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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 roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Outlawing items like marijuana or alcohol invariably leads to black markets and corruption. Since there is much money to be made by selling these products in violation of the law, many people will follow the money and break the law. They will also corrupt the legal system in the process, making payments to people in […]
Outlawing items like marijuana or alcohol invariably leads to black markets and corruption. Since there is much money to be made by selling these products in violation of the law, many people will follow the money and break the law. They will also corrupt the legal system in the process, making payments to people in […]

The Fed’s 2.0 Percent Inflation Target

Everyone recognizes that inflation has slowed sharply from the peaks hit in the spring of 2022. The question often asked is whether the inflation rate has dropped to the Fed’s 2.0 percent target. This requires a bit more careful thinking than it has received. Before directly addressing this issue, let me briefly deal with a […]
Everyone recognizes that inflation has slowed sharply from the peaks hit in the spring of 2022. The question often asked is whether the inflation rate has dropped to the Fed’s 2.0 percent target. This requires a bit more careful thinking than it has received. Before directly addressing this issue, let me briefly deal with a […]
For the 43,578th time, the Washington Post called for cuts to Social Security and Medicare. While the paper rejects Republican efforts to use the debt-ceiling hostage taking route, it tells readers: “Yet the discussion [about the programs’ finances] needs to happen sometime, and sooner rather than later. These entitlements — which already account for about […]
For the 43,578th time, the Washington Post called for cuts to Social Security and Medicare. While the paper rejects Republican efforts to use the debt-ceiling hostage taking route, it tells readers: “Yet the discussion [about the programs’ finances] needs to happen sometime, and sooner rather than later. These entitlements — which already account for about […]

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Vaccine Nationalism: China’s and Ours

In the last year or so there have been many people who complained about China’s “vaccine nationalism.” This generally meant the country refused to approve the U.S. mRNA vaccines. The claim was that our mRNA vaccines were far superior to China’s old-fashioned dead virus vaccines. The argument went that the country needed to maintain its zero Covid policy, otherwise, the pandemic would devastate its unprotected population.

Well, we have now gotten the opportunity to test that claim. There is little doubt that the abrupt ending of pandemic restrictions led to much death and suffering in China. The government is not being open about the pandemic toll, but even the high-end estimates put the number of deaths at around 1 million.

That is a terrible number of lives lost, but the official count in the U.S. is over 1.1 million deaths.  The number of Covid-related excess deaths that were not recorded would push this figure at least 200,000 higher. With four times the population, if China were to be similarly hard-hit it would be seeing well over 5 million deaths.

The current omicron strain is less fatal than the original alpha and delta strains, but plenty of people, including vaccinated people, have died from the omicron strain. Clearly the Chinese vaccines have done a reasonably job protecting China’s population.

We didn’t need this gigantic test to know that China’s vaccines were effective. We actually had some good data from studies that compared the effectiveness of China’s vaccines with the mRNA vaccines. While one study found that the Chinese vaccines were somewhat less effective, they still would prevent the overwhelming majority of the population from getting seriously ill from the disease. The other study found that with a booster shot, one of the Chinese vaccines was actually trivially more effective in preventing death in older people.

The major issue with China was not that it lacked an effective vaccine, its biggest problem in coping with the opening of the country was its failure to get much of its elderly population fully vaccinated and boosted. It’s not clear that President Xi gave a damn about the advice he was getting from our elite policy types, but their complaint that vaccine nationalism was keeping him from buying our mRNA vaccines was nonsense.

If they wanted to give useful advice to Xi, they would have harped on his failure to get China’s elderly population fully vaccinated. This is something that could have in principle been remedied fairly quickly. The idea of quickly shipping over billions of doses of Pfizer or Moderna’s vaccines was the sort of thing that would be laughed at anywhere other than the pages of the Washington Post.    

Furthermore, the obsession with mRNA vaccines is incredibly silly. There are a number of non-mRNA vaccines that have been widely administered to billions of people around the world, providing protection that is comparable to the mRNA vaccines. Most notable in this category is the Oxford-AstraZeneca vaccine, which was widely used in Europe. Our elite policy types have not felt the need to denounce European countries for vaccine nationalism for their failure to ensure that their populations received a mRNA vaccine.    

The fact is that we have done a horrible job dealing with the pandemic. Our policy was always more focused on making Moderna billionaires than protecting people here and around the world from the pandemic. If saving lives had been the focus of policy we would have worked together with researchers around the world (including China), pooling technology and allowing anyone anywhere in the world to produce any vaccines that were determined to be effective. Not only would more rapid dispersion of vaccines, along with tests and treatments, have saved lives in developing countries, by slowing the spread it may have prevented the development of new strains of the pandemic that led to massive waves of infections here.  

And, just to be clear, this is not a question of relying on the market rather than government. In spite of what we hear from the policy types who dominate public debate, government-granted patent monopolies, and related forms of intellectual property, are not the free market. These are policies that we have chosen for promoting innovation, they do not amount to leaving things to the market, even if their beneficiaries would like us to believe otherwise.

 

 

 

 

In the last year or so there have been many people who complained about China’s “vaccine nationalism.” This generally meant the country refused to approve the U.S. mRNA vaccines. The claim was that our mRNA vaccines were far superior to China’s old-fashioned dead virus vaccines. The argument went that the country needed to maintain its zero Covid policy, otherwise, the pandemic would devastate its unprotected population.

Well, we have now gotten the opportunity to test that claim. There is little doubt that the abrupt ending of pandemic restrictions led to much death and suffering in China. The government is not being open about the pandemic toll, but even the high-end estimates put the number of deaths at around 1 million.

That is a terrible number of lives lost, but the official count in the U.S. is over 1.1 million deaths.  The number of Covid-related excess deaths that were not recorded would push this figure at least 200,000 higher. With four times the population, if China were to be similarly hard-hit it would be seeing well over 5 million deaths.

The current omicron strain is less fatal than the original alpha and delta strains, but plenty of people, including vaccinated people, have died from the omicron strain. Clearly the Chinese vaccines have done a reasonably job protecting China’s population.

We didn’t need this gigantic test to know that China’s vaccines were effective. We actually had some good data from studies that compared the effectiveness of China’s vaccines with the mRNA vaccines. While one study found that the Chinese vaccines were somewhat less effective, they still would prevent the overwhelming majority of the population from getting seriously ill from the disease. The other study found that with a booster shot, one of the Chinese vaccines was actually trivially more effective in preventing death in older people.

The major issue with China was not that it lacked an effective vaccine, its biggest problem in coping with the opening of the country was its failure to get much of its elderly population fully vaccinated and boosted. It’s not clear that President Xi gave a damn about the advice he was getting from our elite policy types, but their complaint that vaccine nationalism was keeping him from buying our mRNA vaccines was nonsense.

