If we want to be honest with ourselves and the people who bother to pay attention to what we say, we must acknowledge when we were wrong. I want to do that as clearly as possible. I repeatedly argued against the Fed’s path of rapid rate hikes. I was concerned that the rapid pace of rate hikes would lead to a sharp jump in unemployment.
Ostensibly, the Fed was looking to weaken the labor market (raise unemployment) as a way to reduce the pace of wage growth, and in that way slow inflation. I thought that inflation was likely to come down even without a big jump in unemployment, as the supply chain problems associated with the pandemic were resolved.
It seems that the Fed’s view of inflation was incorrect. The rate of inflation has fallen back nearly to the Fed’s 2.0 percent target, even as the unemployment rate remains below 4.0 percent.
However, I was very much mistaken on the impact of the Fed’s rate hikes. The unemployment rate today is 3.8 percent, only slightly higher than the 3.6 percent rate when it started raising rates in March of 2022. Clearly the Fed’s rate hikes did not have the disastrous impact on unemployment I feared.
Why Higher Rates Didn’t Raise Unemployment
It is possible to identify reasons why the rate hikes did not have as much impact as I and others expected. Usually rate hikes have their largest impact on housing construction.
While the rise in rates did sharply reduce the number of housing starts, from around 1.8 million at an annual rate last March to a bit over 1.3 million in recent months, it did not reduce the number of homes under construction. There were just over 1.6 million under construction when the Fed began raising rates. In recent months the number has been over 1.8 million. In keeping with this increase in homes under construction, employment in residential construction has actually risen since the Fed started raising rates.
The explanation for this seeming paradox is that there was a huge backlog of houses in the pipeline as a result of pandemic supply chain problems. This backlog will eventually be whittled down, but to date, the Fed’s rate hikes have not had the impact on residential construction that would ordinarily be expected.
The second area where Fed rate hikes generally have a large impact is on the trade deficit. This works through a rise in the value of the dollar. The dollar is supposed to rise in value relative to foreign currencies, as people buy dollars in order to take advantage of the high rates here.
This route hasn’t had the usual impact either. The main reason was that the dollar had already risen considerably against other major currencies before the Fed started raising rates. The dollar rose by roughly 10 percent against the euro and a comparable amount against the yen between the start of 2021 and the first Fed rate hike in 2022.
It has risen further against both currencies in the last year and a half, but the trade deficit has nonetheless fallen. It stood at 4.4 percent of GDP in the first quarter of 2022, it was down to 3.0 percent of GDP in the second quarter of this year.
The rise in the dollar surely had some effect in pushing the deficit higher, but this was likely swamped by the effect of consumers shifting away from buying goods following the end of the pandemic. At the height of the pandemic people were unwilling or unable to go to movies, concerts, or travel. As a result, when they spent money it was overwhelmingly on goods consumption, things like cars and TVs. A large share of these goods were imported.
As the impact of the pandemic waned, people shifted back towards buying services and spent a smaller share of their income on goods. The result has been a drop in the trade deficit.
Another area where we expect higher interest rates to have a large effect is on investment in non-residential structures. This category of investment tends to be more interest sensitive than shorter-lived assets, like equipment and software.
Here also the effect of the pandemic lessened the impact. Investment in structures had already fallen sharply, dropping from 3.2 percent of GDP in the fourth quarter of 2019 to 2.6 percent of GDP in the fourth quarter of 2021, a drop of close to 20 percent. Construction of office buildings and retail space fell through the floor as a result of the pandemic, as there was enormous over-supply in both areas.
This meant that as the Fed began raising rates in the spring of 2022 there was not much room for these areas to drop further. In addition, the Biden administration’s polices, notably the CHIPS Act and Inflation Reduction Act, spurred construction of factories producing semi-conductors, batteries, solar panels, and other items needed for a green transition.
These incentives swamped any negative impact from higher interest rates. Construction of factories was 65.9 percent higher in August of 2023 than in August of 2022. Structure investment now stands at 3.1 percent of GDP, almost back to its pre-pandemic share.
The peculiar situation created by the pandemic meant that higher interest rates could not have their normal effect in slowing growth and weakening the labor market. This is why the labor market has remained solid in spite of the sharpest set of rate hikes in more than forty years.
Negative Effects of Higher Interest Rates
Even though rate hikes have not produced the slowing that we would ordinarily expect, they still did have an effect on the economy. The big jump in interest rates essentially shut down mortgage refinancing. The low mortgage rates of the pandemic allowed roughly 14 million homeowners to refinance their mortgage between 2020 and 2022.
According to research from NY Federal Reserve Bank, five million of these borrowers took out a total of $430 billion in equity, which they used to support their consumption or invest in other assets. The other nine million borrowers saved an average of $2,500 a year on interest payments by refinancing at lower rates. Higher interest rates put an end to the refinancing boom, with refinancing down more than 90 percent from its pandemic peak.
Higher mortgage rates also put a squeeze on homebuying. Sales of existing homes are down by almost a third, more than 2 million at an annual rate, from their levels in February of 2022, before the Fed began raising rates. The drop in existing home sales does have some impact on the economy. When people buy a home it generates fees and commissions for realtors, mortgage issuers, and various other actors involved in a home sale. People often tend to buy things like refrigerators and dishwashers when they buy a house and possibly remodel or paint their new home. For this reason, the drop in existing home sales does slow growth, even if the impact is much smaller than would be the case with a comparable drop in the sale of new homes.
While this fall in spending is picked up in GDP, there is another aspect to the drop in home sales that is not picked up in our GDP measures. The reduction in home sales is mostly a story where people would like to sell their current home, and move to a new one, but are reluctant to do so because it would mean giving up a mortgage with a very low interest rate, and taking out a mortgage on a new home with a much higher interest rate. As a result, they put off moving to a home that might better fit their needs.
As was pointed out to me by Adam Ozimek, this is a real cost to higher interest rates that is not picked up in GDP. People who would otherwise be in a different home are unambiguously worse off as a result of high current mortgage rates. (A huge gain that is not picked up in GDP is the increase in the number of people working from home, who are saving thousands of dollars a year on commuting costs and hundreds of hours of commuting time. The number of people working from home has increased by more than 11 million since the pandemic.)
Another cost is that many smaller firms and start-ups are having more difficulty getting access to capital. This may not be a big deal in terms of current investment, but if many of these firms are more innovative than larger incumbent firms, we may be paying a price down the road in the form of less innovation and productivity growth.
And, we know that higher rates have produced stress in the financial system. The wave of bank failures that started with the collapse of the Silicon Valley Bank was a predictable outcome from the sort of sharp rise in interest rates we have seen over the last year and a half. While banks should have hedged themselves from interest rate risk, it is impossible to do so completely, and many financial institutions will be facing serious stress as long as rates are high.
Lowering Rates and Getting Back to Normal
For these reasons, it would be desirable to see the Fed start to turn the corner on interest rates. We don’t really need lower rates to boost the economy just now, we look to be on a healthy growth path for the foreseeable future. But we would nonetheless see substantial benefits from a decline in interest rates.
The lesson from the limited impact of the sharp rise in rates on growth should also apply in reverse. Lower rates will clearly have a positive impact on residential and non-residential construction, as well as the trade deficit, but the impact is not likely to be as large as previously believed. Just as was the case with the rise in rates, other factors are likely to be more important in determining demand in these areas.
To be clear, there is no reason for the Fed to do a sharp reversal on rates. The economy is not in desperate need of stimulus. But we should be looking to get back to something resembling normal following the steep pandemic recession and the sharp recovery. This means edging down to the sort of interest rate curve we saw before the pandemic. A statement of this intention by the Fed, along with a modest rate cut, would be a huge step in this direction.
If we want to be honest with ourselves and the people who bother to pay attention to what we say, we must acknowledge when we were wrong. I want to do that as clearly as possible. I repeatedly argued against the Fed’s path of rapid rate hikes. I was concerned that the rapid pace of rate hikes would lead to a sharp jump in unemployment.
Ostensibly, the Fed was looking to weaken the labor market (raise unemployment) as a way to reduce the pace of wage growth, and in that way slow inflation. I thought that inflation was likely to come down even without a big jump in unemployment, as the supply chain problems associated with the pandemic were resolved.
It seems that the Fed’s view of inflation was incorrect. The rate of inflation has fallen back nearly to the Fed’s 2.0 percent target, even as the unemployment rate remains below 4.0 percent.
However, I was very much mistaken on the impact of the Fed’s rate hikes. The unemployment rate today is 3.8 percent, only slightly higher than the 3.6 percent rate when it started raising rates in March of 2022. Clearly the Fed’s rate hikes did not have the disastrous impact on unemployment I feared.
Why Higher Rates Didn’t Raise Unemployment
It is possible to identify reasons why the rate hikes did not have as much impact as I and others expected. Usually rate hikes have their largest impact on housing construction.
While the rise in rates did sharply reduce the number of housing starts, from around 1.8 million at an annual rate last March to a bit over 1.3 million in recent months, it did not reduce the number of homes under construction. There were just over 1.6 million under construction when the Fed began raising rates. In recent months the number has been over 1.8 million. In keeping with this increase in homes under construction, employment in residential construction has actually risen since the Fed started raising rates.
