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).
Of course China could argue this, it would be really stupid, but nothing prohibits countries from making stupid arguments if they want to push their agenda. In this vein, the Wall Street Journal told readers that if the U.S. took actions against China and other countries for deliberately depressing the value of their currencies by buying dollars they:
"...could argue that Federal Reserve policies that weaken the dollar qualify as subsidies."
Obviously they could make this argument, but it makes little sense. There is a clear difference between central bank policies designed to affect the domestic economy and policies that are designed first and foremost to affect the value of the currency. It really is not hard for people to understand the distinction between a central bank buying its own country's bonds and a central bank buying the bonds and assets of other countries. This is about as sharp and clear a distinction as imaginable.
Central bank policy will affect will the value of the currency, but so will other policies. For example, a large reduction in government spending would be expected to reduce output and lower interest rates. Other countries could with equally good grounds contest this cut in government spending as an unfair subsidy.
This is a clear case where the Wall Street Journal does not like a policy and is inventing reasons for its readers to go along with its view.Add a comment
Robert Samuelson is unhappy that people continue to believe something that is true — that we bailed out the bankers — and happy that people still believe something that is not true — that we prevented a second Great Depression. In his column Samuelson complains:
"The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system."
Okay, let's imagine the counterfactual. We decide to take the free market seriously and let it work its magic on Citigroup, Bank of America, Goldman Sachs and the rest of the high rollers. These huge banks all go into bankruptcy with the commercial banking parts of the operations taken over by the FDIC. All insured deposits are fully protected, with the FDIC and Fed having the option to raise the limits to protect smaller savers.
The shareholders of these banks are out of luck. They have zero. Samuelson is right that share prices were depressed during the crisis, but that is different than going to zero. Furthermore, operating with the protection of Treasury Secretary Timothy Geithner's promise of "no more Lehmans," the share prices soon bounced back.Add a comment
This is really getting over the top. Republicans in Congress are debating an overhaul of the corporate income tax which would eliminate many of the opportunities for gaming the current tax code. To my mind this is great news, because the tax-gaming industry is where many of the richest people in the country, like private equity fund partners, make their money.
This means that the current corporate tax code is a mechanism for transferring money from the rest of us to the likes of Mitt Romney and Peter Peterson. It's understandable that these people would be very upset by a plan to end their tax-gaming windfalls, but why is Neil Irwin at NYT so upset?
The story he pushes is that border adjustability rules in the proposed reform would create enormous disruptions in the economy because it would lead to a sharp rise in the value of the dollar. Irwin tosses around a hypothetical 25 percent increase in the value of the dollar which he warns:
"...could shift trillions of dollars of wealth from Americans to foreigners; set off an emerging markets financial crisis; wreak havoc in global oil markets; and cause sustained harm to the American higher education and tourism industries (including, as it happens, luxury hotels with President Trump’s name on them)."
Okay, this is more than a little bit silly.Add a comment
Donald Trump has used his podium on several occasions to harangue companies about moving jobs overseas. This is probably not an effective way to conduct economic policy, but Justin Wolfers misled NYT readers in claiming:
"Research shows that efforts to boost employment by making it difficult or costly to fire workers have backfired. The prospect of a costly and lengthy legal battle for laid-off employees makes it less appealing to hire new workers. The result has been that higher firing costs have led to to weaker productivity, sclerotic labor markets and higher unemployment."
Actually, more recent research results, including more recent work from the OECD (the source to which he links), show that there is no necessary link between restrictions on firing and unemployment. While excessive restrictions on firing can undoubtedly hurt employment and growth, there is no reason to assume that moderate amounts of severance pay, or other disincentives to dismiss workers, will discourage investment and hiring.
A requirement to give longer term workers severance pay when dismissed does change the incentives facing an employer. In this situation they have more incentive to retrain workers to ensure that they are as productive as possible. They may also opt to invest more in existing facilities rather than move overseas in order to avoid severance pay.Add a comment
The NYT had an interesting piece giving profiles of several young people who are struggling to find full time jobs in Europe. All of the people profiled have college degrees, several have considerably more education.