If they wanted to give useful advice to Xi, they would have harped on his failure to get China’s elderly population fully vaccinated. This is something that could have in principle been remedied fairly quickly. The idea of quickly shipping over billions of doses of Pfizer or Moderna’s vaccines was the sort of thing that would be laughed at anywhere other than the pages of the Washington Post.    

Furthermore, the obsession with mRNA vaccines is incredibly silly. There are a number of non-mRNA vaccines that have been widely administered to billions of people around the world, providing protection that is comparable to the mRNA vaccines. Most notable in this category is the Oxford-AstraZeneca vaccine, which was widely used in Europe. Our elite policy types have not felt the need to denounce European countries for vaccine nationalism for their failure to ensure that their populations received a mRNA vaccine.    

The fact is that we have done a horrible job dealing with the pandemic. Our policy was always more focused on making Moderna billionaires than protecting people here and around the world from the pandemic. If saving lives had been the focus of policy we would have worked together with researchers around the world (including China), pooling technology and allowing anyone anywhere in the world to produce any vaccines that were determined to be effective. Not only would more rapid dispersion of vaccines, along with tests and treatments, have saved lives in developing countries, by slowing the spread it may have prevented the development of new strains of the pandemic that led to massive waves of infections here.  

And, just to be clear, this is not a question of relying on the market rather than government. In spite of what we hear from the policy types who dominate public debate, government-granted patent monopolies, and related forms of intellectual property, are not the free market. These are policies that we have chosen for promoting innovation, they do not amount to leaving things to the market, even if their beneficiaries would like us to believe otherwise.

 

 

 

 

The January report showed that the economy added 517,000 jobs in January, far more than most analysts had expected. The household survey showed the unemployment rate dipping down to 3.4 percent, the lowest rate since 1969. However, it showed a gain in employment of just 84,000 after removing the effect of new population controls.

It is not unusual to see large monthly gaps between job growth in the establishment survey and employment growth in the household survey, so the January gap should not bother us. However, there has been a large gap over last year. The establishment survey shows a gain of 4,970,000 since January of 2022, while the household survey has shown an increase in employment of just 2,760,000, leaving a gap of more than 2.2 million.

The main definitional differences don’t change the picture much. Self-employment is up by 250,000 over the last year. This would make the gap larger, since this would contribute to the growth in employment in the household survey, but not show up as payroll jobs in the establishment survey. There was also an increase in private household employment of 95,000, which would get included in the household survey, but not show up in the establishment data.

Going the other way, agricultural employment is down by 20,000, which would reduce employment in the household survey, but not affect the establishment survey, which only measures non-farm employment. The number of multiple job holders is up by 540,000 over the last year. These multiple jobs would count in the establishment survey (unless they are self-employed), but would not add to the number of employed in the household survey.  

Netting these out would reduce the gap by 260,000, which still leaves job growth in the establishment survey over the last year 1,940,000 above employment growth in the household survey. Having followed the monthly jobs data closely for more than three decades, I have always been partial to the establishment survey.

It is a much larger survey and its sample is employers, that typically have many employees, rather than households that typically have one or two potential workers. In past years, gaps have almost always been closed on the household side, with changes in annual population controls eliminating most of the gap between the surveys.

What If the Household Survey Is Right?

It is at least worth considering the possibility that the household survey could be closer to the mark for 2022. There are two important data points that raise this possibility.

The first is data from the Quarterly Census of Employment and Wages (QCEW). The QCEW relies on unemployment insurance filings, which give a virtual census of payroll employment. The establishment survey is benchmarked to QCEW annually, but the benchmark takes place with the January data, using the QCEW data from the first quarter of the prior year. The QCEW data from March 2022 were just included in the establishment survey, increasing employment growth in the year from March 2021 to March 2022 by 568,000.

We now have data from the QCEW for the second quarter of 2022. The Philadelphia Fed has been doing analysis of these reports when they are issued. Its analysis shows an increase in jobs in the second quarter of just 10,500. That compares to an increase of 1,121,500 jobs in the establishment survey.[1] There are reasons to view the Philadelphia Fed analysis with some skepticism. They have not done it for very many years, and the seasonal adjustment factors following the pandemic will undoubtedly be unusual.

Nonetheless, it is certainly possible that its analysis is close to the mark, implying an overstatement of job growth in the establishment survey of more than 1.1 million in just the second quarter. That would go far toward bringing the establishment and household surveys more in line.

The other important data point suggesting the establishment survey may be overstating job growth is the gap in 2022 between the growth in nominal wages implied by the establishment survey (reported aggregate hours multiplied by the growth in average hourly earnings [AHE]), and the growth in social insurance contributions (mostly Social Security and Medicare). Ordinarily these series follow each other closely as shown below.

 

Source: BEA, BLS, and author’s calculations.

In principle, the growth in social insurance contributions should follow the growth in nominal wages with the exception that changes in the share of earnings going to the self-employed will not be picked up in this wage measure. Also, insofar as a larger share of wage income goes above the cutoff for the Social Security tax, there would also be a gap with nominal wage growth exceeding the growth in social insurance contributions.

From the start of the AHE series in 2008 to the first quarter of 2022, nominal wages as calculated by this method increased by 78.7 percent. Social insurance contributions increased by 78.1 percent, a gap averaging 0.04 percentage points a year. The short-term gaps shown in the graph are easily explained by government suspensions or delays of a portion of the Social Security tax following the Great Recession and in the pandemic.

However, in the three quarters from the first quarter of 2022 to the fourth quarter of 2022 nominal wages increased by 5.5 percent. This compares to just a 4.0 percent increase in social insurance contributions. At an annualized rate, social insurance contributions grew 5.4 over the last three quarters of 2022, while nominal wages grew at a 7.4 percent rate.

Employment in the household survey grew 1.9 percent in the year from January 2022 to January 2023. Taking 75 percent of this annual growth for the three quarters between the first quarter and the fourth quarter puts the growth rate of employment at 1.5 percent. The length of the average workweek declined from 34.67 hours in the first quarter to 34.5 hours in the fourth quarter, a drop of 0.5 percent. This would imply growth in aggregate hours of roughly 1.0 percent based on the household survey’s employment numbers. Working from the 4.0 percent increase in social insurance contributions over this period, this would imply 3.0 percent growth in the nominal wage over the three quarters, or 4.0 percent at an annual rate. That might be a bit low, but not implausible.

 

Does the Growth Reported in the Household Survey Make Sense?

On its face, the 2.76 million jobs reported in the household survey would seem a reasonable figure for job growth, except for the comparison with the extraordinary growth shown in the establishment data. The unemployment rate had fallen to 4.0 percent by January of last year and it was already down to 3.6 percent by March.