The explanation for this seeming paradox is that there was a huge backlog of houses in the pipeline as a result of pandemic supply chain problems. This backlog will eventually be whittled down, but to date, the Fed’s rate hikes have not had the impact on residential construction that would ordinarily be expected.
The second area where Fed rate hikes generally have a large impact is on the trade deficit. This works through a rise in the value of the dollar. The dollar is supposed to rise in value relative to foreign currencies, as people buy dollars in order to take advantage of the high rates here.
This route hasn’t had the usual impact either. The main reason was that the dollar had already risen considerably against other major currencies before the Fed started raising rates. The dollar rose by roughly 10 percent against the euro and a comparable amount against the yen between the start of 2021 and the first Fed rate hike in 2022.
It has risen further against both currencies in the last year and a half, but the trade deficit has nonetheless fallen. It stood at 4.4 percent of GDP in the first quarter of 2022, it was down to 3.0 percent of GDP in the second quarter of this year.
The rise in the dollar surely had some effect in pushing the deficit higher, but this was likely swamped by the effect of consumers shifting away from buying goods following the end of the pandemic. At the height of the pandemic people were unwilling or unable to go to movies, concerts, or travel. As a result, when they spent money it was overwhelmingly on goods consumption, things like cars and TVs. A large share of these goods were imported.
As the impact of the pandemic waned, people shifted back towards buying services and spent a smaller share of their income on goods. The result has been a drop in the trade deficit.
Another area where we expect higher interest rates to have a large effect is on investment in non-residential structures. This category of investment tends to be more interest sensitive than shorter-lived assets, like equipment and software.
Here also the effect of the pandemic lessened the impact. Investment in structures had already fallen sharply, dropping from 3.2 percent of GDP in the fourth quarter of 2019 to 2.6 percent of GDP in the fourth quarter of 2021, a drop of close to 20 percent. Construction of office buildings and retail space fell through the floor as a result of the pandemic, as there was enormous over-supply in both areas.
This meant that as the Fed began raising rates in the spring of 2022 there was not much room for these areas to drop further. In addition, the Biden administration’s polices, notably the CHIPS Act and Inflation Reduction Act, spurred construction of factories producing semi-conductors, batteries, solar panels, and other items needed for a green transition.
These incentives swamped any negative impact from higher interest rates. Construction of factories was 65.9 percent higher in August of 2023 than in August of 2022. Structure investment now stands at 3.1 percent of GDP, almost back to its pre-pandemic share.
The peculiar situation created by the pandemic meant that higher interest rates could not have their normal effect in slowing growth and weakening the labor market. This is why the labor market has remained solid in spite of the sharpest set of rate hikes in more than forty years.
Negative Effects of Higher Interest Rates
Even though rate hikes have not produced the slowing that we would ordinarily expect, they still did have an effect on the economy. The big jump in interest rates essentially shut down mortgage refinancing. The low mortgage rates of the pandemic allowed roughly 14 million homeowners to refinance their mortgage between 2020 and 2022.
According to research from NY Federal Reserve Bank, five million of these borrowers took out a total of $430 billion in equity, which they used to support their consumption or invest in other assets. The other nine million borrowers saved an average of $2,500 a year on interest payments by refinancing at lower rates. Higher interest rates put an end to the refinancing boom, with refinancing down more than 90 percent from its pandemic peak.
Higher mortgage rates also put a squeeze on homebuying. Sales of existing homes are down by almost a third, more than 2 million at an annual rate, from their levels in February of 2022, before the Fed began raising rates. The drop in existing home sales does have some impact on the economy. When people buy a home it generates fees and commissions for realtors, mortgage issuers, and various other actors involved in a home sale. People often tend to buy things like refrigerators and dishwashers when they buy a house and possibly remodel or paint their new home. For this reason, the drop in existing home sales does slow growth, even if the impact is much smaller than would be the case with a comparable drop in the sale of new homes.
While this fall in spending is picked up in GDP, there is another aspect to the drop in home sales that is not picked up in our GDP measures. The reduction in home sales is mostly a story where people would like to sell their current home, and move to a new one, but are reluctant to do so because it would mean giving up a mortgage with a very low interest rate, and taking out a mortgage on a new home with a much higher interest rate. As a result, they put off moving to a home that might better fit their needs.
As was pointed out to me by Adam Ozimek, this is a real cost to higher interest rates that is not picked up in GDP. People who would otherwise be in a different home are unambiguously worse off as a result of high current mortgage rates. (A huge gain that is not picked up in GDP is the increase in the number of people working from home, who are saving thousands of dollars a year on commuting costs and hundreds of hours of commuting time. The number of people working from home has increased by more than 11 million since the pandemic.)
Another cost is that many smaller firms and start-ups are having more difficulty getting access to capital. This may not be a big deal in terms of current investment, but if many of these firms are more innovative than larger incumbent firms, we may be paying a price down the road in the form of less innovation and productivity growth.
And, we know that higher rates have produced stress in the financial system. The wave of bank failures that started with the collapse of the Silicon Valley Bank was a predictable outcome from the sort of sharp rise in interest rates we have seen over the last year and a half. While banks should have hedged themselves from interest rate risk, it is impossible to do so completely, and many financial institutions will be facing serious stress as long as rates are high.
Lowering Rates and Getting Back to Normal
For these reasons, it would be desirable to see the Fed start to turn the corner on interest rates. We don’t really need lower rates to boost the economy just now, we look to be on a healthy growth path for the foreseeable future. But we would nonetheless see substantial benefits from a decline in interest rates.
The lesson from the limited impact of the sharp rise in rates on growth should also apply in reverse. Lower rates will clearly have a positive impact on residential and non-residential construction, as well as the trade deficit, but the impact is not likely to be as large as previously believed. Just as was the case with the rise in rates, other factors are likely to be more important in determining demand in these areas.
To be clear, there is no reason for the Fed to do a sharp reversal on rates. The economy is not in desperate need of stimulus. But we should be looking to get back to something resembling normal following the steep pandemic recession and the sharp recovery. This means edging down to the sort of interest rate curve we saw before the pandemic. A statement of this intention by the Fed, along with a modest rate cut, would be a huge step in this direction.
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Robert Reich posted a table that tells us a huge amount about the U.S. economy.
CEO pay of the largest carmakers in the world
Honda: $2.3M
Nissan $4.5M
Toyota: $6.7M
BMW: $5.6M
Mercedes: $7.5M
Porsche: $7.9M
Ford: $21M
Stellantis: $25M
GM: $29M
The reason this table is so informative is that the performance of these foreign automakers would certainly stand up well in comparison to the U.S. Big Three. (In fairness, Stellantis is largely a European company, headquartered in Amsterdam. But, its CEO gets U.S.-style pay.) So, the question is, why do U.S. companies have to pay so much more to get good help at the top?
The disparity in CEO pay does not reflect pay patterns in the economy more generally. The Bureau of Labor Statistics stopped publishing data showing hourly compensation costs internationally in 2011, but in that year, hourly compensation in manufacturing was considerably higher in Europe, and even slightly higher in Japan. Given the stagnation of manufacturing wages in the next decade, it is unlikely the story has turned in the U.S. favor in the last twelve years.
The most obvious explanation for the bloated CEO pay in the U.S. is that we have a corrupt corporate governance structure. It is obvious what keeps a check on the pay of ordinary workers. Management works very hard to ensure they are not overpaying assembly line workers, retail clerks, or administrative assistants. But who works to ensure that the company is not overpaying the CEO?
In principle, that is supposed to be the job of the corporate board of directors. But for the most part, by their own account, reining in CEO pay does not even seem to be on their list of responsibilities.
Top management typically plays a large role in the selection of directors. It is a very well-paying job, typically paying several hundred thousand dollars a year for a few hundred hours of work. Since directors see the management as their friend, and the best way to keep your job as a director is to stay on good terms with other board members, (directors nominated for re-election by the board win over 99 percent of the time), there is little incentive to ask pesky questions like “can we pay our CEO less?”
In Europe and Japan, typically banks have a large stake in major corporations. This makes them long-term shareholders with a direct stake in corporate governance. They are well-positioned to ask whether they can pay CEOs less. In other words, they can act to put a check on CEO pay in the same way that management puts a check on the pay of ordinary workers. And that is why the pay of CEOs of major European and Japanese car companies is 10-25 percent of the pay of the U.S. CEOs.
Bloated CEO Pay Matters
The issue of bloated CEO pay is not just a question of one person at the top of the corporate hierarchy getting more than they are worth. The high pay for the CEO distorts pay structures throughout the corporation and for the economy as a whole.
If the CEO is getting paid $25 million, then it is likely that the chief financial officer and others in the C-Suite are getting paid $10 million or more. And the third tier of executives might well be getting $2 million to $3 million. This picture would look very different if the CEO was getting paid the $2.3 million a year that Honda’s CEO pulls in.
And, this pay structure spreads to the rest of the economy. It is common now for presidents of universities or major foundations to be paid $2-3 million a year, with other top administrators often passing $1 million. They can argue for this sort of pay by saying how much more they would be getting in the corporate sector. That would not be true if corporate CEOs were paid $2-3 million a year.
And, to be clear this excessive pay is not showing up in big returns for shareholders. To take GM as an example, its share price is virtually unchanged since it went public again following its bankruptcy in the Great Recession.
