Neil Irwin had a nice piece picking up an issue that I have raised repeatedly (e.g. here, here, and here). The slowdown in investment in 2015 and 2016 was primarily driven by a plunge in world energy prices. The more recent pick-up is mostly a result of the partial reversal of this plunge, not excitement over Donald Trump’s election.
The aspect of the issue that Irwin neglects to mention in this piece is that the plunge in energy prices in 2015, and its partial reversal the last two years explain most of the variation in real wage growth in the recovery, as shown below.
12-Month Change in Average Hourly Wage
Source: Bureau of Labor Statistics.
This flip side is important since it explains both why consumption was relatively strong in 2015 and 2016 and why real wage growth has fallen to near zero in the last year and a half.
Neil Irwin had a nice piece picking up an issue that I have raised repeatedly (e.g. here, here, and here). The slowdown in investment in 2015 and 2016 was primarily driven by a plunge in world energy prices. The more recent pick-up is mostly a result of the partial reversal of this plunge, not excitement over Donald Trump’s election.
The aspect of the issue that Irwin neglects to mention in this piece is that the plunge in energy prices in 2015, and its partial reversal the last two years explain most of the variation in real wage growth in the recovery, as shown below.
12-Month Change in Average Hourly Wage
Source: Bureau of Labor Statistics.
This flip side is important since it explains both why consumption was relatively strong in 2015 and 2016 and why real wage growth has fallen to near zero in the last year and a half.
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The NYT ran a piece saying that the Federal Reserve Board is raising interest rates, in spite of weak wage growth, because of the more rapid growth in non-wage compensation. If this is true, then its policy is badly mistaken.
The piece tells readers:
“The average worker received 32 percent of total compensation in benefits including bonuses, paid leave and company contributions to insurance and retirement plans in the second quarter of 2018. That was up from 27 percent in 2000, federal data show.”
While there has been a substantial rise in the non-wage share of compensation over this period, that is not true in the last three years. The Bureau of Labor Statistics reports the non-wage share of compensation was on average 31.7 percent in the second quarter of 2018. That is the same as it was in the first quarter of 2017 and in fact the first quarter of 2015. There has been no clear upward movement in this measure in the last three years. This means that if the Fed is claiming that growing non-wage compensation is making up for a lack of wage growth, then it is not relying on the data.
The piece also tells readers:
“The White House Council of Economic Advisers calculates that increasingly generous paid leave benefits mean that the average American worker is getting an additional half-day of paid leave each year, compared with five years ago.”
Assuming this calculation is correct, if we start with a 250 day work year (50 weeks at five days a week), an extra half day of paid leave would be equivalent to a 0.2 percent increase in pay. Since this rise in paid leave took place over five years, it would mean that the move to more paid time off would add 0.04 percentage points to reported wage growth.
The NYT ran a piece saying that the Federal Reserve Board is raising interest rates, in spite of weak wage growth, because of the more rapid growth in non-wage compensation. If this is true, then its policy is badly mistaken.
The piece tells readers:
“The average worker received 32 percent of total compensation in benefits including bonuses, paid leave and company contributions to insurance and retirement plans in the second quarter of 2018. That was up from 27 percent in 2000, federal data show.”
While there has been a substantial rise in the non-wage share of compensation over this period, that is not true in the last three years. The Bureau of Labor Statistics reports the non-wage share of compensation was on average 31.7 percent in the second quarter of 2018. That is the same as it was in the first quarter of 2017 and in fact the first quarter of 2015. There has been no clear upward movement in this measure in the last three years. This means that if the Fed is claiming that growing non-wage compensation is making up for a lack of wage growth, then it is not relying on the data.
The piece also tells readers:
“The White House Council of Economic Advisers calculates that increasingly generous paid leave benefits mean that the average American worker is getting an additional half-day of paid leave each year, compared with five years ago.”
Assuming this calculation is correct, if we start with a 250 day work year (50 weeks at five days a week), an extra half day of paid leave would be equivalent to a 0.2 percent increase in pay. Since this rise in paid leave took place over five years, it would mean that the move to more paid time off would add 0.04 percentage points to reported wage growth.
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The Washington Post ran a very confused piece on how China perceives Donald Trump’s trade war. First of all, it hugely exaggerated how much is at stake for China. It implied that China’s economy could take a serious hit if Trump’s trade war substantially reduces U.S. imports from China.
