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).

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

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

The NYT had an article reporting on how the Pew Research Center had discovered work done by the Economic Policy Institute for a quarter century (the middle class is hurting). At one point the piece compares the United States with France and Germany:

"The United States, including the middle class, has a higher median income than nearly all of Europe, even if the Continent is catching up. The median household income in the United States was $52,941 after taxes in 2010, compared with $41,047 in Germany and $41,076 in France."

When making such comparisons it is important to note that people in Europe work many few hours than people in the United States. Five or six weeks a year of vacation are standard. In addition, these countries all mandate paid sick days and paid family leave.

According to the OECD, the length of the average work year in the United States in 2015 was 1790 hours. It was 1482 hours in France (17 percent fewer hours) and just 1371 hours (23 percent fewer hours) in Germany. While these comparisons are not perfect (there are measurement issues) it is clear that people in these countries and the rest of Europe are working considerably fewer hours than people in the United States in large part as a conscious choice. This should be noted in any effort to compare them.

Add a comment

I see Noah Smith is struggling to explain "the mystery of labor's falling share of GDP." At the risk of jeopardizing good paying jobs for people with PhDs in economics, let me suggest that there is no mystery to explain.

Noah's piece features a graph showing the labor share of GDP declining from a range of 64 to 65 percent in the 1960s and early 1970s to just over 60 percent in the most recent data. He then gives us several possible explanations for this drop. Let me give an alternative one, there was no drop or at least not much of one.

Suppose we look at the labor share of net domestic product. This is GDP after removing depreciation. This makes sense since deprecation is not something to be divided by labor and capital. It is the amount of output needed to replace worn out plant and equipment. The story since 1960 is below. (For those wanted to check the numbers, labor compensation comes from NIPA Table 1.10, Line 2; NDP from Table 1.7.5, Line 30.)

Book2 20935 image001Source: Bureau of Economic Analysis.

As we can see, there is no pattern of decline over the last five decades. In fact, the labor share of net domestic product is higher today than it was in the sixties. The labor share did fall sharply in the Great Recession, but this seems easy to attribute to the extraordinary weakness of the labor market. The share is now recovering and my bet is, that if the Fed can be prevented from slamming on the brakes, the labor share will soon return to the levels we saw in most of the period from 1970 to the early 2000s.

Of course, this doesn't mean that there was not an upward redistribution of income, but rather that it was mostly from low- and middle-wage earners to high wage earners. The latter group including doctors and dentists, Wall Street financial-types, CEOs and top executives, and folks in a position to benefit from patent and copyright rents. (This is the topic of Rigged: How the Rules of Globalization and the Modern Economy Were Structured to Make the Rich Richer.)

So we should definitely be worried about the upward redistribution of income, but it is not a story of a shift from wages to profits. But undoubtedly we can keep many eocnomists employed for some time trying to explain something that did not happen.

Add a comment

It would have been worth including this point in an interesting column by Gretchen Morgenson noting how bank regulators remain close to the industry they regulate. The point is straightforward. If banks can make profits by writing deceptive contracts and finding ways to trick consumers, then they will devote resources to this effort, instead of concentrating on providing better services and reducing costs.

From the standpoint of the economy, devoting resources to ripping off consumers is a complete waste. It simply redistributes money from the rest of society to the banks. For this reason, people who care about economic growth should support measures that prevent predatory practices by the financial industry.

Add a comment

On the day of the March for Science the NYT ran a column by Chad Terhune, a senior correspondent for Kaiser Health News and California Healthline, telling readers that the economy was dependent on the health care sector to generate employment.

"The country has grown increasingly dependent on the health sector to power the economy, and it will be a tough habit to break. Thirty-five percent of the nation’s job growth has come from health care since the recession hit in late 2007, the single biggest sector for job creation."

Okay, this is the story that we don't have enough work to fully employ people. If we didn't waste huge amounts of labor doing needless tasks in the health care sector, then millions of workers would be out on the street having nothing to do.

That sounds really bad. It's also 180 degrees at odds with the conventional concern of economists, which is scarcity, an inadequate supply of labor. We see this story all the time in various forms. Just yesterday the Washington Post told readers about how the retirement of baby boomers was leading to a shortage of workers in construction and trucking.

More generally, the concern frequently expressed by the Washington Post, that an overly generous disability system is leading too many people to leave the labor force (actually we have the least generous system among rich countries), or concerns about budget deficits generally, are concerns about scarcity. In effect they mean that we don't have enough workers to do what needs to be done. (For the record, the data seem to agree with the scarcity folks for the now, with productivity growth at historic lows for the last decade.)

Anyhow, it is striking that we have seemingly serious people who are 180 degrees at odds on this one. Either the planet as a whole is getting warmer or cooler, it can't possible be both. Experts on climate science appear to be in agreement on this one. Unfortunately, in economic policy, we don't need seem to know which way is up.

Perhaps even worse, no one gives a damn.  

