Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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Nope, that is not what the Washington Post said, instead it insisted to readers that the opposite is the case. The first sentence of a front page article on the Trump administration's infrastructure plans told readers:

"The Trump administration, determined to overhaul and modernize the nation’s infrastructure, is drafting plans to privatize some public assets such as airports, bridges, highway rest stops and other facilities, according to top officials and advisers."

I guess this is another case where we are relying on the extraordinary mind-reading skills of reporters, since the rest of us would not know that the administration is pursuing privatization plans because it is "determined to overhaul and modernize the nation’s infrastructure," as opposed to making the Trump family and people like them even richer. The evidence of past privatizations might suggest the opposite.

While the piece does note some of the past failures of privatization projects, the framing in the first sentence attributes good faith in its motives which there is zero reason to assume. It is certainly possible that the Trump administration is acting in what it perceives to be the public good but it is also entirely possible that it is trying to further enrich a small group of wealthy people at the expense of everyone else.

The Post has no basis for its assertion that Trump administration actually gives a damn about the public interest.

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The New York Times ran a column by Maya MacGuineas, the president of the Peter Peterson-backed Committee for a Responsible Federal Budget. The piece begins with the ominous announcement:

"President Trump entered office facing the worst ratio of debt to gross domestic product of any new president in American history except Harry Truman — an onerous 77 percent."

It could have also begun with the announcement that the ratio of debt service (interest on the debt, net of payments from the Federal Reserve Board) to GDP is less than one percent. This contrasts with a ratio of almost 3.0 percent in the early and mid-1990s. Are you scared yet?

Actually, you should be. Folks like Ms. MacGuineas have pushed austerity policies in the United States and around the world for the last decade. These policies have prevented the government from spending the amount necessary to restore the economy to full employment. This has not only kept millions of people in the United States from having jobs, it has prevented tens of millions from getting pay increases by weakening their bargaining power.

Furthermore, the lower levels of output have an enduring impact on the economy. They are associated with less investment in public and private capital and less money spent on research and development. In addition, unemployed workers don't gain the experience they would have otherwise. Many of the long-term unemployed drop out of the labor force and may end up never working again.

As a result of these effects, the Congressional Budget Office now estimates that the economy's potential level of output for 2017 is 10 percent less than what it had projected for 2017 back in 2008 before the Great Recession really took hold. The loss in output due to this austerity tax is roughly $2 trillion a year. This is the reduction in wages and profit income as a result of the smaller size of the economy. That comes to $6,000 per person per year.

This is the burden that the Peter Peterson crew have imposed on our children and grandchildren due to their scare tactics on the deficits. (Hey, remember the Reinhart-Rogoff 90 percent debt to GDP cliff?) And fans of logic everywhere know that it will not matter one iota to our kids' well-being if the government were to increase taxes on each of them by $6,000 or whether its austerity policies lead them to earn $6,000 less each year.

Unfortunately, because of the distribution of money and power in society, it is only the taxes that will draw attention. The fact that inept economic management needlessly caused us to sacrifice economic growth, and did so in a way that disproportionately hurt the poor and middle class, is considered rude to mention in polite company.

Instead, we get columns with meaningless figures about debt to GDP that are designed to scare people.

 

Addendum:

I somehow forget to mention the rents from government-granted patent and copyright monopolies. As I point out in Rigged, these come to close to $400 billion a year in the case of prescription drugs alone. This is the difference between the patent-protected price and the free market price. It is effectively a privately collected tax. If we add in the rents from medical equipment, software, and other items the figure could easily be twice as high. In other words, we are making our kids pay $400 billion to $800 billion a year to pay for the research and creative work that was done in the past.

Anyone seriously concerned about the burden we impose on our kids has to include this cost in their calculations. Otherwise, they just deserve to have their pronouncements treated with ridicule. 

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Paul Ryan won widespread applause from the Peter Peterson-types some years back for proposing a budget that would virtually eliminate the federal government by 2050, excepting Medicare, Medicaid, Social Security, and the military. According to the Congressional Budget Office's analysis of the Ryan budget (done under Speaker Ryan's supervision), spending on everything other than Social Security, Medicare, and Medicaid would be reduced to 3.5 percent of GDP in 2050. With military spending likely running in the neighborhood of 3.0 percent of GDP, this left around 0.5 percent of GDP for federal spending on education, infrastructure, the Justice Department, research and development, national parks, and all the other things we think of the government as doing.