At the moment, Trump is putting tariffs on $300 billion of exports from China. If this lead to a 50 percent reduction of China’s exports of these items to the U.S. (a huge reduction) that would be $150 billion. This is approximately 1.5 percent of China’s GDP measured in U.S. dollars. Since a substantial portion of China’s exports to the U.S. have value-added from other countries (e.g. the Apple iPhone), perhaps two-thirds of this loss would be value-added in China.
That means that the loss of exports to the U.S. would be equal to 1.0 percent of GDP. By comparison, China’s trade surplus fell by 8.0 percentage points of GDP between 2007 and 2011, a period in which China sustained double-digit economic growth.
This reduction in China’s trade surplus also directly contradicts the piece’s claim that:
“But it [China] has made precious little progress on any of these goals [towards liberalizing trade].”
In fact, the huge reduction in China’s trade surplus (equivalent to $1.6 trillion in the U.S. economy today) indicates it has made enormous progress.
The piece also wrongly tells readers:
“Although China’s once-booming growth rates have slowed markedly in recent years, it is still on track to overtake the United States as the world’s largest economy some time around 2030, according to a raft of respected researchers.”
Actually, by the measure most widely used by economists, purchasing power parity GDP, China’s economy is already 20 percent larger than the U.S. economy.
The Washington Post ran a very confused piece on how China perceives Donald Trump’s trade war. First of all, it hugely exaggerated how much is at stake for China. It implied that China’s economy could take a serious hit if Trump’s trade war substantially reduces U.S. imports from China.
At the moment, Trump is putting tariffs on $300 billion of exports from China. If this lead to a 50 percent reduction of China’s exports of these items to the U.S. (a huge reduction) that would be $150 billion. This is approximately 1.5 percent of China’s GDP measured in U.S. dollars. Since a substantial portion of China’s exports to the U.S. have value-added from other countries (e.g. the Apple iPhone), perhaps two-thirds of this loss would be value-added in China.
That means that the loss of exports to the U.S. would be equal to 1.0 percent of GDP. By comparison, China’s trade surplus fell by 8.0 percentage points of GDP between 2007 and 2011, a period in which China sustained double-digit economic growth.
This reduction in China’s trade surplus also directly contradicts the piece’s claim that:
“But it [China] has made precious little progress on any of these goals [towards liberalizing trade].”
In fact, the huge reduction in China’s trade surplus (equivalent to $1.6 trillion in the U.S. economy today) indicates it has made enormous progress.
The piece also wrongly tells readers:
“Although China’s once-booming growth rates have slowed markedly in recent years, it is still on track to overtake the United States as the world’s largest economy some time around 2030, according to a raft of respected researchers.”
Actually, by the measure most widely used by economists, purchasing power parity GDP, China’s economy is already 20 percent larger than the U.S. economy.
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I have repeatedly said over the last few weeks (and ten years) that bailing out the banks was not necessary to prevent a second Great Depression. While I think this is absolutely true for reasons I have laid out many times, let me make a couple of additional points.
I think a bailout that imposed stringent conditions on the financial industry, essentially requiring a downsizing and restructuring, would have been better than just letting the banks fail. That would have been the best possible outcome. But given that this sort of bailout was not on the table, I think no bailout would have been a better option than the one we got, which largely left the structure of the industry intact.
Also, I have no doubt that the downturn in 2008–-09 would have been worse if the banks had been allowed to fail. But I think the short-term pain would have been more than compensated for by eliminating the albatross of a bloated financial sector. A downsized financial sector would have freed up tens of billions annually (perhaps more than a hundred billion) for productive uses like education and health care. It also would have eliminated a major driver of inequality in the economy, since many of the highest incomes in the economy are generated by the financial industry.
Of course, the idea of having more short-term pain, which I would likely not experience, is not an argument to be made lightly. If the unemployment rate had risen by another half or full percentage point due to the failure of the banks, that means millions more people would be suffering as a result.
That is a very bad story, but one that economists often advocate under other circumstances. Specifically, any economist who has ever advocated that the Federal Reserve Board raise interest rates is effectively making the short-term pain for long-term gain argument. Usually, the case for higher rates would be that preventing spiraling inflation and the associated costs are worth the job loss (or slower job growth) that will be associated with the Fed’s rate hike.
In both the case of letting banks collapse and a Fed rate hike, people can have reasonable differences on the terms of the tradeoffs and therefore come to different conclusions on the best policy. But any economist who argues that we had to bail out the banks because any additional short-term pain was unacceptable, does not deserve to be taken seriously.