In short, excessive CEO pay is a major drain on the economy. CEO pay is not related to their performance, even measured narrowly as returns to shareholders. From the standpoint of those of us not in a position to benefit from the bloated pay structures at the top, it is simply a tax, and a very regressive one.
Robert Reich posted a table that tells us a huge amount about the U.S. economy.
CEO pay of the largest carmakers in the world
Honda: $2.3M
Nissan $4.5M
Toyota: $6.7M
BMW: $5.6M
Mercedes: $7.5M
Porsche: $7.9M
Ford: $21M
Stellantis: $25M
GM: $29M
The reason this table is so informative is that the performance of these foreign automakers would certainly stand up well in comparison to the U.S. Big Three. (In fairness, Stellantis is largely a European company, headquartered in Amsterdam. But, its CEO gets U.S.-style pay.) So, the question is, why do U.S. companies have to pay so much more to get good help at the top?
The disparity in CEO pay does not reflect pay patterns in the economy more generally. The Bureau of Labor Statistics stopped publishing data showing hourly compensation costs internationally in 2011, but in that year, hourly compensation in manufacturing was considerably higher in Europe, and even slightly higher in Japan. Given the stagnation of manufacturing wages in the next decade, it is unlikely the story has turned in the U.S. favor in the last twelve years.
The most obvious explanation for the bloated CEO pay in the U.S. is that we have a corrupt corporate governance structure. It is obvious what keeps a check on the pay of ordinary workers. Management works very hard to ensure they are not overpaying assembly line workers, retail clerks, or administrative assistants. But who works to ensure that the company is not overpaying the CEO?
In principle, that is supposed to be the job of the corporate board of directors. But for the most part, by their own account, reining in CEO pay does not even seem to be on their list of responsibilities.
Top management typically plays a large role in the selection of directors. It is a very well-paying job, typically paying several hundred thousand dollars a year for a few hundred hours of work. Since directors see the management as their friend, and the best way to keep your job as a director is to stay on good terms with other board members, (directors nominated for re-election by the board win over 99 percent of the time), there is little incentive to ask pesky questions like “can we pay our CEO less?”
In Europe and Japan, typically banks have a large stake in major corporations. This makes them long-term shareholders with a direct stake in corporate governance. They are well-positioned to ask whether they can pay CEOs less. In other words, they can act to put a check on CEO pay in the same way that management puts a check on the pay of ordinary workers. And that is why the pay of CEOs of major European and Japanese car companies is 10-25 percent of the pay of the U.S. CEOs.
Bloated CEO Pay Matters
The issue of bloated CEO pay is not just a question of one person at the top of the corporate hierarchy getting more than they are worth. The high pay for the CEO distorts pay structures throughout the corporation and for the economy as a whole.
If the CEO is getting paid $25 million, then it is likely that the chief financial officer and others in the C-Suite are getting paid $10 million or more. And the third tier of executives might well be getting $2 million to $3 million. This picture would look very different if the CEO was getting paid the $2.3 million a year that Honda’s CEO pulls in.
And, this pay structure spreads to the rest of the economy. It is common now for presidents of universities or major foundations to be paid $2-3 million a year, with other top administrators often passing $1 million. They can argue for this sort of pay by saying how much more they would be getting in the corporate sector. That would not be true if corporate CEOs were paid $2-3 million a year.
And, to be clear this excessive pay is not showing up in big returns for shareholders. To take GM as an example, its share price is virtually unchanged since it went public again following its bankruptcy in the Great Recession.
In short, excessive CEO pay is a major drain on the economy. CEO pay is not related to their performance, even measured narrowly as returns to shareholders. From the standpoint of those of us not in a position to benefit from the bloated pay structures at the top, it is simply a tax, and a very regressive one.
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Her column is headlined “Obamacare is Unable to Save Money on U.S. Health Care.” The heading then goes on to explain how some of the cost-saving provisions in the Affordable Care Act (ACA) have not led to cost savings.
The reason why this is so striking is that healthcare costs in the United States have risen much less rapidly since the passage of the ACA than had been projected by the Congressional Budget Office or the Centers for Medicare and Medicaid Services. Healthcare spending has risen only modestly as a share of GDP since 2010, and in the last few years it has actually fallen slightly.
Here’s the picture through last fall.[1] (Someone may want to update this, but I have other things to do just now.)
Source: Bureau of Economics Analysis and author’s calculations.
I realize that the slowing in health care costs can not all be attributed to Obamacare, but I would make two points here. First, if healthcare costs had gone the other way, and risen more rapidly than projected, we know that Obamacare would be blamed, even if the factors leading to higher costs had absolutely nothing to do with the ACA. That is absolutely 100 percent without question. In the interests of symmetry, we should give the ACA credit for the sharp slowing in healthcare cost growth.
The other point is a simple logical one. Whatever the reason for the slowing of health care cost growth, it has provided the country with an enormous economic dividend.
CBO’s long-term budget projections from 2009, the year before the ACA passed, showed that healthcare spending would be equal to 33.1 percent of total consumption spending by 2022 (Table F2-2). In fact, my calculations (adjusted for the 0.8 percentage point gap with CMS), show healthcare spending at just 24.8 percent of current consumption spending.
The gap between the 33.1 percent of consumption projection from CBO and 24.8 percent actual, is equal to more than $1.45 trillion on an annual basis. This comes to $11,800 per family each year. Compared to the projected path of growth of health care spending from 13 years ago, an average family has an additional $11,800 a year to spend on items other than health care.
This is a big deal that really should be more widely recognized. It doesn’t help to have a columnist in one of the country’s most important newspapers claiming the exact opposite of the reality.
[1] These numbers are slightly higher than what the Centers for Medicare and Medicare Services (CMS) report for healthcare spending as a share of GDP. They showed a figure of 17.6 percent for 2019 (the last year for which data are available), while my calculations come to 18.4 percent. I assume this is due to some double counting, where I may have some government healthcare spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other healthcare provision. Although the level is somewhat higher than the CMS data indicate presumably the changes over this period follow the changes as measured by CMS reasonably closely.
Her column is headlined “Obamacare is Unable to Save Money on U.S. Health Care.” The heading then goes on to explain how some of the cost-saving provisions in the Affordable Care Act (ACA) have not led to cost savings.
The reason why this is so striking is that healthcare costs in the United States have risen much less rapidly since the passage of the ACA than had been projected by the Congressional Budget Office or the Centers for Medicare and Medicaid Services. Healthcare spending has risen only modestly as a share of GDP since 2010, and in the last few years it has actually fallen slightly.
Here’s the picture through last fall.[1] (Someone may want to update this, but I have other things to do just now.)
Source: Bureau of Economics Analysis and author’s calculations.
I realize that the slowing in health care costs can not all be attributed to Obamacare, but I would make two points here. First, if healthcare costs had gone the other way, and risen more rapidly than projected, we know that Obamacare would be blamed, even if the factors leading to higher costs had absolutely nothing to do with the ACA. That is absolutely 100 percent without question. In the interests of symmetry, we should give the ACA credit for the sharp slowing in healthcare cost growth.
The other point is a simple logical one. Whatever the reason for the slowing of health care cost growth, it has provided the country with an enormous economic dividend.
CBO’s long-term budget projections from 2009, the year before the ACA passed, showed that healthcare spending would be equal to 33.1 percent of total consumption spending by 2022 (Table F2-2). In fact, my calculations (adjusted for the 0.8 percentage point gap with CMS), show healthcare spending at just 24.8 percent of current consumption spending.
The gap between the 33.1 percent of consumption projection from CBO and 24.8 percent actual, is equal to more than $1.45 trillion on an annual basis. This comes to $11,800 per family each year. Compared to the projected path of growth of health care spending from 13 years ago, an average family has an additional $11,800 a year to spend on items other than health care.
This is a big deal that really should be more widely recognized. It doesn’t help to have a columnist in one of the country’s most important newspapers claiming the exact opposite of the reality.
[1] These numbers are slightly higher than what the Centers for Medicare and Medicare Services (CMS) report for healthcare spending as a share of GDP. They showed a figure of 17.6 percent for 2019 (the last year for which data are available), while my calculations come to 18.4 percent. I assume this is due to some double counting, where I may have some government healthcare spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, health care services, and net health care insurance. Line 32 is the government spending on Medicaid and other healthcare provision. Although the level is somewhat higher than the CMS data indicate presumably the changes over this period follow the changes as measured by CMS reasonably closely.
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The United States’ support of Ukraine, following the invasion by Russia, has featured prominently in the news in recent days as Republicans in Congress have made it front and center in the budget debate. As usual, the media has reported U.S. spending on military and economic assistance without providing any context for the spending. This likely leads both supporters and opponents of the aid to exaggerate its importance to the economy and its significance in the budget.
This is unfortunate, since it really is not possible to make an intelligent judgement of the importance of this aid without a real understanding of its size. To be clear, someone who considers the aid to be very important as a national security matter or as a humanitarian issue may be willing to give the aid even if it were an order of magnitude larger.
On the other side, people who consider the aid to be wasteful, or even counter-productive, may oppose it even if the sums involved were one-tenth as large. But to have a serious debate people should have a clear idea of the sums involved and just tossing around billions or tens of billions of dollars is utterly meaningless to the overwhelming majority of people who are not budget wonks.
