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).

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The jobs report for October showed the unemployment rate falling to 4.1 percent, the lowest rate in almost 17 years. Of course, as many have noted, the unemployment data are somewhat erratic and this was associated with a drop in employment rates (EPOPs), as people left the labor market, which is not good news. Still, the drop in EPOPs followed a jump in September, so that even with the October decline the EPOP for prime-age (ages 25 to 54) women is still 0.7 percentage points above its year-ago level and for men, the increase is 0.6 percentage points. So this is still a very good story.

But the other part of the story, that many folks seem to have missed, is that there is evidence of a modest uptick in wage growth. Typically we look at the year over year gain in wages, which is telling us much about wage growth last November as it is about the pace of wage growth last month. If we focus on the more recent data, taking the average hourly wage for the last three months (August to October) with the prior three months (May to July), there is clear evidence of an uptick in wage growth, as shown below.

jobs 2017 11

The annualized wage growth by this measure is 3.1 percent. If we knock off a couple of tenths due to the fact that September's number was distorted by the hurricane, we are still looking at a 2.9 percent rate of wage growth. While this is hardly spectacular, if inflation remains under 2.0 percent (it jumped in September due to higher gas prices caused by the hurricanes), it translates in a modest pace of real wage growth that is consistent with workers getting their share of productivity growth.

It would be good to see wages outpace productivity growth for a period of time in order to make back ground lost during the Great Recession, but it is important to note this progress. And, if the third quarter productivity number (3.0 percent growth) is not a fluke, then we can really talk about some good wage growth.

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An NYT article discussing the prospects of the Republican tax plan included projections from the Tax Foundation which does not indicate that it is a conservative organization. The piece told readers:

"When economic growth is taken into account, the gains would be more evenly distributed, with the middle class seeing the biggest income increase on a percentage basis. That is because the Tax Foundation assumes additional growth spurred by business tax cuts largely finds its way into workers’ paychecks."

The growth assumed by the Tax Foundation in its projections is not assumed by independent analysts.

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There are many reasons to object to the Republican tax cut plan. Most importantly, the corporate tax cut is likely to primarily benefit shareholders, with little impact on investment; the elimination of the estate tax is a gift to the very richest people in the country; and the 25 percent tax rate for rich people on the income they receive from pass-through businesses is both a huge gift to the very rich and an enormous growth incentive for the tax shelter industry.

But one complaint is largely ill-founded. The limit of the mortgage interest to payments on $500,000 in principal is not likely to have much negative impact on middle-income households. While the NYT tells us that people buying "starter houses" in places like New York City and Silicon Valley are likely to be hit, this impact is likely to be minimal. This can be seen with a bit of arithmetic.

Ife we assume that someone buys a home with 10 percent down, then a $500,000 mortgage would go along with a house that sold for $555,000. According to the Case-Shiller indices, this would put you well into the top third of houses in the New York City commuter zone. (The cut-off is $480,000 in the most recent data.)

Furthermore, it is only the interest on the principle above this amount which is no longer tax deductible. Suppose someone has a $600,000 mortgage (enough to buy a $670,000 home, assuming a 90 percent loan to value ratio). They would be able to deduct the interest on $500,000 in principle, but not the last $100,000. If they paid a 4 percent interest rate on their loan, this would be $4,000 in lost deductions. If they are in the 25 percent bracket, this would amount to an increase of $1,000 in their taxes.

While this amount is not trivial since this person is paying $24,000 a year in mortgage interest alone (taxes and principle almost certainly raise housing costs above $40k a year), their income is almost certainly well over $100k a year, so this is not a moderate-income household. Furthermore, as the principal is paid down, a greater portion of the interest is tax deductible, as the outstanding principle falls to the $500,000 cutoff. In short, it does not make sense to claim this limit is a big hit to middle-income households, even in areas with high-priced housing.

