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).

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I will claim no special insight into the politics that led to Trump’s election Tuesday. I was as surprised as anyone else when not just Florida and North Carolina, but also Pennsylvania, Michigan, and Wisconsin started to turn red. But that’s history now. We have to live with the fact of President Trump and we have to figure out how to protect as much as possible of what we value in this country from his presidency.

This won’t be easy when the Republicans control both houses of Congress and will soon be able to appoint a new justice to the Supreme Court to again give them a right-wing majority. But there are still points of pressure.

Most importantly, the people in Congress want to get re-elected. Pushing unpopular policies like privatizing Social Security or Medicare, or taking away insurance by ending Obamacare, will be horrible albatrosses hanging over their heads the next time they face voters. This reality has to constantly be put in their faces. It is easy for politicians to push nonsense stories about eliminating trillions of dollars of waste, fraud, and abuse. It is much harder to get away with taking away your parents’ Social Security check or the health care insurance that pays for your kid’s insulin.

The other point of pressure is that we know (even if the folks who report the news don’t) that Trump got elected by making many promises that he will not be able to keep. Rebuilding an economy in which the benefits of growth are broadly shared is a great idea, but Donald Trump is not going to bring back the coal mining jobs lost in West Virginia, Kentucky, Ohio and elsewhere. These jobs were not lost because of environmentalists concerned about the future of the planet; they were lost because of productivity growth in the industry (think of strip mining replacing underground mining). We should make sure that people regularly are informed about President Trump’s progress in bringing back coal mining jobs to Appalachia.

Before getting into some specific issues, it is worth noting that not everything Trump says he wants to do is bad. He says that he wants a big infrastructure program. This is badly needed both to modernize our infrastructure and also to create jobs. Trump’s proposed tax cuts will provide a boost to demand that will generate jobs as well. It’s horribly targeted in giving most of the benefits to the rich, but it will still lead to more consumption and therefore more demand and jobs. This may finally give the economy enough stimulus to restore the labor market to its pre-recession strength. That will be good, especially since the beneficiaries of the job growth and the stronger labor market will be disproportionately African American and Hispanic and less-educated workers. Now, I will get to some specifics.

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The NYT ran a piece with the headline, "Trump rides a wave of populist fury that may damage global prosperity." The headline is absolutely bizarre for the simple reason that we are not seeing anything that a serious person can call "global prosperity." Thanks to the austerity policies pursued across much of the across Europe, and to a lesser extent the United States, countries across the developing world have seen a decade of weak or even negative growth. The employment rate of prime age workers (ages 25-54) is still below its pre-recession level in many countries, including in the United States.

These points are actually a major point of the article itself, which emphasizes the poor performance of most economies as a trigger for populist sentiment. In this respect the headline effectively contradicts the point of the article. While the populist policies being advocated by politicians may not offer a good answer for economic problems, we do not have to worry that they somehow will ruin an economic golden age. The mainstream leaders designing economic policy already destroyed prosperity, which doesn't mean that some ill-designed populist policies couldn't make things worse.

One point where the article is mistaken is in dismissing the idea that some people in the UK might be benefited by Brexit.

"In northeastern England (something like the Rust Belt of Britain) people who voted to leave Europe speak openly about doing so to punish those who beseeched them to vote to stay — people like the exceedingly unpopular former prime minister David Cameron. The situation is so depressed, it cannot get worse, the logic runs. Any economic pain will fall on wealthy Londoners, people say.

"But that is almost certainly nonsense. A rupture of trade with Europe is likely to hit these industrial communities hardest. And if that happens, the people living there will be angrier than ever."

Actually there is a very plausible story under which Brexit may benefit left behind industrial communities, which comes directly out of standard economics. Brexit is likely to first and foremost hit the London financial center by denying it privileged access to the EU. This will lead to less exports of financial services, which lower the value of the pound, other things equal. That makes the goods produced by industry in the UK more competitive, increasing output and employment.

This is largely consistent with what we have seen in the months since the vote for Brexit. The pound has plunged against both the euro and the dollar. Also, we have seen a sharp decline in London real estate prices, while house prices have risen in the rest of the country.

While Brexit may not have been an ideal tool for the purpose (policy is never textbook ideal), it may actually provide an effective way to divert resources from the financial sector to the rest of the UK economy. It is certainly too early to pronounce the policy successful in this respect, but it is also too early to insist that it is a failure.


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It will be very hard to get used to the two words “President Trump,” but somehow we will have to figure out a way to survive and keep the country and world intact for the next four years. There are many factors behind the rise of Donald Trump. Clearly, a big part of Trump’s appeal lay in his open expressions of racism, xenophobia, and misogyny.

