Beat the Press

Beat the press por Dean Baker

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.

This is worth keeping in mind when reading a New York Times article discussing Republican plans to cut the weekly $600 supplement to unemployment insurance benefits. The piece cites Mulligan as a conservative economist who argues that this supplement is discouraging people from working and therefore keeping unemployment high. In this context, it is worth remembering that Mulligan made the same argument about the high unemployment in the Great Recession.

Note: Mulligan tweeted this note, which gives his estimates of the employment impact of food stamps, unemployment insurance, and other benefit programs put in place or enhanced under Obama.

This is worth keeping in mind when reading a New York Times article discussing Republican plans to cut the weekly $600 supplement to unemployment insurance benefits. The piece cites Mulligan as a conservative economist who argues that this supplement is discouraging people from working and therefore keeping unemployment high. In this context, it is worth remembering that Mulligan made the same argument about the high unemployment in the Great Recession.

Note: Mulligan tweeted this note, which gives his estimates of the employment impact of food stamps, unemployment insurance, and other benefit programs put in place or enhanced under Obama.

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

 

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very high incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cutoff – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income. 

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.  

[1] This calculation uses a very conservative measure of productivity that adjusts for the difference in gross and net output and the difference between inflation as measured by the Consumer Price Index and the GDP deflator. These issues are discussed here and here.

[2] These data are taken from National Income and Product Accounts, Table 1.13, Line 7 plus Line 8, divided by Line 5, plus Line 6, plus Line 7, plus Line 8.

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

 

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very high incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cutoff – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income. 

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.  

[1] This calculation uses a very conservative measure of productivity that adjusts for the difference in gross and net output and the difference between inflation as measured by the Consumer Price Index and the GDP deflator. These issues are discussed here and here.

[2] These data are taken from National Income and Product Accounts, Table 1.13, Line 7 plus Line 8, divided by Line 5, plus Line 6, plus Line 7, plus Line 8.

Let me go out on a limb and speculate that the vast majority have no clue. This is why it would have been helpful to put the size of the European Union pandemic relief package in some context in this article on the negotiations.

The current GDP for the European Union is a bit over $18 trillion, which means that the rescue package would be roughly 4.5 percent of its GDP. This figure likely overstates the economic impact, since not all the money will be spent in a single year. It is also worth mentioning that most, if not all, EU countries have their own rescue packages, so this is far from the full sum that the EU is spending to offset the impact of the pandemic on their economies.

Let me go out on a limb and speculate that the vast majority have no clue. This is why it would have been helpful to put the size of the European Union pandemic relief package in some context in this article on the negotiations.

The current GDP for the European Union is a bit over $18 trillion, which means that the rescue package would be roughly 4.5 percent of its GDP. This figure likely overstates the economic impact, since not all the money will be spent in a single year. It is also worth mentioning that most, if not all, EU countries have their own rescue packages, so this is far from the full sum that the EU is spending to offset the impact of the pandemic on their economies.

That seems to be the case since an article discussing leading vaccine candidates around the world failed to mention two Chinese candidates that are already in Phase III testing. One of the vaccines, developed by the company Sinovac, is beginning testing in Bangladesh and Brazil. The other vaccine was developed by Sinopharm, and is about to begin stage three testing in Abu Dhabi.

It is difficult to understand how an article focused on leading vaccine candidates would exclude two of the vaccines that are furthest advanced in the testing process. 

That seems to be the case since an article discussing leading vaccine candidates around the world failed to mention two Chinese candidates that are already in Phase III testing. One of the vaccines, developed by the company Sinovac, is beginning testing in Bangladesh and Brazil. The other vaccine was developed by Sinopharm, and is about to begin stage three testing in Abu Dhabi.

It is difficult to understand how an article focused on leading vaccine candidates would exclude two of the vaccines that are furthest advanced in the testing process. 

Ruchir Sharma had a New York Times column today telling readers that Germany will likely emerge from the pandemic as the world’s leading economic power. Part of his story is based on Germany’s robust pandemic stimulus package, which he puts at 47 percent of GDP. (This is somewhat misleading since it includes the nominal value of government loan guarantees, but it is robust stimulus by any measure.) Germany has also successfully used work-sharing and other mechanisms to minimize unemployment.

