Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR).
Robert Samuelson used his column today to say he doesn't understand budget deficits. This is hardly a surprise to regular readers of his column. But, he bizarrely argues that because he is confused, everyone else is also.
Samuelson tells readers:
"The truth is that we don’t fully understand the effects of budget deficits on the business cycle."
No, "we" do understand the effects of budget deficits. It really is pretty simple, deficits increase demand compared to a balanced budget or surplus. Of course, not all spending or taxes are equal. Direct spending on goods and services has more impact than transfer payments, and transfer payments have more impact on demand if they go to lower income people who will spend them than higher income people who save much of their income. The same is true of taxes.
Also, it is important to note that the budget only captures a portion of the government's commitments of revenue. Government-granted patent and copyright monopolies can easily involve a commitment in excess of $1 trillion a year (4–6 percent of GDP) in payments for rents. These are effectively privately collected taxes.
Anyhow, it's unfortunate that Samuelson is confused on this issue. It is even more unfortunate that the Post could not find an economic columnist who understands economics.Add a comment
Sure, Republicans say this, but did we think that they would say that they expect their tax plan to increase the debt by $1.5 trillion, but rich people need tax cuts? Given their endless tirades about deficits under President Obama, Republicans are pretty much required to say that their tax cuts will pay for themselves regardless of what they actually believe.
So why don't we recognize this very simple fact and stop telling people what Republicans believe, as this NYT article does?
"But the bill’s passage was made possible by a near-complete Republican embrace of the idea that about $1.5 trillion of tax cuts will pay for themselves, by producing enough economic growth and additional federal revenue to offset their costs to the Treasury.
"That belief was contradicted by several studies, including one from Congress’s official economic scorekeeper, which Republicans dismissed as overly pessimistic."
The NYT's reporters have no idea what Republican members of Congress believe about the fiscal impact of their tax cut, so they should not be implying that they do. As a practical matter, they may have no beliefs on the issue whatsoever. They get and keep their jobs by doing what their donors want them to do, not by thinking about the economic impact of the bills they pass.Add a comment
The Republican tax bill is an abomination. It gives hundreds of billions of dollars in tax breaks over the next decade to the country's richest people. The Trump family alone stands to pocket more than $1 billion from the reduction in the estate tax and other provisions in the bill.
Furthermore, instead of making the tax code simpler, it creates all sorts of new gaming opportunities. Corporations will have enormous incentive to have their profits show up in tax havens, where they will be able to escape U.S. taxation altogether.
The new rules on pass-through businesses means that anyone is a complete schmuck if they don't arrange a 23 percent tax deduction by having their pay come through their own pass-through. And the repeal of the Johnson Amendment means that rich people will now be able to get taxpayers to subsidize their unlimited campaign contributions by donating to the Church of Republican Politicians.
But one argument repeatedly made by opponents of the bill — that it imposes some huge burden on children — is just painful to see. What do these people think they are saying when they make this assertion?Add a comment
One of the issues that has been raised in the debate over tax cuts is how fast the economy can grow. The Congressional Budget Office (CBO) is projecting growth averaging just 1.9 percent annually over the next decade. This is based on the assumption that the labor force will grow on average by 0.5 percent annually and productivity will grow by 1.4 percent.
By contrast, the Trump administration is arguing that with its tax plan the economy can grow 3.0–4.0 percent annually. It appears that the consulting firm McKinsey Global Institute agrees with the Trump administration's projections on growth, but not due to its tax plan.
The Washington Post reported on a new study from McKinsey which projects that one third of all jobs in the United States will be lost due to robots and artificial intelligence by 2030. This rate of job loss translates into an annual rate of productivity growth of 3.1 percent, roughly the same pace of growth seen during the 1947 to 1973 Golden Age and the period from 1995 to 2005.
If the economy actually sees the productivity growth predicted by McKinsey and the CBO labor market projections prove accurate, then growth should average a bit more than 3.5 percent over the next decade. If this is the case, workers should receive much larger wage increases than they have had in recent decades. Also, the more rapid growth should mean much smaller budget deficits.
It is important to note that the McKinsey report is effectively a baseline projection. It is saying that growth will be considerably faster than is now projected by CBO assuming no change in policy, including no large tax cuts. In fact, if the McKinsey report is correct, it is difficult to see the rationale for tax cuts that predominantly benefit the richest people in the country.Add a comment
When the Washington Post advertises for reporters, do they include "mind reading skills" as a necessary qualification? They gave us yet another example of these skills in an article discussing Republican efforts to craft a tax bill that will be able to get the support of 50 senators.