But this is not the whole story. Many of the white working class people who voted for Trump yesterday voted for Barack Obama just four years earlier. Their character was not transformed in the last four years.

Undoubtedly, part of the story is that some of these people could not bring themselves to vote for a woman for president, even if they could vote for a black man with a foreign-sounding name. There were endless accounts of open and hateful displays of sexism directed against Hillary Clinton and her supporters, many of them encouraged by the candidate himself.

However, even against this backdrop the election was still incredibly close, with states like Wisconsin, Pennsylvania, and Michigan certainly well within Clinton’s reach. There were many factors that depressed Clinton’s vote, most obviously the endless drumbeat about e-mails, which were amplified in the last days of the campaign by F.B.I. Director James Comey’s bizarre intervention into the race.

While many of these factors were beyond the control of Clinton and the Democrats, one factor that was under their control was the decision to push the Trans-Pacific Partnership (TPP). Needless to say, there is little public knowledge of the details of the TPP. But the TPP symbolized a pattern of trade that cost millions of manufacturing jobs in the prior decade and put downward pressure on the wages of the workers without college degrees more generally.

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Alec MacGillis had an interesting profile of Tom Nides in the New Yorker. Nides is currently a top executive at Morgan Stanley who is frequently mentioned as a leading contender for Treasury Secretary or other high level position in the Clinton administration. The piece ends with this remarkable section:

"But Barney Frank, the former Democratic congressman—who, despite having co-authored Dodd-Frank, is not opposed to former Wall Street executives working in Washington—told me that, in a friendly debate that he and Nides have conducted in recent years, Nides has vigorously defended Wall Street compensation: 'He said, "These are extremely talented people who do valuable work.’"'"

This one deserves a bit of thought. Remember, we're talking about the top people at major banks, like former Wells Fargo CEO John Stumpf. These people earns tens of millions of dollars a year. The folks at the hedge funds and private equity funds can earn hundreds of millions of dollars a year.

When we think about their talents, remember these are exactly the group of people that fueled the housing bubble with their fraudulent loans and bad securities. The country has paid and continues to pay an enormous price for this episode. If we look at the Congressional Budget Office's estimates of potential GDP, its current estimate for 2016 is more than ten percent below its projection of 2016 potential GDP back in 2008, before the crash.

To get an idea of the magnitude of 10 percent of GDP, this is roughly 2.5 times the size of the Social Security tax. There are any number of people in Washington who would go absolutely nuts over the suggestion that we raise the Social Security tax by 2.0 percentage points (even if phased in over a decade). Imagine raising it by 30 percentage points. This would have the equivalent impact on people's income as the long-term damage from the collapse of the housing bubble.

It is also worth noting that the Wall Street gang did not do even do well from the standpoint of the firms and shareholders they ostensibly work for. Two of the five major investment banks, Bear Stearns and Lehman, collapsed. The other three also would have gone under in the crisis, if not bailed out by the Fed and the Treasury. In addition, Citigroup and Bank of America, two of the four largest commercial banks, also would have faced collapse if not for massive government aid. 

These Wall Street folks may be incredibly talented people in the same way that Bernie Madoff was, but if their talents benefit anyone other than themselves, they keep this fact well hidden.

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Yep, he tells us the real national embarrassment is not having a racist, sexist, xenophobic candidate as a major party presidential nominee. It's not our failure to address global warming so our kids might face a ruined planet. No, Robert Samuelson tells us our real national embarrassment is that we have an aging population and, horror of horrors, this may involve spending more money on Social Security and Medicare. Okay, let's go through his story.

Samuelson tells us:

"In 1990, those 65 and over comprised 12.5 percent of the population; now, according to Census Bureau projections, that share is racing toward 16 percent in 2020 and 19 percent in 2030. That’s one in five Americans. Already, federal spending for older Americans (mainly Social Security, Medicare and nursing-home care under Medicaid) dominates the national budget. It’s crowding out spending on other programs, from defense to parks, and is the chief source of chronic budget deficits.

"Nor is that all. The economy’s slowdown reflects in part the retirement of millions of baby boomers, whose exit from work reduces labor force growth. The generational unfairness is palpable. Younger Americans are seeing more of their taxes diverted to care of the elderly, who often are in better financial shape than the young who are subsidizing them.

"What we need — it was obvious even before the Bill Clinton presidency — is a new social contract between generations, one that acknowledges longer life expectancy (justifying higher eligibility ages for Social Security and Medicare benefits) and greater wealth among millions of older Americans (justifying lower benefits for well-to-do retirees)."