While these points are well-taken and areas where Germany provides an excellent model, Sharma’s main reason for predicting Germany’s ascendancy is its relatively low debt levels. It is difficult to see why debt levels should be a major impediment to the United States or China, or other countries that print their own currencies. The current interest rate on long-term government bonds in the United States is 0.6 percent, which is higher than the negative 0.5 percent rate on German bonds, but it is difficult to see how it would be a major impediment to future growth. When the United States had budget surpluses at the end of the 1990s, the rate on 10-year Treasury bonds was near 5.0 percent.

If we want to look at everyone’s debt basket case, Japan is currently paying 0.03 percent interest on its 10-year Treasury bonds. Again, this is higher than Germany’s rate, but the interest burden is hardly a major strain on Japan’s economy, even with its debt to GDP  ratio of 250 percent. 

Ruchir Sharma had a New York Times column today telling readers that Germany will likely emerge from the pandemic as the world’s leading economic power. Part of his story is based on Germany’s robust pandemic stimulus package, which he puts at 47 percent of GDP. (This is somewhat misleading since it includes the nominal value of government loan guarantees, but it is robust stimulus by any measure.) Germany has also successfully used work-sharing and other mechanisms to minimize unemployment.

While these points are well-taken and areas where Germany provides an excellent model, Sharma’s main reason for predicting Germany’s ascendancy is its relatively low debt levels. It is difficult to see why debt levels should be a major impediment to the United States or China, or other countries that print their own currencies. The current interest rate on long-term government bonds in the United States is 0.6 percent, which is higher than the negative 0.5 percent rate on German bonds, but it is difficult to see how it would be a major impediment to future growth. When the United States had budget surpluses at the end of the 1990s, the rate on 10-year Treasury bonds was near 5.0 percent.

If we want to look at everyone’s debt basket case, Japan is currently paying 0.03 percent interest on its 10-year Treasury bonds. Again, this is higher than Germany’s rate, but the interest burden is hardly a major strain on Japan’s economy, even with its debt to GDP  ratio of 250 percent. 

It’s so great that the Washington Post is able to find mind readers to write their articles. We got yet another example of this gift in an article that talked about Donald Trump’s demand that a payroll tax cut be included in the next pandemic relief package.

The piece told readers:

“….Trump is again demanding a payroll tax cut. He and some allies view the policy as an effective way to stimulate the economy and quickly give workers a boost [emphasis added].”

Most reporters would not know how Trump actually views the policy, they would just know what he says about the policy. For example, Trump may have focus group data showing that a payroll tax cut is politically popular, which would be a reason for him to support it, whether or not it is actually an effective way to boost the economy.

Thankfully the Post’s reporters are able to get behind what people do and say and tell us what they actually think.

It’s so great that the Washington Post is able to find mind readers to write their articles. We got yet another example of this gift in an article that talked about Donald Trump’s demand that a payroll tax cut be included in the next pandemic relief package.

The piece told readers:

“….Trump is again demanding a payroll tax cut. He and some allies view the policy as an effective way to stimulate the economy and quickly give workers a boost [emphasis added].”

Most reporters would not know how Trump actually views the policy, they would just know what he says about the policy. For example, Trump may have focus group data showing that a payroll tax cut is politically popular, which would be a reason for him to support it, whether or not it is actually an effective way to boost the economy.

Thankfully the Post’s reporters are able to get behind what people do and say and tell us what they actually think.

The New York Times had a piece reporting on the progress of Moderna’s coronavirus vaccine, based on a newly published article. After reporting on the relative success of the vaccine in a group of 45 healthy people, the NYT tells readers:

“Experts agree that more than one vaccine will be needed, because no single company could produce the billions of doses needed.”

This comment is more than a bit bizarre. There is no reason that a single vaccine could not be produced by many different companies. If Moderna, or any other company, has a patent monopoly, that could be an issue, but the government could force licensing of the vaccine. (Actually, since the government has picked up much, perhaps most, of the tab for this vaccine, it could just demand that the patent be placed in the public domain so that it can be produced as cheap generic by any drug company in the world.)