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The Washington Post reported that Republicans in Congress are now considering making their tax cuts temporary, so as to reduce their cost over the 10-year budget horizon. The paper neglected to mention that this change would completely undermine the basis for the claim that the tax cut will lead to boom in investment and growth.

This alleged boom is the basis for both the claim that the average family would get $4,000 from the tax cut and that additional growth would generate $1.5 trillion in revenue over the next decade. As I pointed out yesterday, the projection of an investment boom was never very plausible in any case, but for it to make any sense at all, the tax cuts have to be permanent. 

The Republicans' argument was that lower tax rates would increase the incentive for companies to invest. But if companies anticipate that the tax rate will return to its current level after a relatively short period of time, then the tax cut will provide little incentive. This means there is no basis for the assumption of a boom.

In the case of a temporary tax cut, the claim that average families will see a $4,000 dividend from higher pay makes no sense. And the claim of a $1.5 trillion growth dividend can be seen for what it is: a number snatched out of the air to claim the tax cut won't increase the deficit.  

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The Republicans are telling us that cutting in the corporate tax rate will lead to a big $4000 pay increase for ordinary workers. The story goes that lower taxes will lead to a flood of new investment. This will increase productivity and higher productivity will be passed on to workers in higher wages.

That's a nice story, but the data refuse to go along. My friend Josh Bivens took a quick look at the relationship across countries between corporate tax rates and the capital-to-labor ratio. If the investment boom story is true, then countries with the lowest corporate tax rate would have the highest capital-to-labor ratio.

Josh found the opposite. The countries with the highest capital-to-labor ratios actually had higher corporate tax rates on average than countries with lower capital-to-labor ratios. While no one would try to claim based on this evidence that raising the corporate tax rate would lead to more investment, it certainly is hard to reconcile this one with the Republicans' story.

Just to consider all the possibilities. Josh looked to see if there was a relationship between the change in the tax rate and change in the capital-to-labor ratio. Here, also, the story goes the wrong way. The countries with the largest cuts in corporate tax rates had the smallest increase in their capital-to-labor ratios.

The implication of this simple analysis is that there is no reason to believe that cuts in the corporate tax rate will have any major impact on investment. It will simply mean more money in the pockets of shareholders, with little if any gain for ordinary workers. The moral here is that workers best not go out and spend their promised $4,000 tax cut dividend just yet.

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The Washington Post told readers that the Republican tax plan:

"...will aim to slash corporate tax rates, simplify taxes for individuals and families and lure the foreign operations of multinational firms back to the United States with incentives and penalties."

While there is no plan at the moment, the reports to date have said the Republicans want to shift to a territorial tax under which companies don't pay U.S. tax on their foreign profits. If this is true, their proposal will increase the incentive to shift operations overseas, or at least to have their profits appear to come from overseas operations.

It is worth noting that the concern expressed about future deficits in this piece is referring to a largely meaningless concept. If we are concerned about the commitment to future debt service payments then we should be looking at debt service payments, which are now near historic lows relative to the size of the economy.

We should also be asking about the burden the government creates by granting patent and copyright monopolies. This presently comes to close to $370 billion annually (more than twice the debt service burden) in the case of prescription drugs alone. This is the gap between what we pay for drugs, currently around $450 billion a year, and the price that would exist in a free market without patents and related protections, which would likely be less than $80 billion. The full cost of these protections in all areas is almost certainly at least twice the cost incurred in prescription drugs.

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A NYT article reported on a commitment by its president, Xi Jinping, to raise everyone in China above its official poverty level of 95 cents a day by 2020. According to the piece, 43 million people in China now fall under this income level.

While the piece implies this would be a difficult target for China to make, the cost would actually be quite small relative to the size of its economy. If it were to hand this amount of money (95 cents a day) to each of these 43 million people, it would cost the country $14.9 billion annually. This is just over 0.05 percent of its projected GDP for 2020 of $29.6 trillion. This target would still leave these and many other people very poor but if this is what China's government is shooting for, there is little reason to think it will not be able to meet the target.

