Confusion on Investment at the Washington Post: Point Is to Displace Workers

February 20, 2019

20 Febrero 2019

The Washington Post had a rather confused piece that complained that investment encouraged by accelerated depreciation, which was a provision of the Trump tax cut (also the Obama stimulus), is "helping companies replace workers with machines." This is reported as though it is some sort of scandal, when it is in fact precisely the point of this provision. The stated goal of the Trump tax cut was to promote investment. This was their rationale for having the bulk of the tax cut go to businesses. Their argument was that a lower tax rate would provide businesses with more incentive to invest. More investment would lead to more rapid productivity growth. If workers got their share of gains in productivity, then they would benefit from having higher wages. The key question in this story is whether the tax cut actually led to more investment. The evidence to date is that it has had at most a minimal effect on investment, with investment running slightly higher in 2018 than before the tax cut in 2017. There certainly has been no boom. There also is zero evidence that it led to any uptick in productivity growth, as productivity growth remained very slow through the year. So, by their own standard, the tax cut seems to be failing badly. However, if we did see more investment and productivity growth, it would mean displacing workers. Higher productivity means more output can be produced with the same number of work hours, or alternatively, the same output can be produced with fewer work hours. (Fewer work hours doesn't have to mean fewer workers. In other countries, much of the gain from higher productivity has been realized in the form of shorter work years. Workers have 5–6 weeks a year of vacation, paid family leave, paid sick days, and other forms of paid time off.)

MMT and Taxing the Rich

By CEPRCEPR

February 15, 2019

15 Febrero 2019

(This post first appeared on my Patreon page.) I don’t consider myself an MMTer, but there is a basic Keynesian concept which has been associated with MMT, which is both true and important. For the federal government, taxes are not about raising revenue, taxes are about reducing consumption to prevent inflation. The point is that the federal government does not need taxes for revenue since it can just print money. It instead taxes to create the room in the economy for government spending. This view is sometimes wrongly taken as a “get out of jail free” card, where the government can spend whatever it wants without worrying about raising revenue. That could be true in a deep downturn. However, if the economy is near its full employment level of output, where additional demand will lead to rising inflation, we are pretty much back in the world where we need taxes to offset spending. Any major increase in government spending will lead to higher inflation unless we have higher taxes or have some other mechanism to reduce demand in the economy. We can, of course, argue about how close the economy is to its full employment level of output. This is not easy to determine and the mainstream of the economics profession has badly erred on the high side in arguing that we were near full employment, when in fact the unemployment rate could (and did) go much lower. But leaving the argument about where we hit full employment aside, we still have the basic truth that when we are near full employment, we do need higher taxes to offset additional spending. A small qualifier is worth adding here. We have a $20 trillion economy. We don’t have to worry about inflation because we spend another $2 billion or $5 billion a year on some program we think is important. (That would be 0.01 percent to 0.0025 percent of GDP.) We do have to worry about inflation if we want to spend another $200 billion a year on a big education or health care program.

New York Times Is Badly Confused on European Data: Growth Is a Problem

By CEPRCEPR

February 14, 2019

14 Febrero 2019

The New York Times ran a piece headlined "Europe's middle class is shrinking. Spain bears much of the pain." The gist of the piece is that the middle class in Europe, and especially Spain is disappearing as the result of some mysterious process. It tells readers: "Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. By summer, they figure they will no longer be able to pay their mortgage." [The "they" refers to a formerly middle class couple who lost jobs in the downturn and had to find new jobs at far lower pay." The piece continues: "It is a precarious situation felt by millions of Europeans. "Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union, echoing a similar decline in the United States and reversing two decades of expansion. While middle-class households are more prevalent in Europe than in the United States — around 60 percent, compared with just over 50 percent in America — they face unprecedented levels of vulnerability. ... "The hurdles to keeping their status, or recovering lost ground, are higher given post-recession labor dynamics. The loss of middle-income jobs, weakened social protections and skill mismatches have reduced economic mobility and widened income inequality. Automation and globalization are deepening the divides." Just about every part of this story is wrong, as a quick look at the data would show. To start with, Spain and most other European countries are not growing faster than before the recession. According to the IMF, Spain's economy grew at a 2.7 percent rate in 2018 and is projected to grow 2.2 percent this year. By comparison, it grew at an average rate of more than 3.9 percent in 2006 and 2007, the last two years before the recession. Spain's per capita GDP was just 3.0 percent higher in 2018 than it was in 2007. By comparison, coming out of the Great Depression in the United States, per capita income in 1940 was more than 8.0 percent higher than in 1929.