The piece is also somewhat bizarre in celebrating the success of this initial trial which it quotes someone on the development team as saying  “it exceeds all expectations.” According to the piece, many of the 45 healthy people who were given the vaccine developed serious, but not life-threatening, side effects. With a vaccine, we are asking people to take it who quite likely will not be infected, and many of whom would not suffer serious consequences if they are infected.

If a substantial portion of healthy people have bad side effects, the impact on less healthy people could be more serious. It may be difficult to get people to take the vaccine if they would experience serious side effects. They may just opt to be careful to avoid contact with people who might be infected.

The New York Times had a piece reporting on the progress of Moderna’s coronavirus vaccine, based on a newly published article. After reporting on the relative success of the vaccine in a group of 45 healthy people, the NYT tells readers:

“Experts agree that more than one vaccine will be needed, because no single company could produce the billions of doses needed.”

This comment is more than a bit bizarre. There is no reason that a single vaccine could not be produced by many different companies. If Moderna, or any other company, has a patent monopoly, that could be an issue, but the government could force licensing of the vaccine. (Actually, since the government has picked up much, perhaps most, of the tab for this vaccine, it could just demand that the patent be placed in the public domain so that it can be produced as cheap generic by any drug company in the world.)

The piece is also somewhat bizarre in celebrating the success of this initial trial which it quotes someone on the development team as saying  “it exceeds all expectations.” According to the piece, many of the 45 healthy people who were given the vaccine developed serious, but not life-threatening, side effects. With a vaccine, we are asking people to take it who quite likely will not be infected, and many of whom would not suffer serious consequences if they are infected.

If a substantial portion of healthy people have bad side effects, the impact on less healthy people could be more serious. It may be difficult to get people to take the vaccine if they would experience serious side effects. They may just opt to be careful to avoid contact with people who might be infected.

When the unemployment rate goes up, a standard theme in the media is that workers don’t have the right skills. We saw that yesterday in the New York Times when an article told us “The Pandemic Has Accelerated Demands for a More Skilled Workforce.” It tells us how the growth of telecommuting in response to the pandemic has led to more demand for skilled labor and less demand for less-skilled workers.

The key point in this sort of argument is that the problem is the workers, who don’t have the right skills, not an economy that doesn’t create enough demand for labor. Of course, we get this skills shortage argument every time the unemployment rate soars. In the summer of 2010, when the Great Recession was still near its trough, the NYT ran a piece telling us about the skills shortage in manufacturing. Over the next nine and a half years the sector added almost 1.3 million jobs (11.3 percent), without any notable improvement in the skills of the U.S. workforce. The overall unemployment rate fell to 3.5 percent, again without any major gains in skills in the U.S. workforce.

The focus on the skills gap is even more infuriating since even if there were an issue with demand for skills that would be the result of policy, not technology, as the piece implies. We have lots of jobs in areas like computers and biotech because the government gives out patent and copyright monopolies in these areas. If we are worried that we are creating too much demand for people with advanced skills and not enough demand for people with less education, we can make these monopolies shorter and weaker, or perhaps not even have them at all.

The latter possibility should be a major topic of debate in the context of the pandemic. The government is paying billions of dollars to drug companies for research and testing of various treatments and vaccines to combat the coronavirus. Incredibly, after putting billions of dollars upfront, and taking the big risks, the government is giving the companies patent monopolies which will allow them to charge whatever they want for what was developed on the government’s nickel.

This will likely mean redistributing tens of billions from everyone else to the shareholders, top executives, and key employees in these companies. If we don’t want to see this upward redistribution (also from Black to white, since the beneficiaries in this story are almost certainly overwhelmingly white) the key is not more skills for our workers, the key is for the government not to be giving out patent monopolies for work it has paid for.

To be clear, this is not an argument against education and training. It would be good for workers and the economy if we had a better-trained workforce. But the reason we have high unemployment today, and may have high unemployment for some time into the future, is not a lack of skills, it is a failure of economic policy.

