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).
In the era of Donald Trump, the New York Times apparently felt it was important to get a climate denier among its columnists. For this reason, they hired Bret Stephens away from the Wall Street Journal. Apparently, they could not find a climate denier who also understood arithmetic, since Mr. Stephens clearly falls short in this category.
Stephens uses his most recent column to tout mistakes made by those pushing for reductions in greenhouse gas emissions. He rightly seizes on biofuels, which are in fact a net loser from a global warming perspective.
While he is right that the effort to promote biofuels was a major mistake, it's not clear what the importance of this is. There were major mistakes in the development of every major technology in history. It would be hard to imagine that the effort to develop clean or cleaner energy sources would not take some wrong turns.
Anyhow, Stephens goes badly astray when he tries to tell readers that we have seen nothing but wrong turns. He tells us:
"There’s also been some acknowledgment that Germany’s Energiewende — the uber-ambitious “energy turn” embarked upon by Angela Merkel in 2010 — has been less than a model for others. The country is producing record levels of energy from wind and solar power, but emissions are almost exactly what they were in 2009. Meanwhile, German households pay nearly the highest electricity bills in Europe, all for what amounts to an illusion of ecological virtue."
I managed to track down Mr. Arithmetic (he's been on a long vacation) to ask about this one. Mr. Arithmetic points out that Germany's economy has grown by more than 16 percent since 2009. This means if Stephens is right, that its emissions are lower today than they were in 2009, then Germany has managed a remarkable 16 percent reduction in emissions per unit of GDP in just eight years.
Contrary to what Stephens implies in his column, this would be an incredible success story, especially since Germany's emissions per unit of GDP were already relatively low. (It is harder to achieve a larger percentage reduction from a low level than a high level.) If Stephens is right about Germany, then it should be easy for the United States to achieve and beat the emissions reductions set in the Paris agreement.
It is also worth noting that everyone understood that the first-movers were going to pay a higher price than followers. In other words, Germans understood that by taking the lead in reducing emissions it would pay a higher cost for reductions than laggards. They would be the cutting edge in developing and putting in place new technology, meaning that they would be stuck with paying the bill for some losers. The laggards would only pay for the winners.
This was a very socially minded position, where the whole world stood to gain from the fact that Germany was taking the lead in reducing greenhouse gas emissions. This wasn't a case of stupidity, as Stephens seems to think. It was a case of caring about the future of humanity and being willing to make some sacrifice to protect it.Add a comment
The Washington Post has a major article on a speech by GE's chief executive Jeffrey Immelt in which he condemned lackluster efforts to fund the Export-Import Bank as "pathetic." The piece neglected to mention that GE is almost always one of the largest recipients of below market interest rate loans or guarantees from the Export-Import Bank.
The headline also reported Immelt's condemnation of "protectionism." It would have been worth pointing out that much of what GE sells in the United States is produced overseas, which means that GE's profits would likely be hurt by some protectionist measures or even efforts to reduce the value of the dollar closer to its market rate.
It is also worth noting that it appears that Mr. Immelt is just fine with patent and copyright protection. These forms of protection are enormously costly, often raising the price of the protected items by several thousand percent above the free market price. For this reason, it is wrong to say that Immelt is opposed to protectionism, he appears to just be opposed to types of protectionism that reduce this company's profit.Add a comment
Charles Lane, who made his reputation by misrepresenting studies on Social Security Disability in the Washington Post, has apparently just discovered that states that vote Democratic also have higher state income taxes. While most folks knew this, Lane acts like Donald Trump passing around maps of the Electoral College vote to reporters; he thinks he has discovered something new.
He gleefully suggests that the Republican propose a tax reform that will end the deductibility of state income taxes and use the savings ($74 billion a year or 0.4 percent of GDP) for an enhanced Earned Income Tax Credit and a modest boost in infrastructure spending. Lane argues that this would pose a devastating problem for Democrats.