The article also says that China's slowing growth will make reducing poverty more difficult. While it is harder to reduce poverty with slower growth rather than faster growth, China's economy is still projected to be growing at more than a 6.0 percent annual rate, which is faster than almost every other country in the world.

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It is common for economists to assert that the trade deficit is equal to the gap between national savings and national investment. If the United States invests more than it saves (combining private savings and government savings) then it is running a trade deficit. This is true by definition.

Intro Econ fans may remember that we have the basic accounting identity saying that output is equal to income:


...where C is consumption,

...I is investment,

...G is government spending,

...X-M is net exports (exports minus imports),

and Y is income.

We also can say that Y=S+C+T,

...where S is savings,

...C is consumption,

...and T is taxes.

The basic story is that the government taxes away some of our income and the rest is either saved or consumed (saved means it is not consumed).

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An NYT article discussing Republican plans to sharply limit the tax deduction for 401(k)s noted how these retirement accounts have largely replaced traditional defined-benefit pensions and said that they were cheaper for employers. This is not entirely clear.

In principle, a payment for a retirement benefit is supposed to be a substitute for wages. If a worker gets $2,000 a year paid into a defined-benefit pension or a 401(k) plan, this is supposed to be offset by roughly a $2,000 reduction in wages. In the simple case, the retirement benefit is not costing the employer anything, since the worker is seeing a reduction in pay corresponding to the value of the benefit. (This is the same story economists tell about employer-provided health care insurance.)

As a practical matter, the offset is almost certainly not one to one. Many workers will view the contribution for retirement as worth more than the same amount of dollars in their paycheck while younger workers who are far from retirement might view the contribution as being worth less than the same amount of dollars in their paycheck.

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The NYT had a very informative piece on the prospects for the labor market changes being pushed through in France by its new president Emmanuel Macron. While the background explaining the proposed changes and their rationale was useful, the article included one important item that is seriously misleading. It said that nearly one in four young people in France is unemployed.

This figure is referring to the unemployment rate for French youth (ages 15–24), which the OECD reports as 24.6 percent. However, this figure is the percent of the labor force who are unemployed, not the percent of the population. The labor force is defined as people who are either employed or report to be looking for work and are therefore classified as unemployed.

In France, many fewer young people work than in the United States because higher education is largely free and students get stipends from the government. As a result, the employment rate for French youth is 28.3 percent, compared to 50.1 percent for the United States. If we look at unemployment as a share of the total youth population, the 8.7 percent rate in France is not hugely higher than the 5.8 percent rate in the United States.

Youth unemployment is still a serious issue in France (as it is the United States), but not quite as serious as the one in four figure may lead people to believe.

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It seems the folks reporting on the third quarter GDP forgot to do their homework. The articles touted the 3.0 percent growth figure, which was somewhat stronger than generally expected. However, much of the basis for this stronger than expected growth was a pick-up in inventory accumulations that added 0.73 percentage points to the growth rate in the quarter. The growth in final demand was just 2.3 percent.

It is common to look at final demand growth, which excludes inventory changes, both because the inventory numbers are highly erratic and also are not sustainable. No one thinks that the pace of inventory accumulation will continue to increase at anything like the pace in the third quarter. This point is important since if we are trying to determine the underlying growth path of the economy, it is far more likely to reflect the rate of growth of final demand than a GDP number that is inflated (or deflated) by big changes in inventories.

One potentially very important item that seems to have been missed in the coverage of third quarter GDP was the pick-up in productivity growth implied by the GDP data. Output in the non-farm business sector rose at a 3.8 percent rate in the quarter. With hours worked in the private sector increasing by less than 1.0 percent, this likely means a rate of productivity growth close to 3.0 percent. This would be a huge uptick from the 0.7 percent rate we have seen the last five years.

Productivity data is highly erratic so a single quarter's data should always be viewed cautiously. But an uptick in productivity growth has to start somewhere and if this is the first sign, it is a really huge deal. More rapid trend productivity growth would be far more important than whether the GDP growth rate in the quarter was 3.0 percent or 2.0 percent.

