Mayor de Blasio Wants to Give New York’s Workers a Break

January 09, 2019

09 Enero 2019

Mayor de Blasio has proposed an ordinance that would guarantee workers in the city at least two weeks a year of paid vacation. In taking this step, de Blasio is bringing the city in line with every other wealthy country in the world, which have long had paid vacation as a basic right of employment. It is striking how out of line the United States is with the rest of the world in not providing paid vacation. When I first met my wife, who is from Denmark, she told me about how the unions in the country were having a general strike. They were demanding six weeks of paid vacation a year. They already had five. (The strike was quickly settled with a compromise of five weeks and three days, although they have since raised the number to six weeks.) Denmark is not an outlier, all workers in the European Union can count on at least four weeks a year of vacation and many are near Denmark with five or six weeks. There are two basic points about paid leave. The first is the obvious one; the goal of the economy is to give people decent lives. This means not only having nice things but also having the time to enjoy life. The reduction of work time has long been a basic demand of workers. Many of the biggest labor actions in the late 19th and early 20th century were for the eight-hour day. There was a sharp reduction in average work hours from the turn of the century until 1940. While other countries have continued to reduce average work hours (in Europe, the average work year is now about 20 percent shorter than in the United States), there has been little change in the United States over the last 80 years.

The US Is Not That Important to China

By CEPRCEPR

January 08, 2019

08 Enero 2019

It is common to see stories that have China’s economy reeling as a result of the Trump tariffs. While it does seem that China’s economy is experiencing difficulties, it is hard to tell a story where Trump’s tariffs are a major factor.

First, as I pointed out in the past, China’s trade surplus has actually risen in 2018 compared to 2017. In the first 10 months of 2018, (Census is not releasing new data because of the shutdown), China’s surplus on goods trade was up 11.5 percent from 2017. Perhaps the surplus would have risen even more without the tariffs, but it is a bit hard to believe that China’s economy is suffering too much because its surplus with the US only increased by 11.5 percent.

But the other point is that China’s exports to the US are just not that large a share of its economy. If we assume that exports for November and December would be roughly comparable to the prior two months, then the total for 2018 would be $550 billion, which comes to 4.2 percent of its $13 trillion economy.

However, as we are endlessly reminded by supporters of recent trade deals, much of the value in these exports is generated elsewhere. For example, we count the full value of an iPhone manufactured in China as an export to the US even though the vast majority of the value-added comes from other countries. (This is offset by the fact that much of the value-added of goods imported from Japan, Germany, and elsewhere is produced in China. If anyone in this dispute actually cared about reducing the trade deficit, getting China to raise the value of its currency would help to reduce both the direct and indirect trade deficit with China. But in any case, this issue is irrelevant in this context.)

Let’s assume that 30 percent of the value-added in China’s exports comes from other countries. This means that exports to the US are equal to 3.0 percent of its GDP.

Even if we assume a very large impact from Trump tariffs, perhaps he can reduce US imports from China by a third. This would be 1.0 percentage point of GDP. That is hardly trivial, but not the sort of thing that would push China into a recession.

The long and short is that Trump’s trade measures can be a nuisance to China and can undoubtedly cause serious problems for the most affected industries, but anyone thinking that they can sink China’s economy is seriously deluded.

It is common to see stories that have China’s economy reeling as a result of the Trump tariffs. While it does seem that China’s economy is experiencing difficulties, it is hard to tell a story where Trump’s tariffs are a major factor.

First, as I pointed out in the past, China’s trade surplus has actually risen in 2018 compared to 2017. In the first 10 months of 2018, (Census is not releasing new data because of the shutdown), China’s surplus on goods trade was up 11.5 percent from 2017. Perhaps the surplus would have risen even more without the tariffs, but it is a bit hard to believe that China’s economy is suffering too much because its surplus with the US only increased by 11.5 percent.

But the other point is that China’s exports to the US are just not that large a share of its economy. If we assume that exports for November and December would be roughly comparable to the prior two months, then the total for 2018 would be $550 billion, which comes to 4.2 percent of its $13 trillion economy.

However, as we are endlessly reminded by supporters of recent trade deals, much of the value in these exports is generated elsewhere. For example, we count the full value of an iPhone manufactured in China as an export to the US even though the vast majority of the value-added comes from other countries. (This is offset by the fact that much of the value-added of goods imported from Japan, Germany, and elsewhere is produced in China. If anyone in this dispute actually cared about reducing the trade deficit, getting China to raise the value of its currency would help to reduce both the direct and indirect trade deficit with China. But in any case, this issue is irrelevant in this context.)