The point is that the current deduction means that the federal government effectively subsidizes 40 cents of every dollar that high-income people in blue states pay in state income taxes. This makes it easier for them to raise taxes to pay for things like high-quality Medicaid, pre-kindergarten, and child care. But Lane wants them to have to choose between an expanded EITC and modest boost in infrastructure and maintaining their spending in these areas. He thinks this is especially clever since it will look like they are protecting a tax break for the rich.
This is very cute, but let's see if we get cuter. How about two other reforms that would whack the blue states while making most of the population better off? Suppose we tried to nail the high rollers in the financial sector with a modest financial transactions tax? Representative Peter DeFazio proposed just such a measure yesterday. This would radically downsize the industry, by eliminating a vast amount of wasteful trading.
This would be a huge hit to the financial industry, primarily located in New York and other blue states. It would also raise more than $40 billion a year (other versions would raise more). Virtually all of this money comes out of the hide of the financial industry itself, since the cost of the tax would be fully offset by a reduction in trading volume, leaving trading costs for most investors unchanged.
For another route, how about publicly financed research for prescription drugs? This would allow new drugs for treating cancer, AIDS, and other diseases to be sold in a free market for a few hundred dollars rather than tens or even hundreds of thousands of dollars charged when drug companies have patent monopolies. While the folks during the research could still count on good salaries, the huge dividends earned by patent holders and pharma execs, who are overwhelming blue staters, would disappear. The benefits in lower drug prices could reach $400 billion a year, or more than 2.0 percent of GDP.
What do you say Mr. Lane? Here are some ways to really whack blue states while helping the low- and middle-income people that Democrats are supposed to care about. Are you in?Add a comment
Yes, the NYT once again printed a really big number without any context to make it meaningful for readers. It told us in a headline of an article on efforts to craft a compromise between conservative and moderate members on a new health care bill, that the latest proposal adds $8 billion to cover the cost of providing care to less healthy people.
Is $8 billion a lot of money?
Well, one thing not answered in the article is the time period over which this $8 billion would be spent. Is this a one year number? Is it a ten year total? The article doesn't give an answer to this basic question.
To get some idea of the need, the average cost of treating the 10 percent least healthy people is more than $50,000 a year per person. This means that on an annual basis the cost of treating the 30 million least healthy people in the country would be over $1.5 trillion. Many of these people are getting Medicare, Medicaid, or employer provided insurance, but if one-third of them showed up in the high risk pools, then their costs would be over $500 billion a year.
In this case, if the $8 billion is a one-year figure, it will cover 1.6 percent of the cost of treating this population. On the other hand, if it is a ten-year figure it will cover 0.16 percent of the cost of treating the less healthy people who show up in high risk pools. Either way, it is a tiny fraction of the cost, but it would still be nice to know which one it us.Add a comment
I took part in the March for Science a couple of weeks ago. (Okay, economics is not really a science, but I get angry when my government tries to stifle scientists reporting their evidence on global warming.) Anyhow, the rally was filled with speeches about scientific ideals: open, disinterested, reproducible research. Unfortunately, real world science often doesn't live up to this agenda.
It looks like we are going to get a lesson later this month on how politics interferes with science at the annual meeting of the World Health Assembly (WHA), the decision-making body of the World Health Organization (WHO). The Indian government has proposed a motion, which would have the WHO prepare a report on the research into the efficiency of patents as a financing mechanism for prescription drugs and vaccines compared with alternative financing mechanisms. The latter would include government sponsored prize funds and directly funded research.
The reason why this is an important and interesting question is that the current method of financing research by granting patent monopolies leads to situations where drugs often cost several hundred times their free market price. For example, the Hepatitis C drug Sovaldi has a list price in the United States of $84,000. A high-quality generic version is available in India for $300.