Okay, so we have a rising share of the population over age 65. That is something that happens when a country gets wealthier and medical technology improves. If we take a little longer view, the share of the population over age 65 was 7.4 percent in 1945. It's currently just under 15.0 percent. That means that we have seen a rise in the share of the over age 65 population rise by more than 7.5 percentage points. Apparently in Robert Samuelson world, that rise was okay, but something really really bad will happen when the share of people over age 65 rises another 4.0 percentage points to 19.0 percent.

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Ross Douthat devoted his NYT column this morning to how people in the United States and other wealthy countries deal with a world in which they have fewer children. It's mostly devoted to social psychological speculation, which I will leave to others to assess, but I do want to pick up on an economic item that is a central theme.

Douthat tells readers:

"The Obama White House’s 'Life of Julia' ad campaign in 2012 — featuring a woman whose every choice was subsidized by the government from cradle to grave, with a lone child but no larger family or community in sight — seemed to many conservatives like a perfect confirmation of our fears: Here was liberalism explicitly pitching the state as a substitute for kith and kin."

While I don't recall the campaign ad, presumably the subsidies are for items like child care, education, health care, and Social Security. Douthat is making a clear contrast between incomes that people earn in the market, implicitly without the hand of government, and the items that the government gives to people. In his view, and the view of the conservatives he refers to, the former is good and latter in some way bad. This distinction becomes more problematic when we acknowledge that the government shapes the market in ways that enormously impact the ability of people to earn income in the market.

Starting with an example that was in the news last week, the Fed may soon decide to raise interest rates. The purpose of this move is to slow the economy and the rate of job creation. In addition to keeping some people from getting jobs (disproportionately African Americans and Hispanics), a higher rate of unemployment will weaken the bargaining power of workers who do have jobs. In particular, it puts downward pressure on the wages of the workers at the middle and bottom of the wage distribution.

Going in the opposite direction, the government protects the income of doctors from prohibiting foreign doctors from working in the United States unless they have completed a residency program in the United States. As a result of this restriction, doctors in the United States earn twice as much as their counterparts in other wealthy countries like Germany and Canada. This costs the country roughly $100 billion a year in higher medical expenses.(This effectively reduces the wages of all non-doctors, since our money buys less.)

In the same vein, the government grants patent monopolies in prescription drugs. These monopolies allow drug companies to charge prices that are often several thousand percent above the free market price. This protectionism both makes some of those involved in the process of developing and distributing drugs very rich and ends up costing the rest of us a huge amount in higher drug prices. The gap between the patent protected price of drugs and the free market price can easily exceed $350 billion a year.

There are a variety of other mechanisms through which the market has been shaped in recent decades to redistribute income upward. This is the topic of my new book Rigged: How Globalization and the Rules of the Market Economy Were Structured to Redistribute Income Upward (it's free). It is important to recognize how the market was structured to enrich the rich since it undermines the moral distinction that Douthat and his fellow conservatives want to make.

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It's often said that economists are not very good at economics. (How else could they miss the $8 trillion housing bubble that sank the economy?) Anyhow, we are getting another case proving this point in the discussion of the acceleration of wage growth following the release of the October employment report.

While it does seem that there is a modest uptick in the rate of growth of the average hourly wage, this appears to be almost entirely due to the fact that we are seeing a shift from non-wage compensation (mostly health care) to wages. This was one of the goals of Obamacare, as it was hoped it would slow the growth of health care costs, leaving more money to go into workers' paychecks.

This is still good news for workers (if the quality of their health care insurance is not deteriorating), but it is a substantially different story from one in which tighter labor markets are leading to a more rapid growth in compensation. In the latter case, there is at least an argument for the Fed to be concerned about the risk of inflation and to raise rates. However, it doesn't make sense for the Fed to be thinking about raising interest rates and slowing job growth just because employers are shifting compensation from health care to wages.

Here's the picture for the last five years. (The graph shows the annualized rate of change each quarter.)


I can't see any acceleration in this picture. I guess that's why I'm not at the Fed.

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Carolyn Johnson has done a lot of excellent reporting on abuses and price gouging by the pharmaceutical industry, but her piece today on the "solution to the global crisis in drug prices" is more than a bit bizarre. I'll save you the suspense. The solution is a "public benefit" company which is not set up to maximize profit. (I'm not sure what prevents it from being bought out by a standard profit maximizing company, but we'll leave that one aside.)

While it is encouraging to hear some researchers actually interested in helping humanity rather than getting as rich as Bill Gates, this really seems like a major sidebar. There have been a long list of proposals of various types to have research funded in some form by the government, with all the findings placed in the public domain so that new drugs would be available at generic prices.