Let’s assume that 30 percent of the value-added in China’s exports comes from other countries. This means that exports to the US are equal to 3.0 percent of its GDP.

Even if we assume a very large impact from Trump tariffs, perhaps he can reduce US imports from China by a third. This would be 1.0 percentage point of GDP. That is hardly trivial, but not the sort of thing that would push China into a recession.

The long and short is that Trump’s trade measures can be a nuisance to China and can undoubtedly cause serious problems for the most affected industries, but anyone thinking that they can sink China’s economy is seriously deluded.

If China Is Suffering So Much Because of Trump's Trade War, Why Is Its Surplus Up So Much?

By CEPRCEPR

January 04, 2019

04 Enero 2019

Donald Trump has made his tariffs against China and other countries a big part of his agenda as president. He even went so far as to dub himself “Tariff Man” on Twitter.

The media have been quick to assume that Tariff Man is accomplishing his goals, especially with regard to China. It is standard for news articles, like this one, to assert that China’s economy is suffering in large part because of Trump’s tariffs.

In fact, through the first ten months of 2018 China’s trade surplus with the United States on trade in goods has been $344.5 billion. This is up 11.5 percent from its surplus in the same months last year.

The tariffs surely are having some effect, and China’s surplus would almost certainly be larger if they were not in place. But it is difficult to believe that China’s $13.5 trillion dollar economy (measured at exchange rate values) could be hurt all that all that much by somewhat slower growth in its trade surplus with the United States. (For arithmetic fans, the surplus is equal to 2.5 percent of China’s GDP. We are talking about slower growth in this surplus.)

It is worth noting that we will not be getting new trade data until the government shutdown is over since the Census Bureau is one of the government agencies without funding for fiscal year 2019.

Donald Trump has made his tariffs against China and other countries a big part of his agenda as president. He even went so far as to dub himself “Tariff Man” on Twitter.

The media have been quick to assume that Tariff Man is accomplishing his goals, especially with regard to China. It is standard for news articles, like this one, to assert that China’s economy is suffering in large part because of Trump’s tariffs.

In fact, through the first ten months of 2018 China’s trade surplus with the United States on trade in goods has been $344.5 billion. This is up 11.5 percent from its surplus in the same months last year.

The tariffs surely are having some effect, and China’s surplus would almost certainly be larger if they were not in place. But it is difficult to believe that China’s $13.5 trillion dollar economy (measured at exchange rate values) could be hurt all that all that much by somewhat slower growth in its trade surplus with the United States. (For arithmetic fans, the surplus is equal to 2.5 percent of China’s GDP. We are talking about slower growth in this surplus.)

It is worth noting that we will not be getting new trade data until the government shutdown is over since the Census Bureau is one of the government agencies without funding for fiscal year 2019.

Things that Could Trouble Investors in 2019

By CEPRCEPR

January 02, 2019

02 Enero 2019

The New York Times ran a piece that mentions four factors that could be bad news for investors in 2019. While returns to investors are not my major economic concern, the piece left out what I would consider to be the biggest risk: a profit squeeze.

The low unemployment rate is finally leading to some acceleration in wage growth. The annual rate of hourly wage growth over the last year has been 3.2 percent. Taking the average of the last three months (September, October, and November) compared with the prior three months, it has been 3.3 percent. While this is still not terribly fast, it is up from 2.5 percent through most of 2017.

Suppose that wage growth edges higher in 2019 to 3.7 or 3.8 percent, hardly an absurd proposition. Productivity growth has been averaging around 1.2–1.3 percent. (The job-killing robots are still hiding from the Bureau of Labor Statistics.) This leads to two possible scenarios.

In the first, wage costs are fully passed on in prices. We would then expect to see inflation of close to 2.5 percent. If the Fed gets strict about its 2.0 percent inflation target (likely) it will jack up interest rates to slow the economy. The track record here is not good. The Fed tends to go too far with its rate hikes and push the economy into a recession. That is going to be bad news for investors, as well as the millions of workers who lose their jobs.

The other scenario is that corporations hold the line on prices, leaving inflation close to 2.0 percent. In this case, the more rapid rate of wage growth would be eating into profit margins. This is fine by me since it means that workers would be getting back some of the share of income they lost in the Great Recession.

But stocks are not moved by measures of social justice, they respond to current and expected future profits. If the profit share falls back to its pre-recession level, that will be bad news for investors.

So if folks asked me for the bad things that could happen for the stock market in 2019, this story of a potential profit squeeze or higher inflation prompted an overreaction from the Fed would top my list. I’m surprised it didn’t make it to the NYT’s.