The result of these monopolies is that people struggle to cover the cost of drugs which would be cheap if sold in a free market. Even in cases where governments or insurers are supposed to cover drugs, many balk when the price runs into the tens of thousands or even hundreds of thousands of dollars, as is the case with many new cancer drugs. While the monopoly prices are a serious burden even in rich countries, they are altogether unaffordable in the developing world.Add a comment
A Washington Post article on a bill passed by the House, which would allow employers to give workers time-and-a-half credit for overtime hours, instead of time-and-a-half pay, likely misled many readers on the substance of the bill. The very first sentence told readers the bill:
"...would allow private-sector employees to exchange overtime pay for 'compensatory time' off."
This is not true. The bill does not give the employee the right to say they would prefer compensatory time for working overtime, it gives this right to the employer. In principle, the worker is supposed to have the option to refuse the offer and say that they would instead prefer their overtime pay. However, the piece further misleads readers in the second paragraph:
"It [the bill] seeks to take a similar provision that has been available to government workers since 1985 and extend it to private-sector employees, making it legal for them to choose between an hour and a half of paid comp time and time-and-a-half pay when they work additional hours."
There is a big difference between public employees and private sector employees. Public sector employees cannot be fired at will, while private sector employees can be, unless they are covered by a union contract. While this legislation, in principle, protects private sector employees from being coerced into accepting time off in lieu of overtime pay, it is difficult to see how this could be enforced.
An employer can fire anyone for almost any reason at any time. While the bill does prohibit an employer from firing someone for refusing to take comp time, an employer can legally fire someone because their last name begins with the letter "B." This means that a worker who refuses to accept comp time can be fired over the first letter in their last name.
This could be contested in court, where the worker would argue that the actual reason was their refusal to accept comp time. Perhaps they could prove this, but the damages, even when doubled as required in the bill, would almost certainly not cover the cost of hiring a lawyer. This means that almost no one would use the legal system to protect their rights. If an employer fired one worker over this issue, the rest would quickly get the message.
If the Republicans actually wanted to make the prohibition on firing an enforceable right, the bill would require the employer to pay legal fees, if they lost a case. This requirement for civil rights cases is what makes enforcement of the civil rights laws possible.Add a comment
The Congressional Progressive Caucus released its annual budget today (full plan here). If past patterns hold, it will likely be ignored by the media. Of course, the budget is not about to be adopted by Congress and signed by the president, but as a path forward it certainly is no less realistic than the various budgets put forward in past years by now Speaker Paul Ryan. These budgets effectively called for the elimination of the whole federal government except the military, Medicare, Medicaid, and Social Security. Nonetheless, the Ryan budgets were taken seriously in Washington policy circles and even earned him a "Fiscy" award from a coalition of Peter Peterson-funded groups.
The budget outlines a progressive agenda for the next decade. Put simply, it cuts what the Republicans want to expand (i.e. military spending) and increases what the Republicans want to cut, such as funding for universal pre-kindergarten, Social Security, and health care spending. There is much there and I encourage people to read the EPI summary to which I linked. I will pick two items that I want to highlight.
First, the budget proposes $2 trillion in additional spending on infrastructure and other public investments over the next decade. While this sounds like a huge amount of money, it is a bit less than one percent of GDP and it just gets spending in these areas roughly in line with long-term averages. It is worth noting that they propose to spend the money the old fashion way, through direct spending, not tax gaming like Donald Trump and the Republicans.
This is the way that we built the interstate highway system and the way we built subway systems in New York and Boston that are moving millions of people daily more than a century later. This is not a knock on the private sector. These and other infrastructure projects almost always rely for private contractors for the bulk of the work. But with upfront funding, we can see clearly where the money is going.Add a comment
Both the overall and core deflators for personal consumption expenditures (PCE) fell in March. This brought the change in the core PCE deflator over the last year down to 1.6 percent. The Fed officially targets a 2.0 percent as an average rate. This means that it wants inflation to occasionally be above 2.0 percent in order to average out the times when it is below 2.0 percent. That should mean that it would want to see the inflation rate accelerate slightly to meet this target.
The Fed is widely expected to raise interest rates at least twice more in 2017 and quite likely three times. With inflation well below its target rate, it is reasonable to ask why?
