Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

Please also consider supporting the blog on Patreon.

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

I see my friend Jared Bernstein beat me to the punch in writing up the new data from Usual Weekly Earnings series. As he points out, the story for the median worker — those right at the middle of the income distribution — has not been good over the last year. Donald Trump doesn't seem to be making American great again for these folks.

Fortunately, there is a bit better story lower down on the income ladder, as we can see in the figure below.

Book3 17971 image002

Source: Bureau of Labor Statistics.

While real weekly earnings for the median worker have not gone anywhere in the last year, earnings for those at the 25th percentile and the 10th percentile are still headed up. Over the last three years, usual weekly earnings for the 10th percentile worker have risen by 4.8 percent and for 25th percentile worker by 6.5 percent. That's a pretty good story by almost any standard, although it doesn't make up for the weakness in the immediate aftermath of the housing crash, much less the three decades of wage stagnation that preceded the Great Recession.

Taking the longer three year period even the earnings for the median worker don't look bad, rising by 2.9 percent over this period. That's not great, but in context of 1.0 percent annual productivity growth, at least the median worker is getting her share of the gains. That contrasts with the period from the first quarter of 2007 to the first quarter of 2015 when median earnings rose by a total of just 1.2 percent.

It looks like tight labor markets are acting as expected towards the bottom end of the income ladder. The picture at the median has not been good over the last year or so, but these numbers are erratic. I expect better news in the second quarter at the median, but we'll see.

Add a comment

In a Washington Post column, Fareed Zakaria gave us yet another of the sermon about how Republicans supported "free trade" before Trump. This is of course not true.

Republicans have done little or nothing to remove the barriers that protect doctors and other highly paid professionals from foreign competition. As a result, our doctors are paid roughly twice as much on average as their counterparts in other wealthy countries, costing us roughly $90 billion a year in higher medical expenses. This swamps the cost of the steel and aluminum tariffs that have gotten "free traders" so upset.

The trade deals have also been quite explicit about increasing protectionism in the form of longer and stronger patent and copyright protections. These protections (as in protectionism) quite explicitly redistribute money from the rest of us to folks like Bill Gates. They are incredibly costly in the sense that they are equivalent to extremely large tariffs, often raising the price of the affected product by a factors of ten or a hundred, the equivalent of tariffs of 1000 or 10,000 percent.

And, there is a huge amount of money involved. In the case of prescription drugs alone, patent and related protections cost us more than $370 billion a year, nearly 2.0 percent of GDP. Real free traders don't support this protectionism.

It is, of course, convenient for those pushing this agenda of upward redistribution to pretend that it is all just free trade and the free market, but this is nonsense. Unfortunately, you won't see this point made in the Washington Post. You can read about it in my (free) book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

Add a comment

We all know about the skills shortage where Harvard has to pay investment managers millions to lose the school a fortune on its endowment, Facebook can't find a CEO who can avoid compromising its customers' privacy, and restaurant managers apparently don't understand that the way to get more workers is to offer higher pay. The NYT gives us yet another article complaining about labor shortages.

The complaint is that restaurants have small profit margins and therefore can't afford to offer higher pay to their workers. The way markets are supposed to work is that businesses that can't afford to pay the market wage go out of business. This is why we don't still have half of our workforce employed in agriculture. Factories and other urban businesses offered workers better paying opportunities. Most farms could not afford to match the pay and therefore folded often with the farm owner themselves moving to new employment.

This is the story that we should expect to see with restaurants if there really is a labor shortage. We should start to see more rapidly rising wages. The restaurants that can't pay the market wage go under. That may not be pretty, but that's capitalism. We tell that to unemployed and low paid workers all the time.

For the record, we aren't seeing too much by way of rapidly rising wages to date. Over the last year, the pay of production and non-supervisory workers rose 3.2 percent. That's a bit better than the average of all workers of 2.7 percent, but not the sort of increase that we would expect if there is a serious shortage of labor. It is also worth mentioning that profit margins in business as a whole are near post-war highs as a result of the weak labor market created by the Great Recession, so we should expect some shift back to labor as the labor market tightens.