CBS Relies on Seriously Flawed Economics Textbooks

By CEPRCEPR

February 14, 2019

14 Febrero 2019

CBS News had a piece warning its audience about the problems of large government debt. It noted projections of rising US government debt, commenting:

“The only countries with a higher debt load than the US are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan’s lost decade of economic stagnation is a mainstay of economic textbooks.”

The first three countries are all in the euro zone. They do not have their own currency, but rather must adhere to rules set by the European Central Bank and the European Commission. Their situation is comparable to that of a state in the United States. No one disputes that it would be a big problem for Utah or California to run up very large debts.

Japan is the country most comparable, but the textbooks CBS refers to seem not to be very reliable. According to the IMF, Japan’s per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States.

In spite of having a debt-to-GDP ratio that is more than twice as large as the United States, the country does not provide evidence to support the warnings CBS gives about large deficits. Its long-term interest rates are near zero, meaning the debt is not crowding out investment. Its interest payments on its debt are roughly 0.5 percent of GDP ($100 billion in the United States), indicating that they are not crowding out other spending priorities. And, its inflation rate is just over 1.0 percent, indicating that profligate spending has not led to a problem with inflation.

CBS News had a piece warning its audience about the problems of large government debt. It noted projections of rising US government debt, commenting:

“The only countries with a higher debt load than the US are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan’s lost decade of economic stagnation is a mainstay of economic textbooks.”

The first three countries are all in the euro zone. They do not have their own currency, but rather must adhere to rules set by the European Central Bank and the European Commission. Their situation is comparable to that of a state in the United States. No one disputes that it would be a big problem for Utah or California to run up very large debts.

Japan is the country most comparable, but the textbooks CBS refers to seem not to be very reliable. According to the IMF, Japan’s per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States.

In spite of having a debt-to-GDP ratio that is more than twice as large as the United States, the country does not provide evidence to support the warnings CBS gives about large deficits. Its long-term interest rates are near zero, meaning the debt is not crowding out investment. Its interest payments on its debt are roughly 0.5 percent of GDP ($100 billion in the United States), indicating that they are not crowding out other spending priorities. And, its inflation rate is just over 1.0 percent, indicating that profligate spending has not led to a problem with inflation.

Steve Rattner Warns that Government-Granted Patent and Copyright Monopolies Are Imposing a Burden on Our Children

By CEPRCEPR

February 11, 2019

11 Febrero 2019

Of course, he wouldn’t do that. Steven Rattner isn’t concerned about the hundreds of billions (perhaps more than $1 trillion) that the government redistributes upward each year in the form of patent and copyright rents. These rents, which come to close to $400 billion annually for prescription drugs alone, are a direct and intended result of the monopolies that the government gives companies and individuals as a way of paying for innovation and creative work.

But Steven Rattner isn’t concerned about this enormous burden on our children, which makes folks like Bill Gates incredibly rich. Instead, he is worried about the much smaller burden of the interest on the debt, which currently nets out (after deducting money rebated by the Federal Reserve Board) to around $200 billion a year or 1.0 percent of GDP. He also is not concerned about the fact that the income of our children may be $1 trillion a year less, which has the same effect on living standards as paying another $1 trillion a year in higher taxes ($3,000 per person), because of the austerity that people like him demanded in the years following the Great Recession.

For some reason, no matter how much damage these people cause and how little sense their arguments make, we are still supposed to take their views seriously. Any ideas why?