People familiar with my blog will know that this is not a new concern for me. I have literally been haranguing reporters for decades about their refusal to provide any context for numbers that they know are meaningless to almost their entire audience. For some reason, they refuse to provide any sort of context even when it would likely just take a minute or two to provide a comparison that could make the number meaningful.
I thought I had finally broken through on this point back in 2013, when Margaret Sullivan, then the New York Times Public Editor, wrote a column where she completely accepted this point. She also managed to get strong agreement from David Leonhardt, who was the paper’s Washington editor at the time.
While I had hoped for a change in practice at the NYT, which would then lead other news outlets to follow, nothing changed. We still routinely see large numbers reported, without any context that would make them meaningful to readers.
Anyhow, I will do the simple arithmetic on the money going to Ukraine. I realize that this discussion may seem to minimize the importance of the U.S. money going to Ukraine.
I am not trying to advance any political agenda here. I have serious concerns about U.S. policy in Ukraine, so I have no interest in trying to downplay the economic importance of the U.S. involvement. But we should be able to have a debate on the merits of the policy without misleading people on its economic impact. I hope that I can advance that, as well as calling attention to the importance of putting big numbers in context more generally.
Ukraine Spending as a Share of GDP
According to estimates from the Kiel Institute for the World Economy, the United States has spent just under $75 billion on aid to Ukraine (both economic and military) since the start of the war. If we say this has taken place over roughly one and half years, this figure comes to 0.19 percent of current U.S. GDP.
I have taken spending on some categories of consumption which are roughly comparable.[1] As is shown in the figure below, in the second quarter of 2023 spending on sugar and sweets came to 0.27 percent of GDP. Spending on casino gambling was more than twice as large at 0.51 percent of GDP. And spending on dishes and flatware was a bit more than half as much at 0.11 percent of GDP.
Source: Bureau of Economic Analysis and author’s calculations.
Ukraine Spending as Share of the Budget
Spending on Ukraine does come out of the federal budget, so we may think of it to some extent as being in competition with other spending or tax expenditures (tax breaks). Using fiscal year 2023 as the denominator, Ukraine spending came to 0.78 percent of spending.
By comparison, the preferential treatment (lower tax rate) on dividends and capital gains costs the government an amount equal to 3.15 percent of outlays.[2] The deduction for charitable contributions cost 0.97 percent of the budget. The exclusion of capital gains on assets transferred at death, cost the government 0.88 percent of total spending. (This means people who inherit assets like stock don’t have to pay taxes on unrealized capital gains on the stock.) This comparison is shown in the figure below.
Source: Congressional Budget Office and author’s calculations.
Spending on Ukraine is Not Bankrupting Us, but it May Still Not Be a Good Idea
These comparisons will hopefully allow people to better understand the costs associated with U.S. support for Ukraine. My guess is that they show it to be less important than most people believe. That doesn’t mean that the course pursued by the Biden administration is the best route, but people should be able to argue that position based on a clear understanding of the numbers.
[1] These data come from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U, Lines 94, 227, and 33, respectively.
[2] These calculations use data for 2019 (the most recent year available) from the Congressional Budget Office’s The Distribution of Major Tax Expenditures in 2019, Table 1. The denominator is outlays for 2019.
The United States’ support of Ukraine, following the invasion by Russia, has featured prominently in the news in recent days as Republicans in Congress have made it front and center in the budget debate. As usual, the media has reported U.S. spending on military and economic assistance without providing any context for the spending. This likely leads both supporters and opponents of the aid to exaggerate its importance to the economy and its significance in the budget.
This is unfortunate, since it really is not possible to make an intelligent judgement of the importance of this aid without a real understanding of its size. To be clear, someone who considers the aid to be very important as a national security matter or as a humanitarian issue may be willing to give the aid even if it were an order of magnitude larger.
On the other side, people who consider the aid to be wasteful, or even counter-productive, may oppose it even if the sums involved were one-tenth as large. But to have a serious debate people should have a clear idea of the sums involved and just tossing around billions or tens of billions of dollars is utterly meaningless to the overwhelming majority of people who are not budget wonks.
People familiar with my blog will know that this is not a new concern for me. I have literally been haranguing reporters for decades about their refusal to provide any context for numbers that they know are meaningless to almost their entire audience. For some reason, they refuse to provide any sort of context even when it would likely just take a minute or two to provide a comparison that could make the number meaningful.
I thought I had finally broken through on this point back in 2013, when Margaret Sullivan, then the New York Times Public Editor, wrote a column where she completely accepted this point. She also managed to get strong agreement from David Leonhardt, who was the paper’s Washington editor at the time.
While I had hoped for a change in practice at the NYT, which would then lead other news outlets to follow, nothing changed. We still routinely see large numbers reported, without any context that would make them meaningful to readers.
Anyhow, I will do the simple arithmetic on the money going to Ukraine. I realize that this discussion may seem to minimize the importance of the U.S. money going to Ukraine.
I am not trying to advance any political agenda here. I have serious concerns about U.S. policy in Ukraine, so I have no interest in trying to downplay the economic importance of the U.S. involvement. But we should be able to have a debate on the merits of the policy without misleading people on its economic impact. I hope that I can advance that, as well as calling attention to the importance of putting big numbers in context more generally.
Ukraine Spending as a Share of GDP
According to estimates from the Kiel Institute for the World Economy, the United States has spent just under $75 billion on aid to Ukraine (both economic and military) since the start of the war. If we say this has taken place over roughly one and half years, this figure comes to 0.19 percent of current U.S. GDP.
I have taken spending on some categories of consumption which are roughly comparable.[1] As is shown in the figure below, in the second quarter of 2023 spending on sugar and sweets came to 0.27 percent of GDP. Spending on casino gambling was more than twice as large at 0.51 percent of GDP. And spending on dishes and flatware was a bit more than half as much at 0.11 percent of GDP.
Source: Bureau of Economic Analysis and author’s calculations.
Ukraine Spending as Share of the Budget
Spending on Ukraine does come out of the federal budget, so we may think of it to some extent as being in competition with other spending or tax expenditures (tax breaks). Using fiscal year 2023 as the denominator, Ukraine spending came to 0.78 percent of spending.
By comparison, the preferential treatment (lower tax rate) on dividends and capital gains costs the government an amount equal to 3.15 percent of outlays.[2] The deduction for charitable contributions cost 0.97 percent of the budget. The exclusion of capital gains on assets transferred at death, cost the government 0.88 percent of total spending. (This means people who inherit assets like stock don’t have to pay taxes on unrealized capital gains on the stock.) This comparison is shown in the figure below.
Source: Congressional Budget Office and author’s calculations.
Spending on Ukraine is Not Bankrupting Us, but it May Still Not Be a Good Idea
These comparisons will hopefully allow people to better understand the costs associated with U.S. support for Ukraine. My guess is that they show it to be less important than most people believe. That doesn’t mean that the course pursued by the Biden administration is the best route, but people should be able to argue that position based on a clear understanding of the numbers.
[1] These data come from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U, Lines 94, 227, and 33, respectively.
[2] These calculations use data for 2019 (the most recent year available) from the Congressional Budget Office’s The Distribution of Major Tax Expenditures in 2019, Table 1. The denominator is outlays for 2019.
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A piece on a U.S. District Court judge’s ruling in favor of the Biden administration’s plan to negotiate on the price Medicare pays for drugs concluded by telling readers:
“Many other countries already negotiate drug prices.”
In fact, the United States government already negotiates drug prices for programs like the Veterans’ Administration and Federal Employee’s health care program. The issue is whether to extend negotiations to Medicare, not whether to introduce something altogether novel to the United States.
A piece on a U.S. District Court judge’s ruling in favor of the Biden administration’s plan to negotiate on the price Medicare pays for drugs concluded by telling readers:
“Many other countries already negotiate drug prices.”
In fact, the United States government already negotiates drug prices for programs like the Veterans’ Administration and Federal Employee’s health care program. The issue is whether to extend negotiations to Medicare, not whether to introduce something altogether novel to the United States.
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There is an iconic image from The Simpsons. It is a picture of Grandpa Simpson shaking his fist at the sky, under the headline “Old Man Yells at Clouds.” This aptly describes the state of intellectual thinking among progressives in the United States.
We see endless diatribes against market-oriented policies, as though the problems of inequality, poverty, and environmental destruction somehow came from the market. As I have argued endlessly, and largely pointlessly, this view is ridiculous.
There is no market sitting out there to do these horrible things to society. The market can be structured in thousands of different ways. The billionaires have been very clever in structuring the market to give themselves and their millionaire allies more money. The left, on the other hand, has been yelling about the market, rather than devoting serious thought to how it can be structured differently to produce better outcomes.
The fact that so many of our problems stem from ways we have structured the market, when it could be structured differently, should be pretty obvious. Bill Gates is not one of the richest people in the world because of the market. He is one of the richest people in the world because the government gives Microsoft patent and copyright monopolies on software, and threatens to arrest people who make copies without Gates’ permission.
In the financial crisis in 2008-2009, virtually all of the country’s major banks would have been tossed into the dustbin of history if we had just let the market work its magic. Somehow, saving Citigroup and Robert Rubin, and all the rest is just described as leaving things to the market – by progressives.