Add a comment

Germany is running an annual trade surplus of more than 8.0 percent of its GDP (equivalent to $1.6 trillion in the U.S. economy). This huge trade surplus translates into large deficits for the rest of the world. This is the largest single cause of the problems facing Greece, Italy, Spain, and even France. All are seeing their growth and employment seriously constrained as a result of the large German trade surpluses.

In the good old days before the euro, Germany's trade surplus would have led to a run-up in the value of its currency making its goods and services less competitive in the world economy, which would have diminished its surplus. However, now that Germany is in the euro, this mechanism for adjustment does not exist.

In the absence of an exchange rate adjustment, the mechanism for addressing the trade imbalance would be more rapid inflation and growth in Germany. The inflation would adjust relative prices and the growth would pull in more imports from Germany's trading partners. For reasons that seem largely grounded in superstition, Germany refuses to embark on a more rapid growth path (it is running a budget surplus) and continues to maintain a very low inflation rate. (The two are directly linked, since more rapid growth would be the mechanism for increasing the inflation rate.

Instead of giving these basic facts to readers, the NYT ran a Reuters article that reported the dispute as a silly he said/she said. It told readers:

"The Trump administration has criticized Germany for its large trade surpluses with the United States, while Germany has said its companies make quality products that customers want to buy."

The German response is of course meaningless. The fact that it has a trade surplus means that people want to buy its products at their current prices. If there was an adjustment process that made the German products, say 20 percent more expensive, many fewer people would want to buy them.

The piece also bizarrely asserts that the reform of the corporate income tax being considered by Republicans is "protectionist." It is not obviously protectionist in a way the refunding of the value added tax on exports is protectionist, and it is certainly not as obviously protectionist as patent and copyright protection. In effect, what Reuters was telling readers is that it doesn't like the tax proposal and they should not either.


Note: Typos corrected from an earlier post. Thanks to Robert Salzberg and MichiganMitch.

Add a comment

The Washington Post had an interesting piece on how employers in traditionally male-dominated industries, like construction and trucking, are increasingly looking to hire women. While opening up these relatively high-paying sectors to women is certainly good news, the argument in the article really does not make sense.

The piece asserts that employers are having difficulty finding qualified workers, in large part because of the retirement of large numbers of baby boomers. If employers are really having trouble finding workers then we should see rapidly rising wages in these sectors. We don't.

The piece focuses on iron workers, a skilled construction trade. According to the Bureau of Labor Statistics, the average real hourly wage among specialty trade contractors, the category that includes iron workers, has risen by less than 3.0 percent since its peak in 2002.

Average Hourly Earnings: Specialty Trade Contractors


construction specialty

Source: Bureau of Labor Statistics.

That is annual rate of increase of roughly 0.2 percent. That is not what we would expect in an occupation facing a labor shortage. (Earnings are expressed in 1982–84 dollars, multiply by roughly 2.5 to get 2017 dollars.) It's great that doors are being opened to women, but there is not evidence of a labor shortage in this sector.

The piece also included an interesting discussion of a looming worker shortage in the trucking industry:

"The American Trucking Associations, meanwhile, declared in a recent report that the industry needs to add almost 1 million new drivers by 2024 to replace retired drivers and keep up with demand."

In recent months there have been endless news stories about how self-driving vehicles were going to lead to mass unemployment in the trucking industry. This seems like more evidence of the which way is up problem in economics; we will either have a massive shortage of workers in the trucking industry or mass unemployment. Whichever, it clearly is a serious problem.

Add a comment

The New York Times ran a column by Michael Rips that inadvertently called attention to a major tax scam. Rips is unhappy because when artists and other creative workers donate their work to a museum or other charitable institution they can only deduct the value of the materials on their taxes. They cannot deduct the full market value of the work, nor any amount for their labor.

There is a simple reason why they can't deduct the value of their labor from their taxes, they never paid taxes on their labor in the first place. Suppose a doctor or a lawyer could do work for school and then deduct the value of this work without ever paying taxes on it. This would be a very nice subsidy to the doctors or lawyers, but it doesn't make sense as tax policy. Nor does it make sense to allow artists to deduct the market value of their work, if they had not already paid taxes on it.

But Rips does call attention to an important discrepancy in the tax code. Suppose a rich person buys a painting for $5 million and then donates it to a museum twenty years later when it has a market value of $50 million. The rich person is allowed to deduct the full market value of $50 million from their taxes, even though they only paid $5 million for the painting.

There is no obvious rationale for this sort of arrangement and it naturally encourages cheating. (Find me an appraiser who will say that my $40 million painting is worth $50 million and it gets me another $4 million off my taxes.) The more logical path would be to limit the person to deducting the original price of the work (perhaps with an inflation adjustment). The rich person could of course sell the painting, pay the capital gains tax, and then donate the proceeds to the museum, but then the museum doesn't get the painting.

Anyhow, we know it's hard to be rich, but there is no reason to have special tax breaks like the one Rips calls attention to.

Add a comment