In this story, there is no need to rely on beneficent researchers. Researchers are paid for their work at the time they do it, just like billions of employees throughout the world. If it turns out poorly, that is unfortunate. Of course, incompetent researchers would be fired just like incompetent dishwashers and custodians. But if their work turned out to have huge health benefits, the public would enjoy them in the form of affordable drugs.

Publicly funded research also has the great benefit that research findings could be made public so that other researchers and doctors could benefit. This would allow research to advance more quickly and also for doctors to make more informed prescribing choices for their patients. (As it stands now, the industry only makes the results available that help it to market its drugs.)

Anyhow, it is remarkable that Johnson seems to be unaware of proposals for publicly funded research. (It can go through the private sector — it just doesn't rely on patent monopolies.) The proponents are not an obscure group, they include Joe Stiglitz, a Nobel prize winning economist.

We already spend over $30 billion a year on biomedical research through the National Institutes of Health (NIH). While this money is primarily devoted to basic research, there is no obvious reason the funding couldn't be doubled or tripled and designated to finance developing new drugs and carrying them through the FDA approval process. We spend over $430 billion a year on prescription drugs that would sell for 10–20 percent of this price in a free market, so there is plenty of room to increase funding and still end up way ahead.

While the industry pushes the line that the NIH or equivalent agency would turn into bumbling idiots if they allocated money for drug development, it argues that the current funding is money very well spent and consistently argues for more. Perhaps Johnson shares the industry's bizarre theory of knowledge, otherwise it is difficult to understand why she would not be looking at this obvious solution for high drug prices.

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by Dean Baker and Lara Merling

It's no secret that many folks, including many on the Fed, want to see higher interest rates. There are a variety of arguments put forward, including the story of huge but invisible bubbles that could burst and sink the economy just like the housing bubble did in 2008.

But the argument that deserves the most credibility is the conventional one that a low rate of unemployment is creating an overtight labor market. This leads to more wage growth, which will get passed along in more rapid inflation, which will soon force the Fed's hand. At some point the Fed will have to raise rates to keep inflation from getting out of control or we will be back in an era of excessive inflation. By this logic it is better to get out front and do it now.

In this story, we should at least be seeing the beginnings of an acceleration of inflation, but we don't. The figure below shows the core personal consumption expenditure deflator which provides the basis for the Fed's 2.0 percent (average) inflation target.

Book2 19143 image001

Source: Bureau of Economic Analysis and author's calculations.

The figure shows the annualized rate of inflation using average price levels from the most recent three-month period compared with average price levels from the prior three month period. It's pretty hard to see any evidence of an upward trend in these data. The core rate had approached 2.5 percent in early 2011. It had minor fluctuations, but eventually bottomed out at 1.0 percent in the fall of 2014. It has moved modestly higher in the last two years, peaking at 2.0 percent at the end of 2015, but since then has crept down to 1.7 percent. 

Of course, it is always possible that we will see the picture change and inflation will suddenly start to accelerate, but the point is that it has not yet done so. Furthermore, none of the standard models show that inflation suddenly jumps upward. If it does start to increase it would likely be a long and gradual process. For this reason, it is difficult to see the urgency in the drive to raise interest rates.

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Thomas Edsall's NYT column contrasted the downscale white working class Trump supporters with the growing number of college educated and relatively upscale supporters of Democrats. Near the end of the piece, Edsall quotes M.I.T. economist Daron Acemoglu:

"As long as the Democratic Party shakes off its hard-core anti-market, pro-union stance, there is a huge constituency of well-educated, socially conscious Americans that will join in."

Rather than completely abandon its base in the working class (of all races) there is an alternative route for the Democrats, they could abandon their hard core anti-market positions that benefit the wealthy.

This could start with abandoning their position, especially in trade deals, to make government granted patent and copyright monopolies longer and stronger. These anti-market interventions are affecting an ever larger share of the economy (in prescription drugs alone patent related protections likely increase the costs by more than $350 billion annually). They directly redistribute income from ordinary workers to the relatively wealthy minority in a position to earn rents from these forms of protectionism.

The Democrats can also abandon the licensing restrictions that protect doctors, dentists, and other highly paid professionals from both domestic and international competition. Our laws prevent doctors from practicing medicine unless they complete a U.S. residency program. This is about as blatant a protectionist barrier as you'll find these days. It allows doctors in the United States to earn on average more than $250,000 a year, twice as much as their counterparts in other wealthy countries like Germany and Canada. This protectionism costs us around $100 billion a year in higher medical costs.

We could also subject the financial sector to the same sort of taxes as other sectors of the economy pay (e.g. a financial transactions tax). This market based reform could eliminate more than $100 billion a year in waste in the financial sector that ends up as income for bankers and hedge fund types.