Just to remind folks, this is not an argument about a baseball box score. The point of raising interest rates is to slow the economy and keep people from getting jobs. Also, by keeping labor markets weaker, higher interest rates prevent workers from getting higher pay increases. So, this does matter.Add a comment
Amazon, which famously made itself into one of the world's largest retailers as a result of a massive government subsidy in the form of an exemption from the requirement to collect state sales taxes, is again looking for the government's help. The NYT reported that Amazon has taken out a patent on custom clothing ordering over the Internet.
It's not clear what rights Amazon intends to secure with this patent. If it means to secure the very specific process outlined in the NYT, then it probably wasted money by filing, since it would be very easy for a competitor to alter one or more of the processes detailed in the patent and therefore avoid Amazon's claim.
On the other hand, if the Amazon is claiming the exclusive right to make clothes to order over the Internet, then this is yet another great effort by a private company to use the patent system to stifle innovation. Selling made to order clothes on the Internet is what would ordinarily be viewed as an obvious innovation that is not patentable. (It's in the category of telling someone to turn left at the fork in the road to reach their destination. The driving directions are not patentable.)
While it might seem far-fetched to imagine that Amazon thinks that it can patent the right to sell made to order clothes on the Internet, the company did patent one-click shopping back in the 1990s. It has used this government granted monopoly to force competitors to pay it a fee for the last twenty years.
As Jeff Bezos knows well, it's always easier to rely on the government to give you money than to earn it in the market.Add a comment
Steven Rattner went full Trump in his criticisms of Donald Trump's tax cut plans in a NYT column this morning. Essentially, Rattner blamed the 1981–82 recession on Reagan's tax cuts. The piece tells readers:
"For its part, the Reagan tax cut increased the budget deficit, helping elevate interest rates over 20 percent, which in turn contributed to the double-dip recession that ensued. The stock market fell by more than 20 percent."
This hugely misrepresents the situation in 1981. Inflation had reached double-digit rates at the end of the 1970s due to the jump in world oil prices caused by the Iranian revolution. (Millions of barrels of daily exports were removed from world markets.)
Federal Reserve Chair Paul Volcker was determined to reduce inflation to low single digit rates. He jacked up interest rates to slow the economy before Reagan was even in the White House. The federal funds rate peaked at just under 19 percent in December of 1980. This rise in the federal funds rate is what caused the recession and the stock market plunge. (The stock market subsequently soared. This was arguably a result of Reagan's tax cuts to the rich and corporations. The stock market measures the expected future value of after-tax corporate profits; it is not a measure of economic well-being.)
There are few, if any, economists who would blame the 1981–82 recession on the Reagan tax cuts. It is unfortunate that Rattner apparently feels he has to make this claim to argue against the Trump tax cuts.
It is also worth noting that Rattner's concern about the government debt is hugely misplaced. The ratio of debt service to GDP is around 0.9 percent, near a post-war low. By comparison, it was over 3.0 percent of GDP in the early and mid-1990s. This is the burden the debt places on the economy.
Rattner also ignores patent and copyright rents. This is an alternative way in which the government imposes burdens on the public to pay for items. At present, patent rents in prescription drugs alone come to close to $400 billion a year, more than 2 percent of GDP. This is the difference between the patent protected price of drugs and the free market price. Effectively, patent and copyright monopolies are privately collected taxes. An honest analyst would have to include the effect of these monopolies in assessing the burden the government is creating for taxpayers in the future.Add a comment
For some reason the Washington Post has trouble just telling us what Donald Trump says and does. It instead feels the need to go beyond this to make all sorts of inferences that are not supported by evidence.
Tonight we are told in a headline that, "Trump guarantees protection for those with preexisting medical conditions — but it’s unclear how." This should have been written "Trump says he guarantees protection for those with preexisting medical conditions — but it’s unclear how."
