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

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That's what the Washington Post told readers in reference to the drug BCG, a treatment for early-stage bladder cancer. According to the Post article, there is now a worldwide shortage of BCG. The reason is that the manufacturer, Merck, is producing at the capacity of its manufacturing facility, but the current price does not justify the expenditures associated with building a new facility. The piece tells us that Merck doesn't want to raise the price because it is worried that it will be seen like Martin Shkreli, who raised the price on single-source generic drugs by more than 5000 percent. (BCG is now off patent and available as a generic.)

While it is possible that Merck really fears that its public relations people are so incredibly inept that they would not be able to make the distinction between price increases to cover manufacturing costs and price increases to gouge consumers, it is also possible that Merck thought it would be good to create a shortage of a drug needed to treat a potentially fatal disease in order to support the case for higher drug prices.

The Post article doesn't give us a basis for assessing this alternative explanation. In fact, it never mentions the alternative explanation. This suggests that if the alternative explanation is, in fact, the true one (i.e. Merck wanted to create a shortage to create more public support for high drug prices), then Merck has been effective in advancing its goals.

 

 

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In talking about learning lessons from the collapse of the housing bubble and Great Recession, E.J. Dionne and leaders of the Wall Street-funded Third Way group both showed they have not learned any lessons. Dionne approvingly quotes Matt Bennet, Third Way's executive vice-president for public affairs:

"We need to be working to tame capitalism at this moment, because it is not functioning well, ..."

The quote implies that upward redistribution of the last four decades is simply the result of untamed capitalism. That may be a convenient view for the beneficiaries of this upward redistribution (hey, it was just the natural workings of the market), but it is 180 degrees at odds with reality.

The longer and stronger and patent and copyright protection of the last four decades, which transfers many hundreds of billions of dollars upward each year (and is the reason prescription drugs are expensive) had nothing to do with an untamed market. This was the result of deliberately structuring of the market by Bennet's political allies.

Similarly, the financial system has been structured to allow some people to get enormously rich while contributing nothing to the economy. This has included things like rewriting bankruptcy rules on home mortgages and derivatives to facilitate trading. It also means allowing private equity partners to ripoff public pension funds. And, it means that big banks enjoy too big to fail insurance.

And we structured our trade deals to put downward pressure on the wages of the 70 percent of the workforce without college degrees while protecting the most highly paid professionals, such as doctors and dentists. Also, beginning with Robert Rubin in the 1990s, we pushed for an over-valued dollar that put more downward pressure on the pay of less-educated workers.

It is absurd to pretend that the massive upward redistribution of the last four decades was just capitalism running wild. This upward redistribution was the deliberate design of the leadership of both political parties. (Yes, this is the topic of Rigged [it's free].)

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(This post first appeared on my Patreon site.)

A theme often repeated in the media is that Japan is suffering terribly because of its low birth rates and shrinking population. This has meant slow growth, labor shortages, and an enormous government debt.

Like many items that are now popular wisdom, the story is pretty much nonsense. Let’s start at the most basic measure, per capita GDP growth. Yeah, I said per capita GDP growth because insofar as we care about growth it is on a per person basis, not total growth. After all, Bangladesh has a GDP that is more than twice as large as Denmark’s, but would anyone in their right mind say that the people of Bangladesh enjoy a higher standard of living? (Denmark’s GDP is more than twelve times as high on a per capita basis.)

On a per capita basis, Japan’s economy has grown at an average annual rate of 1.4 percent since the collapse of its stock and real estate in 1990. That’s somewhat less than the 2.3 percent rate of the U.S. economy, but hardly seems like a disaster. By comparison, per capita growth has averaged just 0.8 percent annually since the collapse of the housing bubble in 2007 in the United States.

But per capita income is just the beginning of any story of comparative well-being. There are many other factors that are as important in determining people’s living standards. To take an obvious one that gets far too little attention, the length of the average work year has declined far more over this period in Japan than in the United States.

According to the OECD, the length of the average work year has declined by almost 16 percent between 1990 and 2017 (the last year for which data are available). By comparison, the length of the average work year in the United States has declined by less than 3 percent over this period. This is a really big deal in terms of peoples’ lives.

If we use a start point of a 40-hour workweek, for 50 weeks a year, a 16 percent reduction in hours would be equivalent to 8 weeks a year of additional vacation. Alternatively, it would mean a 6.4 hour reduction in the length of the average workweek, meaning that people would be working 33.6 hours a week rather than 40 hours. My guess is that most people in the United States would be very happy to see the same sort of reduction in work hours as in disaster Japan.