The New York Times ran a piece that mentions four factors that could be bad news for investors in 2019. While returns to investors are not my major economic concern, the piece left out what I would consider to be the biggest risk: a profit squeeze.

The low unemployment rate is finally leading to some acceleration in wage growth. The annual rate of hourly wage growth over the last year has been 3.2 percent. Taking the average of the last three months (September, October, and November) compared with the prior three months, it has been 3.3 percent. While this is still not terribly fast, it is up from 2.5 percent through most of 2017.

Suppose that wage growth edges higher in 2019 to 3.7 or 3.8 percent, hardly an absurd proposition. Productivity growth has been averaging around 1.2–1.3 percent. (The job-killing robots are still hiding from the Bureau of Labor Statistics.) This leads to two possible scenarios.

In the first, wage costs are fully passed on in prices. We would then expect to see inflation of close to 2.5 percent. If the Fed gets strict about its 2.0 percent inflation target (likely) it will jack up interest rates to slow the economy. The track record here is not good. The Fed tends to go too far with its rate hikes and push the economy into a recession. That is going to be bad news for investors, as well as the millions of workers who lose their jobs.

The other scenario is that corporations hold the line on prices, leaving inflation close to 2.0 percent. In this case, the more rapid rate of wage growth would be eating into profit margins. This is fine by me since it means that workers would be getting back some of the share of income they lost in the Great Recession.

But stocks are not moved by measures of social justice, they respond to current and expected future profits. If the profit share falls back to its pre-recession level, that will be bad news for investors.

So if folks asked me for the bad things that could happen for the stock market in 2019, this story of a potential profit squeeze or higher inflation prompted an overreaction from the Fed would top my list. I’m surprised it didn’t make it to the NYT’s.

Protectionist Measure to Help US Corporations at the Expense of US Workers Tops Trump China Trade Agenda

By CEPRCEPR

January 02, 2019

02 Enero 2019

Readers of this NYT piece on Robert Lighthizer, United States trade representative, and his negotiations with China may have missed this point. The piece said that one of Lighthizer’s main goals was to stop China’s practice of requiring that companies like Boeing and GE, who set up operations in China, take Chinese companies as business partners.

This is an effective way of requiring technology transfers since the partners will become familiar with the production techniques of the US companies. This will enable them in future years to be competitors with these companies.

If the US government prohibits contracts that require this sort of technology transfer, it will make it more desirable to outsource some of their production to China. This will be good for the profits of Boeing, GE, and other large companies but bad for US workers. It will also mean that we will be paying more for products in the future than would otherwise be the case, since if Chinese companies would have been able to out-compete US companies, it presumably means that would be charging lower prices or selling a better product.

It is also worth noting that the basic concern expressed by Lighthizer and others assumes that major US corporations are unable to look out for themselves. They are not being forced to enter into contracts with China. This problem arises because they decide to invest in China, even with conditions requiring technology transfer.

We have a great story here where the government, and many analysts, think our largest corporations lack the ability to look out for their best interests. By contrast, when it comes to individual workers who are forced to sign away their right to have class action suits, or individual investors who can be fleeced by the financial industry, the current position of the government is that they can look out for themselves.

The NYT piece also does some inappropriate mind reading when it tells readers:

“Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.”

The reporter/editor does not know that Trump is “increasingly eager” or that he “views” the markets as “a political electrocardiogram of his presidency.”

Good reporting says what politicians do and say. It does not report as fact their alleged opinions.

Readers of this NYT piece on Robert Lighthizer, United States trade representative, and his negotiations with China may have missed this point. The piece said that one of Lighthizer’s main goals was to stop China’s practice of requiring that companies like Boeing and GE, who set up operations in China, take Chinese companies as business partners.

This is an effective way of requiring technology transfers since the partners will become familiar with the production techniques of the US companies. This will enable them in future years to be competitors with these companies.

If the US government prohibits contracts that require this sort of technology transfer, it will make it more desirable to outsource some of their production to China. This will be good for the profits of Boeing, GE, and other large companies but bad for US workers. It will also mean that we will be paying more for products in the future than would otherwise be the case, since if Chinese companies would have been able to out-compete US companies, it presumably means that would be charging lower prices or selling a better product.

It is also worth noting that the basic concern expressed by Lighthizer and others assumes that major US corporations are unable to look out for themselves. They are not being forced to enter into contracts with China. This problem arises because they decide to invest in China, even with conditions requiring technology transfer.