The piece told readers:
"Many Republicans believe the economic growth that will be unleashed by the tax cuts will be worth it, potentially creating such an economic boom that new revenue will come in from job creation and corporate investment."
It's good the Post's reporters have this mind reading ability. The rest of us might just think that Republicans are saying utter nonsense about tax cuts and economic growth because, at least publicly, they can't just say "we are trying to give more money to our wealthy campaign contributors." This is, of course, what they are in fact doing, so some of us might think it is what they intend to do.Add a comment
The Republicans had planned to include a trigger mechanism in their tax plan, which would have automatically raised taxes in the event of budget deficits that exceeded targets. This is classically bad economic policy. It means that if growth slows and the economy falls into a recession, the government would be raising taxes. Such a tax increase when the economy is already slowing would further dampen growth, making a downturn worse.
This is very basic economics. The fact that the Republicans were prepared to include it in their bill indicates that they either have very little knowledge of economics or they don't care about the economic impact of their tax plan. It would have been helpful if the media had highlighted this issue since it offers considerable insight into how the Republican leadership is thinking about this tax plan.Add a comment
On Morning Edition yesterday, Representative Jeb Hensarling, the chair of the House Financial Services Committee, was interviewed by David Greene. At one point, Greene asked him about the Republican tax cut proposal. After blaming President Obama for the slow growth of the last eight years, Hensarling commented:
"Every time we've had a pro-growth fundamental tax reform, be it under President Reagan, President Kennedy — you can even go all the way back to President Coolidge. We have seen paychecks increase, economic growth be ignited and actually more revenues come into the government."
It would have been helpful for Greene to have corrected Hensarling here. We had a big tax cut that was sold as "pro-growth" under President George W. Bush. This was not followed by strong growth and, in fact, the recovery following the tax cuts ended with the collapse of the housing bubble that gave us the Great Recession. This was the basis for the weak growth that Hensarling was complaining about in his prior comment.
The strongest period of growth since the 1960s followed a tax increase put in place by the Clinton administration in 1993. While it is not plausible to attribute this growth to the tax increase, obviously it did not prevent the growth.
It would have been helpful to point these facts out to listeners, some of whom might have been misled into believing Hensarling's claims.Add a comment
The Washington Post proudly told readers that the economy had reached potential GDP in the third quarter of 2017 and therefore future GDP growth will have to be far slower than in the recent past, averaging just 1.8 percent over the next decade. While this is true based on the projections of the Congressional Budget Office (CBO) and most independent forecasters, it would have been worth noting that these projections have been very far from the mark frequently in the past.
CBO and other forecasters completely missed the economic crash caused by the collapse of the housing bubble. At the time, they projected potential productivity growth of 1.9 percent annually, rather than the roughly 1.0 percent rate we have seen over the last decade. CBO also completely missed the upturn in productivity growth that began in 1995. They had thought the slowdown rate of roughly 1.4 percent would continue indefinitely, instead productivity growth increased to close to a 3.0 percent annual rate over the next decade.
It is highly misleading to imply that these productivity growth projections are hard and fast numbers, given the dismal track record of the recent past. In this respect, it is worth noting that productivity growth was over 3.0 percent in the third quarter. If fourth quarter GDP is in line with the most recent projections, it will be well over 2.0 percent for the fourth quarter as well. While it is far too early to say that we are on a higher productivity track, it is certainly a possibility given these numbers.
If productivity growth remains over 2.0 percent, then 3.0 percent is perfectly plausible growth target for reasons that have nothing to do with the proposed tax cut. The rise in productivity growth is more likely due to a tightening of the labor market leading businesses to make greater efforts to economize on their use of labor. This means both that the least productive jobs go unfilled (e.g. greeters at Walmart and the midnight shift at convenience stores) and firms invest more in labor saving technology.
It is also worth noting that the "robots taking our jobs" folks have to believe that the Washington Post is spewing nonsense in this piece. Robots taking our jobs is a story of very rapid productivity growth. The Post is giving us a story of extremely slow productivity growth. Rapid is the opposite of slow — but many of our leading public intellectuals have not yet been able to grasp this fact.Add a comment
The New York Times discussed the prospects for the Republican tax bill, comparing the difference in Republican attitudes towards the tax bill and the efforts to repeal the Affordable Care Act. In its effort to explain this difference, it told readers:
"But lowering taxes is, at heart, what makes a Republican a Republican."