When the unemployment rate goes up, a standard theme in the media is that workers don’t have the right skills. We saw that yesterday in the New York Times when an article told us “The Pandemic Has Accelerated Demands for a More Skilled Workforce.” It tells us how the growth of telecommuting in response to the pandemic has led to more demand for skilled labor and less demand for less-skilled workers.

The key point in this sort of argument is that the problem is the workers, who don’t have the right skills, not an economy that doesn’t create enough demand for labor. Of course, we get this skills shortage argument every time the unemployment rate soars. In the summer of 2010, when the Great Recession was still near its trough, the NYT ran a piece telling us about the skills shortage in manufacturing. Over the next nine and a half years the sector added almost 1.3 million jobs (11.3 percent), without any notable improvement in the skills of the U.S. workforce. The overall unemployment rate fell to 3.5 percent, again without any major gains in skills in the U.S. workforce.

The focus on the skills gap is even more infuriating since even if there were an issue with demand for skills that would be the result of policy, not technology, as the piece implies. We have lots of jobs in areas like computers and biotech because the government gives out patent and copyright monopolies in these areas. If we are worried that we are creating too much demand for people with advanced skills and not enough demand for people with less education, we can make these monopolies shorter and weaker, or perhaps not even have them at all.

The latter possibility should be a major topic of debate in the context of the pandemic. The government is paying billions of dollars to drug companies for research and testing of various treatments and vaccines to combat the coronavirus. Incredibly, after putting billions of dollars upfront, and taking the big risks, the government is giving the companies patent monopolies which will allow them to charge whatever they want for what was developed on the government’s nickel.

This will likely mean redistributing tens of billions from everyone else to the shareholders, top executives, and key employees in these companies. If we don’t want to see this upward redistribution (also from Black to white, since the beneficiaries in this story are almost certainly overwhelmingly white) the key is not more skills for our workers, the key is for the government not to be giving out patent monopolies for work it has paid for.

To be clear, this is not an argument against education and training. It would be good for workers and the economy if we had a better-trained workforce. But the reason we have high unemployment today, and may have high unemployment for some time into the future, is not a lack of skills, it is a failure of economic policy.

It is standard for economic reporters to treat higher stock prices as good news. A rising stock market is often touted in the same way that job gains or GDP growth are touted, as evidence of a stronger economy.

This can be true. When the economy is growing at a healthy pace, the stock market is usually rising also. But the link is far more tenuous than is generally recognized. The market is in principle a measure of expected future profits. Policies that redistribute income from workers or taxpayers, such as anti-union laws or a corporate tax cut, would be expected to lead to a rising stock market, even if they did not spur economic growth.

But even beyond this direct redistributive issue, there is another sense in which a rising stock market can be bad for the 90 percent of the population that doesn’t own much stock (this includes 401(k)s). Higher stock prices encourage rich people to spend more money.

To see why this is an issue we need to pull out our MMT or Keynesian handbook. (MMT is essentially Keynes. That is not an insult; the term “modern monetary theory” is taken from the Keynes’ Treatise on Money.) To my view, the main takeaway from MMT is that the limit on the government’s ability to spend is inflation. This goes against the line pushed by the deficit hawks, that we have to worry about the government borrowing too much, because at some point lenders will be unwilling to lend us money.

As those of us who are not part of the deficit hawk cult point out, the government can print money if no one is willing to lend to it. Of course, in reality, investors have been very happy to lend the government money. The current interest rate on long-term government bonds is less than 0.7 percent. That compares to interest rates in the 4.0-5.0 percent range back when the government was running a budget surplus at the end of the 1990s.

But suppose this changed and investors suddenly soured on U.S.  government debt? Well, the Fed could just buy the debt that investors wanted to dump. It would pay for it the old-fashioned way, by printing money.

This is certainly a logical possibility, after all the Fed can print as much money as it wants. (It’s actually all electronic transactions, with bank credits, but that is beside the point.) The real problem that we could run into is that printing money keeps interest rates lower than they otherwise would be. As a result, demand from public and private investment, housing, and other forms of consumption will be higher than in the case where the Fed is not buying bonds. In an economy that is operating near its capacity (definitely not the current economy), higher levels of demand can lead to inflation. If the Fed keeps printing large amounts of money, causing interest rates to stay low and demand to remain excessive, we could see spiraling inflation, or in an extreme case, hyperinflation.