Add a comment

The Post asserted that:

"[...]entering into a new TPP could unify Trump with other trading partners and put new pressure on Beijing to either allow more imports into China or risk being alienated by other Asian countries, that would now received new trade benefits as part of the deal."

Actually, the countries in the TPP will receive relatively few "new trade benefits" as a result of the TPP. Six of the other eleven countries in the pact already have trade deals with the United States, which means there are very few remaining barriers to be reduced. (One of the other five countries is Brunei, whose trade patterns will probably not cause China's government to lose much sleep.)

If the pact was intended to hurt China, its designers did not do a very good job. It has lax rules of origins requirements. In some cases, for example most car parts, an item with as little as 35 percent value added from TPP countries could qualify for preferential treatment.

This means, for example, that car parts produced in China, with Vietnam adding 35 percent of the value (possibly in a Chinese owned firm) would get preferential treatment under the TPP. Since these requirements are difficult to enforce rigorously, it is likely that some items with as much as 70 percent value-added coming from China will get preferential treatment under the TPP. That does not sound like an effective way to exclude Chinese products. (NAFTA's rules of origins for car parts required 62.5 percent of the value-added to come from the countries in the pact.) 

The TPP also includes provisions that will make member countries pay more money for prescription drugs due to longer and stronger patent and related monopolies. It also includes provisions on e-commerce that would likely make it more difficult to crack down on the sorts of abuses we are now hearing about from Facebook. These features, which are major parts of the pact, are not likely to help the United States build an effective coalition against China on trade or anything else.

The piece also tells readers that Trump has:

"[...]shown a general reluctance to enter into multilateral trade deals because he believes these allow the United States to be ripped off."

It is not clear how the Post knows what Trump "believes." It can tell readers what he says, but given the frequency with which he reverses his positions, it seems unlikely he believes anything.

Add a comment

I'm not kidding, that's what a column by Isaac Stone Fish in The Washington Post told us. We all know the list of complaints against China. They subsidize their exports of many products, costing US workers their jobs. They deliberately prop up the dollar against the yuan, making US goods and services less competitive. Our companies complain that China takes their intellectual property (doesn't bother me).

But Fish's Post column tells us the real problem is that Starbucks and other companies looking to profit from the Chinese consumer market may be hit by a government promoted boycott. I suppose if I had a million dollars of Starbuck's stock, I would be concerned. After all, their profits could fall by 5–10 percent, lowering the stock price proportionately. (Actually, most non-stockholders gain in this story, as big fans of free trade already know. If China pays less to Starbucks in profits, the dollar will be lower, which means that we will have a lower trade deficit, other things equal.)

For the other 99.99 percent of the American people who don't own large amounts of stock in Starbucks or similarly situated companies, it doesn't look like a big deal. Of course, it is interesting to see what sort of arguments The Washington Post takes seriously enough to feature on its opinion page.

Add a comment

The Washington Post is trying to scare people about budget deficits. Okay, that is not exactly news, it has been trying to scare people about deficits to justify cuts to Social Security and Medicare benefits and other programs for decades, but they are redoubling their efforts now. (In fairness, the Republican tax cut gave them more material.)

Heather Long gives us the classic story:

"The United States is able to run such high deficits because the U.S. Treasury turns around and sells U.S. debt to investors around the world. Right now, a lot of people want to buy U.S. government bonds, even though America already has $15 trillion in debt owned by the public. But the problem is no one knows when people might say enough is enough and stop buying U.S. debt — or demand much higher rates of return.

"Even if the nightmare scenario doesn’t materialize, deficits are a drag on the economy. Investors opt to buy government debt instead of making the type of private investments that create jobs or raise wages, economists warn."