Job growth averaged just 2.2 million in the four years before the pandemic, a period in which the unemployment rate fell from 4.8 percent to 3.5 percent. It is not clear that we should have expected substantially more rapid job growth in a period where the unemployment rate was already quite low by historical standards, and not far above the pre-pandemic low.

In addition, we are now seeing the peak years for retirement of the baby boom cohorts. Also, immigration was sharply curtailed during the pandemic.

Putting these factors together, the employment growth shown in the household survey is entirely consistent with the drop in unemployment it shows. If the job growth in the establishment survey is anywhere close to being right, it would imply a much larger drop in unemployment and/or a surge in employment either from an unmeasured increase in labor force participation or a growth in the population that has not been picked up in the Census Bureau’s data for some reason. From this standpoint, the household survey numbers would seem to be more plausible than the extraordinary job growth reported in the establishment data.

 

Why Would the Establishment Survey Suddenly Be So Wrong?

There is not an obvious explanation as to why the establishment survey would suddenly start hugely overstating job growth in 2022. The most obvious source of error would be its birth-death model for incorporating the impact of new firms and firms going out of business. When the economy went into a free fall in 2008, following the collapse of Lehman, it was easy to see that this model was overstating job growth. It was imputing a similar number of jobs to the same months in 2006 and 2007, when the economy was still growing at a healthy pace.

The birth-death imputations for 2022 don’t seem obviously out-of-line in the same way. That doesn’t mean that they may not still be overstating growth, but there is not an apparent error as was the case in the fall of 2008 and winter of 2009. (The benchmark revision for March 2009 was -902,000.)

One way to investigate the possible source of error would be to compare job growth by industry in the CES data for the second quarter of 2022 with the job growth reported in the QCEW. Looking at the restaurant sector, the CES reports a job gain of 588,000 between the first and second quarters of last year. The QCEW shows an increase 490,000 for the same period. (These data are not seasonally adjusted.) It would be possible to go through the data sector by sector to see if there is a pattern to the gaps in reported job growth. This can also be done with the state level data. Anyhow, if the CES proves to be substantially overstating job growth, we should know this when we have the preliminary benchmark revision this summer and have a better idea of possible causes.

The Meaning of Overstated Job Growth in the CES

If the household survey turns out to be giving us a more accurate measure of the job growth, it would radically alter our view of the state of the economy. While we may not have a good sense of what job growth was in a specific month, if we are on a pace that gives us 2.76 million jobs over the course of a year (230,000 a month), then the economy is not adding jobs at a pace that is necessarily unsustainable. The fears over inflation prompted by the January figure of 517,000 would be much more contained if the number were someone near 230,000.

This slower pace of job growth is also more consistent with the picture we have seen of slower wage growth. The rate of wage growth slowed sharply over the course of 2022. For the month of January, it was just 0.3 percent. That seems hard to reconcile with a labor market that added 4,970,000 jobs over the course of a year, when the unemployment rate had already fallen to 4.0 percent.

A slower pace of job growth would also radically alter the picture we now have of productivity growth over the course of 2022. Reported productivity growth was negative in the first half of 2022, the worst two quarter performance in more than half a century. While we likely did see very poor productivity growth, due to both supply chain problems and rapid turnover in the labor force, if job growth was considerably slower than indicated in the CES, then productivity growth would be correspondingly better.

This is a big deal since it could mean that we are in fact on a path of more rapid productivity growth than we were seeing before the pandemic. That would both go far towards alleviating inflationary pressures and allowing more rapid gains in living standards.

Conclusion: The Household Survey Could Be Right

I would be reluctant to accept the idea that the household survey is giving us a better measure of job growth than the establishment survey. Over time, there is zero question that the establishment survey has a far better track record.

However, the job growth reported in the establishment survey in 2022 is so extraordinary that it really is necessary to question its accuracy. The employment growth shown in the household survey would still be quite impressive, especially in the context of an economy that started the year at a historically low rate of unemployment. We will know the answer to this question when we get the preliminary benchmark data in August, but for now, we should be open-minded to accepting the possibility that the household survey is closer to the mark.

 

[1] These figures are actually for the sum of state job growth, which is slightly different from the national job growth shown in the establishment survey, primarily due to differences in the individual state and national seasonal adjustment factors. It is appropriate to compare the sum of the states in the establishment survey with the QCEW data, since the Philadelphia Fed was using state adjustment factors in its calculations.

The January report showed that the economy added 517,000 jobs in January, far more than most analysts had expected. The household survey showed the unemployment rate dipping down to 3.4 percent, the lowest rate since 1969. However, it showed a gain in employment of just 84,000 after removing the effect of new population controls.

It is not unusual to see large monthly gaps between job growth in the establishment survey and employment growth in the household survey, so the January gap should not bother us. However, there has been a large gap over last year. The establishment survey shows a gain of 4,970,000 since January of 2022, while the household survey has shown an increase in employment of just 2,760,000, leaving a gap of more than 2.2 million.

The main definitional differences don’t change the picture much. Self-employment is up by 250,000 over the last year. This would make the gap larger, since this would contribute to the growth in employment in the household survey, but not show up as payroll jobs in the establishment survey. There was also an increase in private household employment of 95,000, which would get included in the household survey, but not show up in the establishment data.

Going the other way, agricultural employment is down by 20,000, which would reduce employment in the household survey, but not affect the establishment survey, which only measures non-farm employment. The number of multiple job holders is up by 540,000 over the last year. These multiple jobs would count in the establishment survey (unless they are self-employed), but would not add to the number of employed in the household survey.  

Netting these out would reduce the gap by 260,000, which still leaves job growth in the establishment survey over the last year 1,940,000 above employment growth in the household survey. Having followed the monthly jobs data closely for more than three decades, I have always been partial to the establishment survey.

It is a much larger survey and its sample is employers, that typically have many employees, rather than households that typically have one or two potential workers. In past years, gaps have almost always been closed on the household side, with changes in annual population controls eliminating most of the gap between the surveys.

What If the Household Survey Is Right?

It is at least worth considering the possibility that the household survey could be closer to the mark for 2022. There are two important data points that raise this possibility.

The first is data from the Quarterly Census of Employment and Wages (QCEW). The QCEW relies on unemployment insurance filings, which give a virtual census of payroll employment. The establishment survey is benchmarked to QCEW annually, but the benchmark takes place with the January data, using the QCEW data from the first quarter of the prior year. The QCEW data from March 2022 were just included in the establishment survey, increasing employment growth in the year from March 2021 to March 2022 by 568,000.

We now have data from the QCEW for the second quarter of 2022. The Philadelphia Fed has been doing analysis of these reports when they are issued. Its analysis shows an increase in jobs in the second quarter of just 10,500. That compares to an increase of 1,121,500 jobs in the establishment survey.[1] There are reasons to view the Philadelphia Fed analysis with some skepticism. They have not done it for very many years, and the seasonal adjustment factors following the pandemic will undoubtedly be unusual.