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Earlier this week I had a column in Politico pointing out that doctors in the United States get paid roughly twice as much as their counterparts in other wealthy countries and that we could save almost $100 billion a year ($700 per family) if we got doctors pay in line with their pay elsewhere by opening up the market. This made many folks (most identifying themselves as doctors) angry, as they let me know with e-mails, tweets, facebook comments and various other outlets. My response to these criticisms is below.

Folks also may be interested in picking up the discussion with a segment next Monday (10-30) on Wisconsin Public Radio at 7:00 A.M. EDT.


Response to Critics

The criticisms of my piece took a variety of directions but the vast majority noted the large debt that many doctors incur in med school. This is a serious issue, but I would raise a couple of points here. First, a debt burden of $250,000 comes to less than $9,000 a year over a 30-year career. That’s less than 4 percent of the average doctors’ pay. Even if you add in one-third for interest costs, it is still less than 5 percent of the average doctors’ pay and only around 10 percent of the difference between the average doctors’ pay in the U.S. and their pay in other wealthy countries.

I would agree that we should alter the way med school is financed and instead have it covered by the government, as is largely the story elsewhere. (The same applies to college.) However, it is interesting to note how when we talk about opening up the market for doctors to more international and domestic competition we get this huge outcry over the fate of doctors with high debt. I don’t recall similar outcries about the risk to the continued employment and pensions and retiree health care benefits of autoworkers and steelworkers when these sectors were opened to international competition. Nor do we hear these complaints expressed as vocally in reference to efforts to restrict Amazon and other internet retailers when it means the loss of hundreds of thousands or even millions of jobs in traditional retail stores.

Many complained that I had no evidence for what I argued in the piece. The links in the piece provide pretty solid evidence that U.S. doctors are paid substantially more than their counterparts in other wealthy countries. Here’s another source that readers may find useful.

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Roger Altman, an investment banker and deputy treasury secretary under President Clinton, warned about the effect of growing inequality on national politics in a Washington Post column. He implies that this increase in inequality has been a natural outcome of the market:

"A series of powerful, entrenched factors have brought the American Dream to an end. Economists generally cite globalization, accelerating technology, increased income inequality and the decline of unions. What’s noteworthy is that these are long-term pressures that show no signs of abating."

The "powerful entrenched factors" are all the result of deliberate policy choices that Mr. Altman apparently doesn't want to see altered. In the case of globalization, we have made a deliberate decision to put our manufacturing workers in direct competition with low-paid workers in the developing world, while largely protecting our most highly paid workers like doctors and dentists. This has the predicted and actual effect of shifting income upward.

"Accelerating technology" (actually it has been decelerating as productivity growth has slowed to a crawl in the last decade) does not lead to upward redistribution; laws determining ownership of technology, such as patent and copyright monopolies redistribute income upward. There is a huge amount of money at stake with these government-granted monopolies. In the case of prescription drugs alone, patents and related protections add close to $370 billion a year (almost $3,000 per household) to what we pay for drugs in the United States. Bill Gates, the world's richest person, would probably still be working for a living without patent and copyright monopolies for Microsoft software.

And, the drop in unionization rates in the United States has also been the result of deliberate policy to make it more difficult to organize unions and to weaken the unions that do exist. Canada, which has a very similar culture and economy, has seen no comparable decline in unionization rates over the last four decades.

Someone seriously interested in reversing the upward redistribution of income would look to reverse these policies, but Altman seems to want us to believe that they are unalterable and instead focus on band-aid solutions. But, what do you expect from Jeff Bezos' Washington Post? (Yes, this is the point of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) 

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Fareed Zakaria pushes the pet myth of the arithmetically challenged elite (yes, that is probably redundant) that the federal debt is limiting spending for many important ends in his column this morning.

"It is politically paralyzed, unable to make major decisions. Amidst a ballooning debt, its investments in education, infrastructure, and science and technology are seriously lacking."