I have repeatedly said over the last few weeks (and ten years) that bailing out the banks was not necessary to prevent a second Great Depression. While I think this is absolutely true for reasons I have laid out many times, let me make a couple of additional points.
I think a bailout that imposed stringent conditions on the financial industry, essentially requiring a downsizing and restructuring, would have been better than just letting the banks fail. That would have been the best possible outcome. But given that this sort of bailout was not on the table, I think no bailout would have been a better option than the one we got, which largely left the structure of the industry intact.
Also, I have no doubt that the downturn in 2008–-09 would have been worse if the banks had been allowed to fail. But I think the short-term pain would have been more than compensated for by eliminating the albatross of a bloated financial sector. A downsized financial sector would have freed up tens of billions annually (perhaps more than a hundred billion) for productive uses like education and health care. It also would have eliminated a major driver of inequality in the economy, since many of the highest incomes in the economy are generated by the financial industry.
Of course, the idea of having more short-term pain, which I would likely not experience, is not an argument to be made lightly. If the unemployment rate had risen by another half or full percentage point due to the failure of the banks, that means millions more people would be suffering as a result.
That is a very bad story, but one that economists often advocate under other circumstances. Specifically, any economist who has ever advocated that the Federal Reserve Board raise interest rates is effectively making the short-term pain for long-term gain argument. Usually, the case for higher rates would be that preventing spiraling inflation and the associated costs are worth the job loss (or slower job growth) that will be associated with the Fed’s rate hike.
In both the case of letting banks collapse and a Fed rate hike, people can have reasonable differences on the terms of the tradeoffs and therefore come to different conclusions on the best policy. But any economist who argues that we had to bail out the banks because any additional short-term pain was unacceptable, does not deserve to be taken seriously.
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The failure of economics reporters in major news outlets to make simple logical connections is truly astounding. The Washington Post gave us another great example of this failure in a piece on robots replacing workers in a Chinese warehouse.
The gist of this story is that this warehouse, which only has four workers overseeing dozens of robots, could be the wave of the future. At one point the piece tells us that the consulting firm McKinsey projects that almost one-third of jobs could be replaced by automation by 2030.
While this is presented as something ominous, this replacement of workers by technology is known as “productivity growth.” The loss of one-third of all jobs in 12 years would translate into productivity growth of just over 3.0 percent annually. This is roughly the pace of productivity growth we saw in the long Golden Age from 1947 to 1973, a period of low unemployment and rapid wage growth.
Also, if the McKinsey projection on productivity growth proves correct, then the Trump administration’s growth target of 3.0 percent annually will be easily reached. (The Congressional Budget Office projects productivity growth around 1.7 percent annually.) GDP growth is the sum of productivity growth and labor force growth. With the latter likely to be in the range of 0.4 to 0.6 percent annually, GDP growth will be well in excess of 3.0 percent if the McKinsey projection on productivity growth proves correct.
It is absolutely astounding that the Post somehow does not connect predictions of rapid automation with projections of GDP growth. This is definitional, it is not something subject to debate. In its defense, the Post is hardly alone in this failure.
This piece also includes a bizarre discussion of China’s “labor shortage.”
“The country’s one-child policy, which was in place from 1979 to 2016, shaved down today’s number of young job seekers, giving workers more leverage to ask for higher pay and better benefits.
“Government officials have admitted the policy stifled population growth, making it tougher and more expensive for companies to fill vacancies.”
Why should China’s government have to “admit” that it pursued a policy that has helped to give workers more bargaining power so that they can share in the country’s economic gains? Many people might think this is the goal of economic policy.
The failure of economics reporters in major news outlets to make simple logical connections is truly astounding. The Washington Post gave us another great example of this failure in a piece on robots replacing workers in a Chinese warehouse.
The gist of this story is that this warehouse, which only has four workers overseeing dozens of robots, could be the wave of the future. At one point the piece tells us that the consulting firm McKinsey projects that almost one-third of jobs could be replaced by automation by 2030.
While this is presented as something ominous, this replacement of workers by technology is known as “productivity growth.” The loss of one-third of all jobs in 12 years would translate into productivity growth of just over 3.0 percent annually. This is roughly the pace of productivity growth we saw in the long Golden Age from 1947 to 1973, a period of low unemployment and rapid wage growth.