Nonetheless, it is certainly possible that its analysis is close to the mark, implying an overstatement of job growth in the establishment survey of more than 1.1 million in just the second quarter. That would go far toward bringing the establishment and household surveys more in line.

The other important data point suggesting the establishment survey may be overstating job growth is the gap in 2022 between the growth in nominal wages implied by the establishment survey (reported aggregate hours multiplied by the growth in average hourly earnings [AHE]), and the growth in social insurance contributions (mostly Social Security and Medicare). Ordinarily these series follow each other closely as shown below.

 

Source: BEA, BLS, and author’s calculations.

In principle, the growth in social insurance contributions should follow the growth in nominal wages with the exception that changes in the share of earnings going to the self-employed will not be picked up in this wage measure. Also, insofar as a larger share of wage income goes above the cutoff for the Social Security tax, there would also be a gap with nominal wage growth exceeding the growth in social insurance contributions.

From the start of the AHE series in 2008 to the first quarter of 2022, nominal wages as calculated by this method increased by 78.7 percent. Social insurance contributions increased by 78.1 percent, a gap averaging 0.04 percentage points a year. The short-term gaps shown in the graph are easily explained by government suspensions or delays of a portion of the Social Security tax following the Great Recession and in the pandemic.

However, in the three quarters from the first quarter of 2022 to the fourth quarter of 2022 nominal wages increased by 5.5 percent. This compares to just a 4.0 percent increase in social insurance contributions. At an annualized rate, social insurance contributions grew 5.4 over the last three quarters of 2022, while nominal wages grew at a 7.4 percent rate.

Employment in the household survey grew 1.9 percent in the year from January 2022 to January 2023. Taking 75 percent of this annual growth for the three quarters between the first quarter and the fourth quarter puts the growth rate of employment at 1.5 percent. The length of the average workweek declined from 34.67 hours in the first quarter to 34.5 hours in the fourth quarter, a drop of 0.5 percent. This would imply growth in aggregate hours of roughly 1.0 percent based on the household survey’s employment numbers. Working from the 4.0 percent increase in social insurance contributions over this period, this would imply 3.0 percent growth in the nominal wage over the three quarters, or 4.0 percent at an annual rate. That might be a bit low, but not implausible.

 

Does the Growth Reported in the Household Survey Make Sense?

On its face, the 2.76 million jobs reported in the household survey would seem a reasonable figure for job growth, except for the comparison with the extraordinary growth shown in the establishment data. The unemployment rate had fallen to 4.0 percent by January of last year and it was already down to 3.6 percent by March.

Job growth averaged just 2.2 million in the four years before the pandemic, a period in which the unemployment rate fell from 4.8 percent to 3.5 percent. It is not clear that we should have expected substantially more rapid job growth in a period where the unemployment rate was already quite low by historical standards, and not far above the pre-pandemic low.

In addition, we are now seeing the peak years for retirement of the baby boom cohorts. Also, immigration was sharply curtailed during the pandemic.

Putting these factors together, the employment growth shown in the household survey is entirely consistent with the drop in unemployment it shows. If the job growth in the establishment survey is anywhere close to being right, it would imply a much larger drop in unemployment and/or a surge in employment either from an unmeasured increase in labor force participation or a growth in the population that has not been picked up in the Census Bureau’s data for some reason. From this standpoint, the household survey numbers would seem to be more plausible than the extraordinary job growth reported in the establishment data.

 

Why Would the Establishment Survey Suddenly Be So Wrong?

There is not an obvious explanation as to why the establishment survey would suddenly start hugely overstating job growth in 2022. The most obvious source of error would be its birth-death model for incorporating the impact of new firms and firms going out of business. When the economy went into a free fall in 2008, following the collapse of Lehman, it was easy to see that this model was overstating job growth. It was imputing a similar number of jobs to the same months in 2006 and 2007, when the economy was still growing at a healthy pace.

The birth-death imputations for 2022 don’t seem obviously out-of-line in the same way. That doesn’t mean that they may not still be overstating growth, but there is not an apparent error as was the case in the fall of 2008 and winter of 2009. (The benchmark revision for March 2009 was -902,000.)

One way to investigate the possible source of error would be to compare job growth by industry in the CES data for the second quarter of 2022 with the job growth reported in the QCEW. Looking at the restaurant sector, the CES reports a job gain of 588,000 between the first and second quarters of last year. The QCEW shows an increase 490,000 for the same period. (These data are not seasonally adjusted.) It would be possible to go through the data sector by sector to see if there is a pattern to the gaps in reported job growth. This can also be done with the state level data. Anyhow, if the CES proves to be substantially overstating job growth, we should know this when we have the preliminary benchmark revision this summer and have a better idea of possible causes.

The Meaning of Overstated Job Growth in the CES

If the household survey turns out to be giving us a more accurate measure of the job growth, it would radically alter our view of the state of the economy. While we may not have a good sense of what job growth was in a specific month, if we are on a pace that gives us 2.76 million jobs over the course of a year (230,000 a month), then the economy is not adding jobs at a pace that is necessarily unsustainable. The fears over inflation prompted by the January figure of 517,000 would be much more contained if the number were someone near 230,000.

This slower pace of job growth is also more consistent with the picture we have seen of slower wage growth. The rate of wage growth slowed sharply over the course of 2022. For the month of January, it was just 0.3 percent. That seems hard to reconcile with a labor market that added 4,970,000 jobs over the course of a year, when the unemployment rate had already fallen to 4.0 percent.

A slower pace of job growth would also radically alter the picture we now have of productivity growth over the course of 2022. Reported productivity growth was negative in the first half of 2022, the worst two quarter performance in more than half a century. While we likely did see very poor productivity growth, due to both supply chain problems and rapid turnover in the labor force, if job growth was considerably slower than indicated in the CES, then productivity growth would be correspondingly better.

This is a big deal since it could mean that we are in fact on a path of more rapid productivity growth than we were seeing before the pandemic. That would both go far towards alleviating inflationary pressures and allowing more rapid gains in living standards.

Conclusion: The Household Survey Could Be Right

I would be reluctant to accept the idea that the household survey is giving us a better measure of job growth than the establishment survey. Over time, there is zero question that the establishment survey has a far better track record.

However, the job growth reported in the establishment survey in 2022 is so extraordinary that it really is necessary to question its accuracy. The employment growth shown in the household survey would still be quite impressive, especially in the context of an economy that started the year at a historically low rate of unemployment. We will know the answer to this question when we get the preliminary benchmark data in August, but for now, we should be open-minded to accepting the possibility that the household survey is closer to the mark.