Someone reading the headline quickly might have thought that Trump actually made some sort of guarantee of providing health care insurance to people with preexisting conditions. He didn't.Add a comment
No, the Post would never try to read the president's mind to make Trump look bad. Instead it read Trump's mind to make him look good. The second paragraph of the lead article told readers:
"With an eye toward keeping his core promise of creating jobs and ramping up economic growth, Trump has fixated on tax reform as the next undertaking of his administration — an opportunity for him to land a first major legislative victory after repeated failures to pass a health-care package."
Hmmm, so the Post knows that the reason Donald Trump wants to eliminate the estate tax is to create jobs and ramp up economic growth, as opposed to save his children and those of other billionaires from paying billions of dollars in taxes? It's great they have such mind-reading abilities, otherwise we would might find it hard to believe, since eliminating the estate tax is likely to have no noticeable impact on growth.
In the same vein, Trump's proposal to create the mother of all loopholes, by allowing pass-through corporations to just pay a 15 percent tax rate (as opposed to the 39.6 percent tax rate now paid by high income individuals) was intended to give his family and other rich people an enormous tax break. The only job creation from this tax cut is likely to be in the tax shelter industry as the nation's rich restructure their income to show up in pass-through corporations.
We might say the same about Trump's plan to eliminate the alternative minimum tax. While this move is likely to score pretty much a zero on the job creation front, it would likely save Trump tens, if not hundreds, of millions annually on his tax bill.
Newspapers with reporters less skilled in mind reading would be stuck reporting on just what the president and his staff say and do. Thankfully, we have the Washington Post to tell us Donald Trump's real motives.Add a comment
The Washington Post's article on first quarter GDP growth wrongly told readers that unusually warm weather slowed GDP growth in the first quarter. The rationale was that this lead to a decline in the use of electricity and heating compared with a normal winter, which meant less output. While I noted this fact in my own write-up of the GDP report, the drop in energy usage was more than offset by an increase in construction that was made possible by the mild weather.
Residency and non-residency construction rose at 13.7 percent and 22.1 percent annual rates, respectively. The former increase added 0.5 percentage points to the quarter's growth rate, while the latter added 0.55 percentage points. By contrast, the drop utility usage likely lowered growth by around 0.4 percentage points. (The release lumps it in with housing consumption, so it does not provide a direct measure.) This means that on net, good weather was almost certainly a net positive even before considering its impact on restaurant spending and other forms of consumption.
The major anomaly in the first quarter data was the slow pace of inventory accumulation, which subtracted 0.93 percentage points from growth. Pulling out inventories, the growth in final demand was 1.6 percent in the first quarter which is very much in line with the 2.0 percent average annual growth rate for the last six years.Add a comment
Simon Lester took the time to write a thoughtful response to my often repeated complaint that we don't have free trade in doctors. The gist of his response is that trade liberalization usually results from the other party demanding more access to U.S. markets. In the case of doctors, we don't generally have foreign countries demanding that we make it easier for their doctors to practice in the United States, therefore there is little pressure to have liberalization.
A friend asked for my response, which I thought I would share below. Before getting to this, let me just respond again to a widely repeated complaint, that liberalization of professional services would lead to brain drain from the developing world.
As I always point out, we can easily compensate developing countries for the loss of the doctors and other professionals they train. We can provide enough money to train two or three doctors for every one that comes here and still be way ahead.
I realize that many people don't like this idea, but this seems more a matter of religion that anything based in the world. As it is, we already get many doctors and other professionals from developing countries and their home countries get zero by way of compensation. I am proposing a route that might double or triple the flow from the developing world, but provide compensation. In almost all cases I suspect that developing countries would come out way ahead in this story.
Anyhow, the response is below.Add a comment
Much of the response to the tax cutting plans of Donald Trump shows us yet another illustration of the "which way is up?" problem in economics. The point is that economists can't even seem to agree on the most basic issues about the economy and the problems we now face.
I usually use the "which way is up?" problem to refer to the people who warn us about robots taking all the jobs. This is a theme that gets lots of air time in the media and is supposed to have us all very worried. There are two huge flaws in the story.