There is a long list of market-friendly measures that would help to reverse the upward redistribution of the last four decades. (Yep, this is the topic of my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) Anyhow, supporters of this upward redistribution do their best to turn language on its head and deny that these forms of protectionism are protection. They pretend that patent and copyright protections are the free market or that they never heard of restrictions on foreign doctors. Unfortunately, this group of deniers includes most of the people who write on these issues. But, there is always hope that they can learn.


Note: Typos in an earlier version were corrected, thanks Robert Salzberg.

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The promoters of "free trade" are feeling frustrated these days. Their trade deals are facing large-scale public opposition everywhere. This opposition almost derailed a trade deal between Canada and the European Union. In the United States, both major party candidates are openly opposed to the Trans-Pacific Partnership (TPP).

The NYT recognizes some of the problems in recent trade pacts, but still badly misrepresents the key issues in an editorial on trade. The misrepresentation picks up a recent theme of the selective protectionists (a.k.a. "free traders"). It claims that trade has been falling:

"The total value of American imports and exports fell by more than $200 billion last year; they’ve fallen by an additional $470 billion in the first nine months of this year. Sluggish growth is both a cause and a result of this slowdown."

Numbers fans everywhere know the trick here. As I pointed out yesterday, the reason that the value of U.S. trade fell last year was the drop in the prcie of oil and commodities. The real value of trade rose by $2.3 billion from 2014 to 2015. This is admittedly slow growth, but it is not the same thing as the advertised decline. (These data are available from Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.6.)

The editorial compounds the error by bringing in data from 2016. It's true the nominal value of trade fell by $163 billion (not the $470 billion advertised) in the first nine months of 2016, but if we adjust for falling prices trade actually rose by $63 billion.

But this aside, it's time to stop honoring the lies by the promoters of trade deals. These deals have nothing to do with free trade. They are designed to redistribute income upward.

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The NYT had an interesting article arguing that trade has stopped growing in the last couple of years. The piece notes data showing that combined U.S. exports and imports fell in the 2015 compared to 2014 and seem likely to fall again in 2016. It then raises the concern that this will lead to slower growth going forward. There are a couple of points that complicate this issue.

The first is that the drop in the dollar value of trade is the result of lower prices, not a smaller volume of goods and services being imported and exported. While the nominal value of exports fell by $111.0 billion from 2014 to 2015, the real value actually rose by $2.3 billion. On the import side, the nominal value fell by $97.8 billion while the real value rose by $116.5 billion.

In other words, the actual amount of goods and services crossing U.S. borders in 2015 was in fact higher in 2015 than in 2014, we were just paying less for what we imported and foreigners were paying less for what we exported to them. The big factors here were the sharp drop in oil prices and comparable drops in the price of many agricultural commodities that we export. It is not clear that this is bad for economic growth, but in any case the issue is not a drop in the quantity of goods and services crossing national borders.

The other point is that the definition of a traded item can change depending on the property rules in place at the time. To take a simple example, suppose that one billion people in China use Microsoft's Windows operating system. If we make them all pay $50 for each system then this is $50 billion in U.S. exports to China. Now suppose that everyone in China is able to use Windows at no cost. In this case we have $50 billion less in exports, but we still have one billion people in China getting the benefit of the Windows operating system.

Much of the focus of U.S. trade policy in recent decades has been about making other countries pay for items that in principle could be free through patents and copyright protection. (Yes, this is protectionism, even if your friends profit from it.) It is not clear that we are boosting world growth by making countries pay more money for items like prescription drugs, software, recorded music and video material, although we would certainly be increasing the dollar value of trade flows.

The long and short is that it is not clear what we are measuring when we see a decline in trading or volume or what it would mean if trading volume increases because we can force other countries to pay for items that would otherwise be available for free. (Yes, these issues are covered in my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, which is available for free.)


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By Lara Merling

The official unemployment rate in the U.S. is currently estimated at 5 percent, a number that is sufficiently low for some to claim that the economy is at full employment. The unemployment rate varies significantly across states. Between September 2015 and March 2016 the unemployment rate has averaged 2.8 percent in North Dakota, 3 percent in Hawaii and New Hampshire, while in West Virginia it was at 6.4 percent, and in Washington DC, and Alaska it averaged 6.6 percent.

Once the labor market is at full employment, it is difficult to have much by way of further employment gains beyond the growth in the working-age population. If the current 5.0 percent unemployment rate is actually close to full employment, then we should expect to see smaller increases in the employment-to-population ratio (EPOP) in states with lower unemployment rates, since these states should be running up against the full employment limit. We would then expect higher gains in EPOPs in states that have higher unemployment rates which are further away from reaching full employment.