While the article notes that the situation faced by these young people is the result of the weak economy following the crash in 2008, it would have been helpful to point out that this weakness is the result of policy choices by Europe's leaders. They have deliberately decided to run low budget deficits in spite of the fact that most of the continent is operating well below its potential. Long-term interest rates are very low and inflation remains below the European Central Bank's 2.0 percent target, which itself is absurdly low.
In short, the plight of these young people and tens of millions of others should be seen as the fruit of the economic policy pursued by dogmatic leaders across Europe. It is not something that just happened.Add a comment
It really is hard to understand, the potential gains are enormous. If we got the pay of our doctors down to the levels in other wealthy countries it could save us close to $100 billion a year. Our doctors average more than $250,000 (that's after paying for malpractice insurance and other expenses), with doctors in places like Germany and Canada getting about half of this amount.
The barriers may not be as large in other highly paid professions (we prohibit foreign doctors from practicing here unless they complete a U.S. residency program), but the economy would benefit enormously from exposing all the highly paid professions to international competition. It is bizarre that this topic never gets raises even in pieces like this one in the NYT touting the virtues of immigration.
(We can deal with the problem of brain drain from developing countries, by compensating them for the doctors and other professionals that come here. Even if we paid them enough to allow them to train two or three doctors for every one that came here, the U.S. would still be way ahead.)Add a comment
Economists have been worried about the weak productivity growth of the last decade, with some worried it will continue indefinitely. In the last decade, productivity growth has averaged less than 1.0 percent annually. This compares to a rate of close to 3.0 percent a year in the decade from 1995 to 2005 as well as the quarter century from 1947 to 1973. Slower productivity growth limits the extent to which wages can rise, except through redistribution.
However, Thomas Friedman apparently believes that if we end NAFTA, we will bring back manufacturing to the United States. But he argues that the new manufacturing capacity will be far more productive than the industry at present, and therefore mean very few jobs. He told readers:
"And if Trump forces all these U.S.-based multinationals to move operations from Mexico back to the U.S., what will that do? Help tank the Mexican economy so more Mexicans will try to come north, and raise the costs for U.S. manufacturers. What will they do? Move their factories to the U.S. but replace as many humans as possible with robots to contain costs."
Economists usually believe that expanding trade leads to higher productivity, so Friedman is offering a novel thesis with this idea that contracting trade will lead to more rapid productivity growth.Add a comment
The NYT ran a piece discussing the possibility that we are substantially undercounting growth because we aren't incorporating the benefits of many things we can now get for free, like information over the Internet. There are many interesting issues here, although it is difficult to believe the uncounted benefits add much to growth. We also have uncounted costs, like paying for the cell phone and Internet service that you need now to stay in communication with friends and family. We also have to pay for all sorts of on-line security, which we didn't have to do before we were on-line. (The payments for antivirus software and other security measures add to GDP and growth.)
Regardless of the validity of the claims for under-measured growth, there is an important logical point. If we are undercounting growth, then we are getting richer faster than the official data show. Harvard economist Martin Feldstein is cited in the piece saying that he thinks we are undercounting GDP growth by 2 percentage points annually. This means that we have to add this figure to current growth rates.
In the case of wage growth, if Feldstein is correct, then average (not median) real wages can be expected to grow 3.5 percentage points annually for the next two decades, rather than 1.5 percent growth rate projected by the Social Security trustees. This means that in two decades real wages will have nearly doubled and three decades they will be 180 percent higher than they are today.
This would mean a great deal in terms of economic policy. We have many people running around Washington warning about how our kids will face crushing tax burden if we don't reduce our deficits and debt. Suppose that Martin Feldstein is correct and we actually are understating growth by 2.0 percentage points annually. And suppose the deficit fearmongers are right and in two decades we have to raise taxes on our kids.
If we raised Social Security taxes by five full percentage points (way more than any projections indicate would be necessary) their after-tax earnings would still be on average almost 90 percent higher than what workers receive today. In thirty years, their after tax wages would be more than 160 percent higher.