There are of course a million and one other ways that we structure the financial sector to benefit the rich: government deposit insurance, exemption from the sort of sales taxes that apply to almost everything else we buy, and nonsensical tax preferences like the carried interest deduction that fuel private equity and hedge funds. Yet, somehow progressive intellectuals look at all the rich and super-rich in finance and just see the market being left to itself.
And, for two of our super-billionaires, Elon Musk and Mark Zuckerberg, we have Section 230 protection. This means that their Internet platforms are not subject to the same rules on defamation as print and broadcast outlets. Yeah, this is just the market, telling us to give special privileges to online platforms.
Progressives call trade agreements, that were designed to place downward pressure on the pay of manufacturing workers by putting them in competition with low-paid workers in the developing world, “free trade.” These deals had nothing to do with free trade.
They did nothing to remove the protectionist barriers that allow for the high pay of U.S. doctors, dentists, and other highly paid professionals. And, these deals quite explicitly increased protectionist barriers in the form of patent and copyright protections. Yet, somehow, progressive intellectuals think it is clever to call these deals “free trade agreements.”
This is not just semantics, although I would argue the semantics are important. We need to have a clear understanding of the factors that led to the massive upward redistribution over the last four decades, if we are going to reverse it. Imagining that we are fighting the market, and we just need government intervention to come to the rescue, is not going to do it for us. The government has been there the whole time, for some reason, progressives have just decided not to see it.
Industrial Policy Is Not a Mantra
This comes up big-time with the newfound love for “industrial policy.” Industrial policy, the idea of the government steering resources to specific areas is great, and we have been doing it forever.
The most obvious example is homeownership where we structured the tax code explicitly to favor homeownership and also set up a set of massive financing institutions, Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, to support homeownership. We also set up the Federal Housing Authority explicitly to make affordable mortgages available to moderate-income households. It’s hard to see how this does not qualify as industrial policy.
To take another important example, we spend over $50 billion a year on biomedical research, mostly through the National Institutes of Health. This research is the basis for a biomedical industry that has revenue of more than $500 billion annually for prescription drugs, more than $100 billion for non-prescription drugs, and more than $200 billion for medical equipment. Again, if this is not industrial policy, it is hard to imagine what would be.
It’s great that the Biden administration has decided to increase support for the shift to electric cars and clean energy. It’s also good that it is putting up funding for developing cutting-edge semiconductors and producing them domestically, but these are changes in direction, not a qualitative break from some imagined free market world.
Whether or not these changes in direction lead to less inequality will depend on how we structure the policy. We can have truly wonderful industrial policy, in terms of directing resources to important areas, that leads to more inequality.
The government’s contract with Moderna to develop a Covid vaccine is the poster child in this category. It was very important for the United States, and the world, to develop Covid vaccines as quickly as possible. But, in the case of Moderna, we paid it over $900 million to develop and test a vaccine, and then gave it control over it. The result was that the stock price of Moderna increased by tens of billions and we created at least five Moderna billionaires by the summer of 2021.
If we just celebrate the industrial policy – paying for the development of a vaccine – and don’t pay attention to how the rules are structured, then we get Moderna billionaires. And, if we do the same with our industrial policy for electric cars, wind and solar energy, and semiconductors, then we will end up with many more billionaires.
That might be great news for the anti-billionaire industry, since there will be many more billionaires to complain about, but it will not be good news for people who are genuinely concerned about inequality. The point here is we have to understand how the rules we are making can lead to more or less inequality. If we just have the illusion that the question is simply the government or the market, we are not even playing the game.
And, the semantics here do matter. Market outcomes have a good reputation in general. People like markets, with some real cause. It has generated an enormous amount of wealth over the last two centuries, making it possible to lift billions of people out of poverty.
By contrast, people can point to many bad outcomes from heavy-handed government interventions. The extreme case is Soviet central planning, which did not have much to recommend it by the last days of the Soviet Union. There is also no shortage of instances where overly rigid bureaucratic rules have obstructed progress in important areas.
For this reason, it really is self-defeating and unnecessary to argue that we want the government to override the market. The issue is not whether the government will override the market, the issue is how the government will structure the market.
The right wants to structure the market so all the money goes to its billionaire backers. Progressives want to structure the market so that the benefits of growth are broadly shared.
That is the choice we are posing, the market is simply a tool, we are fighting over how we want to use it. Why on earth should we ever tell people that the market is the enemy?
Let Grandpa Simpson yell at the clouds, progressives should be focused on real enemies.
There is an iconic image from The Simpsons. It is a picture of Grandpa Simpson shaking his fist at the sky, under the headline “Old Man Yells at Clouds.” This aptly describes the state of intellectual thinking among progressives in the United States.
We see endless diatribes against market-oriented policies, as though the problems of inequality, poverty, and environmental destruction somehow came from the market. As I have argued endlessly, and largely pointlessly, this view is ridiculous.
There is no market sitting out there to do these horrible things to society. The market can be structured in thousands of different ways. The billionaires have been very clever in structuring the market to give themselves and their millionaire allies more money. The left, on the other hand, has been yelling about the market, rather than devoting serious thought to how it can be structured differently to produce better outcomes.
The fact that so many of our problems stem from ways we have structured the market, when it could be structured differently, should be pretty obvious. Bill Gates is not one of the richest people in the world because of the market. He is one of the richest people in the world because the government gives Microsoft patent and copyright monopolies on software, and threatens to arrest people who make copies without Gates’ permission.
In the financial crisis in 2008-2009, virtually all of the country’s major banks would have been tossed into the dustbin of history if we had just let the market work its magic. Somehow, saving Citigroup and Robert Rubin, and all the rest is just described as leaving things to the market – by progressives.
There are of course a million and one other ways that we structure the financial sector to benefit the rich: government deposit insurance, exemption from the sort of sales taxes that apply to almost everything else we buy, and nonsensical tax preferences like the carried interest deduction that fuel private equity and hedge funds. Yet, somehow progressive intellectuals look at all the rich and super-rich in finance and just see the market being left to itself.
And, for two of our super-billionaires, Elon Musk and Mark Zuckerberg, we have Section 230 protection. This means that their Internet platforms are not subject to the same rules on defamation as print and broadcast outlets. Yeah, this is just the market, telling us to give special privileges to online platforms.
Progressives call trade agreements, that were designed to place downward pressure on the pay of manufacturing workers by putting them in competition with low-paid workers in the developing world, “free trade.” These deals had nothing to do with free trade.
They did nothing to remove the protectionist barriers that allow for the high pay of U.S. doctors, dentists, and other highly paid professionals. And, these deals quite explicitly increased protectionist barriers in the form of patent and copyright protections. Yet, somehow, progressive intellectuals think it is clever to call these deals “free trade agreements.”
This is not just semantics, although I would argue the semantics are important. We need to have a clear understanding of the factors that led to the massive upward redistribution over the last four decades, if we are going to reverse it. Imagining that we are fighting the market, and we just need government intervention to come to the rescue, is not going to do it for us. The government has been there the whole time, for some reason, progressives have just decided not to see it.
Industrial Policy Is Not a Mantra
This comes up big-time with the newfound love for “industrial policy.” Industrial policy, the idea of the government steering resources to specific areas is great, and we have been doing it forever.
The most obvious example is homeownership where we structured the tax code explicitly to favor homeownership and also set up a set of massive financing institutions, Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, to support homeownership. We also set up the Federal Housing Authority explicitly to make affordable mortgages available to moderate-income households. It’s hard to see how this does not qualify as industrial policy.
To take another important example, we spend over $50 billion a year on biomedical research, mostly through the National Institutes of Health. This research is the basis for a biomedical industry that has revenue of more than $500 billion annually for prescription drugs, more than $100 billion for non-prescription drugs, and more than $200 billion for medical equipment. Again, if this is not industrial policy, it is hard to imagine what would be.
It’s great that the Biden administration has decided to increase support for the shift to electric cars and clean energy. It’s also good that it is putting up funding for developing cutting-edge semiconductors and producing them domestically, but these are changes in direction, not a qualitative break from some imagined free market world.
Whether or not these changes in direction lead to less inequality will depend on how we structure the policy. We can have truly wonderful industrial policy, in terms of directing resources to important areas, that leads to more inequality.
The government’s contract with Moderna to develop a Covid vaccine is the poster child in this category. It was very important for the United States, and the world, to develop Covid vaccines as quickly as possible. But, in the case of Moderna, we paid it over $900 million to develop and test a vaccine, and then gave it control over it. The result was that the stock price of Moderna increased by tens of billions and we created at least five Moderna billionaires by the summer of 2021.
If we just celebrate the industrial policy – paying for the development of a vaccine – and don’t pay attention to how the rules are structured, then we get Moderna billionaires. And, if we do the same with our industrial policy for electric cars, wind and solar energy, and semiconductors, then we will end up with many more billionaires.
That might be great news for the anti-billionaire industry, since there will be many more billionaires to complain about, but it will not be good news for people who are genuinely concerned about inequality. The point here is we have to understand how the rules we are making can lead to more or less inequality. If we just have the illusion that the question is simply the government or the market, we are not even playing the game.