The figure below compares the change in the EPOP in each state over the period from March 2016 and September 2016, for people between the ages of 18 and 64, with the state's average unemployment rate for September 2015 to March 2016.

 Book11 8941 image001

As can be seen there is no relationship between the unemployment level and the change in EPOP. Some states with very low unemployment rates have seen large increases in EPOP, while some of the states with the highest unemployment levels have seen much smaller increases, or even decreases in EPOP. While this comparison is far from conclusive, it does not easily fit with a story with the labor market approaching full employment.

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The Washington Post had a fact check on Obamacare to explain some of the issues around the widely reported rate hikes for policies in the exchange. It gets a few points wrong in a generally solid piece.

First, it explains the problem of the exchanges as being one in which people are more willing to pay the penalty for not having insurance than signing up on the exchange:

"The feared individual mandate has not had the expected result of convincing people to buy insurance, with younger and healthier Americans apparently more willing to pay a $695-per-person fine than sign up for health care they think is too costly. So the mix of people in the insurance pools have tended to be people who have chronic illnesses and thus require more care and frequent doctor or hospital visits. The risk pools are also why insurance companies have sought higher premiums and the biggest deductibles."

While it is true that the mix of people in the exchanges are less healthy than expected, the problem is not that people are opting to pay the penalty rather than get insurance. This has been a frequent mistake in reporting.

In fact, the percentage of the population that is insured is running above the projections at the time the law was passed. This is in spite of the fact that a 2012 Supreme Court ruling allowing states to opt out of the Medicaid expansion provided for in the law. The reason that the exchange population is less healthy than expected is that more people continue to get insurance through their employer than expected. And, since the people who get employer provided insurance are healthier on average than the population as a whole (most are working full-time jobs), this means that relatively healthy people are being kept off of the exchanges.

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A Washington Post article told readers that the 2.9 percent GDP growth reported for the third quarter made it more likely the Fed would raise interest rates at its December meeting. Part of its story is that inflation is accelerating.

"Inflation remains below the Fed’s target rate of 2 percent but is creeping closer to that level."

Actually, the opposite is the case. The report (Appendix Table A) showed that the core personal consumption expenditure deflator increased at a 1.7 percent annual rate in the third quarter. That is down from 2.1 percent in the first quarter and 1.8 percent in the second quarter.

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Alan Reynolds had a column insisting that the U.S. need not fear trade agreements impact on the United States labor market. The context is an argument that the presidential candidates are wrong to oppose the Trans-Pacific Partnership. The piece argues that trade agreements have not led to increased trade deficits and that imports from China really have not had much impact on the manufacturing sector in the U.S. His argument doesn't quite fit the data.

The piece lays out the basic argument in its subhead:

"If trade agreements are so lousy, why are our largest deficits with countries that lack a U.S. trade deal?"

It then notes that the United States largest trade deficits are with China and Japan and that we have trade deals with neither. This might be a good rhetorical point at the Wall Street Journal, but it has nothing to do with the issue at hand. The question is the direction of change following an agreement. While the data on this point is not entirely conclusive, there is evidence that deficits have generally increased with countries following the implementation of trade deals.

To take some prominent examples, the U.S. went from a modest trade surplus with Mexico in 1993, before NAFTA went into effect, to a deficit of more than $60 billion in 2015. It went from a trade deficit of $13.2 billion with South Korea in 2011, the year before a trade deal went into effect, to a deficit of $28.3 billion in 2015.

It is also important to note that the composition of trade is likely to shift against U.S. manufacturing as a result of trade deals. These deals are quite explicitly designed to increase payments from other countries for licensing fees and royalties to U.S. pharmaceutical, entertainment, and software companies. The more these countries are forced to pay Pfizer for drugs and Disney for Mickey Mouse, the less money they have to spend on U.S. manufactured goods. In other words, the gains for these companies from trade deals imply larger trade deficits in other areas like manufactured goods.

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The Social Security scare story is a long established Washington ritual. Bloomberg news decided to bring it out again in time for Halloween. The basic story is that the Social Security trust fund is projected to face a shortfall in less than two decades. This means that unless Congress appropriates additional revenue, the program is projected to only be able to pay a bit more than 80 percent of scheduled benefits.

This much is not really in dispute. The question is how much should we be worried about this projected shortfall and what should we do about it. Bloomberg's answer to the first question is that we should be very worried. It goes through the list of potential fixes and implies that all would be difficult or impossible.

I will just take one potential fix, which is raising the payroll tax by 2.58 percentage points to cover the projected shortfall. Bloomberg tells us:

"’s doubtful that the American public would accept such jarring changes."