The first is that the robots taking all the jobs story is one of incredible abundance. It's one where we can have all the goods and services that we could want and not have to work for them. We should all be getting big pay increases and large cuts in hours. This will be just fine, since the robots will produce the goods and services that we want to buy with our larger paychecks.
There are slightly more sophisticated stories that can be told about the robots taking our jobs, but these don't really make the cut either. One is that robots only take the jobs of less-educated people. This is certainly not true as a matter of logic. Why can't robots do brain surgery? Is there any reason to think diagnostic software can't replace many doctors? There is no reason a priori to assume that robots and artificial intelligence will have more impact on the demand for workers with less education than workers with more education. And, the efforts to show empirically that this has been the case don't fly.
The other more sophisticated version of the robots taking all the jobs story is that it is a distributional issue, with money going from the people who work to the people who own the robots. The problem with this story is that people are able to own robots because the government gives them patent and copyright monopolies. If we are concerned about too much upward redistribution to robot owners, we can just make these monopolies shorter and weaker. This is not some huge technological problem confronting humanity, it is a problem of overly restrictive intellectual property rights.Add a comment
The NYT had a major story about a ruling from a Chinese court requiring shoe manufacturers there to pay New Balance for using its logo on their shoes. The article repeatedly used the term "counterfeit" to refer to items that are similar to those produced by a major brand, but sell at a far lower price. This is inaccurate.
For an item to be counterfeit, the buyer must be deceived. In other words, the people buying the shoes with the New Balance logo must wrongly believe that they are buying New Balance shoes. From the article it appears that this is not generally the case. It tells us that the companies use names that are like New Balance, but are not New Balance. This is presumably telling consumers their shoe is similar to the one produced by New Balance, but it is not actually a New Balance shoe.
This distinction is important for two reasons. First, as long as it is clear that these shoes are not actually made by New Balance, the company does not have to worry that its reputation could be damaged by an inferior product. If the items were true counterfeits, then their poor quality would hurt the reputation of New Balance, which would be a real source of damage to the company.
The other reason the distinction is important is that the consumer is an ally in cracking down on actual counterfeits. In this case, the consumer is deceived because she paid a premium to get a presumably high-quality product, which she did not actually get. Consumers who are victims of counterfeits would be likely to cooperate with enforcement efforts.
On the other hand, consumers who knowingly buy unauthorized copies of major brands are benefiting from the opportunity to buy the copy at a lower cost than the brand product. They presumably are willing to trust the quality of the product produced by the knock-off manufacturer, given the savings. In this case, consumers have no reason to cooperate with enforcement efforts, since they will force them to pay more for the products they are buying.
It would be helpful if the NYT and other news outlets were careful to make the distinction between counterfeits and unauthorized copies in their reporting.Add a comment
Donald Trump gets lots of things wrong, but he doesn't necessarily get everything wrong. On the link between budget deficits and trade deficits, Trump might be closer to the mark than the NYT.
The NYT rightly took Donald Trump to task for being lost in his trade policy. During his campaign Trump railed against NAFTA and repeatedly complained about China's currency "manipulation." Now that he is in the White House it is still not clear exactly what he hopes to do with NAFTA.
In the case of China, he has decided he is now good friends with China's president Xi Jinping after meeting with him earlier in the month. Trump apparently decided it would be rude to raise the currency issue with his new friend and instead settled for some Chinese trademarks for his daughters' clothing line.
Trump definitely deserves some criticism for this reversal, but the NYT editorial goes a bit overboard in telling readers that Trump's tax cut plan will make the trade deficit worse:
"Those tax cuts might increase growth somewhat, but history and many experts tell us it is far more likely that the tax cuts would explode the deficit and drive up interest rates as the federal government is forced to increase borrowing. Investors from around the world would then pour money into Treasury bonds, bidding up the value of the dollar, which would increase the trade deficit — $502 billion last year — as American exports become more expensive in the rest of the world and imports become cheaper. This in turn could cost jobs. Economists say that’s exactly what happened in the 1980s when the Reagan administration and Congress drove up the federal deficit through tax cuts and increased military spending."