 

[1] These figures are actually for the sum of state job growth, which is slightly different from the national job growth shown in the establishment survey, primarily due to differences in the individual state and national seasonal adjustment factors. It is appropriate to compare the sum of the states in the establishment survey with the QCEW data, since the Philadelphia Fed was using state adjustment factors in its calculations.

Maybe you have some idea, but I sure as hell don’t. I was struck by seeing this number in a column on why the birth rate in South Korea has declined so much. While it is a very interesting column, this sentence left me scratching my head:

Over 16 years, 280 trillion won ($210 billion) has been poured into programs encouraging procreation, such as a monthly allowance for parents of newborns.

I suspect I have more knowledge of Korea’s economy than most NYT readers, but offhand I really had no idea of how large a commitment this spending is. I had to go to the IMF’s website and find that Korea’s GDP over the last sixteen years has been $22.9 trillion, which puts this spending at a bit more than 0.9 percent of GDP.

This would be the equivalent of around $2 trillion in spending in the United States, which is a pretty sizable commitment. It would have been useful if the NYT had insisted that the number be expressed as a share of GDP or personal income or some measure that would be meaningful to a substantial portion of its readers.

As it is, I doubt that almost any NYT reader had much sense of whether this money was a big or small commitment. Presumably, the intent was to convey information to readers. This figure did not.

Maybe you have some idea, but I sure as hell don’t. I was struck by seeing this number in a column on why the birth rate in South Korea has declined so much. While it is a very interesting column, this sentence left me scratching my head:

Over 16 years, 280 trillion won ($210 billion) has been poured into programs encouraging procreation, such as a monthly allowance for parents of newborns.

I suspect I have more knowledge of Korea’s economy than most NYT readers, but offhand I really had no idea of how large a commitment this spending is. I had to go to the IMF’s website and find that Korea’s GDP over the last sixteen years has been $22.9 trillion, which puts this spending at a bit more than 0.9 percent of GDP.

This would be the equivalent of around $2 trillion in spending in the United States, which is a pretty sizable commitment. It would have been useful if the NYT had insisted that the number be expressed as a share of GDP or personal income or some measure that would be meaningful to a substantial portion of its readers.

As it is, I doubt that almost any NYT reader had much sense of whether this money was a big or small commitment. Presumably, the intent was to convey information to readers. This figure did not.

The New York Times had an interesting article on how the drug company AbbVie made billions of dollars on the arthritis drug Humira by exploiting the patent system. AbbVie’s strategy was to file hundreds of patents on Humira, long after the drug had already been brought to market. This meant that even after its main patents had expired it would still have other patents that were still in effect.

The legal status of these secondary patents may have been dubious, but the company was prepared to spend large amounts of money suing potential generic competitors for patent infringement. This threat was sufficiently credible to get competitors to agree to delay entry for many years, and also to pay a licensing fee after they did enter the market.

This is now a common pattern for drug companies to protect their blockbuster drugs. There is a fundamental asymmetry in contesting infringement lawsuits.

The patent holder is suing to maintain a patent that allows it to sell its drug at the monopoly price. The potential generic competitor is trying to get the right to sell a drug at the free market price. Since there is so much more money at stake for the patent holder, it can profitably deploy far more resources to press its case than a generic competitor. That is why it is common for potential generic competitors to agree to delaying entry or just give up altogether.

This is the sort of corruption that economics predicts will result from government-granted patent monopolies.  

The New York Times had an interesting article on how the drug company AbbVie made billions of dollars on the arthritis drug Humira by exploiting the patent system. AbbVie’s strategy was to file hundreds of patents on Humira, long after the drug had already been brought to market. This meant that even after its main patents had expired it would still have other patents that were still in effect.

The legal status of these secondary patents may have been dubious, but the company was prepared to spend large amounts of money suing potential generic competitors for patent infringement. This threat was sufficiently credible to get competitors to agree to delay entry for many years, and also to pay a licensing fee after they did enter the market.

This is now a common pattern for drug companies to protect their blockbuster drugs. There is a fundamental asymmetry in contesting infringement lawsuits.

The patent holder is suing to maintain a patent that allows it to sell its drug at the monopoly price. The potential generic competitor is trying to get the right to sell a drug at the free market price. Since there is so much more money at stake for the patent holder, it can profitably deploy far more resources to press its case than a generic competitor. That is why it is common for potential generic competitors to agree to delaying entry or just give up altogether.

This is the sort of corruption that economics predicts will result from government-granted patent monopolies.  

While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. To start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slightly stronger 3.1 percent in the third quarter. This is very far from the negative growth we see in a recession.

When we look at the individual components, the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained, and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.

However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of a negative impact in future quarters. Housing stands out here, and the drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third-quarter growth by 1.42 percentage points.

The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so the rapid plunges of the summer and fall seem to be behind us for the moment.

New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.

Another bright spot for housing is that mortgage refinancing has fallen to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.

Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.

Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.

Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.

The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of job growth and rising real wages, there is no reason to expect any sharp downturn in consumption.   

This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption during the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at a 2.6 percent annual rate.

The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it and keeping overall consumption growth in positive territory.

The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.

The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.

In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.

The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in the coming months, which will be a huge factor in lowering the core inflation rate.

Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at a 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.

This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes to around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.

Compared to the falling productivity in the first half, even a modest pace of positive growth will go far toward alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.

In short, the world is looking good, we just have to keep the Fed from messing it up.

While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. To start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slightly stronger 3.1 percent in the third quarter. This is very far from the negative growth we see in a recession.

When we look at the individual components, the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained, and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.

However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of a negative impact in future quarters. Housing stands out here, and the drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third-quarter growth by 1.42 percentage points.

The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so the rapid plunges of the summer and fall seem to be behind us for the moment.

New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.

Another bright spot for housing is that mortgage refinancing has fallen to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.

Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.

Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.

Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.

The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of job growth and rising real wages, there is no reason to expect any sharp downturn in consumption.   

This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption during the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at a 2.6 percent annual rate.

The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it and keeping overall consumption growth in positive territory.

The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.

The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.

In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.

The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in the coming months, which will be a huge factor in lowering the core inflation rate.

Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at a 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.

This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes to around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.

Compared to the falling productivity in the first half, even a modest pace of positive growth will go far toward alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.

In short, the world is looking good, we just have to keep the Fed from messing it up.

The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?

Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.

This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.

In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.

Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up?

New York Times columnist Peter Coy weighed in firmly on the side of too much demand in a piece arguing we have to do something about deficits. He tells us:

“Unless you subscribe to modern monetary theory, which holds that deficits don’t matter unless they cause inflation, something has to be done, and soon. In textbook macroeconomics, higher debt leads to ‘higher real interest rates, greater interest payments to foreign investors, reduced business investment and lower consumer investment in durable goods,’ James Poterba, a public finance economist at the Massachusetts Institute of Technology, wrote for the Peter G. Peterson Foundation website in 2021.”