Well, Ryan now has some serious competition from Donald Trump. In his budget, he has these same categories of spending shrinking to 3.6 percent of GDP by 2027, down from 6.3 percent of GDP at present. While Ryan's endpoint may be more impressive, it is important to remember that he has another 23 years to get there. According to CBO, in 2030 Ryan's budget has 5.25 percent of GDP going to the same categories of spending, including the military. If we pull out 3.0 percent for the military (Ryan is more hawkish than Trump, who only spending 2.3 percent of GDP on the military in 2027) then Ryan would have 2.25 percent of GDP for this everything else category in 2030.

So we have Trump at 3.6 percent of GDP for the bulk of the federal government in 2027 compared to 2.3 percent in the same categories for Ryan in 2030. If we assume the same rate of decline in the years from 2027 t0 2030 as in the years 2017 to 2027, then Trump's budget would be down to 2.8 percent of GDP by 2030. It looks like Ryan is still somewhat ahead of Trump in his plan to eliminate the federal government, but Trump can still hope to catch up.

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A major and frequent sin of reporting is to tell readers the intentions of politicians. This is bad reporting because the reporter does not know the intentions of politicians, they know what the politicians say and do. When a news story tells its audience that a politician "wants," "believes," or is "concerned" it is making an assertion that the reporter cannot possibly know to be true. The reporter is effectively assuring their audience that what the politician claims as their motive is in fact their motive.

The NYT carried this bad practice a step further in its reporting on the Trump budget. The very first sentence of the piece tells readers:

"...seeks to balance the federal budget through unprecedented cuts to programs for poor and working-class families, effectively pitting them against older Americans who would largely escape the budget ax (emphasis added)."

In this case, we have a reporter telling us the goal of the budget, presumably based on the claims of the politicians who drafted it. The idea that the goal of Trump administration is balancing the budget with this proposal is at least implausible, if not blatantly false. It is also not especially accurate to make the divide described in this sentence between the old and the poor.

On the issue of balancing the budget, the key item here is the assumption that the economy will grow at annual rate of 3.0 percent over the next decade rather than the 1.9 percent rate projected by the Congressional Budget Office. There are very few economists who will support the claim that the economy can sustain anything close to 3.0 percent annual growth for a decade.

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Yes, it's yet another example of the skills shortage. In the middle of his review of a new book by Mervyn King, the former head of the Bank of England, Steven Pearlstein tells readers:

"If you are like me, just thinking about the constant interplay among trade flows, investment flows, savings rates, exchange rates, inflation, interest rates and asset prices makes your head hurt. Perhaps that’s because it’s never exactly clear what is cause and what is effect, or whether the effect is up or down."

For people whose head doesn't hurt, the chains of causation are actually fairly clear. While Pearlstein tells readers that the United States and the other Anglo-Saxon countries are "saving too little," in a context where other countries are propping up the dollars (as King claims and Pearlstein apparently agrees), causing us to run large trade deficits, we are saving too much.

The trade deficits the United States and other countries run as a result of having over-valued currencies lead to unemployment unless they are offset by large budget deficits. The budget deficits run in the years after the 2001 recession and 2008–2009 recession were insufficient to restore the economy to full employment. (We did eventually reach something close to full employment in 2006–2007 due to the construction and consumption demand generated by the housing bubble.)

Larger budgets would mean less national savings, although the increased borrowing associated with the deficit would be partially offset by the additional output in the economy, which would lead to more savings. It is also possible to get back to full employment by reducing labor supply through measures such as work sharing, mandated paid vacations, and other measures designed to shorten the average work year. This is how Germany managed to reduce its unemployment in the Great Recession, even though it had a sharper fall in output than the United States.

Pearlstein's confusion on cause and effect also leads him to claim some sort of crisis is imminent, since at some point other countries are likely to stop propping up the dollar. There is no basis for this assertion. We actually have a clear precedent for this story of adjustment.

In the late 1980s, following the 1985 Plaza Accord, Japan, Germany, and our other major trading partners helped to engineer a sharp reduction in the value of the dollar, which caused our trade deficit to decline from a peak of more than 3.0 percent of GDP in 1986 to roughly 1.0 percent of GDP by 1989. The economy grew at a respectable pace throughout this period and there was no major uptick in inflation.