The problem with this assertion is that the Republican plans actually raise taxes for close to half of middle-income families, as the New York Times has reported. Given the structure of this tax cut and prior Republican tax cuts it would seem more accurate to say that cutting taxes for rich people is what makes a Republican a Republican.Add a comment
In the bizarre world of Washington economics, where patent monopolies are "free trade" and projections of Social Security shortfalls decades in the future are a "crisis," it's perhaps not surprising to see reality turned on its head in the debate over the Republican tax bill. The Washington Post had a major article on Wisconsin senator Ron Johnson's objections to the tax bill.
According to the article, Johnson's is objecting because he wants a lower tax rate on income that individuals receive from pass-through corporations. In presenting Johnson's case, the article gets the issue completely backward by telling readers:
"Johnson wants 'pass-through' companies to be treated more like other corporations that are seeing their rates reduced from 35 percent to 20 percent under the GOP legislation."
Johnson absolutely does not want pass-through corporations to be treated like other corporations. Pass-through corporations by definition pay zero tax. Their profits are passed through to their owner(s), who then pay tax on it as normal income under current law.
Johnson has no interest in seeing the tax rate on pass-through corporations (which enjoy the privilege of limited liability like other corporations) raised to the same levels as other corporations. Instead, Johnson is arguing that individuals who get income from pass-through corporations should pay a lower tax rate than other people. This is an argument about the tax rate individuals face, it has nothing to do with corporate tax rates.
This is also considered textbook bad tax policy, since it means taxing income at different rates, depending on its source. If there is a big difference in the tax rate that people pay on income they get from pass-through corporations, as opposed to say working as a lawyer or doctor, then they have a large incentive to have their income come from a pass-through corporation. As a result, people will be spending lots of money creating pass-through corporations and misrepresenting the source of their income.
This is a great policy if the point is to promote the tax shelter industry, it is terrible policy if the goal is increasing economic growth and a fair tax code.Add a comment
I am a big fan of Dani Rodrik's writings on trade, and I agree with most of what he says in his NYT column today, but I do have one major disagreement. However, before going there let me emphasize some of the key points he makes in the piece.
First, Rodrik is very much on the mark in arguing that recent trade deals, like the Trans-Pacific Partnership, have very little to do with free trade. As he says, these deals are about imposing a corporate-friendly structure of regulations on both our trading partners and the U.S. (The deals have the effect of locking in laws that could otherwise be more easily altered.)
He also is right in singling out the pharmaceutical industry as the biggest villain in this story. We have been using these trade deals to ensure ever longer and stronger patents and related protections. The result is to make drugs, which would otherwise be cheap, extremely expensive. The price of drugs can be a serious burden even in rich countries, but patent protection can make life-saving drugs altogether unaffordable in developing countries. We should be looking to foster alternative, more efficient, mechanisms for financing research, not using trade deals to impose patent monopolies everywhere.
It's worth mentioning in this context the effort to impose rules on digital commerce in these trade deals. Folks following the scandals related to Facebook and Twitter's involvement in the presidential election know that we don't really have the rules down ourselves. In other words, we do not have a system in place that prevents both foreign and domestic actors from using dishonest means to influence public opinion and interfere with the democratic process. We also don't have effective systems in place to ensure the privacy of our personal data. These are really big issues that are probably worth getting sorted out before we try to shove a one-size-fits-all model on the rest of the world.Add a comment
That is the question millions are asking after she made this assertion in a segment on Morning Edition today. Economists would usually look to evidence that budget deficits are creating too much demand in the economy, such as a rising inflation rate and/or high interest rates. Both interest rates and inflation are at historically low levels, with inflation consistently running below the Federal Reserve Board's 2.0 percent target. Based on these facts, it is not clear what could be the basis of Liasson's assertion.
In some cases, people point to the interest on the debt as a burden placed on our children. This is misleading since some of our children (or at least Bill Gates' children) will be receiving this interest. However, even this measure does not suggest a major problem. Currently, interest payments on the debt, after netting out money refunded by the Federal Reserve Board (the government pays interest on the bonds held by the Fed, which is then refunded to the Treasury) are less than 0.8 percent of GDP. They were more than 3.0 percent of GDP in the early 1990s.