Of course, he wouldn’t do that. Steven Rattner isn’t concerned about the hundreds of billions (perhaps more than $1 trillion) that the government redistributes upward each year in the form of patent and copyright rents. These rents, which come to close to $400 billion annually for prescription drugs alone, are a direct and intended result of the monopolies that the government gives companies and individuals as a way of paying for innovation and creative work.

But Steven Rattner isn’t concerned about this enormous burden on our children, which makes folks like Bill Gates incredibly rich. Instead, he is worried about the much smaller burden of the interest on the debt, which currently nets out (after deducting money rebated by the Federal Reserve Board) to around $200 billion a year or 1.0 percent of GDP. He also is not concerned about the fact that the income of our children may be $1 trillion a year less, which has the same effect on living standards as paying another $1 trillion a year in higher taxes ($3,000 per person), because of the austerity that people like him demanded in the years following the Great Recession.

For some reason, no matter how much damage these people cause and how little sense their arguments make, we are still supposed to take their views seriously. Any ideas why?

It's Monday and Robert Samuelson Wants to Cut Social Security!

By CEPRCEPR

February 11, 2019

11 Febrero 2019

I guess we can always count on The Washington Post to print misleading pieces calling for cuts in Social Security. After all, what are newspapers for? Anyhow, Robert Samuelson gives us one of his usual tirades, misrepresenting most of the key items in the debate. The basis of his outrage is a bill proposed by Representative John Larson to increase Social Security. The proposal is for a modest overall increase in benefits with a larger increase for the poor. The proposal also calls for indexing benefits to a cost of living index designed to monitor the expenses faced by seniors, instead of the population as a whole. Samuelson complains that this could lead to higher benefits. The gist of Samuelson's argument is that seniors are doing very well right now. He cites a recently done study by C. Adam Bee and Joshua Mitchell, two economists who were at the Census Bureau at the time, that found, based on tax filings that seniors had higher incomes than we had realized. While the study did show seniors were doing better than earlier survey data, the picture is not altogether positive. For example, the average income for seniors in the bottom decile is just $7,500, for the second decile it's $13,000. It probably would not seem too outrageous to most people to want to give these people somewhat higher benefits. Even for the 5th decile, the average income was only $32,500. (These figures are all in 2012 dollars, so add about 15 percent to put them in today's dollars.) But perhaps more importantly, the main reason Bee and Mitchell found higher income levels than previous data is under-reported pension income. Samuelson misleading reports the issue by saying that most of the "underreporting involve income from IRAs, 401(k) plans and traditional pensions." Actually, for middle-income households under-reporting of 401(k) income was pretty much irrelevant. The problem was missed pension income.

• Healthcare

Slower Health Care Cost Growth: It's a Worldwide Pattern

By CEPRCEPR

February 08, 2019

08 Febrero 2019

Catherine Rampell noted in her column today the sharp slowing in health care cost growth in the last decade. This is an important point, which has received remarkably little attention. The Medicare projections and the budget projections more generally look far better than would otherwise be the case because of lower than projected health care cost growth. (It is hard to understand why the Obama administration did not try to take more credit for the slower cost growth.)

Anyhow, there is an important point to add to this picture. There has been a similar slowing in most other wealthy countries. According to data from the OECD, between 1990 and 2008, per person spending rose at a 6.7 percent annual rate. It slowed to a 4.8 percent rate in the years from 2008 to 2017. In Spain, spending growth declined from 6.9 percent to 2.2 percent. In the Netherlands the decline was from 5.9 percent to 3.4 percent. And in France the decline was from 5.5 percent to 3.2 percent.

While the slower growth in the United States is good news (it’s actually associated with better health among the elderly population where the slowing was sharpest), it seems that the driving force goes beyond policy changes in the United States. Some of the slowing in European countries was undoubtedly the result of austerity imposed by deficit-obsessed governments. But it is striking that the slowdown occurs in most wealthy countries at roughly the same time. And, this is in spite of an aging population that requires more health care.

Catherine Rampell noted in her column today the sharp slowing in health care cost growth in the last decade. This is an important point, which has received remarkably little attention. The Medicare projections and the budget projections more generally look far better than would otherwise be the case because of lower than projected health care cost growth. (It is hard to understand why the Obama administration did not try to take more credit for the slower cost growth.)