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If anyone thought that Republicans believed in local rule or protecting the public from criminals, the Texas legislature is working hard to correct this misunderstanding. It just passed a new law that prohibits Texas' cities from imposing requirements on taxi services like Uber or Lyft.

The law was passed in response to a measure by Austin that required that drivers for Uber and other services undergo a background check that included fingerprints. Uber and Lyft claimed that they were too incompetent to administer the same sort of background checks as their competitors. After spending millions of dollars on a city-wide initiative, which they lost, the two companies chose to end service in the city rather than comply with the ordinance.

They then turned to lobbying the Texas legislature where their millions in lobbying fees paid off. The new law could also override a measure in Houston that requires these companies to service people with handicaps.

Anyhow, this action by the Republican-controlled legislature should make it clear that the core Republican principle is giving more money to those who have money. Anything else is secondary.

 

Correction:

I wrote this post in haste and likely gave the readers the impression that I thought people who had been convicted of felonies should not be able to drive cabs and should possible be denied other types of employment. I very much regret that. We have had far too many people, disproportionately people of color, go through our prison system. Most have enormous difficulty being employed after they have completed their sentence.

It is entirely reasonable that people convicted of crimes in the past would be allowed to drive Ubers or cabs, if it can be determined that they do not pose a danger to passengers. The key is the ability to do a proper background check of the person, which likely would include fingerprint checks, which was the issue with the Austin regulation.

I wrote the post because it is not plausible that the Texas legislature was motivated by a concern about the employment prospects of people who had been convicted of crimes. They were obviously responding to Uber's high dollar lobbying campaign. I should have been more careful in writing this post, recognizing the difficulty that many convicted of crimes face in getting jobs.

 

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It is so annoying when the economy refuses to listen to what the economists say it should be doing. In this case, it seems to be ignoring the insistence that new jobs require more education and typically a college degree.

The problem is that in the last four years the employment-to-population ratio has actually been rising for people with just a high school degree while it is has fallen slightly for people with college degrees.

Book4 4755 image001
Source: Bureau of Labor Statistics.

Since January of 2013, the employment-to-population ratio (EPOP) for people with just a high school degree has risen by almost two percentage points while it has fallen by almost one percentage point for college grads. This certainly doesn't fit the simple story of people needing more education for the jobs being created in today's economy.

Obviously, there are other factors at play here, but the most obvious one, the retirement of the baby boom generation, should work the other way. The people who reached retirement age during the last four years were disproportionately less educated, which should depress the EPOP of workers with just high school degrees relative to college grads.

To be clear, people with college degrees are undoubtedly better off in today's labor market than those with less education. Their overall employment is 72 percent, compared to just 55 percent for high school grads. And, they get paid much more when they do work. But at least by the EPOP measure, it does not appear that the labor market is being increasingly tilted in their favor as often claimed.

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In his Washington Post column today George Will told readers that the problem of rising costs in the U.S. health care system is simply a case of Baumol's disease. This refers to the problem identified by economist William Baumol (who recently died), that productivity in the service sector tends to rise less rapidly than productivity in the manufacturing sector. The implication is that if workers get paid the same in both sectors, then the cost of services will always rise relative to the cost of manufactured goods. Will tells us that this is the story of rapidly rising health care costs.

There are a couple of big problems with this story. First, it is not always the case that productivity in services rises less rapidly than productivity in manufacturing. ATMs have hugely increased the ability of banks to serve customers without tellers. Film developing became hugely more productive with digital cameras.

It is quite likely in the decades ahead that we will see innovations in technology that will lead to large increases in productivity in health care. For example, improvements in diagnostic technology will likely allow a skilled technician to diagnose illnesses with better accuracy than the best doctor. Similarly, robots will almost certainly be able to perform delicate surgeries with more precision than the best surgeon. In these and other areas of health care there is enormous potential for productivity gains, assuming that doctors and others who stand to lose don't use their political power to block the technology.

This brings up the second point. While health care costs have risen everywhere, no other country pays anything close to what we do in the United States, even though they have comparable outcomes. The figure below shows per capita health care spending in the United States and five other wealthy countries since 1971. (The numbers shown are from the OECD and expressed in purchasing power parity. I converted them to 2016 dollars using the PCE deflator.)