Also, if anyone is concerned about the burden imposed by these future payments, they should also be concerned about the much larger commitments the government makes when issuing patent and copyright monopolies in order to finance innovation and creative work. In the case of prescription drugs alone, the added expense of patents and related protections comes to close to $370 billion a year, or almost 2.0 percent of GDP.
Adding in the costs from these monopolies in medical equipment, software, and other sectors would almost certainly double this amount. Anyone seriously concerned about burdens on future generations would have to be noting the burdens created by patent and copyright monopolies, which swamp any plausible interest burden of the debt. The fact this is never mentioned suggests that burdens on our kids are not a major concern for people complaining about budget deficits.Add a comment
Since 47 percent of the benefits of the proposed tax bill go to the richest one percent, and the very rich, like Donald Trump, will get an enormous bonanza from ending the estate tax and other provisions, many people thought the goal of Republicans with this tax bill was to give more money to the rich people who finance their campaigns. Thankfully, the New York Times is there to correct this mistaken impression.
The NYT told readers that the Republican tax proposals are an:
"...effort to clean up the tax code, close loopholes and secure bigger tax cuts for all."
Fortunately, we have the NYT to explain the Republicans' motives. Certainly, based on the evidence in the public domain, almost everyone would have thought they were just trying to give money to the rich.Add a comment
Both the NYT and Washington Post articles on the battle over the succession and the Consumer Financial Protection Bureau (CFPB) neglected to mention the legislative history around the creation of the CFPB. There were competing sections on the order of succession in the event of the director's departure in the House and Senate versions.
One specified that the normal procedure on vacancies, in which the president gets to appoint an acting director, would be followed. The other had language indicating that the deputy director would become acting director until a new director was approved by Congress. This was the language that was used in the final bill. That supports the interpretation of the Democrats that the deputy director should fill in as acting director until Trump nominates a person to be director and that person is approved by Congress.Add a comment
It's amazing how so many reporters feel the need to tell us what politicians really think. Sorry, but I don't believe they know.
The example this time is a piece reporting on how 2018 may be a wave election with defeats for the Republicans comparable to what the Democrats experienced in 2010. It concludes by discussing the effort to shove through a tax bill before the end of the year:
"Republicans do not think the tax bill will be a political albatross once voters gain a fuller appreciation of its advantages. Of course, that is exactly what Democrats thought about the health care bill at this point in 2009."
It's entirely plausible that Republicans don't say that they think the bill is a political albatross. After all, what would that look like? Would members of the House and Senate be telling reporters:
"...we know the public hates this bill because it gives so much money to rich people, but these are our campaign contributors and we have to come through for them. Furthermore, even if we lose our election, they will pay us millions of dollars a year to work for them as lobbyists."
If something like this were, in fact, the case it is extremely unlikely that Republican politicians would be saying it to NYT reporters. It is far more likely that they would be uttering nonsense about how the tax bill is really good for the country and that people will come to realize this after it is approved.
Competent reporters would just tell readers what the politicians say. They would not try to tell us what the politicians actually believe, since they don't know.Add a comment
Okay, that's not quite what the NYT said. Instead, an article on the impact of ending the tax deduction for state and local income taxes told readers:
"Eliminating the deduction has long been a goal of many Republican lawmakers, who view the tax break as a subsidy that poorer red states provide to richer blue ones that spend heavily on government services."
Contrary to what the NYT tells us, their reporters really don't know how Republican lawmakers "view" the tax break. However, for some reason they couldn't just tell us what they say, they had to pretend to know what they think.
How about if reporters just stuck to telling us what politicians say and do and not pretend to read their minds? Then, we would all have something to be thankful for next Thanksgiving.Add a comment
The NYT had a good piece discussing the potential impact of capping the mortgage interest deduction and property taxes on the housing market; however, the piece missed an important way in which the Republican tax bills would reduce the benefits of the mortgage interest deduction. The piece notes that doubling the standard deduction will reduce the number of people who itemize and therefore benefit from the mortgage interest deduction.
But both bills also end the deduction for state and local income taxes. Without this deduction, most homeowners will have few other deductions apart from their mortgage interest and whatever is allowed for property taxes. These deductions will be less for almost everyone than their standard deduction ($24,000 for a couple). This means that they would just take the standard deduction and the mortgage interest deduction would be of no value to them. (The Tax Policy Center projects that just over 5 percent of tax filers would still itemize their deductions if these changes in the tax code are put into effect.)