As I said, I don't think it's plausible that we could be understating growth by anything close to the 2.0 percent claimed by Feldstein. However, if we are, then our kids will be incredibly rich relative to today's workers. It would be rather silly for us to waste our time worrying about deficits or debts out of a concern for generational equity. (It is silly anyhow, since debt and deficits have almost nothing to do with generational equity, but that is another story.)Add a comment
Margot Katz-Sanger left this point out of her scorecard on Obamacare. Since people are now able to get inursance through the exchanges, they are no longer dependent on getting it from their employer, which usually means working a full-time job. As a result, the number of people choosing to work part-time has risen by more than 2 million since the law went into effect. The people benefiting have disproportionately been young parents and older workers who are too young to qualify for Medicare.Add a comment
Yahoo ran a piece pointing out that it didn't really make sense for Donald Trump to take credit for the jobs report released on Friday since the survey on which the report is based was taken in the middle of January, before he was in the White House. The piece concludes by telling readers:
"So while Trump can’t be blamed for disappointing data or take credit for a good report, next month is all his!"
While the first point is entirely correct, it doesn't really make sense to give a president credit or blame for what happens in the early months of their administration. The economy has a great deal of momentum, which means it will continue whatever path it is on for some time.
In the case of President Obama, the economy was tanking when he came into office, losing more than 700,000 jobs a month. While he did quickly push a modest stimulus package through Congress, it wasn't signed until the end of February and didn't really start to have an impact until April. Even at that point, Obama's program had to counteract an enormous amount of negative momentum in the economy.
In Trump's case, the economy is on a path of modest growth and relatively strong job creation. This is likely to continue for the foreseeable future, unless he does something to slow or speedup growth, or there is some extraordinary shock to the economy.
Anyhow, we are inevitably going to try to score the performance of a president and it is customary to treat the day they take office as the starting point for the scorecard. However, as a practical matter, this approach does not make a great deal of sense.
Thanks to Robert Salzberg for calling this piece to my attention.Add a comment
It's not clear that this is what he intended to do in a column that rightly criticized Donald Trump for quickly abandoning his pledge to force drug companies to lower prices, but it is what he did. Pearlstein asserts:
"Because ours is the only country that does not negotiate prices with drug companies, using a national formulary, Americans pay roughly twice what patients in other countries do for the most widely used drugs still under patent. What that means, in effect, is that Americans pay for the 20 percent of drug industry revenue that is invested in researching new drugs, giving the rest of the world a free ride. In exchange for this largesse, a disproportionate share of the high-paying research jobs are located in the United States."
Pearlstein is asserting that the United States is making its citizens pay more than people elsewhere for their drugs, in effect as a bribe, to get drug companies to locate research jobs in the United States. This is a clear violation of WTO rules and would be quite a news story if Pearlstein has any evidence to back up this assertion.
As a practical matter, we would expect drug companies to locate their research facilities where the cost of the research is lowest. The cost of research is not affected one iota by what a country's citizens pay for drugs. Most likely the reason most research is located in the United States is the enormous subsidies that the government provides through the National Institutes of Health (NIH). It is not a coincidence that a huge number of biotech companies are located in the Maryland suburbs of Washington, right next to the NIH campus.
It is also absurd to claim, as Pearlstein does, that we give the rest of the world "a free ride." The rest of the world pays plenty of money to finance the research being done by the pharmaceutical industry. The industry only claims to do $50 billion a year in research spending. They collect well over $500 billion a year in revenue outside of the United States. In effect, Pearlstein is claiming that if the U.S. government decides to hand the pharmaceutical industry another $50 billion a year in profits because of the power of their lobbyists, that other countres are free-riding because they are not equally corrupt.
Of course, serious newspapers would be discussing more efficient alternatives to patent-monopoly supported drug research (see Rigged, chapter 5), but the Washington Post gets considerable advertising revenue from the pharmaceutical industry.Add a comment
It's often said that the economy is too simple for economists to understand it. Neil Irwin gave us evidence to support this assertion in a NYT column today. The piece both raises the question of whether the economy is too dynamic, or not dynamic enough, and what we can do to protect workers if it is too dynamic.