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That point would have been worth mentioning in a NYT article on the fact that most new manufacturing jobs have been in prosperous areas of the country rather than in areas that lost numbers of manufacturing jobs in the last decade. While the economy has been adding a moderate number of manufacturing jobs since 2011, the number of union members in the industry has continued to fall. 

According to the Bureau of Labor Statistics, there were 84,000 fewer union members employed in manufacturing in 2018 than in 2011. While there has been a modest increase in union employees in the last two years, the 2018 number was still 29,000 below the 2015 figure.

The decline in union membership is likely one of the main reasons that wage growth in manufacturing has lagged pay growth in the rest of the economy. The average hourly wage in manufacturing rose by just 2.2 percent over the last year compared to a 3.1 percent rate of increase for the overall average. In the prior twelve months, the average manufacturing wage increased by just 1.7 percent.

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An otherwise useful NYT article on the ending of Mario Draghi's tenure as the president of the European Central Bank (ECB) included the bizarre assertion that restraining inflation is "traditionally a central bank’s only task." This is not at all true, as central banks around the world have often acted to increase employment and maintain financial stability. In fact, the Federal Reserve Board quite explicitly has a dual mandate for price stability and high employment.

The piece is correct in asserting that the ECB charter makes price stability the bank's only goal, but the ECB is an outlier in this respect. It also is worth remembering that the ECB is a relatively new institution, just coming into existence in 1998, so it was not long able to stick to the single goal of price stability laid out in its charter. (In one of the great absurd moments in history Jean Claude Trichet, Draghi's predecessor, praised himself at his retirement event for keeping inflation under the ECB's 2.0 percent target. At the time, the euro was on the edge of collapse, with Greece, Italy, and Spain on the verge of being forced out of the euro.) 

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People may not have gotten that immediately picked this up from Ruchir Sharma's column complaining that not enough companies are going bankrupt, but this is the gist of the argument. Sharma complains that because of continuing fiscal stimulus (large budget deficits) and low-interest rates from central banks, too many zombie companies are able to survive.

He tells us:

"The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans.

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s."

Then we get to the meat of his argument:

"Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials, and labor."

Okay, so the argument is that healthy companies are being prevented from growing because they have to pay too much for capital, materials, and labor due to the zombie companies. Well, we can quickly dismiss the claim on capital and materials.

The cost of capital has never been lower, precisely because of low interest rates from central banks. In the United States, the interest rate on high yield bonds is just over 6.0 percent at present, compared to the rate of close to 9.0 percent in the boom years of the late 1990s.

Sharma's story is that if the Fed and other central banks raised interest rates, the interest rate for more marginal borrowers would fall? That might pass muster in the opinion pages of the NYT, but probably not anywhere else.

The same story applies to materials. What materials does Sharma think are excessively priced? Most major commodities are not above their inflation-adjusted prices from pre-recession levels. In the case of an important one, oil, the inflation-adjusted price is considerably lower than it was in 2007.

This just leaves labor. Certainly, if Sharma's zombies, comprising 16 percent of exchange-listed companies, went out of business we would have higher unemployment, which would in fact put downward pressure on wages. It is a bit hard to believe that this would lead to a surge of investment and productivity growth, but this is effectively Sharma's argument. Anyhow, most workers in the United States will likely be happier if no one in a policy position decides to test Sharma's argument.

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We know that because of the way it presented the results of a study of the impact of rent control in New York City. The article showed the average savings on rent-controlled units by borough, by income quartiles, and by race and ethnic group. It showed that the average savings were by far the largest on rent-controlled units in Manhattan, renters in the top quartile had the largest average savings, and that white beneficiaries of rent control saved far more on average than black, Hispanic, or Asian beneficiaries. It also showed that older tenants had higher average savings than younger ones.

While this makes rent control in New York City look like a bonanza for rich renters, and a nothing for everyone else, we actually cannot conclude this from the data the WSJ presented. The big problem is that it doesn't tell us the numbers in each group.

Suppose that a grand total of three white people, all high income and living in Manhattan, benefit from rent control. Everyone else is more moderate income and either black, Hispanic, or Asian. The results shown in the article would be entirely consistent with this picture, even if 1 million non-white, mostly low and moderate income people benefited from rent control.

While the number of wealthy white people who benefit from rent control is surely much more than 3, the WSJ chose not to tell us how many relatively well-to-do white people benefit from rent control, even though it has this data from its study. That could have been an oversight by the paper, or alternatively, it may have decided not to tell us how many wealthy white people benefited, relative to non-whites because the number was not very large.

In any case, without knowing the relative size of the groups, we have no basis for saying that wealthy whites are the main beneficiaries of rent control, as the piece implies. We do know that the ones living in rent-controlled units benefited most. However, the piece does tell us that people in the bottom quartile living in rent-controlled units saved an average of $2,400 a year on their rent and people living in the next quartile saved more than $2,700 a year. This is not a trivial sum to low and moderate-income households.