Okay, that’s a pretty clear statement of the too much demand story, coming from the foundation created by that great deficit hawk Peter Peterson. But, let’s take a look at Coy’s dismissive comment, “unless you subscribe to modern monetary theory,” and think about the issue at hand.[1]

I have never been a card-carrying member of Modern Monetary Theory (MMT), but I do take its arguments seriously. Let’s say that we run large budget deficits and have the Federal Reserve Board buy up much of the debt. To people who have been alive in the last 15 years, this policy goes under the name “quantitative easing.”  

To my knowledge, none of the current or past members of the Fed consider themselves followers of MMT, but they basically followed an MMT prescription. They had the Fed buying up large amounts of debt to keep interest rates low and boost the economy.

The reason this is important is that we don’t get the exploding debt scare story that Coy, along with the Peter Peterson gang, are trying to push. When the Fed buys up bonds, guess who gets the interest on the bonds?

That’s right folks, it goes to the Fed. And, the Fed refunds it to the Treasury. So, our crushing interest burden ends up being a simple accounting transaction where the Treasury essentially ends up paying interest to itself.

Okay, but how long can this go on? The short answer is forever, the slightly longer answer is until we see a problem with inflation. This gets us back to the basic issue, are we worried that we have too much demand or too little demand?

If Larry Summers and other proponents of the secular stagnation view are correct, then we have very little reason to fear exploding budget deficits. Our major concern going forward will be too little demand. That means the Fed can do an awful lot of quantitative easing without causing any problems for the economy.

If that one is stretching people’s brains, let’s look to Japan. It has a debt-to-GDP ratio of 264 percent, the equivalent of a debt of more than $66 trillion in the United States. The interest rate on its long-term bonds is 0.35 percent. Its net interest payments on its government debt come to 0.3 percent of its GDP, compared to 1.7 percent in the United States. And, apart from a modest pandemic uptick, it has been struggling to raise its inflation rate to its central bank’s 2.0 percent target.

Long and short, if Larry Summers and the secular stagnation crew are correct, then the debt fears being pushed by many are unfounded. If, on the other hand, we are likely to run up against real and lasting supply constraints going forward, then too much spending or too little taxes, can be a problem.

What About Patent and Copyright Monopolies?

I just feel the need to ask, since no one else ever does. Granting patent and copyright monopolies is one way the government pays people to do things. For some reason, this obvious point is never mentioned in public discussions of debt and deficits.

If, for example, we were to decide to spend $100 billion more annually (we currently spend a bit more than $50 billion) on biomedical research, we would get an immediate chorus of “how are you going to pay for it?” from all knowledgeable policy types. However, if we tell the drug companies to spend $100 billion a year on research, and we will give you patent monopolies that allow you to raise your prices by $100 billion annually above the free market price, no asks about how we pay for it. Of course, this is exactly what we do, but drug companies use these monopolies to raise their prices by somewhere around $400 billion annually.

Anyhow, it is more than a bit bizarre that almost everyone involved in budget debates has a clear conception of how we can impoverish our kids by imposing high taxes, but it seems none of them have given a second thought to how high prices for drugs, medical equipment, computer software and a whole range of other items, due to government-granted monopolies, can be a burden.

As the saying goes, economists are not very good at economics.

[1] It’s also worth noting that the budget horror stories, past and present, project that health care spending will grow rapidly as a share of GDP. We actually have seen very limited increases in health care spending as a share of GDP, and since the pandemic, the health care spending share has actually fallen.

The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?

Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.

This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.

In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.

Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up?

New York Times columnist Peter Coy weighed in firmly on the side of too much demand in a piece arguing we have to do something about deficits. He tells us:

“Unless you subscribe to modern monetary theory, which holds that deficits don’t matter unless they cause inflation, something has to be done, and soon. In textbook macroeconomics, higher debt leads to ‘higher real interest rates, greater interest payments to foreign investors, reduced business investment and lower consumer investment in durable goods,’ James Poterba, a public finance economist at the Massachusetts Institute of Technology, wrote for the Peter G. Peterson Foundation website in 2021.”

Okay, that’s a pretty clear statement of the too much demand story, coming from the foundation created by that great deficit hawk Peter Peterson. But, let’s take a look at Coy’s dismissive comment, “unless you subscribe to modern monetary theory,” and think about the issue at hand.[1]

I have never been a card-carrying member of Modern Monetary Theory (MMT), but I do take its arguments seriously. Let’s say that we run large budget deficits and have the Federal Reserve Board buy up much of the debt. To people who have been alive in the last 15 years, this policy goes under the name “quantitative easing.”  

To my knowledge, none of the current or past members of the Fed consider themselves followers of MMT, but they basically followed an MMT prescription. They had the Fed buying up large amounts of debt to keep interest rates low and boost the economy.

The reason this is important is that we don’t get the exploding debt scare story that Coy, along with the Peter Peterson gang, are trying to push. When the Fed buys up bonds, guess who gets the interest on the bonds?

That’s right folks, it goes to the Fed. And, the Fed refunds it to the Treasury. So, our crushing interest burden ends up being a simple accounting transaction where the Treasury essentially ends up paying interest to itself.

Okay, but how long can this go on? The short answer is forever, the slightly longer answer is until we see a problem with inflation. This gets us back to the basic issue, are we worried that we have too much demand or too little demand?

If Larry Summers and other proponents of the secular stagnation view are correct, then we have very little reason to fear exploding budget deficits. Our major concern going forward will be too little demand. That means the Fed can do an awful lot of quantitative easing without causing any problems for the economy.

If that one is stretching people’s brains, let’s look to Japan. It has a debt-to-GDP ratio of 264 percent, the equivalent of a debt of more than $66 trillion in the United States. The interest rate on its long-term bonds is 0.35 percent. Its net interest payments on its government debt come to 0.3 percent of its GDP, compared to 1.7 percent in the United States. And, apart from a modest pandemic uptick, it has been struggling to raise its inflation rate to its central bank’s 2.0 percent target.

Long and short, if Larry Summers and the secular stagnation crew are correct, then the debt fears being pushed by many are unfounded. If, on the other hand, we are likely to run up against real and lasting supply constraints going forward, then too much spending or too little taxes, can be a problem.

What About Patent and Copyright Monopolies?

I just feel the need to ask, since no one else ever does. Granting patent and copyright monopolies is one way the government pays people to do things. For some reason, this obvious point is never mentioned in public discussions of debt and deficits.

If, for example, we were to decide to spend $100 billion more annually (we currently spend a bit more than $50 billion) on biomedical research, we would get an immediate chorus of “how are you going to pay for it?” from all knowledgeable policy types. However, if we tell the drug companies to spend $100 billion a year on research, and we will give you patent monopolies that allow you to raise your prices by $100 billion annually above the free market price, no asks about how we pay for it. Of course, this is exactly what we do, but drug companies use these monopolies to raise their prices by somewhere around $400 billion annually.