That's an interesting political assessment. It would be worth knowing the basis for this assertion. We had comparably jarring changes in the form of Social Security tax increases in the decades of 40s, 50s, 60s, 70s, and 80s. There was no massive tax revolt against any of these tax increases; what has convinced Bloomberg that we can never again have a comparable increase in the payroll tax?

A piece of evidence suggesting that tax increases necessary to support Social Security might be politically viable is the fact that few people even noticed the 2.0 percentage point increase in the payroll tax at the start of 2013 when the payroll tax holiday ended. This was at a time when the labor market was still very weak from the recession and wages had been stagnant for more than a decade. (A survey conducted for the National Academy for Social Insurance also found that people were willing to pay higher taxes to support the scheduled level of Social Security benefits.)

Given this history and evidence, Bloomberg's claim that the public won't tolerate the sort of tax increases necessary to fully fund Social Security looks like an unsupported assertion.

The other point on this topic is that economists usually believe that workers care first and foremost about their after-tax wage, not the tax rate. The Social Security trustees project that real before-tax wages will rise on average by more than 50 percent over the next three decades. By comparison, the tax increase needed to fully fund Social Security seems relatively small, as shown below.

wage projection 29243 image002

Source: Social Security trustees report, 2015 and author's calculations.

Most workers have not seen their wages increase as much as the average wage over the last four decades since a disproportionate share went to those at top. These are people like CEOs, Wall Street traders, and doctors and other highly paid professionals. Workers stand to lose much more in terms of after-tax income if this upward redistribution continues over the next three decades than they would from the "jarring" Social Security tax increase that Bloomberg feels the need to warn us about.

So, of course people could get really worried about Social Security, as Bloomberg wants, or they can focus on the upward redistribution which will have far more impact on their well-being and that of their children. (Yes, this is the topic of my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, which can be downloaded for free.)

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The New York Times had a major adventure in fantasy land when it ran a front page article asserting that the problem with the health care exchanges under the Affordable Care Act is that the penalties have not been large enough to coerce people into getting health care insurance. The begins by telling readers:

"The architects of the Affordable Care Act thought they had a blunt instrument to force people — even young and healthy ones — to buy insurance through the law’s online marketplaces: a tax penalty for those who remain uninsured.

"It has not worked all that well, and that is at least partly to blame for soaring premiums next year on some of the health law’s insurance exchanges."

The piece then explains that many people are opting not to buy insurance and instead pay the penalty.

The problem with this line of argument for fans of reality is that the number of uninsured has actually fallen by more than had been projected at the time the law was passed. This is in spite of the fact that many states were allowed to opt out of the Medicare expansion by a 2012 Supreme Court decision making expansion optional. (It was mandatory in the law passed by Congress.)

It is not difficult to find the evidence that the number of uninsured has fallen more than projected. In March of 2012, the Congressional Budget Office and the Joint Tax Committee projected that there would be 32 million uninsured non-elderly people in 2015. Estimates from the Kaiser Family Foundation put the actual number at just under 29 million. In other words, three million more people were getting insured as of last year (our most recent data) than had been projected before most of the ACA took effect.

So, if more people are getting insured than had been expected, how could the penalties have been a failure? I leave that one for the folks at the NYT responsible for this front page story.

I will add one other item in this story worth correcting. The piece includes a quote from Joseph J. Thorndike, the director of the tax history project at Tax Analysts, telling readers:

“If it [the mandate] were effective, we would have higher enrollment, and the population buying policies in the insurance exchange would be healthier and younger."

While we do care whether the people in the exchanges are healthy, it doesn't matter if they are young. In fact, healthy older people are far more profitable to insurers than healthy young people since their premiums are on average three times as high. There is a slight skewing against the young in the structure of premiums, but this has little consequence for the costs of the system.

As a practical matter, the people signing up on the exchanges are probably somewhat less healthy than had been expected, but this is largely because more people are getting insurance through employers than had been expected. The people who get insurance through their employers are more healthy than the population as a whole, since for the most part they are healthy enough to be working full-time jobs.

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The coverage of the new law in New York state, which would prohibit the short-term renting of whole apartments in New York City, has been difficult to understand. It presents as competing claims that it would increase the supply of affordable housing in New York City and that it will allow hotels to raise their fees. (This Washington Post piece is an excellent example.) Actually, it will likely do both.

The basic story is that the city has a large number of units that are subject to some form of rent control. The purpose is to keep these units affordable for people who don't work on Wall Street. This purpose is defeated if it is possible for either the landlord or tenant to rent out the unit through a service like Airbnb. If the landord is going the Airbnb route then it removes a unit of otherwise affordable housing from the market. If the tenant is going the Airbnb route then they are taking advantage of rent control to make a profit on arbitrage.