We have a great story here where the government, and many analysts, think our largest corporations lack the ability to look out for their best interests. By contrast, when it comes to individual workers who are forced to sign away their right to have class action suits, or individual investors who can be fleeced by the financial industry, the current position of the government is that they can look out for themselves.

The NYT piece also does some inappropriate mind reading when it tells readers:

“Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.”

The reporter/editor does not know that Trump is “increasingly eager” or that he “views” the markets as “a political electrocardiogram of his presidency.”

Good reporting says what politicians do and say. It does not report as fact their alleged opinions.

• Affordable Care Act

Resolutions to Improve Debates on Economic Policy in 2019

By CEPRCEPR

January 01, 2019

01 Enero 2019

(This post originally appeared on my Patreon page.) Okay, it’s that time of year when we are all supposed to commit ourselves to performing nearly impossible tasks over the next twelve months. I will play the game. Here is the list of areas where I will try to bring economics into economic policy debates in 2019. 1) Patent and copyright monopolies are government policies This one is pretty simple, but that doesn’t mean it is easy. It should be pretty obvious that these and other forms of intellectual property are government policies explicitly designed to promote innovation and creative work. We can (and have) make them stronger and longer, or alternatively, make them shorter and weaker, or not have them at all. We can also substitute other mechanisms for financing innovation and creative work, including expanding those that already exist. (Anyone hear of the National Institutes of Health?) Incredibly, most policy debates, especially those on inequality, treat these monopolies as though they were just given to us by the gods. It is endlessly repeated that technology has allowed people like Bill Gates to get incredibly rich while leaving less-educated workers behind. But that’s not true. It is our rules on patents and copyrights that have allowed people to get enormously wealthy from technological developments. With a different set of rules, Bill Gates would still be working for a living. There are a few pieces on the topic here, here, and here (chapter 5). 2) Patent and copyright rents are equivalent to interest payments on government debt This is a point that directly follows from the recognition that patent and copyright monopolies are government policies. We can think of granting these monopolies as alternatives to direct government spending.

Steven Rattner's Charts in the NYT Don't Show What He Says They Show

By CEPRCEPR

December 31, 2018

31 Diciembre 2018

Steven Rattner used his NYT column to present a number of charts to show Donald Trump's failures as president. While some, like the drop in enrollments in the health care exchanges, do in fact show failure, others do not really make his case. For example, he has a chart with a headline "paltry raise for the middle class." What his chart actually shows is that middle class wages, adjusted for inflation, fell sharply in the recession, but have been rising roughly 1.0 percent a year since 2014. They recovered their pre-recession levels in 2017 and now are almost a percentage point above the 2008 level. This is not a great story, but the picture under Trump is certainly better than under Obama. (This wasn't entirely Obama's fault, since he inherited an economy in the toilet.) The chart shows more rapid growth at the bottom of the pay latter and a modest downturn under Trump for those at the top. By recent standards, this is not a bad picture, even if Trump does not especially deserve credit for it. (He came in with an unemployment rate that was low and falling.) Rattner also presents as a bad sign projections for fewer Fed rate hikes. While one basis for projecting fewer rate hikes is that the economy now looks weaker for 2019 than had been thought earlier in the year (but still stronger than had been projected in 2016), another reason is that inflation is lower than expected. Economists have consistently over-estimated the impact that low unemployment would have on the inflation rate. With inflation coming in lower than projected, there is less reason for the Fed to raise rates. Contrary to what Rattner is implying, this is a good development. It means that the unemployment rate can continue to fall and workers at the middle and the bottom of the pay ladder can continue to see real wage gains.

E.J. Dionne Provides Classic Example of Liberals Missing the Boat

By CEPRCEPR

December 31, 2018

31 Diciembre 2018

I often rail against liberals who wring their hands over the unfortunate folks who have been left behind by globalization and technology. E.J. Dionne gave us a classic example of such hand-wringing in his piece today on the need to help the left behinds to keep them from flaming reactionaries.

For some reason, it is difficult for many liberals to grasp the idea that the bad plight of tens of millions of middle class workers did not just happen, but rather was deliberately engineered. Longer and stronger patent and copyright protection did not just happen, it was deliberate policy. Subjecting manufacturing workers to global competition, while largely protecting doctors, dentists, and other highly paid professionals was also a policy decision. Saving the Wall Street banks from the consequences of their own greed and incompetence was also conscious policy.

I know it’s difficult for intellectuals to grasp new ideas, but if we want to talk seriously about rising inequality, then it will be necessary for them to try. (Yeah, I’m advertising my [free] book Rigged again.) Anyhow, let’s hope that in 2019 we can actually talk about the policies that were put in place to redistribute income upward and not just pretend that Bill Gates and his ilk getting all the money was a natural process.