Anyhow, it is more than a bit bizarre that almost everyone involved in budget debates has a clear conception of how we can impoverish our kids by imposing high taxes, but it seems none of them have given a second thought to how high prices for drugs, medical equipment, computer software and a whole range of other items, due to government-granted monopolies, can be a burden.

As the saying goes, economists are not very good at economics.

[1] It’s also worth noting that the budget horror stories, past and present, project that health care spending will grow rapidly as a share of GDP. We actually have seen very limited increases in health care spending as a share of GDP, and since the pandemic, the health care spending share has actually fallen.

I rarely disagree in a big way with Paul Krugman, but I think he misses the boat in an important way in his piece on China’s alleged demographic crisis. Before getting to my point of disagreement, first let me emphasis a key point of agreement.

Krugman points out that many countries, notably Japan, have managed to do just fine in the face of a declining population and shrinking workforce. Their people continue to enjoy rising standards of living as their population shrinks. In the case of Japan, its population has been declining for more than a decade and its workforce has been pretty much stagnant over this period. Nonetheless, its per capita income is nearly 10 percent higher than it was a decade ago.

This actually understates the improvement in living standards enjoyed by the Japanese population over this period. The average number of hours worked in a year also fell by more than 7.0 percent, meaning a typical Japanese worker has more leisure time now than they did a decade ago.

It’s also worth mentioning that Japan’s cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work, and less crowded, beaches, parks, and museums. These quality of life factors don’t get picked up in GDP.    

Japan has been running large deficits and built up a large debt to sustain economic growth in the last two decades, but this has not created a major burden for its economy. Its interest payments on its debt are less than 0.3 percent of GDP, compared to 1.7 percent of GDP for the United States. Its inflation rate has consistently been well below its central bank’s 2.0 percent target, although it did see a modest Covid uptick in the last two years.

This point about inflation is central. Back in the good old days, when the Peter Peterson anti-Social Security warriors were in their prime in the 1990s, the standard story on an aging society was that we would have too few workers to support all the old-timers. The retirement of the baby boomers was supposed to break the camel’s back. There would have to be massive tax increases, otherwise the government would run huge deficits which would lead to cascading interest payments on the debt. Alternatively, it could finance its deficits by printing money, leading to out of control inflation.

The Peterson story was never very honest, since the real factor driving its deficit horror story was the projection of exploding private sector health care costs. Since the government picks up roughly half the national tab on health care through programs like Medicare and Medicaid, the explosion in health care costs then being projected would have meant a massive burden on the public sector, even without the aging of the population.

As it turns out, we didn’t see anywhere near the explosive growth in health care costs projected at the time, but we have seen the aging of the population and an increase in the ratio of retirees to workers. But rather than seeing excess demand (Covid shutdown and recovery excepted), our problem has been inadequate demand. The same problem that has afflicted Japan.

This story, which now passes under the name of “secular stagnation,” is 180 degrees opposite the problem pushed by the deficit hawks. Back then, the problem of an aging population was supposed to be that we would be seeing so much demand that our shrinking labor force would not be able to produce enough goods and services. Now the story is that we see less demand with our aging population, so we will see weak growth, unemployment, and deflation.

It’s good that the economics profession has been able to adjust its theories to reality, but we should at least acknowledge the complete shift in perspectives. It is a bit embarrassing that the nearly universally accepted dogma within the profession twenty or thirty years ago proved to be the exact opposite of the reality.

On to China!

Okay, now that we know the terrain, the question is whether China should be terrified that its population is now falling, as all our leading news outlets are telling us?  Well, as people who have listened to the media’s sky is falling tales should recognize, China’s falling population crisis is just our old friend, the story of not enough workers to meet the demands of an aging population.[1] So the question is whether China’s economy will be able to meet the demands created by a growing population of retirees.

As Krugman correctly points out in his column, there is no reason in principle that China should not be able to support its elderly. The question is a political one of whether its government is prepared to establish adequate Social Security and Medicare-type systems to ensure that its elderly have sufficient income and decent health care. Not having any special expertise on China’s politics, I can’t answer that question, but it is important to recognize that it is not a problem of an inadequate labor force.

Where Krugman left me scratching my head was his discussion of this problem of shifting resources to support the elderly:

“For China has long had a wildly unbalanced economy. For reasons I admit I don’t fully understand, policymakers there have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to relatively low consumer demand.

“Instead, China has sustained its economy with extremely high rates of investment, far higher even than those that prevailed in Japan at the height of its infamous late-1980s bubble. Normally, investing in the future is good, but when extremely high investment collides with a falling population, much of that investment inevitably yields diminishing returns.”

There are two points I would make here. First, while Krugman is entirely right about the high rates of investment preventing households from enjoying the full benefits of economic growth, it is worth noting that China’s population has enjoyed enormous improvements in living standards over the last four decades. In the 1970s, the standard of living for the bulk of the population was only slightly better in many respects than for people in Sub Saharan Africa.

Today, hundreds of millions of people in China have near European standards of living. Krugman is right that the country’s growth could allow for even more gains (especially in rural areas), but the enormous gains seen by the bulk of the population probably meant that there was more tolerance for waste than in a context where say, a declining workforce was leading to stagnant or declining living standards.

The other point is simply the flip side of Krugman’s point about the massive investment spending in China. This is a waste of resources that can in principle be converted to meet the needs of the elderly population. In other words, if anyone believed the not enough workers story, we can point to all the people and resources tied up in nearly pointless investment projects. They could instead be building hospitals, retirement facilities, and in other ways producing the goods and services demanded by a growing elderly population. Of course, China couldn’t accomplish this sort of conversion overnight, but its population isn’t aging overnight.

Again, if China can undertake this sort of conversion is a political question. Maybe people more expert on China’s politics can answer it, but it clearly is not an issue of too few workers to meet the demands of an aging population.

One final issue: as I have pointed out on many occasions, the impact of even modest rates of productivity growth swamp the impact of demographics. China’s productivity growth has slowed in recent years, but even at a pace of 3-4 percent annually (what we have been seeing in recent years), it should easily be able to produce enough so that in ten or twenty years both workers and retirees can enjoy much higher living standards than they do today.

Whether its productivity growth will continue at recent rates, or slow further, is an open question, but anyone claiming that it will not have enough output to be able to support its retirees is predicting a massive slowing of productivity growth. For what it’s worth, the International Monetary Fund (I.M.F) is projecting that China continues to sustain strong productivity growth. It projects that GDP growth will average more than 4.5 percent annually even as its workforce shrinks.  

The I.M.F. projection can of course be wrong, but clearly it does not accept the declining population crisis story. For now, that one is best filed under “fiction.”  