Book2 28024 image002

As can be seen, health care costs have been rising everywhere, but nowhere have they risen anywhere near as rapidly as in the United States. At the start of this period in 1971 the United States didn't even lead the pack in per capita spending, coming in slightly below Denmark. In 2015, health care costs in the U.S. were more than twice as high as in Denmark and France and almost 2.4 times as high as in the United Kingdom. Even if we compare costs with Germany, the second most expensive country in this group, the savings would still be almost $4,200 a year per person, or more than $1.3 trillion for the country as a whole.

The reason our health care costs have risen so much more rapidly than anywhere else is not Baumol's disease. Health care is a service everywhere, not just in the United States. The difference stems from the fact that doctors, insurers, drug companies, and medical equipment makers are far more capable of controlling the political process in the United States than in these other countries. They use their political power to restrict competition and get government subsidies. As a result, these actors are able to secure massive rents that come out of the pockets of the rest of us.

It is understandable that columnists and newspapers that would like to protect these rents would try to tell the public that high-cost health care is just a fact of nature, but it is not true.

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There were a number of articles about the scary news that debt levels are again above their housing bubble peaks. If you need something to be scared about (really?) I suppose you can worry about this, but if you want to seriously consider the economic impact of this data point, there ain't much there.

There are two big differences between now and our previous peak ten years ago. One is that the economy and income is considerably higher today. The other major difference is that interest rates are considerably lower on average than they were ten years ago.

We actually have a very good summary statistic from the Federal Reserve Board that tells us the burden of the debt level. It is called the "financial obligations ratio." It measures the ratio of debt service payments, plus rent, to disposable income. (Rent is included since rent and mortgage payments can be seen as substitutes.)

Here's the story since they started the series in 1980.

Book1 13400 image002Source: Federal Reserve Board.

As can be seen, at 15.4 percent, this ratio is near its low point for the last four decades. It is far below the peaks hit during the housing bubble years. In other words, there is little reason to worry about debt burdens suddenly creating a massive drag on the economy and leading to the sort of financial crisis we saw when the housing bubble collapsed.

This doesn't mean that many people are not struggling to cope with student loans and other debts. Household income has barely recovered from pre-crisis levels and many families are still worse off than they were a decade ago. That's a really bad story, but it doesn't mean a financial crisis is imminent.

Can the picture change if interest rates rise? Sure, but not very quickly. (Most of this debt is fixed rate mortgage debt.) Furthermore, how much do we expect rates to rise and how quickly?

The long and short is that many people (not me) were caught sleeping by the run-up of debt in the housing bubble years. They aren't making up for it by worrying about debt now, they are just being wrong again.

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We have all heard the argument from conservatives about the benefits of relying on the private sector rather than the government. Private companies are fast moving and can respond more quickly to changing conditions and technology. By contrast, the government is slow and bureaucratic. And, there is more than a bit of truth to this story.

So what happens when we have the slow-moving bureaucratic government making payments to fast moving dynamic insurers in a program like Medicare. Well, all good believers in the superiority of the private sector will expect the insurers to rob the government blind. And this seems to be the case.

The NYT reported the allegations of a whistle-blower at United Health, the country's largest insurer. According to the whistle-blower, Benjamin Poehling a former finance director at United Health, the company had a policy of altering patient's medical conditions to put them in groups for which Medicare provides higher compensation.

The issue here involves Medicare Advantage program, which now includes roughly one-third of the people receiving Medicare benefits. People enrolled in Medicare Advantage get their health care covered by a private insurer. The insurer gets compensated by Medicare, with the fee adjusted depending on the patient's health condition. The insurers get more money for enrolling a less healthy person than enrolling a more healthy person.

According to Mr. Poehling, United Health would find ways to have patients be labeled with conditions that came with higher reimbursements. He claims that other insurers engaged in the same practice. According to the piece, this could have meant billions of dollars in overpayments over the last 15 years. While this is not a large amount relative to Medicare's total budget (the program will spend over $600 billion this year), it is a large amount for one company to steal.

This sort of gaming of a government program is exactly the sort of behavior that would be expected in this situation. Since insurers stand to gain large amounts of money by making their insurees appear sicker than they actually are, we should expect that they would engage in this sort of gaming.