And, the semantics here do matter. Market outcomes have a good reputation in general. People like markets, with some real cause. It has generated an enormous amount of wealth over the last two centuries, making it possible to lift billions of people out of poverty.
By contrast, people can point to many bad outcomes from heavy-handed government interventions. The extreme case is Soviet central planning, which did not have much to recommend it by the last days of the Soviet Union. There is also no shortage of instances where overly rigid bureaucratic rules have obstructed progress in important areas.
For this reason, it really is self-defeating and unnecessary to argue that we want the government to override the market. The issue is not whether the government will override the market, the issue is how the government will structure the market.
The right wants to structure the market so all the money goes to its billionaire backers. Progressives want to structure the market so that the benefits of growth are broadly shared.
That is the choice we are posing, the market is simply a tool, we are fighting over how we want to use it. Why on earth should we ever tell people that the market is the enemy?
Let Grandpa Simpson yell at the clouds, progressives should be focused on real enemies.
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The Washington Post has a long history of hating on powerful unions, like the United Auto Workers (UAW), or any factor that allows blue-collar workers to earn a decent living. In keeping with that tradition, editorial writer and columnist Charles Lane argued that the UAW strike is highlighting the “contradictions” in Bidenomics.
Lane’s argument is that if we want to deal with climate change effectively, we should want to get the items needed for the green transition as cheaply as possible. This means we should want solar and wind installations produced at the lowest possible cost, as well as electric cars. According to Lane, that means we should not have import tariffs and be happy if these items are produced with low-cost non-union labor.
This is a plausible case in the short term, but that may not be true in the longer term. In the short term, obviously it is cheaper to get clean energy inputs at lower cost than at higher cost, but that may not be the case in the long term.
If the United States can build up its capacity and expertise as a top-line producer of solar panels, wind turbines, and electric cars, we may find that it is cheaper to produce these items here. There is evidence that unionized workers are more productive than poorly paid non-union workers.
Unionized workers switch jobs much less frequently and, when they know they will share in the gains of productivity-enhancing innovations, have far more incentive to share their insights with management. Countries with far higher unionization rates than the United States, notably Germany and Denmark, have been quite successful in maintaining top-level manufacturing operations.
The Political Coalition for a Green Transition
But apart from the economics of ensuring that unions are part of a green transition, there is also a political issue. Good policy does not just happen. It would make great sense to change the basis for the corporate income tax to a tax on stock returns. It doesn’t happen because the people who gain from the tax gaming industry (corporate accountants, tax lawyers, and the companies that do it effectively) are much more powerful than the tiny group of people who actually care about collecting the corporate income tax.
Similarly, we can reduce bloated CEO pay, and radically lower the excessive pay of high-end executives more generally (leaving more for ordinary workers), if we give shareholders more control over setting pay. However, this change doesn’t happen because there is no notable political force behind it, and the CEOs and their friends scream “communism” at efforts to give shareholders more control of the companies they ostensibly own.
The point is that change does not just happen in this world. It needs a political force to push it. Most of the country’s unions, including the UAW, have been willing to support policies for a green transition, but they want to make sure that their workers are protected in the process. The fact that Biden is willing to take a risk, that he may be raising costs somewhat, at least in the short-term, to keep this important ally, simply reflects political reality.
If this point is too subtle for the people who own and control the Washington Post, if Donald Trump gets back in the White House, there will be no green transition in the United States. He and most of his Republican allies have made it clear that they intend to sabotage private efforts to move to clean energy, not subsidize them.
In this respect, it is also worth noting that the Washington Post and other major news outlets have played an important role in making a green transition more difficult. They regularly report assertions from Republican politicians on global warming as reflecting their sincere beliefs, saying things like these politicians “believe” that global warming is not a real problem.
In addition to being awful journalism (reporters don’t know what politicians actually have in their heads), it is almost certainly not true. Many of the country’s most prominent Republican politicians, like Ted Cruz, Ron DeSantis, and Josh Hawley, have educations from top universities. It is highly unlikely that they learned nothing about global warming or somehow came to views that contradict the nearly unanimous consensus among scientists who are not on the payroll of the fossil fuel industry.
For this reason, it is absurd to treat their assertions about global warming as reflecting their sincere beliefs. A simple and neutral way to describe their assertions is to simply report what they say, or that they “claim” global warming is not a problem. Reporters can stick to reporting what they know and leave it to readers to determine for themselves whether these politicians are being honest.
Higher Costs Due Patent Monopolies and Related Protections
The Washington Post, like other elite news outlets, is always happy to beat up any real or perceived market intervention that benefits ordinary workers, however, it insists it cannot see the more costly interventions that benefit many corporations and highly-educated workers. Specifically, it virtually never raises any questions, either in news articles or opinion pieces, about the costs imposed by government-granted patent monopolies and related protections.
This is especially important in the case of prescription drugs, where life-saving medicines, that likely would sell for a few dollars a prescription in a free market, can sell for hundreds or even thousands of dollars a prescription when they have government-granted patent monopolies. We will spend over $570 billion this year on drugs that would likely sell for less than $100 billion in a free market without patent monopolies.
While the WaPo would ordinarily be very concerned about a government expenditure of $470 billion a year (nearly $5 trillion over a decade), when the government effectively makes this expenditure by granting patent monopolies, there is no room for discussion in the paper. There is a similar story with patent monopolies in clean energy.
If we are actually facing an existential crisis with global warming (we are), we should be looking to ensure that all relevant technologies are available at the lowest possible cost. If it were not a question of political power, we would be suspending patents and related protections for the relevant technologies, allowing everyone everywhere in the world to use the latest technology at zero cost. We would also be open-sourcing the research behind the technology so researchers all over the world can benefit and build on innovations, wherever they occur.
We can compensate companies for the profits they lose as a result. Of course, if they consider compensation from whatever formula is used inadequate, they can sue after the fact, but we should not let their concerns about compensation slow the process of moving to a green economy. (Yes, we should have done this during the pandemic, but we know that in polite debate, profits and pay for high-end workers are far more important than human lives.)
There is also the issue of supporting research going forward. The United States, and other countries, should be paying out money directly, sort of like what we do now with military research and with biomedical research supported by the National Institutes of Health and other government agencies, in key areas for developing clean technologies.
This would require some agreements with other countries on sharing costs, but again, we can outline the plan and start the research now, and fight over the exact compensation formulas later. But that would only be if we cared about saving the planet. Again, all this newly supported research would be fully open-source with any patents in the public domain and all results posted on the web as quickly as possible.
Bottom Line: WaPo Cares About Beating Up Blue Collar Workers, not Saving the Planet
The story with Lane, the WaPo, and really the major media outlets more generally, is that they are more committed to maintaining class distinctions and ensuring that blue-collar workers don’t get a decent paycheck, than trying to contain global warming. They dump on policies that benefit blue-collar workers that could slow the green transition in the short-term, but are just fine ignoring policies that benefit major corporations and highly-educated workers, which also slow the transition. This is not a surprise, we know who owns and controls the Washington Post.
The Washington Post has a long history of hating on powerful unions, like the United Auto Workers (UAW), or any factor that allows blue-collar workers to earn a decent living. In keeping with that tradition, editorial writer and columnist Charles Lane argued that the UAW strike is highlighting the “contradictions” in Bidenomics.
Lane’s argument is that if we want to deal with climate change effectively, we should want to get the items needed for the green transition as cheaply as possible. This means we should want solar and wind installations produced at the lowest possible cost, as well as electric cars. According to Lane, that means we should not have import tariffs and be happy if these items are produced with low-cost non-union labor.
This is a plausible case in the short term, but that may not be true in the longer term. In the short term, obviously it is cheaper to get clean energy inputs at lower cost than at higher cost, but that may not be the case in the long term.
If the United States can build up its capacity and expertise as a top-line producer of solar panels, wind turbines, and electric cars, we may find that it is cheaper to produce these items here. There is evidence that unionized workers are more productive than poorly paid non-union workers.
Unionized workers switch jobs much less frequently and, when they know they will share in the gains of productivity-enhancing innovations, have far more incentive to share their insights with management. Countries with far higher unionization rates than the United States, notably Germany and Denmark, have been quite successful in maintaining top-level manufacturing operations.
The Political Coalition for a Green Transition
But apart from the economics of ensuring that unions are part of a green transition, there is also a political issue. Good policy does not just happen. It would make great sense to change the basis for the corporate income tax to a tax on stock returns. It doesn’t happen because the people who gain from the tax gaming industry (corporate accountants, tax lawyers, and the companies that do it effectively) are much more powerful than the tiny group of people who actually care about collecting the corporate income tax.
Similarly, we can reduce bloated CEO pay, and radically lower the excessive pay of high-end executives more generally (leaving more for ordinary workers), if we give shareholders more control over setting pay. However, this change doesn’t happen because there is no notable political force behind it, and the CEOs and their friends scream “communism” at efforts to give shareholders more control of the companies they ostensibly own.
The point is that change does not just happen in this world. It needs a political force to push it. Most of the country’s unions, including the UAW, have been willing to support policies for a green transition, but they want to make sure that their workers are protected in the process. The fact that Biden is willing to take a risk, that he may be raising costs somewhat, at least in the short-term, to keep this important ally, simply reflects political reality.