This is also bad news for the hotel industry, since people who might have otherwise stayed in hotels will instead stay in Airbnb units, thereby lowering occupancy rates and putting downward pressure on hotel prices. Therefore, there is absolutely nothing contradictory about the argument this measure will both increase the supply of affordable housing and benefit the hotel industry.

The long-run story may be somewhat different. In the long-run the construction of hotels is responsive to demand. If there is a high vacancy rate in the city's hotels, there will be fewer hotels built in future years. This will leave more land for the construction of apartments and other uses. In that case, the restriction on Airbnb rentals may not ultimately lead to an increase in the number of affordable housing units in the city (a financial transactions tax would be more effective), but is perfectly reasonable to believe that in the short-term this restriction on Airbnb rentals will both increase the supply of affordable housing units and benefit the hotel industry.                                        

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The usually excellent radio show This American Life may have misled listeners in its discussion of NAFTA and trade this week. The piece misrepresents both some of the key issues on trade and also economists' attitudes towards trade deals.

On the key issues, the piece notes that deals like NAFTA have led to job losses. It uses the figure of 700,000 jobs. It then compares this to the gains to the economy that are projected from lower tariff barriers and therefore lower priced goods.

What this discussion leaves out of the picture is the fact that the jobs lost are disproportionately for non-college educated workers. This puts downward pressure on the wages of non-college educated workers more generally as the displaced workers crowd into retail, services, and other sectors of the economy. So it is not just the 700,000 displaced workers who suffer as a result of this pattern of trade, it is non-college educated workers more generally who see their wages fall as a result of the deal.

This issue of wage inequality is important to remember when the segment tells listeners:

"In fact, there's this survey that the University of Chicago did where they asked all these economists all across the political spectrum, are Americans better off, on average, because of NAFTA?  95% said yes. 5% said they were unsure."

This might be taken as meaning that nearly all economists think that NAFTA benefited the country. Whether or not this is true, that is not the question they answered. This question asks the economists whether American "on average" are better off because of NAFTA. The question does not ask about distribution. This means that if NAFTA gave Bill Gates $100 billion and cost the rest of the country $99 billion, then the correct answer to this question is that NAFTA made the country on average better off. Even economists who think NAFTA was bad policy might think that it led to gains on average.

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Just kidding. Actually, insurance costs have slowed sharply in the years since the Affordable Care Act was passed, but it is unlikely many readers of the NYT would know this. Instead, it has focused on the large increase (not levels) in premium costs for the relatively small segment of the population insured on the exchanges. In keeping with this pattern, it gives us a front page piece telling readers about the 25 percent average increase in premiums facing people on the exchange this year. There are two points to keep in mind on this issue.

First, the focus on premiums is exclusively on the relatively small segment of the population getting insurance through the exchanges and specifically through the exchanges managed through the federal government. According to the latest numbers, 12.7 million people are now getting insurance through the exchanges (roughly 4.0 percent of the total population). This article refers to the premiums being paid by the 9.6 million people insured through the federally managed exchange (3.0 percent of the total population). Many states, such as California, have well run exchanges that have been more successful in keeping cost increases down.

There are two reasons that costs on the exchanges have been rising rapidly. The first is that insurers probably priced their policies too low initially. Even with the increases this year premium prices are still lower than had been expected in 2010 when the law was passed. In fact, there has been a sharp slowing in the pace of health care cost growth in the last six years. While not all of this was due to the ACA, it was undoubtedly a factor in this slowdown. In the years from 1999 to 2010, health care costs per insured person rose at an average annual rate of 5.7 percent. In the years from 2010 to 2015 costs per insured person rose at an average rate of just 2.3 percent.

HCsoendinginsuredperson1999 1016

Source: Bureau of Economic Analysis and author's calculations.

The other reason that premiums on the exchanges have risen rapidly is that more people are stiill getting insurance through employers than had been expected. The people who get insurance through employers tend to be healthier on average than the population as a whole. The Obama administration expected that more employers would stop providing insurance, sending their workers to get insurance on the exchanges. Since they have continued to provide insurance, the mix of people getting insurance through the exchanges is less healthy than had been expected.

Note that this has nothing to do with the "young invincible" story that had been widely touted in the years leading up to the ACA. The problem is not that healthy young people are not signing up. The problem is simply that healthy people of all ages are getting their insurance elsewhere. The overall percentage of the population getting insured is higher than projected, not lower as the young invincible silliness would imply.



Robert Salzberg reminds me that the vast majority of people buying insurance in the exchanges get subsidies. For most people these subsidies will fully cover these cost increases. Even after the increases noted in this NYT article, almost 80 percent of the people buying insurance in the exchanges will be able to get a plan for less than $100 per month.

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