Arithmetic fans would evaluate this assertion by looking for evidence that the debt is causing problems such as high interest rates and inflation and creating a large debt service burden.

The opposite is the case, with long-term interest rates still under 2.5 percent compared to more than 5.0 percent in the surplus years of the late 1990s. Inflation remains under the Fed's 2.0 percent target and has actually been trending downward this year. And, debt service is less than 1.0 percent of GDP (net of interest rebated by the Fed), compared to over 3.0 percent in the 1990s.

In short, there is no evidence that debt is limiting our ability to spend more in these and other areas. There is a strong case that fears over the debt, raised by folks like Zakaria, are limiting our ability to invest for the future.

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I'm off on vacation. I'll be back October 27. So remember, don't believe anything you read in the papers until then.

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Trade deals are usually thought to increase productivity by allowing countries to benefit from comparative advantage, where each country concentrates on the areas where it is relatively more efficient. For this reason, it is striking that a study on the impact of reversing NAFTA that was cited in an NYT article found that the United States, Canada, and Mexico would all see an increase in productivity if NAFTA was reversed.

While both the article and the study highlighted the number of jobs that would be lost if NAFTA were repealed, the study actually projects that GDP would fall by a considerably smaller percentage for each of the three countries. In the case of the United States, the study projects a loss of 255,000 jobs or 0.17 percent of total employment. However, GDP is projected to fall by just 0.08 percent. This implies a gain in productivity of 0.09 percentage points.

Canada is projected to lose 125,000 jobs or 0.69 percent of total employment. However, its GDP is only projected to drop by 0.48 percent, implying a productivity gain of approximately 0.21 percent. Mexico turns out to be the big winner, with its employment falling by 951,000 or 1.82 percent, while GDP only drops by 0.87 percent, implying a productivity gain of approximately 0.95 percent.

This gain in productivity is presumably associated with higher wages, since we expect workers to be paid in accordance with their productivity. In principle, governments could tax away a portion of these wage gains and redistribute them to the unemployed to ensure that everyone gains, making the reversal of NAFTA a win-win for all involved.

No, I don't take these projections seriously, but the NYT apparently wants us to. So, if we buy what the NYT is selling, we should believe that we could get a modest boost to productivity if we just did away with NAFTA altogether. 

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Doug Schoen, a former consultant to Bill Clinton, argued the case that the Democrats should keep their ties to Wall Street in a NYT column this morning. While he does advance his argument with some red-baiting and bad logic, he uses tradition as a starting point.

"Many of the most prominent voices in the Democratic Party, led by Bernie Sanders, are advocating wealth redistribution through higher taxes and Medicare for all, and demonizing banks and Wall Street.

"Memories in politics are short, but those policies are vastly different from the program of the party’s traditional center-left coalition. Under Bill Clinton, that coalition balanced the budget, acknowledged the limits of government and protected the essential programs that make up the social safety net.

"President Clinton did this, in part, by moving the party away from a reflexive anti-Wall Street posture. It’s not popular to say so today, but there are still compelling reasons Democrats should strengthen ties to Wall Street."

Of course, memories are not actually short, contrary to what Schoen claims. Many supporters of harsher policies directed against the financial sector remember the stock bubble whose crash led to what was at the time, the longest period without job growth since the Great Depression. They also remember a financial sector that continued to run wild as the housing bubble inflated. And they remember the Great Recession that followed the collapse of that bubble. And, they remember the government's bailout policies that ensured that the financial industry-types would end up on their feet and not in jail.

But Schoen does go beyond appealing to tradition.

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When it became impossible to sell the Trans-Pacific Partnership (TPP) on its economic merits, proponents of the deal began to argue for it as a way to contain China's power in the region. Thomas Friedman picks up this line and runs with it in his latest column.