If this point is too subtle for the people who own and control the Washington Post, if Donald Trump gets back in the White House, there will be no green transition in the United States. He and most of his Republican allies have made it clear that they intend to sabotage private efforts to move to clean energy, not subsidize them.
In this respect, it is also worth noting that the Washington Post and other major news outlets have played an important role in making a green transition more difficult. They regularly report assertions from Republican politicians on global warming as reflecting their sincere beliefs, saying things like these politicians “believe” that global warming is not a real problem.
In addition to being awful journalism (reporters don’t know what politicians actually have in their heads), it is almost certainly not true. Many of the country’s most prominent Republican politicians, like Ted Cruz, Ron DeSantis, and Josh Hawley, have educations from top universities. It is highly unlikely that they learned nothing about global warming or somehow came to views that contradict the nearly unanimous consensus among scientists who are not on the payroll of the fossil fuel industry.
For this reason, it is absurd to treat their assertions about global warming as reflecting their sincere beliefs. A simple and neutral way to describe their assertions is to simply report what they say, or that they “claim” global warming is not a problem. Reporters can stick to reporting what they know and leave it to readers to determine for themselves whether these politicians are being honest.
Higher Costs Due Patent Monopolies and Related Protections
The Washington Post, like other elite news outlets, is always happy to beat up any real or perceived market intervention that benefits ordinary workers, however, it insists it cannot see the more costly interventions that benefit many corporations and highly-educated workers. Specifically, it virtually never raises any questions, either in news articles or opinion pieces, about the costs imposed by government-granted patent monopolies and related protections.
This is especially important in the case of prescription drugs, where life-saving medicines, that likely would sell for a few dollars a prescription in a free market, can sell for hundreds or even thousands of dollars a prescription when they have government-granted patent monopolies. We will spend over $570 billion this year on drugs that would likely sell for less than $100 billion in a free market without patent monopolies.
While the WaPo would ordinarily be very concerned about a government expenditure of $470 billion a year (nearly $5 trillion over a decade), when the government effectively makes this expenditure by granting patent monopolies, there is no room for discussion in the paper. There is a similar story with patent monopolies in clean energy.
If we are actually facing an existential crisis with global warming (we are), we should be looking to ensure that all relevant technologies are available at the lowest possible cost. If it were not a question of political power, we would be suspending patents and related protections for the relevant technologies, allowing everyone everywhere in the world to use the latest technology at zero cost. We would also be open-sourcing the research behind the technology so researchers all over the world can benefit and build on innovations, wherever they occur.
We can compensate companies for the profits they lose as a result. Of course, if they consider compensation from whatever formula is used inadequate, they can sue after the fact, but we should not let their concerns about compensation slow the process of moving to a green economy. (Yes, we should have done this during the pandemic, but we know that in polite debate, profits and pay for high-end workers are far more important than human lives.)
There is also the issue of supporting research going forward. The United States, and other countries, should be paying out money directly, sort of like what we do now with military research and with biomedical research supported by the National Institutes of Health and other government agencies, in key areas for developing clean technologies.
This would require some agreements with other countries on sharing costs, but again, we can outline the plan and start the research now, and fight over the exact compensation formulas later. But that would only be if we cared about saving the planet. Again, all this newly supported research would be fully open-source with any patents in the public domain and all results posted on the web as quickly as possible.
Bottom Line: WaPo Cares About Beating Up Blue Collar Workers, not Saving the Planet
The story with Lane, the WaPo, and really the major media outlets more generally, is that they are more committed to maintaining class distinctions and ensuring that blue-collar workers don’t get a decent paycheck, than trying to contain global warming. They dump on policies that benefit blue-collar workers that could slow the green transition in the short-term, but are just fine ignoring policies that benefit major corporations and highly-educated workers, which also slow the transition. This is not a surprise, we know who owns and controls the Washington Post.
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Donald Trump claims that no one was harmed when he lied about the value of his assets on statements he made to lenders, because loans were paid off with interest. New York Times columnist, Peter Coy takes this claim far more seriously than he should.
The key point that Coy misses is that lenders base the interest rate they charge on the financial condition of their borrower. To see this point, suppose that you want to take out a mortgage but you are unemployed, have no assets, and already have vast amounts of debt. When you file your application, you tell the bank that you have a job with a 7-figure salary, have $5 million in the bank, and no debt.
Ten years later, you sell the home, and repay the mortgage, after having made all your mortgage payments on time. Was the bank harmed?
Well, if you had been truthful with the bank, they would have charged you a much higher interest rate, if they had chosen to make the loan at all. In effect, the bank was being subjected to much greater risk than it realized. It would have charged for this risk, if it had realized it was taking it.
By lying, Trump was able to get his loans at a lower interest rate than if he had been truthful. This likely saved him many millions in interest payments, at least assuming that lenders took him seriously.
In his deposition, Trump seemed to maintain that lenders know everything he says is a lie. That is perhaps true, but the forms he signed did not indicate that. Perhaps everyone should know that everything Trump says is a lie, but it seems that many people are not yet in on the joke.
Donald Trump claims that no one was harmed when he lied about the value of his assets on statements he made to lenders, because loans were paid off with interest. New York Times columnist, Peter Coy takes this claim far more seriously than he should.
The key point that Coy misses is that lenders base the interest rate they charge on the financial condition of their borrower. To see this point, suppose that you want to take out a mortgage but you are unemployed, have no assets, and already have vast amounts of debt. When you file your application, you tell the bank that you have a job with a 7-figure salary, have $5 million in the bank, and no debt.
Ten years later, you sell the home, and repay the mortgage, after having made all your mortgage payments on time. Was the bank harmed?
Well, if you had been truthful with the bank, they would have charged you a much higher interest rate, if they had chosen to make the loan at all. In effect, the bank was being subjected to much greater risk than it realized. It would have charged for this risk, if it had realized it was taking it.
By lying, Trump was able to get his loans at a lower interest rate than if he had been truthful. This likely saved him many millions in interest payments, at least assuming that lenders took him seriously.
In his deposition, Trump seemed to maintain that lenders know everything he says is a lie. That is perhaps true, but the forms he signed did not indicate that. Perhaps everyone should know that everything Trump says is a lie, but it seems that many people are not yet in on the joke.
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The New York Times decided to celebrate Greece’s economy with an article headlined “Greece, battered a decade ago, is booming.” The piece touts a tourist and investment boom, which does seem to be a marked improvement for the economy after almost a decade of austerity.
Still, the case it makes is weaker than it may appear. It tells readers:
“The economy is growing at twice the eurozone average, and unemployment, while still high at 11 percent, is the lowest in over a decade.”
Since the eurozone growth rate for 2023 is projected to be 0.8 percent, growing twice as fast is a rather low bar. (The projected Greek growth rate of 2.6 percent is respectable.) The 11 percent unemployment rate is far higher than the rest of the European Union, which has a 5.9 percent unemployment rate (6.4 percent for the eurozone).
The recent growth in GDP should be put in a longer-term context. If we take the longer picture, Greece’s real per capita GDP on a purchasing power parity basis is projected to be $32,204 this year, which is more than 14 percent below its peak in 2008.
The media in the United States were highlighting the difficulty that people in the United States were having putting food on the table and paying rent in 2022 when real income was down by around 1.0 percent from pre-pandemic levels. The people in Greece are obviously doing better with their economy growing at a healthy pace than if it were not, but the data do not indicate they have much to celebrate.
The New York Times decided to celebrate Greece’s economy with an article headlined “Greece, battered a decade ago, is booming.” The piece touts a tourist and investment boom, which does seem to be a marked improvement for the economy after almost a decade of austerity.
Still, the case it makes is weaker than it may appear. It tells readers:
“The economy is growing at twice the eurozone average, and unemployment, while still high at 11 percent, is the lowest in over a decade.”
Since the eurozone growth rate for 2023 is projected to be 0.8 percent, growing twice as fast is a rather low bar. (The projected Greek growth rate of 2.6 percent is respectable.) The 11 percent unemployment rate is far higher than the rest of the European Union, which has a 5.9 percent unemployment rate (6.4 percent for the eurozone).
The recent growth in GDP should be put in a longer-term context. If we take the longer picture, Greece’s real per capita GDP on a purchasing power parity basis is projected to be $32,204 this year, which is more than 14 percent below its peak in 2008.
The media in the United States were highlighting the difficulty that people in the United States were having putting food on the table and paying rent in 2022 when real income was down by around 1.0 percent from pre-pandemic levels. The people in Greece are obviously doing better with their economy growing at a healthy pace than if it were not, but the data do not indicate they have much to celebrate.
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Catherine Rampell had an interesting column dealing with the question of when prices will “come back down?” Rampell correctly answered “never,” but I am not convinced this is the real question people are posing.
Rampell deals with the question as being one about the overall Consumer Price Index (CPI). She is explicitly not talking about the price of the everyday items, like food and gas, that people purchase regularly.
This distinction is my reason for skepticism. First, the price of many food items has come back down. Overall food prices have not, but it actually is plausible that we will see further declines in the food basket.
The prices of most commodities, like wheat and corn, are pretty much back to their pre-pandemic level. Shipping costs have also fallen back to roughly pre-pandemic levels. And, corporations are complaining that they are losing some of the pricing power that they had during the pandemic.