In fact, even if they still chose to itemize the mortgage interest deduction will be far less valuable under this new code. Suppose that they had $10,000 in property taxes that are deductible and pay $15,000 a year in mortgage interest and have no other deductions. Since the combined total of $25,000 exceeds the $24,000 standard deduction, it would pay for this couple to itemize; however, the benefit is much smaller.
Their benefit from itemizing is just the difference between their itemized deductions and the standard deduction. In this case, this difference reduces their taxable income by $1,000, saving them $250 on their taxes if they are in the 25 percent bracket. If we still had a $12,000 standard deduction, their itemized deductions would be reducing their taxable income by $13,000, saving them $3,250 on their taxes.
In short, by raising the standard deduction and reducing the number of itemized deductions that are available, the Republican tax proposals will be hugely reducing the value of the mortgage interest deduction even if they follow the Senate bill and don't reduce the cap on deductible interest.
Thanks to Robert Salzberg for calling my attention to the Tax Policy Center projection.Add a comment
Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.
"In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle."
There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.Add a comment
Yes, David Brooks actually said this. The context is his column noting the complaints against the big tech companies. After going through the list Brooks tells readers:
"The political assault on this front [against the monopoly power of the big tech companies] is gaining steam. The left is attacking tech companies because they are mammoth corporations; the right is attacking them because they are culturally progressive. Tech will have few defenders on the national scene."
It is hard to believe that anyone with even a passing knowledge of U.S. politics could say something so ridiculous. Tech has hundreds of billions of dollars to throw at politicians, think tanks and other academics, and to buy media outlets in addition to the Internet sites it already controls.
Everywhere outside of David Brooks' World, people respond to money. The one thing we can be absolutely certain of is that there will no shortage of prominent individuals happy to defend tech on the national scene. My guess is that the tech giants won't see the need to follow Brooks' agenda as the only road to salvation. They are more likely to just buy up another think tank or two.Add a comment
Robert Samuelson comes in behind Donald Trump when it comes to mastering the logic of international trade. In his column telling readers that "Trump gets the trade problem all wrong," Samuelson gets three really big things about trade wrong:
1) The dollar's status as the major global currency is not a major factor in the trade deficit;
2) In contrast to Samuelson's trade agenda, most workers have no reason to want the U.S. government to devote greater efforts to enforcing patent and copyright protection elsewhere; and
3) The Trans-Pacific Partnership (TPP) was not about free trade; in fact, it can with more legitimacy be called a protectionist pact.
On the first point, the dollar has long been the major global currency. That did not lead the United States to run trade deficits in the 1950s and 1960s. In fact, through most of the next three decades, it ran considerably smaller deficits than it is running now.
The reason the U.S. is running such large trade deficits was the decision by many developing countries to accumulate huge amounts of reserves following the botched bailout from the East Asian financial crisis in 1997. This was a serious failure of the international financial system, managed by the United States. (That would be Clinton, Rubin, and Summers if we want to name names.)Add a comment
There may be no other person who has done as much harm to the world in this century as Peter Peterson, the Wall Street billionaire. Peterson has used his money to promote his complaints about excessive budget deficits. Due to his ability to fund a wide range of organizations, he has helped to keep these concerns at the center of public debate.
Back in the last decade, when some of us were trying to raise the alarm about the housing bubble and the economic damage that would be caused by its collapse, Peterson's crew were keeping the budget deficit front and center. News outlets like the Washington Post, New York Times, and National Public Radio had any number of news stories and columns raising concerns about the budget deficit. There was virtually nothing discussing the housing bubble and the risks it posed.
After the bubble burst and the economy desperately needed stimulus in the form of larger budget deficits, the Peterson organizations were still pressing their concern about exploding deficits. At a time when millions of people were needlessly unemployed, and millions more underemployed, Peterson's crew pressed the case for reducing the deficit. They were so successful they got the Obama administration to appoint the Bowles–Simpson commission on the deficit just as the recession was hitting its trough in terms of unemployment. This deficit fanaticism probably had an even more negative impact in Europe where the European Union and the European Central Bank imposed austerity on the countries of southern Europe that have led to downturns comparable to the Great Depression (much worse in the case of Greece).Add a comment