On the first question, we really don't have to debate much. We have good measure of the economy's dynamism, it's called "productivity growth." Productivity growth measures the increase in the amount of output in an average hour of work. It has has been extremely slow in the last decade, just 1.0 percent annually. It was rapid from 1995 to 2005, at 3.0 percent a year, but this was just equal to the pace during the period from 1947 to 1973. So, we clearly have no reason to worry that the economy is too dynamic.
In terms of protecting workers, the piece makes the point that workers who lose their job due to innovation are an important externality. This is obviously true. It's also not a new point. Other wealthy countries require that companies give severance pay to longer term workers. This both provides a bit of insurance to workers and effectively causes companies to internalize at least part of the costs associated with throwing a long-term employee out of work.
For example, if companies are required to pay two weeks of severance pay for each year of work, then a company planning to lay off a worker who has been employed for twenty years would have to pay forty weeks of severance pay. This would be a substantial disincentive to laying off workers. Companies would then have more incentive to modernize existing facilities and to retrain workers so they have the skills needed to be as productive as possible.
One of the great things about required severance pay is that it can be mandated at the state level. This means that there is no need to wait until Donald Trump and the Republican congress decide it is a good idea. States with progressive governments can adopt laws to this effect tomorrow. (At the moment, Montana is leading the way, with a law that prohibits dismissal without cause.)
Anyhow, this really is not a hard problem, nor is it new. We can provide a substantial degree of protection to workers from job loss due to technology or any other reason. We have chosen not to do so.Add a comment
One of the central themes in the Republican drive to repeal Dodd-Frank is the claim that it has made it difficult for businesses to get credit. This assertion is often given the he said/she said treatment, as in this Washington Post piece today. (Actually, it's often just given the he said treatment, where the assertion is accepted as fact, with the question being whether a reduction in business credit is worth making the banking industry safer.)
There is actually evidence that we can look to in order to assess the ability of businesses to get credit in the Dodd-Frank era. On the one hand we can look at the interest rate on high-yield bonds as being the cost of capital to many mid-size firms that are big enough to get access to the bond market, but still far too risky to qualify as investment grade.
Rates in this market, as well as spreads against Treasury bonds, have been extraordinarily low in recent years. In fact, there were so low that Fed chair Janet Yellen warned against a bubble in this market in the summer of 2014. The other major piece of evidence is the self-assessment of businesses of the problems they face in getting credit.
The National Federation of Independent Businesses (NFIB) has been surveying its members on the problems they face in their business. They explicitly ask about credit conditions. In recent years, this has been a very minor problem and in fact last year hit record lows for the survey.
While all surveys have methodological issues, there is no reason to believe that the NFIB would tilt its findings to make credit look like less of a problem than it actually is. Nor is plausible that credit could be a major problem for a substantial portion of U.S. businesses but not for the businesses included in the NFIB survey.
In short, we do have evidence on the question of Dodd-Frank undermining access to business credit and it is unambiguous, it has not posed a major problem. The claim that Dodd-Frank has prevented businesses from expanding and undermined the recovery is one of those alternative facts that is so popular in political debates these days. It should not be taken seriously.Add a comment
According to the Wall Street Journal, Donald Trump and the Republicans in Congress are looking to get rid of the Dodd-Frank financial reform bill and to repeal the fiduciary rule which requires financial advisers to give advice that is in the best interest of their clients. Without this rule, many financial advisers would give advice to clients suggesting they invest in products which may not be good for them, but pay the advisers a high commission.
While the fiduciary rule and the consumer protections in Dodd-Frank are often portrayed as being important for consumers, which they are, they also serve an important economic purpose. If we make it more difficult to make profits by designing deceptive profits, then banks and other financial institutions will have to do things like offering better service and lower fees to attract customers. While ripping off customers is simply a form of redistribution (from customers to bankers and shareholders) providing better service and products is economic growth. In other words, people who care about growth rather than redistributing income upward should be in favor of these regulations.Add a comment
The discussion of the Trump administration's view of the value of the dollar by Neil Irwin is somewhat confused. Irwin wrongly asserts that Treasury secretarys have always argued for a strong dollar:
"If you asked the Treasury secretary his view of the dollar, the answer would be equally rote: 'A strong dollar is in the interest of the United States.'"