I often rail against liberals who wring their hands over the unfortunate folks who have been left behind by globalization and technology. E.J. Dionne gave us a classic example of such hand-wringing in his piece today on the need to help the left behinds to keep them from flaming reactionaries.

For some reason, it is difficult for many liberals to grasp the idea that the bad plight of tens of millions of middle class workers did not just happen, but rather was deliberately engineered. Longer and stronger patent and copyright protection did not just happen, it was deliberate policy. Subjecting manufacturing workers to global competition, while largely protecting doctors, dentists, and other highly paid professionals was also a policy decision. Saving the Wall Street banks from the consequences of their own greed and incompetence was also conscious policy.

I know it’s difficult for intellectuals to grasp new ideas, but if we want to talk seriously about rising inequality, then it will be necessary for them to try. (Yeah, I’m advertising my [free] book Rigged again.) Anyhow, let’s hope that in 2019 we can actually talk about the policies that were put in place to redistribute income upward and not just pretend that Bill Gates and his ilk getting all the money was a natural process.

Good News on Copyright

By CEPRCEPR

December 30, 2018

30 Diciembre 2018

The New York Times has an interesting piece on the flood of books that are about to come into the public domain now that the term for the last extension of copyright (from 75 to 95 years) is about to be reached. This extension was applied retroactively, so it meant that virtually no copyrighted works came into the public domain for 20 years.

As policy, making a copyright extension is rather bizarre, since it is impossible to provide incentives for things that happened in the past. As the piece notes, one of the main motivations was Disney’s desire to keep some Mickey Mouse work under copyright protection, which is why the extension is sometimes referred to as the “Mickey Mouse copyright act.”

Anyhow, the fact that the work is now coming into the public domain both means that new editions can be published at just the cost of printing, making them more widely available. In addition, people can now freely do derivative works, as well as play and movies, derived from these books, without paying and/or getting permission from the copyright holders. It will be interesting to see how this change affects the treatment of the work newly in the public domain, which includes books by Agatha Christie, F. Scott Fitzgerald, and Kahlil Gibran.

The New York Times has an interesting piece on the flood of books that are about to come into the public domain now that the term for the last extension of copyright (from 75 to 95 years) is about to be reached. This extension was applied retroactively, so it meant that virtually no copyrighted works came into the public domain for 20 years.

As policy, making a copyright extension is rather bizarre, since it is impossible to provide incentives for things that happened in the past. As the piece notes, one of the main motivations was Disney’s desire to keep some Mickey Mouse work under copyright protection, which is why the extension is sometimes referred to as the “Mickey Mouse copyright act.”

Anyhow, the fact that the work is now coming into the public domain both means that new editions can be published at just the cost of printing, making them more widely available. In addition, people can now freely do derivative works, as well as play and movies, derived from these books, without paying and/or getting permission from the copyright holders. It will be interesting to see how this change affects the treatment of the work newly in the public domain, which includes books by Agatha Christie, F. Scott Fitzgerald, and Kahlil Gibran.

More Fun with the Stock Market Plunge

By CEPRCEPR

December 28, 2018

28 Diciembre 2018

The media continue to be in a panic over the drop in the stock market over the last few weeks. Fortunately for political pundits, there is no expectation that they have any clue about the subjects on which they opine. For those more interested in economics than hysterics, the drop in the market is not a big deal. The market is at best very loosely related to the economy. It generally rises in recoveries and falls in recessions, but it also has all sorts of movements that are not obviously related to anything in the real economy. The most famous example of such an erratic movement was the crash in October of 1987. The market fell by more than 20 percent in a single day. There was no obvious event in the economy or politics that explained this fall, which hit markets around the world. Nor did the decline presage a recession. The economy continued to grow at a healthy pace through 1988 and 1989. It didn’t fall into a recession until June of 1990, more than two years later. There is little reason to believe the recent decline will have any larger impact on the economy than the 1987 crash. As a practical matter, stock prices have almost no impact on investment. The bubble of the late 1990s was the major exception when companies were directly issuing stock to finance investment. Stock prices do affect consumption through the wealth effect, but the recent decline is not large enough to have all that much impact. Also, since it was just reversing a sharp run-up in the prior 18 months, it essentially means that we will not see some of the positive wealth effect that the economy would have felt otherwise. Basically, the hysteria over the drop in the stock market is either people in the media displaying their ignorance or a political swipe at Donald Trump by people who apparently don’t think there are substantive reasons to criticize him. This drop is not the sort of thing that serious people should concern themselves with.