 

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Either that, or everyone else is. The centerpiece of Yang’s campaign is that technology is rapidly displacing labor, creating the prospect of mass unemployment in the not distant future.

As a factual matter, this is wrong about the present and recent past. Productivity growth, which measures the rate at which technology is displacing human labor, has averaged just 1.3 percent annually since 2005, the slowest pace on record. This compares to an annual growth rate of 3.0 percent in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. Furthermore, official projections, like those from the Congressional Budget Office and the Social Security Administration, show that productivity growth rates will remain slow for the indefinite future.

While it is possible that these projections will prove wrong, and that productivity growth will accelerate rapidly Yang is going against the overwhelming majority of economists with his view. It is also worth noting that the periods of rapid productivity growth, especially the Golden Age, were periods of low unemployment and rapid increases in wages. So, even if productivity growth did accelerate rapidly, there is little reason to believe it will lead to the sort of mass unemployment that Yang warns against.

It would have been worth some mention of these facts in this lengthy piece on Yang since it is likely that many Washington Post readers were unaware of them.

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That’s what Robert Samuelson tells us today in his column. That might seem a strange concern for a country that is ten times as densely populated as the United States, but Samuelson apparently sees it as a real nightmare.

After all, if its population keeps shrinking, Japan will face a severe labor shortage. They may have a hard time getting people to fill lower paying lower productivity jobs. For example, it might be hard to find workers to shove people onto Toyko’s overcrowded subways.

But it gets worse. As a result of the social services required by the elderly Japan has been running large deficits and built up an enormous debt.

“The mounting deficit spending has in turn ballooned Japan’s government debt to 226 percent of GDP — ‘the highest ever recorded in the OECD area’ and roughly twice the U.S. level.”

Yes, and the burden of this debt is absolutely crushing to the Japanese people. According to the I.M.F., Japan’s debt service burden will be equal to 0.1 percent of GDP this year, which is equal to roughly $20 billion in the U.S. economy. If the country continues on its current course, its debt service burden will turn negative in two years.

The issue here is that Japan has negative (nominal) interest rates. Lenders pay the Japanese government to borrow their money. As a result, the interest burden on Japan’s “higher recorded” debt is no burden whatsoever.

But wait, it gets worse. Samuelson tells us (citing economist Timothy Taylor):

Half of Japanese children born in 2007 are expected to live to 107.”

As we can see, the situation in Japan is pretty bad. Samuelson warns us that it could be our future too, which I suppose might be possible if we fix our health care system.

Anyhow, I will have more to say about Japan next week, but Samuelson and his clique really need to do a better job of finding a bogey man.

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Elizabeth Warren’s proposal to raise the value of the Chinese yuan and other currencies against the dollar is not getting good reviews in the media from economists. As can be expected, some of the arguments are pretty strange.

As the usually astute Noah Smith tells it in his Bloomberg piece, the problem with the trade deficit is:

“U.S. consumers are consistently living beyond their means, which seems unsustainable.”

The implication is that if the trade deficit were lower than we would be forced to cut back consumption. But the major problem the United States has faced over the last decade, according to many economists, is “secular stagnation,” which is an obscure way of saying, not enough demand.

Contrary to what Smith tells us, U.S. consumers are not living beyond their means, rather we actually need them to spend more money to bring the economy to full employment. To be more precise, we need them to spend more in the domestic economy, to increase demand here as opposed to in our trading partners. (We can also bring the economy to full employment by having the government spend more money on things like health care or a green new deal.)

Smith also disagrees with Warren’s mechanism for getting the dollar down, which involves a mixture of negotiations and threats of countervailing measures. The idea is that the biggest actor is China, who for some reason it is assumed would never agree to raise the value of its currency. CNN raises similar concerns. This view seems badly off the mark.

First, it is assumed in both pieces that China is no longer acting to deliberately keep down the value of the yuan against the dollar, even though most economists now concede that it deliberately depressed the value of its currency to maintain large trade surpluses in the last decade. (They did not acknowledge China’s currency management at the time.)

It is wrong to claim that China is not now acting to keep down the value of the yuan. While it is no longer buying large amounts of dollars and other currencies, it holds a stock of more than $3 trillion in reserves, which is well over $4 trillion if we add in its sovereign wealth fund.

This huge stock of foreign assets has the effect of depressing the value of the yuan against the dollar in the same way that the Fed’s holding of more than $3 trillion in assets helps to keep down interest rates. While few economists question that the Fed’s holding of assets leads to lower long-term rates than would otherwise be the case, they seem to deny that China’s holding of a large stock of foreign assets has similar effects in currency markets.

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