This is not true. There have been many occasions in the past when Treasury secretaries have quite openly worked to bring down the value of the dollar. In the mid-1980s, Reagan's Treasury secretary James Baker met with his counterparts in major trading partners to negotiate a decline in the value of the dollar in the Plaza Accord. The point was quite explicitly to reduce the U.S. trade deficit.
There was a similar story in the early years of the Clinton administration. A main goal of his deficit reduction package was to lower the value of the dollar, thereby reducing the U.S. trade deficit. Lloyd Bentsen, Clinton's first Treasury secretary indicated he was content to see the dollar fall in response to the decline in interest rates in the United States.
The strong-dollar policy began with Robert Rubin becoming Treasury secretary. This led to an explosion in the U.S. trade deficit and the massive imbalances that led to the housing bubble and the Great Recession that followed its collapse. So, a strong dollar hardly has a solid pedigree either in economic theory or reality.
The piece also perversely warns that is a border adjustment tax isn't fully offset by a rise in the value of the dollar:
"...the tax would hit American consumers and retailers hard."
If the Trump administration wants the dollar to fall then it must have the intention of increasing import prices. This generally doesn't "hit American consumers and retailers hard" because the net effect on the price of most items they buy is limited. (Recall the huge rise in prices associated with the 30 percent drop in the dollar from 2002 to 2008? Yeah, no one else does either.)
In other words, higher import prices is a feature, not a bug. It is a necessary aspect of a policy intended to reduce the trade deficit and create more jobs in manufacturing.Add a comment
During his presidential campaign Donald Trump frequently talked about how he used campaign contributions as payoffs to advance his business interests. He boasted that if you give politicians money they have to do what you want. In an apparent effort to further advance his business interests, Donald Trump is pushing a plan that would allow him to get taxpayer subsidies for these payoffs.
He proposed a plan that would overturn current law, so that tax-exempt churches could get directly involved in political campaigns. (The NYT article is inaccurately headlined, saying that Trump would end "law banning political endorsements by churches." There is no law that blocks churches from making political endorsements. The law only blocks endorsements by organizations with tax-exempt status.)
If Congress follows the path proposed by Trump, he would be able to make tax-deductible donations to a church-like organization, which would then pass them on as payoffs to politicians of Mr. Trump's choosing. This would mean, for example, that he could donate $100 million to the First Church of Trump. Since this donation would be tax deductible, he would get 40 percent, or $40 million, written off of his taxes. The Church of Trump would then make contributions to the candidates of Trump's choosing. He would then call upon these politicians for favors he needs to boost his businesses profits.
It will be interesting to see if the same Congress will be able to vote for both cuts to people's health care and subsidies to Donald Trump's political payoffs.
Add a comment
While intellectual types are writing all sorts of grand treatises on how automation is going to take all the jobs and leave most people unemployed, the folks at the Bureau of Labor Statistics who actually collect the data haven't gotten the message. They released data today on productivity growth (this is the measure of the rate at which automation is reducing the need for labor) for the 4th quarter of 2016.
The data showed that productivity grew at a 1.3 percent annual rate in the 4th quarter and is now 1.0 percent higher than it was a year ago. This is roughly the same pace that productivity has grown for the last decade. It is an extremely slow rate of productivity growth. Productivity had grown at close to a 3.0 percent rate from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.
In other words, instead of automation moving along at an incredibly rapid rate leading to mass displacement of workers, it is actually advancing very slowly. We can put the threat of automation in the alternative facts category, albeit in the category of alternative facts that appeals to intellectual-types.Add a comment
Thomas Edsall has an interesting piece on the turn to right-wing populists in the United States and elsewhere in recent years. While he connects the turn to the right to economic hardship for the working class, he leaves out an important part of the story. The economic hardship for the working class was actually to a large extent the result of policies supported by the Democratic Party in the United States and social democratic parties across Europe.