Anyhow, there is an important point to add to this picture. There has been a similar slowing in most other wealthy countries. According to data from the OECD, between 1990 and 2008, per person spending rose at a 6.7 percent annual rate. It slowed to a 4.8 percent rate in the years from 2008 to 2017. In Spain, spending growth declined from 6.9 percent to 2.2 percent. In the Netherlands the decline was from 5.9 percent to 3.4 percent. And in France the decline was from 5.5 percent to 3.2 percent.

While the slower growth in the United States is good news (it’s actually associated with better health among the elderly population where the slowing was sharpest), it seems that the driving force goes beyond policy changes in the United States. Some of the slowing in European countries was undoubtedly the result of austerity imposed by deficit-obsessed governments. But it is striking that the slowdown occurs in most wealthy countries at roughly the same time. And, this is in spite of an aging population that requires more health care.

The Robots Taking the Jobs Industry

By CEPRCEPR

February 08, 2019

08 Febrero 2019

(This piece first appeared as a post on my Patreon page.) There is an old saying that the economy is too simple for economists to understand. There is plenty of evidence of this all around. After all, almost no economists could see the $8 trillion housing bubble, the collapse of which gave us the great recession. Back in the stock bubble days of the late 1990s, leading economists in both political parties wanted to put Social Security money in the stock market based on assumptions of returns which were at the least incredibly implausible, if not altogether impossible. The endless scare stories of robots taking all the jobs, or the threat of automation, fit this model. While this is a recurring theme in major media outlets, it basically makes zero sense. Replacing human labor with technology is a very old story. It’s called “productivity growth.” We’ve been seeing it pretty much as long as we have had a capitalist economy. In fact, this is what allows for sustained improvements in living standards. If we had not seen massive productivity growth in agriculture, then the bulk of the country would still be working on farms. Otherwise, we would be going hungry. However, thanks to a massive improvement in technology, less than 2 percent of our workforce is now employed in agriculture. And, we can still export large amounts of food.

Farhad Manjoo Promotes Billionaire Ideology in Proposal to Get Rid of Billionaires

By CEPRCEPR

February 07, 2019

07 Febrero 2019

New York Times columnist Farhad Manjoo tells us that he likes to “explore maximalist policy visions” in his columns. He falls well short of this goal in a piece calling for abolishing billionaires, which actually helps legitimate their existence.

The piece repeatedly tells us that their wealth is driven by technology, a point that first appears in the subhead which refers to “tech-driven inequality.” The problem with Manjoo’s piece is that the inequality is not in fact driven by technology, it is driven by our policy on technology, specifically patent and copyright monopolies. These forms of protection do not stem from the technology, they are policies created by a Congress which is disproportionately controlled by billionaires.

If the importance of these government-granted monopolies is not clear, ask yourself how rich Bill Gates would be if any start-up computer manufacturer could produce millions of computers with Windows and other Microsoft software and not send the company a penny. The same story holds true with most other types of technology. The billionaires get rich from it, not because of the technology but because the government will arrest people who use it without the patent or copyright holder’s permission.

This point is central to the debate on the value of billionaires. If we could get the same or better technological progress without making some people ridiculously rich, then we certainly don’t need billionaires (I discuss alternatives in chapter 5 of my book Rigged [it’s free].) But in any discussion of the merits of billionaires, it is important to understand that they got their wealth because we wrote rules that allowed it. Their immense wealth was not a natural result of the development of technology.

It is unfortunate that this idea is apparently too radical for Manjoo.

New York Times columnist Farhad Manjoo tells us that he likes to “explore maximalist policy visions” in his columns. He falls well short of this goal in a piece calling for abolishing billionaires, which actually helps legitimate their existence.

The piece repeatedly tells us that their wealth is driven by technology, a point that first appears in the subhead which refers to “tech-driven inequality.” The problem with Manjoo’s piece is that the inequality is not in fact driven by technology, it is driven by our policy on technology, specifically patent and copyright monopolies. These forms of protection do not stem from the technology, they are policies created by a Congress which is disproportionately controlled by billionaires.