Okay, so the bad story is that the large amount of bonds issued to finance the deficit will lead to high interest rates. (This actually skips a step. The Fed could buy these bonds, ensuring rates don't rise, as it did in its quantitative easing days. Its ability to buy bonds is limited by inflation concerns.) But Long tells us that even if interest rates don't rise, government borrowing is still crowding out investment. Really?

Add a comment

Many more of us are food consumers than farmers, yet somehow the prospect that a trade war with China will lead to lower prices for soybeans and other agricultural products is never reported as a positive development. Undoubtedly, the pain to farmers is much more important to them than the small benefit that many of us may see in the form of lower food prices, but reporters have felt it important to tell us about the small cost that many of us might see as a result of higher steel and aluminum prices as a result of Trump's tariffs on these products.

This seems like a serious asymmetry in reporting on this topic.

Add a comment

Once again Robert Samuelson takes a big swing and misses in his Washington Post column today. He argues that schools in states like West Virginia, Kentucky, and Oklahoma are underfunded and unable to pay their teachers a decent wage because of the cost for caring for the elderly.

This is wrong for two obvious reasons. First, these are all low-tax states. They could try something like raising taxes on higher income households. This is one way to get money.

The other problem is that a main reason why it costs so much to care for our elderly is that we pay our doctors and drug companies twice as much for their services and products as people in other wealthy countries. If we paid the same prices for our health care as people in Canada or Germany, it would free up more than $1 trillion annually for schools and other worthwhile items.

But The Washington Post doesn't like to call attention to the incomes of the affluent, they would rather beat up on senior citizens.

Add a comment

I see that five former Democratic chairs of the Council of Economic Advisers warned of an impending debt crisis in a column in the Washington Post. They tell us that current and projected future levels of deficits and debts will soon send interest rates soaring, crashing the economy. While I am skeptical about the basic proposition for a number of reasons, perhaps most importantly Japan's persistently low interest and inflation rates in spite of a debt-to-GDP ratio that is two and a half times ours, but let me offer a solution: selling off patent monopolies.

We can sell off patent monopolies in all sorts of areas, auctioning off as many as are necessary to make our deficit hawks happy. For example, we can sell off a patent on the idea of turning left at a fork in the road. If people try to get around the patent by taking three rights, we can sell off the patent on turning right at the fork in the road. And of course, we can sell off a patent on turning around and going in the opposite direction to take care of these wise asses.

We can sell off patents on boiling water and making ice. We can make as long a list as we like, there are no shortage of items which we can turn into patent monopolies.

Is this horrible economic policy? Of course it is, but our deficit hawks never pay attention to the obligations we impose on future taxpayers by granting patent and copyright monopolies, they just look at the debt. So, if that s all they care about, let's solve the debt problem by issuing more patent and copyright monopolies and make many of our country's leading economists happy.

And, just to be clear, we are talking about enormous sums of money. In the case of prescription drugs alone, patent and related protections cost us around $370 billion a year. This is almost 2.0 percent of GDP or more than twice the burden of interest service on the debt, net of money refunded by the Fed. (This is discussed in my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

We could clearly raise enough money by selling off various patent and copyright monopolies to get our debt down to whatever size is needed to make our economists happy. It's stupid policy, but as the old saying goes, economists are not very good at economics.

Add a comment

Seriously, the NYT ran a piece with the headline, "why Trump's tariffs could raise the cost of a hip replacement." The point of the piece is that we now import a substantial amount of medical equipment and devices from China. This means that if we have to pay 25 percent more, then the price of these items in the United States will be higher. This means that operations like hip replacements that might require some equipment now purchased from China will cost more.

Okay, let's try to use some numbers here. The piece tells us that we import $3 billion a year in medical equipment from China. According to the Commerce Department, we spent over $90 billion on medical equipment and devices last year (National Income and Product Accounts, Table 5.5.5U, Line 6). This means that the items imported from China came to a bit more than 3 percent of the total.