In this story, the constraint on government spending is the risk of inflation, which in turn is the result of too much demand in the economy. This is the story of why we have taxes. If there is excessive demand and we don’t want to cut spending, then we can raise taxes to reduce consumption spending by the people we tax. The tax revenue is not needed to pay for the spending in the way that stores need sales to pay wages, the tax revenue is a way to reduce demand in the economy to provide the room needed for the government to spend.

With this story in mind, let’s get back to the stock market. Suppose the market rises by 10 percent, not because of expectations of greater future profits, but simply as a result of irrational exuberance. Investors are just excited about holding stock, as was the case in the 1990s stock bubble and may well be the case with certain stocks now.

If we round up somewhat, the current capitalization of the U.S. stock market is $40 trillion, which means that a 10 percent increase would imply an addition of $4 trillion. There is a well-known stock wealth effect on consumption, which is usually estimated as between 3-4 percent.[1] This means that if the value of households’ stock holdings rise by $100, they will increase their annual consumption spending by between $3-$4. If we apply this wealth effect calculation to the $4 trillion increase in market capitalization, it would imply an increase in annual consumption of between $120 billion and $160 billion, or 0.6 to 0.8 percent of GDP.

This increase in consumption generates more demand in the economy. It has roughly the same impact in employing labor and other resources as an increase in government spending of the same amount. This means that if the economy was more or less at its capacity, so that additional demand would lead to inflation, and the stock market jumped by 10 percent, we would suddenly be facing a problem with inflation.

In that case, in order to prevent inflation, the government would have to do something to reduce demand to offset the jump in consumption from stockholders.[2] This could mean that the Federal Reserve Board would raise interest rates to reduce investment spending, housing construction, and other consumption. Alternatively, the government could raise taxes to reduce consumption. However, going either route means that someone has to spend less because stockholders are spending more. In other words, higher stock prices mean that people who are not stockholders have to spend less money.

This conclusion is pretty much an inevitable implication of the wealth effect, regardless of whether or not someone accepts MMT or Keynesian economics. If stockholders are consuming more, then there is less for everyone else, at least when the economy is near full employment.

For this reason, most people have little cause to celebrate when stock prices rise. Not only do higher stock prices not benefit the typical worker, they can actually harm them by forcing government cutbacks or tax increases, or higher interest rates from the Fed. The stock market may be the home team for the people who own and run major news outlets, but not for most of the country. When the market goes up, most people should not be cheering.

[1] While people often talk about issuing stock as being a mechanism for financing investment, in reality it is rare for companies to finance investment by issuing shares. The one notable exception to this rule was in the 1990s stock bubble when many new companies found they could raise hundreds of millions or even billions by issuing shares, in some cases without even knowing how they could hope to make a profit from their business. More typically, companies issue shares to allow early investors to cash out their holdings.

[2] In reality, any increase in consumption takes time. Stockholders are not changing their consumption based on day to day movements in the stock market, rather this wealth effect on consumption would be phased in over 1 to 2 years.

It is standard for economic reporters to treat higher stock prices as good news. A rising stock market is often touted in the same way that job gains or GDP growth are touted, as evidence of a stronger economy.

This can be true. When the economy is growing at a healthy pace, the stock market is usually rising also. But the link is far more tenuous than is generally recognized. The market is in principle a measure of expected future profits. Policies that redistribute income from workers or taxpayers, such as anti-union laws or a corporate tax cut, would be expected to lead to a rising stock market, even if they did not spur economic growth.

But even beyond this direct redistributive issue, there is another sense in which a rising stock market can be bad for the 90 percent of the population that doesn’t own much stock (this includes 401(k)s). Higher stock prices encourage rich people to spend more money.