While there is no easy way to prevent this sort of practice (the insurer will always know more about the health of the patient than the government), the best route is to have an effective deterrence. Since most cases of this sort of fraud are likely to go undetected, it is important that when individuals are caught, they face serious penalties.

If the higher-ups at United Health could look forward to spending most of the rest of their lives in jail, then it may discourage this sort of fraud in the future. Alternatively, we could look to go back to a single-payer system similar to the traditional Medicare program. Since neither of these outcomes seem likely at the moment, look forward to a lot more taxpayer dollars going into the pockets of corrupt insurance company executives.

 

Note: Typos corrected from earlier version, thanks to Robert Salzberg.

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Who said it's not a good labor market when you can get paid hundreds of millions of dollars for losing your investors money (compared with a stock index). The big question is why do the people who sign these contracts (managers of pension funds and university endowments) still have jobs?

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Morning Edition had an interview (sorry, not posted yet) with Republican Senator Ben Sasse talk about the need for honest leadership. He was critical of Donald Trump's claims that he would help manufacturing workers. While the criticism is justified, Sasse condemned the idea of turning to protectionism.

Of course, the United States would not have to turn to protectionism: it has been practicing selective protectionism for decades. We have maintained the barriers that largely protect our doctors, dentists, and other highly paid professionals from foreign competition. This allows doctors and dentists to earn twice as much as their counterparts in Canada and Western Europe.

We also have been pushing longer and stronger patent and copyright protection in both trade deals and domestic law. This is the reason that we pay $440 billion (2.3 percent of GDP) a year for prescription drugs rather than their free market price, which would likely be in the range of $40 billion to $80 billion. 

The protection for highly paid professionals and patent and copyrights are a major part of the upward redistribution of the last four decades. Unfortunately, Senator Sasse was not prepared to talk about this protectionism honestly even if he could condemn Donald Trump's flirtation with protectionism for manufacturing workers as being dishonest.

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Trade denialism seems to be a fast-growing sector of the economy these days. Robert Samuelson, the Washington Post columnist, is one of the leading practitioners. In today's column, he has a new study by Gary Clyde Hufbauer and Zhiyao “Lucy” Lu from the Peterson Institute for International Economics, which tells us both that the job loss from imports was not a really big deal and also that we have gained hugely from trade.

The gist of the job loss exercise is to take the period from 2001 to 2016, measure the growth in imports, and then calculate the job loss over this fifteen year period. As Samuelson tells us:

"...the Peterson study estimates that from 2001 to 2016, imports displaced 312,500 jobs per year . Even this overstates the impact, because it ignores exports. In the same years, they boosted jobs by 156,250 annually, offsetting half the job loss."

He then tells us this is no big deal in an economy with 160 million workers that adds 200,000 jobs a month.

Some folks may beg to differ. First, the growth in exports doesn't really offset the gross job loss due to increased imports. The exports are generally in different industries and almost certainly in different factories. In other words, the jobs lost due to imports is the figure we should focus on in terms of the people who are seeing their lives disrupted.

It is also worth noting that the trade-related job loss was heavily concentrated over a narrow period of time, the explosion in the trade deficit from 2001 to 2007. While this took place during the George W. Bush presidency, the main cause was the run-up in the value of the dollar from the Clinton years, so we can make the blame bipartisan.

Anyhow, using the study's methodology, we get that the economy lost an average of 620,000 jobs a year due to imports in these six years, with almost 400,000 of the yearly job loss occurring in manufacturing. This means that almost 15 percent of the people employed in manufacturing may have seen their jobs disappear due to imports in this six-year time period. That doesn't seem like a minor issue.

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The Washington Post ran a column by

"Canadian authorities do not inspect every shipment of products headed for the U.S. marketplace to ensure that packages don’t contain adulterated, counterfeit or illegal drugs. Canada does not have the resources to undertake such comprehensive searches, and the Canadian and U.S. governments are not currently set up to  facilitate such a program. Canada’s health-inspection regime is designed to ensure the safety of medications for Canadians, not for other countries."

While this is undoubtedly true, there is a little secret that fans of economics and logic have long known. With additional money, Canada could expand the size of its regulatory agency so it would have the resources to undertake such comprehensive searches.

And, where might Canada get the additional money? It can tax the drugs being sold to people in the United States. With the price of drugs in the United States often two or three times the price of drugs in Canada, there is plenty of room to impose a tax to cover the additional inspection costs and still leave massive savings for people in the United States.