If the tariffs are passed on in full (a very questionable assumption, both because of the large market here and the fact that actual production costs are a small fraction of the price of these patent-protected items), then the price of medical equipment would rise on average about 0.8 percent. Most of the cost of major surgeries like hip replacements go to the doctor and hospital, not the artificial device, but let's say that half of the cost is the device itself.

This means that the cost of your hip replacement surgery will rise by a whopping 0.4 percent as a result of the Trump tariffs! The NYT should look for some better ammunition if it wants to seriously push its case.


Addendum

Robert Salzberg points out to me that if the artificial hip itself were produced in China, then the price increase resulting from the tariff would be 25 percent on the implant, not 0.8 percent as I assume above. In this post, I assumed that implants are as likely to be produced in China as medical equipment more generally, but Robert's point is worth noting.

He also points me to an old NYT piece on medical travel, which gives the price of manufacturing an implant at $350 in the United States and $150 in Asia. This piece gives further evidence that any increases in the price of implants from China due to the tariff will be virtually invisible in the cost of the procedure.

It is also yet another reminder of the enormous potential gains from free trade in medical travel. If any of our politicians actually supported free trade, the gains from setting up an institutional structure (i.e. rules for insurers and malpractice) to facilitate medical travel would swamp the gains from trade deals like NAFTA and the TPP. Unfortunately, most politicians are staunchly protectionist when it comes to measures that might reduce the income of doctors, hospitals, and medical equipment manufacturers. They only are interested in reducing trade barriers when most of the losers are less-educated and less politically powerful workers.

Add a comment

I guess "terrific" doesn't mean what it used to mean. According to the Washington Post, the average monthly before-subsidy premium for a plan purchased in the health care exchanges was $621, an increase of 30 percent from 2017. For some reason, this rise in premiums doesn't seem to be getting as much attention as the increase in premiums while President Obama was still in office.

Add a comment

Last month New York Governor Andrew Cuomo signed into effect a law that created an optional employer-side payroll tax as a partial substitute for the state income tax. Since then the word in many news outlets is that the take-up is likely to be low since the new tax is complicated.

This complexity line is especially being pushed by conservatives, as in this Newsday article, since the point of the tax is to develop a workaround for the limit on deductions for state and local income taxes (SALT) in the new tax bill the Republicans pushed through Congress last year. This bill limited the SALT deduction to $10,000. This limit was quite explicitly put in place to hit more liberal high tax states like New York and California. Their plan was that if these states wanted to provide higher quality services to their residents and a stronger social safety net, they would pay a big price for it.

The employer-side payroll tax is a way to preserve deductibility. The expectation is that an employer-side payroll tax will come out of wages. To take a simple case, suppose a worker gets paid $200,000 a year. If her employer goes the payroll tax route then the employer will be a paying a 5 percent tax, or $10,000, on the worker's $200,000 salary. We would typically expect this to result in the worker seeing a pay cut of $10,000 so that she only earns $190,000.

While workers don't like pay cuts, in this case, it should not be an issue, since the payroll tax saves them $10,000 on her state income taxes. This means she has just as much money with $190,000 annual pay as she did before when she got paid $200,000 but owed the state $10,000 in state income taxes.

The big difference is that she now faces federal income taxes on just $190,000 of income, not her former $200,000 income. Since this worker is in the 32 percent federal tax bracket, this shift saved her $3,200 off her income taxes (32 percent of $10,000). And contrary to what is implied in the Newsday piece, she gets this savings whether or not she itemizes on her tax return.

Add a comment

I am Dawn Niederhauser, CEPR’s Director of Development, and I am highjacking Beat the Press to make an important announcement. Many of you regular readers of Beat the Press may have received an email from me about this, but in case you missed the news, I am writing to let you know that there is a new way to support Dean and Beat the Press

As you may know, Dean stepped down as CEPR’s Co-Director in January so that he could devote more time to his writing. We are thrilled that he will continue to "beat the press" in his new position as a CEPR Senior Economist. And as CEPR’s Director of Development, I am particularly thrilled that he has agreed to provide additional commentary via the Beat the Press page on Patreon.