"Trump came into office vowing to end the trade imbalance with China — a worthy goal. And what was his first move? To tear up the Trans-Pacific Partnership, the trade deal that would have put the U.S. at the helm of a 12-nation trading bloc built around U.S. interests and values, potentially eliminating some 18,000 tariffs on U.S. goods and controlling 40 percent of global G.D.P. And China was not in the group. That’s called leverage.

"Trump just ripped up the TPP to “satisfy the base” and is now left begging China for trade crumbs, with little leverage. And because he needs China’s help in dealing with North Korea, he has even less leverage on trade."

Let's see, we're eliminating 18,000 tariffs. That sounds really impressive, except the vast majority of these tariffs were near zero anyhow. Admittedly, a zero tariff is more supportive of trade than a tariff of 1.0 percent, but it's not exactly going to lead to a flood of exports. It has roughly the same impact as a 1.0 percent decline in the value of the dollar, the sort of change in currency values that we often see in a single day.

The touting of the number of tariffs, rather than the impact on trade is the sort of cheap trick propagandists resort to when they can't make a serious argument. It's worth also noting that the 18,000 tariff figure includes many altogether meaningless tariffs, like Brunei's tariffs on ski boots made in the United States and tariffs on items that are already banned from international trade, like shark fins.

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No regular reader of the NYT expects great insights from David Brooks, but the sort of name-calling in today's column is the sort of thing one expects from a grade schooler. It turns out that if you don't agree with Brooks' view of the world you are a "downswinger," you have gone from an "optimistic, progress-embracing view toward a pessimistic, system-doubting view."

Well hey, who wants to be a downswinging pessimist, as opposed to someone who embraces progress? How about we instead divide the world between those who live in reality and work for a living and those who earn a good salary lying in NYT columns.

David Brooks begins his piece by telling us these are the best of times, especially for those of us who live in the United States. Here's his second paragraph:

"In 1980 the U.S. had a slight edge in G.D.P. per capita over Germany, Japan, France and the U.K. But the U.S. has grown much faster than the other major economies over the past 37 years, so that now it produces about $54,000 of output per capita compared with about $39,000 for Japan and France."

Hmmm, a slight edge in 1980? Here are the numbers according to the International Monetary Fund.

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The White House is pushing the line that their proposed cut to corporate tax rates will lead to an increase in average household income of more than $4,000.

“Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggests that over a decade, this effect could be much larger.”

This is a pretty impressive claim, but it gets even better a couple of pages later:

“When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”

There are few things worth pointing out about the White House’s claims here. First, the idea that workers would see large gains from a reduction in corporate income tax rates is not based on the idea that lower taxes will be directly passed on in wages. The amount of tax at stake is far too small to have the sort of impact on wages claimed here.

Rather the implication is that there would be a huge burst of investment leading to a huge increase in productivity and growth. The higher levels of productivity would be passed on to workers in the form of higher wages.

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Robert Samuelson used his column to relate concerns expressed by former Fed chair Ben Bernanke that the Fed would lack the ability to fuel a recovery when the United States next falls into a recession. Although Samuelson doesn't go into detail, the background here is that the country has faced a persistent shortfall of demand at least since the collapse of the housing bubble.

One way this shortfall can be filled is with larger budget deficits. Unfortunately, there is intense political opposition to budget deficits fueled by people like Wall Street billionaire Peter Peterson and the Washington Post. The failure to have larger deficits have cost the country trillions of dollars in lost output and made the economy permanently weaker, in effect imposing a huge tax on our children and grandchildren in the form of lower wages.

The other obvious way that the shortfall could be filled is with a smaller trade deficit. If our trade deficits were, for example, 1.0 percent of GDP instead of the current 3.0 percent of GDP, we would not be facing a shortfall of demand and Bernanke's problem would disappear. Unfortunately, people in policy circles largely cling to an absurd trade deficit denialism under which the size of the deficit cannot affect demand and employment, an argument which is made explicitly in an NYT column this morning by former Secretary of State George Schultz and Pedro Aspe, a former secretary of finance in Mexico.

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