If the importance of these government-granted monopolies is not clear, ask yourself how rich Bill Gates would be if any start-up computer manufacturer could produce millions of computers with Windows and other Microsoft software and not send the company a penny. The same story holds true with most other types of technology. The billionaires get rich from it, not because of the technology but because the government will arrest people who use it without the patent or copyright holder’s permission.

This point is central to the debate on the value of billionaires. If we could get the same or better technological progress without making some people ridiculously rich, then we certainly don’t need billionaires (I discuss alternatives in chapter 5 of my book Rigged [it’s free].) But in any discussion of the merits of billionaires, it is important to understand that they got their wealth because we wrote rules that allowed it. Their immense wealth was not a natural result of the development of technology.

It is unfortunate that this idea is apparently too radical for Manjoo.

NYT Tells Us Russia's Reserves Are Too Large, What About China?

By CEPRCEPR

February 06, 2019

06 Febrero 2019

It really gets annoying when reporting in our nation’s leading newspaper has a make it up as you go along character. A piece on a new infrastructure program to boost Russia’s economy begins by telling readers:

“Russia has become a world-class saver. So much gold has piled up in its central bank that Russia surpassed China last year to become the world’s fifth-largest holder of gold.

“The International Monetary Fund often has to badger developing nations to bulk up foreign currency reserves. Russia has $472 billion in reserves, more than the country’s combined public and foreign debt of $453 billion and nearly three times what the IMF recommends.”

Okay, so Russia’s $472 billion in reserves are “nearly three times what the IMF recommends.” Then how about the $3,073 billion in reserves held by China? China’s economy is a bit more than eight times as large, but when we add in the more than $1.5 trillion value of China’s sovereign wealth funds, its reserves would be almost ten times the size of Russia’s.

The reason this matters is some of us have argued that China’s currency continues to be undervalued and that this is a matter of government policy. If it cut back its reserve holds to a level that the IMF apparently thinks is appropriate for Russia, it would drive down the value of the dollar against the Chinese yuan, making US goods and services more competitive. If we had a president who was concerned about the US trade deficit with China, they would make raising the value of the Chinese currency the main focus.

Unfortunately, news outlets like The New York Times have insisted that China’s currency is no longer undervalued. While it felt the need to tell readers that Russia’s reserves are excessive for an economy of its size, it claims the opposite about China’s even larger level of reserves relative to the size of its economy. This is not a good way for a news outlet to maintain its credibility.

It really gets annoying when reporting in our nation’s leading newspaper has a make it up as you go along character. A piece on a new infrastructure program to boost Russia’s economy begins by telling readers:

“Russia has become a world-class saver. So much gold has piled up in its central bank that Russia surpassed China last year to become the world’s fifth-largest holder of gold.

“The International Monetary Fund often has to badger developing nations to bulk up foreign currency reserves. Russia has $472 billion in reserves, more than the country’s combined public and foreign debt of $453 billion and nearly three times what the IMF recommends.”

Okay, so Russia’s $472 billion in reserves are “nearly three times what the IMF recommends.” Then how about the $3,073 billion in reserves held by China? China’s economy is a bit more than eight times as large, but when we add in the more than $1.5 trillion value of China’s sovereign wealth funds, its reserves would be almost ten times the size of Russia’s.

The reason this matters is some of us have argued that China’s currency continues to be undervalued and that this is a matter of government policy. If it cut back its reserve holds to a level that the IMF apparently thinks is appropriate for Russia, it would drive down the value of the dollar against the Chinese yuan, making US goods and services more competitive. If we had a president who was concerned about the US trade deficit with China, they would make raising the value of the Chinese currency the main focus.

Unfortunately, news outlets like The New York Times have insisted that China’s currency is no longer undervalued. While it felt the need to tell readers that Russia’s reserves are excessive for an economy of its size, it claims the opposite about China’s even larger level of reserves relative to the size of its economy. This is not a good way for a news outlet to maintain its credibility.