For those of you who are not familiar with Patreon, it is a membership platform that provides tools for creators to run a subscription content service. It allows writers and artists (and even economists!) to provide exclusive content to their subscribers, or "patrons." Anyone who signs up to support Beat the Press via Patreon will have access to additional commentary and will be able to engage with other subscribers and with Dean. But the main purpose is to provide ongoing financial support for Beat the Press.

Click here to support Beat the Press on Patreon!

Beat the Press will continue in its current format and will be free to all, as always. Dean has always made my job really difficult by insisting that all of CEPR’s content, even his books, be available for free. So we are mindful that offering any content that is only available to subscribers could be seen as going against precedent.

But honestly? Times are tough. CEPR has relied on foundation funding for the bulk of its operating costs since its inception. Foundation funding is becoming harder and harder to come by. We are looking to find ways to expand our funding base. After evaluating all the options, we decided that Patreon was the best avenue for creating a dedicated funding stream for Beat the Press. That seemed to us to be a “fair trade.”

For those of you who are already monthly sustainers and want to switch to supporting Beat the Press through Patreon, please send an email to [email protected] and I will cancel your monthly donation. You can then sign up to support Beat the Press on Patreon, at any amount. The more you pledge, the more resources Dean will have to skewer the likes of Robert Samuelson.

A big thank you to those of you who have already signed up to become Beat the Press patrons! We really appreciate your support.

Okay, back to your regularly scheduled programming. And remember, don’t believe everything you read in the newspapers.

Add a comment

I would agree with pretty much all of Paul Krugman's criticisms of Donald Trump's trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:

"In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment."

The issue here is who set the rules and what is proper payment.

The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn't be surprising that developing countries like China might not like these rules.

The idea that developing countries would seek to get around rules established by their richer counterparts should not be alien to people in the United States. The United Kingdom had made it illegal to transfer blueprints for steam engines out of the country in order to preserve its competitive advantage. Francis Lowell famously memorized plans on a trip there in order to build the first steam-powered factory in the United States. The United States refused to recognize UK copyrights for much of the 19th century. So if China is not following the rules today, it has an important role model it can point to.

There is certainly a valid point that the cost of innovation must in some way be shared internationally. Certainly, the US shouldn't be expected to foot the bill for the whole world. But does Krugman really want to argue that patent and copyright monopolies are the most efficient mechanisms available? We should be looking for more modern mechanisms that focus on sharing rather than bottling up knowledge, with China and other developing countries having a serious voice in their construction.

On this topic, it is important to note that China may have fired a serious shot over the bow this week. It announced a major initiative to promote the manufacture and use of generic drugs. I have no idea if this has anything to do with Donald Trump's trade war, but this could be a very big deal if China is going to be aggressively pushing generic drugs both in its domestic market and internationally. The fact is, the "rules" in many areas are not very clear (it is much harder to get a patent on a drug in India than the United States) and if China is going to press the boundaries, look for a really big hit to Pfizer and Merck's stock prices.

Add a comment

Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.

The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPS provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.

Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the US are sold in a free market in India.

This can matter hugely for people in the United States, since if China joins India as a mass producer of high-quality generic drugs, it will become increasingly difficult for the US drug companies to maintain an island of protected prices in the United States. The gap between the patent-protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.

There is an enormous amount of money at stake (in addition to people's health) if we can get drugs at their free market price. We will spend more than $450 billion this year on prescription drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is more than five times the entire food stamp budget.

We will need to have alternative mechanisms for financing the research and development of new drugs and having these costs shared internationally. But it is not difficult to develop mechanisms that are more efficient than the anachronistic patent monopoly system. If Trump's trade war ends pushing us in this direction, the whole world will have won.

Add a comment

As a long-term columnist at the NYT, Thomas Friedman apparently never feels the need to know anything about the topics on which he writes. This explains his sarcastic speculation that Putin could be a CIA agent since he has done so much to hurt Russia.