All of this translates into a picture where the rate of inflation in food prices may drop further (the annual rate was 1.6 percent over the last three months) and could possibly turn negative. I doubt that food prices will fall back to pre-pandemic levels, but we may see the overall index decline for a period of time.
We see a different picture with gas prices. Production cutbacks by Saudi Arabia (was there a “perfect phone call” from Donald Trump?) have sent crude oil prices from $70 a barrel to $90 a barrel, raising gas prices back to almost $3.90 a gallon as a nationwide average.
However, it is plausible that these prices will fall again. For better or worse (obviously worse from a climate perspective), U.S. oil production is at a record high. Exploding growth in the EV market, especially in China and Europe, will reduce demand. Maybe Saudi Arabia will respond with further cuts (I don’t have a crystal ball), but it is not absurd to think that gas prices will come back down.
Anyhow, the point here is that the prices that are most directly in people’s faces can come back down. When we move beyond these prices to items like rent, owners’ equivalent rent (the rent you would pay yourself for living in a home you own), and new car purchases, I’m not sure that these fit well into most people’s conceptions of inflation.
Owners’ equivalent rent accounts for over a quarter of the CPI, do the two-thirds of households who own their home actively think about how much it would cost them to rent the place? Most people rarely buy a new car, and even used car purchases are not frequent (used car prices have been falling over the last year).
I also doubt that many people other than economists and people who write on economics have a clear vision of the overall CPI or the price index of their choosing. For this reason, I’m not sure that many people really expect prices to come back down. Average hourly wages have risen by almost 20 percent since the start of the pandemic, do people really expect that they will pay the same for stuff as they did in 2019?
It is also worth noting that prices never came back down in the 1980s. Ronald Reagan was singing about “Morning in America” in his 1984 re-election campaign when inflation was still over 4.0 percent.
My guess here is that the concern for prices coming back down is being fueled by the Fox News gang and their allied politicians. This is a theme they endlessly tout. I know this because Elon Musk has decided that I have to see the tweets of every right-wing politician and pundit in the country in my Twitter feed. (I have blocked most of them, but I still see plenty.)
As is often the case, Fox can have a huge impact on the national political agenda. We see this all the time, most obviously with the absurdity around Biden’s impeachment. Months of extensive investigation have produced absolutely nothing in terms of serious evidence and shot down most of the right-wing theories of President Biden’s corruption. Yet, the House is prepared to move forward, and close to half the country actually says they think there is a plausible basis for impeachment.
Anyhow, we know that Fox and its friends endlessly harp on out-of-control inflation. This may not correspond to reality, but that is not a big factor for many people. In short, I don’t think the issue is whether inflation will flip over to deflation, the question Rampell addresses, I think the issue is when, if ever, the right stops whining about inflation.
The Myths of Deflation
As long as we’re on the topic, I want to beat up on one of the myths about the problem of deflation. Rampell repeats the widely circulated story that when we see deflation, like what Japan had in the 1990s and 2000s, consumers will delay their purchases, leading to less demand and a weak economy.
I’m afraid this story does not make much sense. Deflation peaked in Japan at around a 1.0 percent annual rate, but it usually was a smaller decline. Would people really delay buying a $40 shirt or pair of pants because it might cost 20 cents less in six months? Even with a big-ticket item like a $30,000 car, would it make sense to delay the purchase six months to save $150?
Also, focusing on the overall index misses the fact that when inflation is close to zero the prices of many items are already falling. In fact, car prices often fell here in the decades before the pandemic, even as the overall inflation rate was positive. If the inflation rate falls from a rate of positive 1.0 percent to negative 1.0 percent, it just means that the balance of items with falling prices has increased.
There is a plausible story that falling prices hurt investment. If an auto manufacturer is looking to build a new factory, it is asking about how much it can expect to sell its cars for over the next ten or twenty years. If it believes that prices will be lower five or ten years out, then it will be less likely to build the factory.
For this reason, we can certainly tell the story that deflation would be bad news for the economy, but it is bad news in the same way that 1.0 percent inflation is worse than 2.0 percent inflation, crossing the zero mark means nothing. (We could tell a story of a deflationary spiral, but Japan never saw anything like that, nor has almost anyone else since the start of the Great Depression.) In short, deflation can be bad, but only in the same way, that very low inflation can be bad. Zero is not the problem.
Catherine Rampell had an interesting column dealing with the question of when prices will “come back down?” Rampell correctly answered “never,” but I am not convinced this is the real question people are posing.
Rampell deals with the question as being one about the overall Consumer Price Index (CPI). She is explicitly not talking about the price of the everyday items, like food and gas, that people purchase regularly.
This distinction is my reason for skepticism. First, the price of many food items has come back down. Overall food prices have not, but it actually is plausible that we will see further declines in the food basket.
The prices of most commodities, like wheat and corn, are pretty much back to their pre-pandemic level. Shipping costs have also fallen back to roughly pre-pandemic levels. And, corporations are complaining that they are losing some of the pricing power that they had during the pandemic.
All of this translates into a picture where the rate of inflation in food prices may drop further (the annual rate was 1.6 percent over the last three months) and could possibly turn negative. I doubt that food prices will fall back to pre-pandemic levels, but we may see the overall index decline for a period of time.
We see a different picture with gas prices. Production cutbacks by Saudi Arabia (was there a “perfect phone call” from Donald Trump?) have sent crude oil prices from $70 a barrel to $90 a barrel, raising gas prices back to almost $3.90 a gallon as a nationwide average.
However, it is plausible that these prices will fall again. For better or worse (obviously worse from a climate perspective), U.S. oil production is at a record high. Exploding growth in the EV market, especially in China and Europe, will reduce demand. Maybe Saudi Arabia will respond with further cuts (I don’t have a crystal ball), but it is not absurd to think that gas prices will come back down.
Anyhow, the point here is that the prices that are most directly in people’s faces can come back down. When we move beyond these prices to items like rent, owners’ equivalent rent (the rent you would pay yourself for living in a home you own), and new car purchases, I’m not sure that these fit well into most people’s conceptions of inflation.
Owners’ equivalent rent accounts for over a quarter of the CPI, do the two-thirds of households who own their home actively think about how much it would cost them to rent the place? Most people rarely buy a new car, and even used car purchases are not frequent (used car prices have been falling over the last year).
I also doubt that many people other than economists and people who write on economics have a clear vision of the overall CPI or the price index of their choosing. For this reason, I’m not sure that many people really expect prices to come back down. Average hourly wages have risen by almost 20 percent since the start of the pandemic, do people really expect that they will pay the same for stuff as they did in 2019?
It is also worth noting that prices never came back down in the 1980s. Ronald Reagan was singing about “Morning in America” in his 1984 re-election campaign when inflation was still over 4.0 percent.
My guess here is that the concern for prices coming back down is being fueled by the Fox News gang and their allied politicians. This is a theme they endlessly tout. I know this because Elon Musk has decided that I have to see the tweets of every right-wing politician and pundit in the country in my Twitter feed. (I have blocked most of them, but I still see plenty.)
As is often the case, Fox can have a huge impact on the national political agenda. We see this all the time, most obviously with the absurdity around Biden’s impeachment. Months of extensive investigation have produced absolutely nothing in terms of serious evidence and shot down most of the right-wing theories of President Biden’s corruption. Yet, the House is prepared to move forward, and close to half the country actually says they think there is a plausible basis for impeachment.
Anyhow, we know that Fox and its friends endlessly harp on out-of-control inflation. This may not correspond to reality, but that is not a big factor for many people. In short, I don’t think the issue is whether inflation will flip over to deflation, the question Rampell addresses, I think the issue is when, if ever, the right stops whining about inflation.
The Myths of Deflation
As long as we’re on the topic, I want to beat up on one of the myths about the problem of deflation. Rampell repeats the widely circulated story that when we see deflation, like what Japan had in the 1990s and 2000s, consumers will delay their purchases, leading to less demand and a weak economy.
I’m afraid this story does not make much sense. Deflation peaked in Japan at around a 1.0 percent annual rate, but it usually was a smaller decline. Would people really delay buying a $40 shirt or pair of pants because it might cost 20 cents less in six months? Even with a big-ticket item like a $30,000 car, would it make sense to delay the purchase six months to save $150?
Also, focusing on the overall index misses the fact that when inflation is close to zero the prices of many items are already falling. In fact, car prices often fell here in the decades before the pandemic, even as the overall inflation rate was positive. If the inflation rate falls from a rate of positive 1.0 percent to negative 1.0 percent, it just means that the balance of items with falling prices has increased.
There is a plausible story that falling prices hurt investment. If an auto manufacturer is looking to build a new factory, it is asking about how much it can expect to sell its cars for over the next ten or twenty years. If it believes that prices will be lower five or ten years out, then it will be less likely to build the factory.
For this reason, we can certainly tell the story that deflation would be bad news for the economy, but it is bad news in the same way that 1.0 percent inflation is worse than 2.0 percent inflation, crossing the zero mark means nothing. (We could tell a story of a deflationary spiral, but Japan never saw anything like that, nor has almost anyone else since the start of the Great Depression.) In short, deflation can be bad, but only in the same way, that very low inflation can be bad. Zero is not the problem.
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