The entire Food and Drug Administration budget for medical product safety last year was $2.7 billion. We will spend over $440 billion on prescription drugs in 2017. A small tax on whatever passes through Canada should easily cover the cost of inspections and, in fact, could cover the cost for Canada as well. This is a classic win-win through trade under which everyone can benefit.

Of course, Ms. Aglukkaq is correct that this is not a good solution to the problem of making drugs affordable in the U.S. We should be looking for alternatives to supporting research through government granted patent monopolies, as Senator Sanders has been doing. Along with Sherrod Brown and 15 other Democratic senators, Sanders has proposed money for a prize fund which would buy up the patents for approved drugs and put them in the public domain so that they could be sold at their free market price.

The bill also proposes that the government pay for the clinical testing of new drugs. The test results would be in the public domain, which would enormously benefit researchers and doctors when deciding which drugs to prescribe. And, the approved drug would also be available at free market prices.

The big problem is that, while drugs are cheap, patent monopolies make them expensive. Unfortunately, the Washington Post doesn't like people pointing things like this out on its opinion page. (It is probably worth mentioning that the Post gets large amounts of advertising revenue from drug companies.)

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Bloomberg reports that Esther George, perhaps the Fed's biggest inflation hawk, has a new argument for raising interest rates: she claims that inflation is a big tax on the poor. This is peculiar for two reasons.

First, the people who are denied work as a result of higher interest rates will be disproportionately those at the bottom of the ladder: African Americans, Hispanics, and workers with less education. Furthermore, higher unemployment rates mean that the workers who have jobs will have less bargaining power and be less able to push up their wages. It's hard to see how people who lose jobs and get lower pay increases will benefit from a slightly lower inflation rate.

The other reason why the argument doesn't quite work is that even the modest inflation we have seen in recent years is driven almost entirely by rising rents.

Core Inflation Rate: Excluding Rent
core inf no shelter

Source: Bureau of Labor Statistics.

Higher interest rates could actually make rental inflation worse. An immediate effect of higher interest rates is lower construction. This will reduce the supply of housing in cities with rapidly rising rents, making the shortage of housing units worse. This will compound the negative effect of reduced labor market opportunities.

That hardly seems like a winning policy option for the poor.

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Gretchen Morgenson had a good piece this weekend on fees paid by public pension funds. These fees are large and have grown rapidly in recent decades. The fees go to some of the richest people in the country, such as private equity and hedge fund managers (think of Peter Peterson or Mitt Romney).

The fees often do not correspond to any benefits to the pension funds in the form of higher returns. In other words, these fees are the equivalent of a massive welfare program under which the taxpayers are putting money in the pockets of some of the richest people in the country — for doing nothing.

A simple way to combat this taxpayer handout to the very wealthy is strong transparency requirements. If pension funds were required to public post the full terms of all contracts with pension fund advisers, private equity companies, and others involved in managing their money, along with the returns on the assets, it would likely cut down on the heist.

It's simple, but probably too big of a lift in the corrupt political environment of the U.S. today. 

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The Washington Post had a very useful front page piece on the poor quality of dental care received by large segments of the population. It noted the high price of dental care, but never examines why it costs so much in the United States.

A big part of the story is that dentists earn on average $200,000 a year, roughly twice the average of their counterparts in Western Europe and Canada. This is in large part because our dentists benefit from protectionism. We prohibit qualified foreign dentists from practicing in the United States unless they graduate from a U.S. dental school (or in recent years, a Canadian school).

The price of dental equipment is also inflated due to the fact that it enjoys government-granted patent monopolies. In most cases, this equipment would be relatively cheap if it were sold in a free market. (Yes, we need to pay for the research that supports technological innovation, but there are alternative mechanisms. This issue and protection for dentists is discussed in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it's free].)

Anyhow, this is yet another example of how the religiously pro-free trade Washington Post happily turns a blind eye to protectionism when it is the wealthy who benefit.

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This is more of the "which way is up" problem in economics. Right now, we have lots of economists debating how best to reform the tax code. Most of them see increasing the incentive to save (which means not spending money) as an important goal.