For all his authoritarian tendencies, it is likely that most Russians think primarily about Putin's impact on the economy, just as is typically the case among voters in the United States. On that front, Putin has a very good record.

According to data from the I.M.F. Russia's economy had plunged in the 1990s under the Yeltsin presidency. When Putin took over in 1998, per capita income in the country had shrunk by more than 40 percent from its 1990 level. This is a far sharper downturn than the United States saw in the Great Depression. Since Putin took power its per capita income has risen by more than 115 percent, an average annual growth rate of more than 3.9 percent.

While this growth has been very unequal, that was also the case even as Russia's economy was collapsing under Yeltsin. The typical Russian has done hugely better in the last two decades under Putin than they did in the period when Yeltsin was in power.

For this reason, there are probably few Russians who would have sympathy for Friedman's speculation about Putin's ties to the CIA. The same would not be the case for Boris Yeltsin.

Add a comment

Jeff Stein's Wonkblog piece might have misled readers about the complexity of New York's new employer-side payroll tax as a workaround for Republican tax bill's limit on the deduction for state and local taxes. The piece told readers:

"'Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,' wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. 'It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.'"

While the logic is that an employer-side payroll tax reduces wages by a roughly equal amount, the one put forward by Governor Cuomo is unlikely to result in anyone getting a pay cut. The tax is phased in at a rate of 1 percent in 2018, and then 2 percent in both 2019 and 2020. Wages are rising an average of 2.5 percent annually. This is an average for all workers, the pay for workers who stay at the same employer is rising by more than 3.0 percent annually.

This means that workers at employers paying the tax are likely to see smaller wage gains rather than actual cuts. The Cuomo administration was quite conscious of this issue in designing the tax. (I had some discussions with Cuomo's staff on the tax plan.)

While this plan has been described as too complicated it is much simpler than the Flexible Savings Account (FSA), which have proven very popular with employees. These accounts require lots of bookkeeping and also put workers at risk of losing unspent money. By contrast, the employer-side payroll tax is simply a one-time adjustment to workers' pay.

It also allows for much larger potential savings than an FSA. A person earning $200,000 a year can save more than $3,000 a year on their taxes if their employer takes advantage of the employer-side payroll tax option. This is about four times as much as the maximum they can save on an FSA.

Add a comment

I realize it would be too much to ask that people who write on economics for major news outlets have any clue about how the economy works. I say that seriously; I have been commenting on economic reporting for more than two decades. Being a writer on economics is not like being a custodian or bus driver where you have to meet certain standards. The right family or friends can get you the job and there is virtually no risk of losing it as a result of inadequate performance.

But Roger Lowenstein performs a valuable service for us in the Washington Post this morning when he unambiguously equates the value of the stock market with the country’s economic well-being. It seems that Mr. Lowenstein is unhappy that Donald Trump’s recent tariff proposals sent the market plummeting. The piece is titled, “when the president tanks your stock portfolio.” It holds up Trump’s tariff plans as a uniquely irresponsible act because of its impact on stock prices.

Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.

Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.

But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.

Suppose the next president announces that she will raise the corporate income tax rate back to 35 percent from its current 21 percent level. Any bets on what this does to stock prices?

Add a comment

A Washington Post article on the possibility that Donald Trump will have to disclose his finances may have misled readers. The piece told readers:

"Company officials argue it would have been impractical to untangle and sell all of Trump’s real estate holdings, and that doing so might have created additional conflicts of interest."

It neglected to point out that this assertion by Trump's employees is a lie. It is easy to design schemes under which Trump could disassociate himself from his business without creating conflicts of interest.

As I pointed out shortly after the election, this could be accomplished through a three-step process.

1) Donald Trump arranges to hire three auditors from an independent accounting firm. Each one does an independent assessment of Trump's holdings and assigns it a value.