Actually, there is a very weak relationship between the budget deficit, interest rates, and the value of the dollar. While the dollar did rise a great deal in the early 1980s, arguably theis was at least as much due to Paul Volcker's interst rate policy at the Fed as the budget deficit. The dollar fell sharply in the second half of the decade following the Plaza Accord, in which our major trading partners agreed to try to bring down the value of the dollar. This is in spite of the fact that there was little reduction in the structural deficit over this period.
The biggest run-up in the value of the dollar occurred in the late 1990s, when the budget deficit was turning into a surplus, following the I.M.F.'s bailout of the countries of East Asia, after the 1997 financial crisis. Developing countries in the region and around the world began to accumulate massive amounts of reserves in order to avoid being in the same situation as the countries of East Asia. This accumulation of reserves caused the dollar to rise by more than 30 percent against the currencies of U.S. trading partners.
The trade deficit exploded in response, eventually reaching almost 6 percent of GDP in 2005 and 2006. The budget deficits of the 2000s almost certainly increased employment by creating demand in a context where there was a worldwide saving glut.
Given this history, and the fact that the U.S. economy arguably still has a considerable amount of excess capacity (the employment-to-population ratio for prime-age workers is still down by 2 percentage points from pre-recession levels and 4 percentage points from 2000 levels), it is far from clear that an increase in the budget deficit will lead to a higher dollar and a larger trade deficit.
Note: Typos have been corrected from an earlier version.Add a comment
The Washington Post ran an article about a new study from the Congressional Budget Office (CBO) comparing the pay of federal government employees with their counterparts in the private sector. The study found that less educated employees tend to earn more in the federal government than in the private sector, while more educated workers on average earn somewhat less. On average, it found there was a small pay premium for federal employees. The article also notes several other studies with different findings, most importantly an analysis from the Labor Department that found the pay of federal employees lags the private sector by 38 percent.
It is worth noting the main reason for the difference in the two studies. The CBO analysis calculates private sector pay by looking at general categories of workers based on experience and education. By contrast, the Labor Department analysis tries to match up specific tasks performed by federal employees with their counterparts in the private sector. For example, the pay of a biologist working at the National Institutes of Health would be compared with the pay of a biologist working in the pharmaceutical industry. If done accurately, this methodology should provide a more accurate comparison.Add a comment
The NYT had an article discussing various efforts to deal with companies shifting profits overseas to avoid paying the corporate income tax. The piece implies that we don't know how to ensure that companies pay taxes on foreign profits.
Actually, it is not hard to design a system where companies cannot avoid paying taxes on their foreign profits. If corporations were required to turn over an amount of non-voting shares equal to the targeted tax rate (e.g. if we want taxes to be equal to 25 percent of profits, then the non-voting shares should be equal to 25 percent of the total), then it would be almost impossible for companies to escape their tax liability.
Under this system, the non-voting shares would be treated the same way as voting shares in terms of payouts. If a company paid a $2 dividend on its voting shares, then the government's shares would also get a $2 dividend. If it bought back 10 percent of its shares at $100 a share, it will also buy back 10 percent of the government's shares at $100 a share.
Under this system, there is basically no way for a company to avoid its tax obligations unless it also rips off its own shareholders. In this case, it would be outright fraud and the shareholders would have a large interest in cracking down on its top management.
It understandable that those who don't want corporations to pay income taxes would be opposed to this sort of non-voting shares system, but it is wrong to say that we don't know how to collect the corporate income tax.Add a comment
Yes, it's Groundhog Day. Republicans are once again claiming that tax cuts will spur enough economic growth to pay for themselves. Well, old-timers like myself remember Round I and Round II when we tried this grand experiment. It didn't work.