[1] There is also the silliness around turning negative. There is very little difference to the economy if its population or labor force is shrinking slowly, say 0.2 percent a year, or growing by the same amount. We saw the same hysteria around the issue of deflation, as though economies would somehow face a crisis if their rate of inflation was a small negative number instead of a small positive number. The lesson that actually serious people everywhere know, is that crossing zero doesn’t matter.

I rarely disagree in a big way with Paul Krugman, but I think he misses the boat in an important way in his piece on China’s alleged demographic crisis. Before getting to my point of disagreement, first let me emphasis a key point of agreement.

Krugman points out that many countries, notably Japan, have managed to do just fine in the face of a declining population and shrinking workforce. Their people continue to enjoy rising standards of living as their population shrinks. In the case of Japan, its population has been declining for more than a decade and its workforce has been pretty much stagnant over this period. Nonetheless, its per capita income is nearly 10 percent higher than it was a decade ago.

This actually understates the improvement in living standards enjoyed by the Japanese population over this period. The average number of hours worked in a year also fell by more than 7.0 percent, meaning a typical Japanese worker has more leisure time now than they did a decade ago.

It’s also worth mentioning that Japan’s cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work, and less crowded, beaches, parks, and museums. These quality of life factors don’t get picked up in GDP.    

Japan has been running large deficits and built up a large debt to sustain economic growth in the last two decades, but this has not created a major burden for its economy. Its interest payments on its debt are less than 0.3 percent of GDP, compared to 1.7 percent of GDP for the United States. Its inflation rate has consistently been well below its central bank’s 2.0 percent target, although it did see a modest Covid uptick in the last two years.

This point about inflation is central. Back in the good old days, when the Peter Peterson anti-Social Security warriors were in their prime in the 1990s, the standard story on an aging society was that we would have too few workers to support all the old-timers. The retirement of the baby boomers was supposed to break the camel’s back. There would have to be massive tax increases, otherwise the government would run huge deficits which would lead to cascading interest payments on the debt. Alternatively, it could finance its deficits by printing money, leading to out of control inflation.

The Peterson story was never very honest, since the real factor driving its deficit horror story was the projection of exploding private sector health care costs. Since the government picks up roughly half the national tab on health care through programs like Medicare and Medicaid, the explosion in health care costs then being projected would have meant a massive burden on the public sector, even without the aging of the population.

As it turns out, we didn’t see anywhere near the explosive growth in health care costs projected at the time, but we have seen the aging of the population and an increase in the ratio of retirees to workers. But rather than seeing excess demand (Covid shutdown and recovery excepted), our problem has been inadequate demand. The same problem that has afflicted Japan.

This story, which now passes under the name of “secular stagnation,” is 180 degrees opposite the problem pushed by the deficit hawks. Back then, the problem of an aging population was supposed to be that we would be seeing so much demand that our shrinking labor force would not be able to produce enough goods and services. Now the story is that we see less demand with our aging population, so we will see weak growth, unemployment, and deflation.

It’s good that the economics profession has been able to adjust its theories to reality, but we should at least acknowledge the complete shift in perspectives. It is a bit embarrassing that the nearly universally accepted dogma within the profession twenty or thirty years ago proved to be the exact opposite of the reality.

On to China!

Okay, now that we know the terrain, the question is whether China should be terrified that its population is now falling, as all our leading news outlets are telling us?  Well, as people who have listened to the media’s sky is falling tales should recognize, China’s falling population crisis is just our old friend, the story of not enough workers to meet the demands of an aging population.[1] So the question is whether China’s economy will be able to meet the demands created by a growing population of retirees.

As Krugman correctly points out in his column, there is no reason in principle that China should not be able to support its elderly. The question is a political one of whether its government is prepared to establish adequate Social Security and Medicare-type systems to ensure that its elderly have sufficient income and decent health care. Not having any special expertise on China’s politics, I can’t answer that question, but it is important to recognize that it is not a problem of an inadequate labor force.

Where Krugman left me scratching my head was his discussion of this problem of shifting resources to support the elderly:

“For China has long had a wildly unbalanced economy. For reasons I admit I don’t fully understand, policymakers there have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to relatively low consumer demand.

“Instead, China has sustained its economy with extremely high rates of investment, far higher even than those that prevailed in Japan at the height of its infamous late-1980s bubble. Normally, investing in the future is good, but when extremely high investment collides with a falling population, much of that investment inevitably yields diminishing returns.”

There are two points I would make here. First, while Krugman is entirely right about the high rates of investment preventing households from enjoying the full benefits of economic growth, it is worth noting that China’s population has enjoyed enormous improvements in living standards over the last four decades. In the 1970s, the standard of living for the bulk of the population was only slightly better in many respects than for people in Sub Saharan Africa.

Today, hundreds of millions of people in China have near European standards of living. Krugman is right that the country’s growth could allow for even more gains (especially in rural areas), but the enormous gains seen by the bulk of the population probably meant that there was more tolerance for waste than in a context where say, a declining workforce was leading to stagnant or declining living standards.

The other point is simply the flip side of Krugman’s point about the massive investment spending in China. This is a waste of resources that can in principle be converted to meet the needs of the elderly population. In other words, if anyone believed the not enough workers story, we can point to all the people and resources tied up in nearly pointless investment projects. They could instead be building hospitals, retirement facilities, and in other ways producing the goods and services demanded by a growing elderly population. Of course, China couldn’t accomplish this sort of conversion overnight, but its population isn’t aging overnight.

Again, if China can undertake this sort of conversion is a political question. Maybe people more expert on China’s politics can answer it, but it clearly is not an issue of too few workers to meet the demands of an aging population.

One final issue: as I have pointed out on many occasions, the impact of even modest rates of productivity growth swamp the impact of demographics. China’s productivity growth has slowed in recent years, but even at a pace of 3-4 percent annually (what we have been seeing in recent years), it should easily be able to produce enough so that in ten or twenty years both workers and retirees can enjoy much higher living standards than they do today.

Whether its productivity growth will continue at recent rates, or slow further, is an open question, but anyone claiming that it will not have enough output to be able to support its retirees is predicting a massive slowing of productivity growth. For what it’s worth, the International Monetary Fund (I.M.F) is projecting that China continues to sustain strong productivity growth. It projects that GDP growth will average more than 4.5 percent annually even as its workforce shrinks.  

The I.M.F. projection can of course be wrong, but clearly it does not accept the declining population crisis story. For now, that one is best filed under “fiction.”  

[1] There is also the silliness around turning negative. There is very little difference to the economy if its population or labor force is shrinking slowly, say 0.2 percent a year, or growing by the same amount. We saw the same hysteria around the issue of deflation, as though economies would somehow face a crisis if their rate of inflation was a small negative number instead of a small positive number. The lesson that actually serious people everywhere know, is that crossing zero doesn’t matter.

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