2) The middle assessment becomes a benchmark. Donald Trump buys an insurance policy that will guarantee him that he will get this amount of money when all assets are sold. If the total take is less than the benchmark, he collects on the insurance policy. Any money received in excess of the benchmark goes to a charity of Trump's choosing (not the Trump Foundation).

3) All the proceeds from the sales are placed in a blind trust.

This would be a very straightforward process. We know that Trump has a hard time finding competent people to work for him, but the rest of us would have little difficulty solving his conflict of interest problem.

Add a comment

Greg Ip gave us another rendition of this old scare story in a Wall Street Journal column. The argument is that the interest paid on US government debt will soon impose an enormous burden on the federal government, choking off spending on important government programs.

The key part of this story is that interest rates will jump at some point in the not too distant future. While this is in fact what the Congressional Budget Office predicts, it is also what it has been predicting even since the Great Recession, and consistently been shown wrong.

The key question is, why would interest rates rise? There are two stories where we see interest rates rise. One is that we start to see an uptick in the inflation rate. In that case, long-term rates would almost certainly rise since investors would have the option of getting a better return just by holding physical commodities. Of course, the Fed would almost certainly raise interest rates in response to higher inflation, which would more directly cause interest rates to rise. One point about higher inflation that is worth noting is that it reduces the real value of the debt.

The other reason interest rates could rise is that the Fed raises rates even in the absence of higher inflation. In that case, the Fed as a matter of policy would be increasing our interest burden. (Selling off its assets also has the same effect, since the interest on the assets held by the Fed is refunded to the Treasury.)

Arguably, the Fed's rate increases in the last year and a half have not been justified by higher inflation, as the inflation rate remains well below the Fed's target. It is striking that none of the deficit hawks, including the Committee for a Responsible Federal Budget, which is cited in this piece, have ever expressed concern about the higher debt service burden resulting from these interest rate hikes.

Add a comment

After all, the economy generates 200,000 jobs a month on net (more than five million gross), so what difference could it make if one million doctors and dentists were displaced through trade. If the idea that losing one million very high paying jobs wouldn't be any big deal seems strange to you, then you don't really understand how economists talk about trade.

Of course, the actual column, by Donald Boudreaux, an economics professor at George Mason University, wasn't talking about doctors and dentists. These occupations are highly protected. It is very difficult for foreign-trained professionals, even those in countries with comparable standards, to practice in the United States. Unlike steelworkers and textile workers, doctors and dentists have enough political power to get politicians to support their protection and to get the "free trade" media outlets to pretend they don't notice.

But the best part of the story is the economists. Folks like Boudreaux would argue that doctors and dentists are just being silly and don't understand trade if they think it could hurt them. This is the argument that he and other economists make about the massive loss of manufacturing jobs due to trade in the last two decades. The issue, of course, goes beyond even the job loss, since reduced demand leads to downward pressure on the wages of those who still have jobs. This has been a major source of increased inequality, as manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees. (To be clear, I want free trade in doctors and dentists, but it would reduce their pay and our health care costs.)

Trade can also lead to a major shortfall in demand when we get large trade deficits, as was the case in the last decade. This was a major source of the famed "secular stagnation" that even many mainstream economists acknowledged during the Great Recession. If we had a trade deficit of 1.0 percent of GDP instead of the deficit of 3.0 percent of GDP we had during most of the recession and recovery (or 6.0 percent in 2005–2006), then the economy would have been much closer to full employment. But hey, that was no big deal, only silly people worry about trade.

And yes, free traders should be furious about government granted patent and copyright monopolies. Making them longer and stronger is a central goal of current trade deals. These are extremely costly forms of protectionism, equivalent to tariffs of many thousand percent.

But you don't hear much about patents and copyrights as protectionism because Pfizer and Microsoft have lots of power. Also, the people who write about trade and control major news outlets are far more likely to have family and friends who benefit from these forms of protection than to be close to the steelworkers and textile workers who lost jobs and/or pay due to international competition. 

Add a comment