To see why this is an issue we need to pull out our MMT or Keynesian handbook. (MMT is essentially Keynes. That is not an insult; the term “modern monetary theory” is taken from the Keynes’ Treatise on Money.) To my view, the main takeaway from MMT is that the limit on the government’s ability to spend is inflation. This goes against the line pushed by the deficit hawks, that we have to worry about the government borrowing too much, because at some point lenders will be unwilling to lend us money.

As those of us who are not part of the deficit hawk cult point out, the government can print money if no one is willing to lend to it. Of course, in reality, investors have been very happy to lend the government money. The current interest rate on long-term government bonds is less than 0.7 percent. That compares to interest rates in the 4.0-5.0 percent range back when the government was running a budget surplus at the end of the 1990s.

But suppose this changed and investors suddenly soured on U.S.  government debt? Well, the Fed could just buy the debt that investors wanted to dump. It would pay for it the old-fashioned way, by printing money.

This is certainly a logical possibility, after all the Fed can print as much money as it wants. (It’s actually all electronic transactions, with bank credits, but that is beside the point.) The real problem that we could run into is that printing money keeps interest rates lower than they otherwise would be. As a result, demand from public and private investment, housing, and other forms of consumption will be higher than in the case where the Fed is not buying bonds. In an economy that is operating near its capacity (definitely not the current economy), higher levels of demand can lead to inflation. If the Fed keeps printing large amounts of money, causing interest rates to stay low and demand to remain excessive, we could see spiraling inflation, or in an extreme case, hyperinflation.

In this story, the constraint on government spending is the risk of inflation, which in turn is the result of too much demand in the economy. This is the story of why we have taxes. If there is excessive demand and we don’t want to cut spending, then we can raise taxes to reduce consumption spending by the people we tax. The tax revenue is not needed to pay for the spending in the way that stores need sales to pay wages, the tax revenue is a way to reduce demand in the economy to provide the room needed for the government to spend.

With this story in mind, let’s get back to the stock market. Suppose the market rises by 10 percent, not because of expectations of greater future profits, but simply as a result of irrational exuberance. Investors are just excited about holding stock, as was the case in the 1990s stock bubble and may well be the case with certain stocks now.

If we round up somewhat, the current capitalization of the U.S. stock market is $40 trillion, which means that a 10 percent increase would imply an addition of $4 trillion. There is a well-known stock wealth effect on consumption, which is usually estimated as between 3-4 percent.[1] This means that if the value of households’ stock holdings rise by $100, they will increase their annual consumption spending by between $3-$4. If we apply this wealth effect calculation to the $4 trillion increase in market capitalization, it would imply an increase in annual consumption of between $120 billion and $160 billion, or 0.6 to 0.8 percent of GDP.

This increase in consumption generates more demand in the economy. It has roughly the same impact in employing labor and other resources as an increase in government spending of the same amount. This means that if the economy was more or less at its capacity, so that additional demand would lead to inflation, and the stock market jumped by 10 percent, we would suddenly be facing a problem with inflation.

In that case, in order to prevent inflation, the government would have to do something to reduce demand to offset the jump in consumption from stockholders.[2] This could mean that the Federal Reserve Board would raise interest rates to reduce investment spending, housing construction, and other consumption. Alternatively, the government could raise taxes to reduce consumption. However, going either route means that someone has to spend less because stockholders are spending more. In other words, higher stock prices mean that people who are not stockholders have to spend less money.

This conclusion is pretty much an inevitable implication of the wealth effect, regardless of whether or not someone accepts MMT or Keynesian economics. If stockholders are consuming more, then there is less for everyone else, at least when the economy is near full employment.

For this reason, most people have little cause to celebrate when stock prices rise. Not only do higher stock prices not benefit the typical worker, they can actually harm them by forcing government cutbacks or tax increases, or higher interest rates from the Fed. The stock market may be the home team for the people who own and run major news outlets, but not for most of the country. When the market goes up, most people should not be cheering.

[1] While people often talk about issuing stock as being a mechanism for financing investment, in reality it is rare for companies to finance investment by issuing shares. The one notable exception to this rule was in the 1990s stock bubble when many new companies found they could raise hundreds of millions or even billions by issuing shares, in some cases without even knowing how they could hope to make a profit from their business. More typically, companies issue shares to allow early investors to cash out their holdings.