Round I was under President Reagan when he put in big tax cuts at the start of the presidency. These tax cuts were supposed to lead to a growth surge which would cover the costs of the tax cuts. Not quite, the deficit soared and the debt-to-GDP ratio went from 25.5 percent of GDP at the end of 1980 to 39.8 percent of GDP at the end of 1988. (It rose further to 46.6 percent of GDP by the end of the first President Bush's term.)
Round II were the tax cuts put in place by George W. Bush. At the start of the Bush II administration the ratio of debt to GDP was 33.6 percent. It rose to 39.3 percent by the end of 2008.
In addition to these two big lab experiments with the national economy, we also have a large body of economic research on the issue. This research is well summarized in a study done by the Congressional Budget Office (CBO) back in 2005 when it was headed by Douglas Holtz-Eakin, a Republican economist who had served as the head of George W. Bush's Council of Economic Advisers.
I commented on this study a few years back:
"In a model that examined the effects of a 10% reduction in all federal individual income tax rates, the economy was slightly larger in the first five years after the tax cut and slightly smaller in the five years that followed. In this case, using dynamic scoring showed the tax cut costing more revenue than in the methodology the CBO currently uses.
"The CBO did find that dynamic scoring of the tax cut could have some positive effects if coupled with other policies. In one set of models, policymakers assumed that taxes were raised after 10 years. This led the government to raise more tax revenue in the first 10 years because people knew that they would be taxed more later, so they worked more."
In short, Holtz-Eakin considered the extent to which tax cuts could plausibly be said to boost growth and found that they had very limited impact on the deficit. The one partial exception, in which growth offset around 30 percent of the revenue lost, was in a story where people expected taxes to rise in the future. In this case, people worked and saved more in the low-tax period with the idea that they would work and save less in the higher tax period in the future.
That is not a story of increasing growth, but rather moving it forward. I doubt that any of the Republicans pushing tax cuts want to tell people that they better work more now because we will tax you more in the future. But that is the logic of the scenario where growth recaptures at least some of the lost revenue.
Having said all this, let me add my usual point. The debt-to-GDP ratio tells us almost nothing. We should be far more interested the ratio of debt service to GDP (now near a post war low of 0.8 percent).
Also, if we are concerned about future obligations we are creating for our children we must look at patent and copyright monopolies. These are in effect privately imposed taxes that the government allows private companies to charge as incentive for innovation and creative work. The size of these patent rents in pharmaceuticals alone is approaching $400 billion. This is more than 2 percent of GDP and more than 10 percent of all federal revenue. In other words, it is a huge burden that honest people cannot ignore.Add a comment
According to press accounts, Donald Trump seems prepared to put out a tax cut proposal that could net him hundreds of millions of dollars over the next decade. It probably won't do much to help the rest of us, but folks who were worried about whether President Trump would be able to pay off his debts should be relieved.
Here's the basic story. The word is that the Trump tax plan will include two measures that will personally help Trump enormously. The first is eliminating the alternative minimum tax. This is a special tax that is put in the tax code to ensure that people are not able to use loopholes to escape their tax liability altogether. The rate for very high income people like Donald Trump is 28 percent.
The second special benefit for Mr. Trump is allowing individuals to pay the newly lowered 15 percent corporate income tax on income received through pass-through corporations. The idea of a pass-through corporation is a neat concept in itself.
The government grants the benefits of corporate status as a mechanism to promote wealth accumulation. Corporate status includes a variety of benefits, but first and foremost it gives you limited liability. This means that if you do something incredibly stupid that results in enormous harm to large numbers of people (e.g. producing a drug that leads to birth defects), the corporation is liable only to the extent it has assets. The individual shareholders are off the hook. In other words, they don't have to worry about losing their homes and their retirement accounts to cover the damage their company has inflicted on people.
In the good old days, before the focus of economic policy was giving ever more money to the rich, the quid pro quo for corporate status was paying the corporate income tax. In this sense, the corporate income tax is a completely voluntary tax. Anyone is free to organize a company as a partnership in which the owners do have personal liability, and thereby avoid the corporate income tax completely.Add a comment