon taxes, there are policies that can provide equivalent disincentives. (Gillis does understate the incentive effect. People in Europe use much less energy than in the US, presumably in large part because of the higher prices there.) If we convert car insurance from being largely a fixed cost to a per mile charge, it would have provide a substantial disincentive to driving.

An average insurance policy costs roughly $1,000 a year. If average miles driven per car are 10,000 a year, this would come to 10 cents a mile. For a car that gets 20 miles a gallon, paying 10 cents a mile in higher insurance premiums would provide the same disincentive as a $2.00 a gallon gasoline tax. The nice part about this switch is that it does not mean raising people's insurance premiums on average, it just changes the way they pay.

We obviously have to do much more than switch to pay by the mile auto insurance to stop global warming, but this is a relatively simple and largely painless measure that could have a substantial impact.

 

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The media apparently just love the story of everyone being a gig worker, and like Donald Trump, they are not going to let the data get in the way. The Washington Post just ran a column telling us that gig workers are everywhere.

While this person and millions of others are struggling to get by with non-standard employment, the most recent survey from the Bureau of Labor Statistics shows there has been no increase in gig-type employment over the last decade. The proliferation of gig economy jobs is a story the media like to tell for some reason. It would be nice if they instead tried to focus on the real economy.

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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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