In the United States, the Democratic Party supported trade, financial, and intellectual property policies that had the effect of redistributing income upward. In the case of trade, deals like NAFTA and the Trans-Pacific Partnership (TPP), were quite explicitly designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. The predicted and actual outcome of these policies is a loss of manufacturing jobs and downward pressure on the wages of non-college educated workers more generally. This policy was aggravated by the decision of the Clinton administration to push a high dollar policy that caused the trade deficit to explode.
At the same time, the self proclaimed "free traders" in the Democratic Party favored policies that protected doctors, dentists, and lawyers from the same sort of international competition. It's not surprising that working class voters would not be pleased with a party that was working to take away their jobs and push down their pay, and derided them as stupid "protectionists" for opposing the policies, even while they personally were benefiting from protectionists policies.
In this vein, longer and stronger patent and copyright protections also have the effect of redistributing upward. Similarly, the regulatory policies directed towards the financial industry, including free too big to fail insurance, also have the effect of redistributing upward.
In Europe, the push for needless austerity, which has generally been embraced by social democratic parties, both directly and indirectly hurt the working class. The direct effect shows up in cuts in areas like health care, education, and pensions. The indirect effect is high unemployment and lower wages.
For these reasons, it is not surprising working class voters would not be happy with the establishment parties they have traditionally supported even if the right-wing populists may not offer a coherent economic alternative. (Yes, this is largely the point of my (free) book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.Add a comment
The response to Donald Trump's ban on Muslim immigrants has been reassuring. Millions of people have acted in various ways to express their opposition to this blatant act of bigotry. But as part of this story, we are being told that immigrants everywhere and always benefit all workers.
Far be it from me to criticize this great wisdom, which we can find in this Wonkblog post by Christopher Ingraham. So let's pretend that the people making this assertion have a shred of integrity. How about getting rid of the restrictions that make it extremely difficult for foreign doctors and dentists to practice in the United States?
Currently, foreign doctors are banned from practicing unless they complete a U.S. residency program. Foreign dentists are prohibiting from practicing in the United States unless they graduate a U.S. dental school. (We have allowed graduates of Canadian schools since 2011.) As a result of these protectionist measures our doctors earn on average more than twice as much as doctors in other wealthy countries, netting more than $250,000 a year. Our dentists also get paid twice as much, averaging close to $200,000 a year. This protectionism costs us close to $100 billion a year in higher health care costs.
So we all agree that protectionism is bad and that we want more immigrants, so how about it? Will we tear down the walls barring qualified doctors and dentists, or are all of our open border types not really sincere?Add a comment
Four years ago, we calculated the potential savings to the federal and state governments, as well as beneficiaries, from lower drug prices. In the paper, Reducing Waste with an Efficient Medicare Drug Benefit, we compared how much people in the United States paid for drugs with payments in other wealthy countries. We then calculated how much the federal and state governments, as well as beneficiaries, would save on the Medicare prescription drug benefit if we paid the same amount for drugs as people in other countries.
The calculation had low and high savings scenarios. In the low savings scenario, it was assumed people in the United States would pay as much for prescription drugs as in Canada, the highest country in the group. This involved savings of 27.8 percent on drugs, since Canadians pay on average 72.2 percent as much as people in the United States. The high savings scenario was based on drug payments in Denmark, which are on average 34.5 percent as high as in the United States, implying a savings of 65.5 percent.Add a comment
The Fed raised interest rates last month because they said the economy was getting close to full employment and they were worried about accelerating inflation. The data do not provide much support for this concern.
Last week the Commerce Department reported that the core personal consumption expenditure deflator rose at just a 1.3 percent annual rate in the fourth quarter. This is well below the 2.0 percent average rate targeted by the Fed.
This morning the Bureau of Labor Statistics reported that the Employment Cost Index, which includes benefits and not just wages, rose at 2.0 percent annual rate in the fourth quarter and has risen just 2.2 percent over the last year.
The latest data suggest that inflation might even slowing rather than rising, indicating that there is no reason whatsoever for the Fed to weaken the labor market and slow job growth with further rate hikes. In other words, the Fed is shooting at phantom inflation.Add a comment