[2] In reality, any increase in consumption takes time. Stockholders are not changing their consumption based on day to day movements in the stock market, rather this wealth effect on consumption would be phased in over 1 to 2 years.

Ross Douthat has good news for folks who don’t like China. His NYT column yesterday told us that China’s economy will run out of steam in a decade and that the U.S. will again be able to reclaim world leadership after 2030. The problem is that the piece presents nothing to support this claim.

After telling readers that China is passing the U.S. for world leadership due to the inept presidency of Donald Trump, Douthat gets to the meat of his piece:

“It’s possible that we’re nearing a peak of U.S.-China tension not because China is poised to permanently overtake the United States as a global power, but because China itself is peaking — with a slowing growth rate that may leave it short of the prosperity achieved by its Pacific neighbors, a swiftly aging population, and a combination of self-limiting soft power and maxed-out hard power that’s likely to diminish, relative to the U.S. and India and others, in the 2040s and beyond.

“Instead of a Chinese Century, in other words, the coronavirus might be ushering in a Chinese Decade, in which Xi Jinping’s government behaves with maximal aggression because it sees an opportunity that won’t come again.”

The problem is that the cited piece for “China’s slowing growth rate” still has China growing close to 4.0 percent annually. That is almost 2.0 percentage points faster than the 2.1 percent growth rate projected for the U.S. in the last five years of the decade.

Furthermore, the U.S. economy is starting from a much lower base. In 2019 China’s economy was already more than 25 percent larger than the U.S. economy, while the U.S. economy is projected to shrink by 5.5 percent this year, China’s is expected to grow by 1.8 percent. It is hard to see how an economy that is starting from a lower level and growing at a slower pace, will pass a larger economy that is growing more rapidly. I guess it takes an NYT columnist to figure that one out.

One final point, there seems to be an obsession in the media with China’s lower birth rate and likely declining population. While the idea that this is a big problem for China is repeated endlessly, it really lead to the obvious question, why?

So the country will have fewer people. This will likely mean fewer people working in very low productivity jobs in agriculture and the service sector. And why exactly would this be a problem for China?

Ross Douthat has good news for folks who don’t like China. His NYT column yesterday told us that China’s economy will run out of steam in a decade and that the U.S. will again be able to reclaim world leadership after 2030. The problem is that the piece presents nothing to support this claim.

After telling readers that China is passing the U.S. for world leadership due to the inept presidency of Donald Trump, Douthat gets to the meat of his piece:

“It’s possible that we’re nearing a peak of U.S.-China tension not because China is poised to permanently overtake the United States as a global power, but because China itself is peaking — with a slowing growth rate that may leave it short of the prosperity achieved by its Pacific neighbors, a swiftly aging population, and a combination of self-limiting soft power and maxed-out hard power that’s likely to diminish, relative to the U.S. and India and others, in the 2040s and beyond.

“Instead of a Chinese Century, in other words, the coronavirus might be ushering in a Chinese Decade, in which Xi Jinping’s government behaves with maximal aggression because it sees an opportunity that won’t come again.”

The problem is that the cited piece for “China’s slowing growth rate” still has China growing close to 4.0 percent annually. That is almost 2.0 percentage points faster than the 2.1 percent growth rate projected for the U.S. in the last five years of the decade.

Furthermore, the U.S. economy is starting from a much lower base. In 2019 China’s economy was already more than 25 percent larger than the U.S. economy, while the U.S. economy is projected to shrink by 5.5 percent this year, China’s is expected to grow by 1.8 percent. It is hard to see how an economy that is starting from a lower level and growing at a slower pace, will pass a larger economy that is growing more rapidly. I guess it takes an NYT columnist to figure that one out.

One final point, there seems to be an obsession in the media with China’s lower birth rate and likely declining population. While the idea that this is a big problem for China is repeated endlessly, it really lead to the obvious question, why?

So the country will have fewer people. This will likely mean fewer people working in very low productivity jobs in agriculture and the service sector. And why exactly would this be a problem for China?

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