Of course, more saving is not a good idea if we think the economy doesn't have enough demand to fully employ the workforce. I put myself in the group of economists who hold this view, but we are the minority these days. Most economists think that the economy is pretty close to full employment. That is why the Fed is raising interest rates. Presumably, this is also why people are worried about budget deficits, at least insofar as their concern about budget deficits has any real world rationale.

Anyhow, in this context the NYT is completely off the mark when it tells readers:

"Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season."

If people are spending less on real estate commissions and other costs associated with buying and selling homes, then they are saving more. Which, according to the economists trying to restructure the tax code, is a good thing. It will leave more resources for investment, leading to more rapid increases in productivity. (Again, I don't buy this. I think investment is being held back by a lack of demand, but that's just my fringe position.) 

The rest of the claim also doesn't make much sense. If more people sold their homes and then turned around and bought new homes, this would increase the number of homes for sale, but it would also increase the number of buyers on the market by roughly the same amount. There is only a net improvement for buyers if some of the sellers opt to rent, but the piece is not talking about people switching from owning to renting.

The data also don't support the claim that people are moving less frequently, as can be seen in one of the charts included with the article. It shows that the most recent rate of sales of existing homes, at 5.7 million annually, is somewhat above the level at the start of the last decade. It is even further above the mid-1990s pre-housing bubble rate. In other words, the rate of sales of existing homes is pretty much back to, or possibly even above, the rate we saw in more normal times — even if it is below the frenzy levels of the bubble years.

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Binyamin Appelbaum had a good piece in the NYT presenting how mainstream economists assess the prospects for boosting growth with the sort of tax cuts proposed by the Trump administration. While the piece accurately conveys the range of views among the mainstream of the profession about the extent to which it is possible to boost GDP growth, it is worth noting that the mainstream of the profession has an absolutely horrible track record in this area. 

The piece tells us that the Federal Reserve Board puts the economy's potential growth rate at just 1.8 percent a year. It then presents views of several economists suggesting that a well-designed tax reform could raise this by 0.3 to 0.5 percentage points.

As recently as 2012, the Congressional Budget Office (CBO) projected that the economy could grow at a 2.5 percent annual rate for the period between 2018 and 2022 (see Summary Table 2). CBO's projections are usually near the center of the economic mainstream, so in the not distant past, many economists believed that the economy could sustain a 2.5 percent annual rate of growth.

It is also worth noting that there is enormous uncertainty about how low the unemployment rate can go without sparking inflation. CBO put the non-accelerating inflation rate of unemployment (NAIRU) in the 5.2–5.4 percent range five years ago. In the most recent month, the unemployment rate was 4.4 percent. There is no evidence in the data of any acceleration in the rate of inflation.

This is important background. While it is probably true that the sort of tax reform proposed by Trump (i.e. giving rich people more money and creating more opportunities to game the tax code) will not provide much boost to growth, economists really don't have much basis for confidence in their own projections of the economy's potential. They have repeatedly been wrong by huge amounts in the past, so unless they suddenly learned a great deal of economics, we should view current projections with considerable skepticism.

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I've had people ask me, so I went back to refresh my memory. Yes, it was very bad news as the Watergate scandal unfolded and Nixon was eventually forced to resign. The economy slipped into a recession beginning in November of 1973, with the unemployment rate rising from a low of 4.6 percent in October of 1973 to an eventual peak of 9.0 percent in May of 1975.

Unemployment Rate: 1970 to 1980
Unemploy 70s

Source: Bureau of Labor Statistics.

Having put these numbers on the table, I'm not sure how much of this can be attributed to Watergate and the crisis of the Nixon presidency. The proximate cause was the Arab oil embargo which quadrupled the price of oil at a time when the U.S. was far more dependent on oil than is currently the case. Nixon also removed the wage and controls which were intended to keep inflation under control through the 1972 election. Throw in a wheat deal with the Soviet Union that sent wheat prices soaring and you have a serious inflation problem.

The Fed responded by slamming on the brakes which gave us at the time what was considered to be a pretty awful recession. Would Nixon have done anything to save the economy if he wasn't struggling to save his presidency? It's hard to say to say what he could or would have done, but the story as it played out was not pretty.

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The betting still seems to be that the Fed will raise rates in June, but it doesn't seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.

However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.

Here's the picture.

Core CPI Inflation, Excluding Shelter Costs
core inf no shelter
Source: Bureau of Labor Statistics.

The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining. 

So why does the Fed feel it has to raise rates?

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