Also, if the McKinsey projection on productivity growth proves correct, then the Trump administration’s growth target of 3.0 percent annually will be easily reached. (The Congressional Budget Office projects productivity growth around 1.7 percent annually.) GDP growth is the sum of productivity growth and labor force growth. With the latter likely to be in the range of 0.4 to 0.6 percent annually, GDP growth will be well in excess of 3.0 percent if the McKinsey projection on productivity growth proves correct.
It is absolutely astounding that the Post somehow does not connect predictions of rapid automation with projections of GDP growth. This is definitional, it is not something subject to debate. In its defense, the Post is hardly alone in this failure.
This piece also includes a bizarre discussion of China’s “labor shortage.”
“The country’s one-child policy, which was in place from 1979 to 2016, shaved down today’s number of young job seekers, giving workers more leverage to ask for higher pay and better benefits.
“Government officials have admitted the policy stifled population growth, making it tougher and more expensive for companies to fill vacancies.”
Why should China’s government have to “admit” that it pursued a policy that has helped to give workers more bargaining power so that they can share in the country’s economic gains? Many people might think this is the goal of economic policy.
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Paul Krugman is on the money in his analysis of Trump’s trade policy. The issue is not just that he is using tariffs. Tariffs can sometimes be useful tools, either to pressure a trading partner to change their practices or, in some cases, to support an industry in need of breathing space.
But no such logic can be applied to Trump’s tariffs. He is angry at Canada and China for reasons that have never been clearly stated and seem to change daily.
He also doesn’t seem to understand the most basic logic of tariffs. He is not imposing taxes on Canada and China, he is imposing taxes on US consumers. If he carries through with all his threatened tariffs, the bill for a typical household will be in the neighborhood of $600 a year. That is a pretty good size tax increase.
But it gets worse. As several news articles have pointed out, Trump is exempting his friends from the tariffs that are being applied to their competitors. This is pretty much the dictionary definition of crony capitalism. Trump is using the government’s trade policy to punish people he doesn’t like, both foreign and domestic, and benefit the people who support him politically.
The amazing part of this story is that Trump doesn’t even seem to see anything wrong with this practice. Having been brought up a spoiled rich kid, he never had to pay any attention to rules or think about the consequences of his actions.
He pretty much said exactly this in his complaint about not having an attorney general. While Attorney General Jeff Sessions has followed Trump’s policies in a wide range of areas, such as not enforcing civil rights laws and arresting immigrants applying for asylum, he is not doing what Trump wants his attorney general to do.
Based on his tweets, Trump considers it the attorney general’s job to protect him and his friends from criminal prosecution and to use the Justice Department to harass his political enemies. Sessions has instead allowed the professional staff in the Justice Department, including the special prosecutor, to determine who should be investigated and which charges should be filed.
There is no reason to think Trump views trade policy any differently than he does the Justice Department. When someone gets him angry, he wants to be able to slap a tariff on them. If he wants to help his political backers, he gives them special exemptions.
There is no policy here, that would require far more thought than we have ever seen from this president. It’s just a spoiled child punishing his enemies and helping his friends.
Paul Krugman is on the money in his analysis of Trump’s trade policy. The issue is not just that he is using tariffs. Tariffs can sometimes be useful tools, either to pressure a trading partner to change their practices or, in some cases, to support an industry in need of breathing space.
But no such logic can be applied to Trump’s tariffs. He is angry at Canada and China for reasons that have never been clearly stated and seem to change daily.
He also doesn’t seem to understand the most basic logic of tariffs. He is not imposing taxes on Canada and China, he is imposing taxes on US consumers. If he carries through with all his threatened tariffs, the bill for a typical household will be in the neighborhood of $600 a year. That is a pretty good size tax increase.
But it gets worse. As several news articles have pointed out, Trump is exempting his friends from the tariffs that are being applied to their competitors. This is pretty much the dictionary definition of crony capitalism. Trump is using the government’s trade policy to punish people he doesn’t like, both foreign and domestic, and benefit the people who support him politically.
The amazing part of this story is that Trump doesn’t even seem to see anything wrong with this practice. Having been brought up a spoiled rich kid, he never had to pay any attention to rules or think about the consequences of his actions.
He pretty much said exactly this in his complaint about not having an attorney general. While Attorney General Jeff Sessions has followed Trump’s policies in a wide range of areas, such as not enforcing civil rights laws and arresting immigrants applying for asylum, he is not doing what Trump wants his attorney general to do.
Based on his tweets, Trump considers it the attorney general’s job to protect him and his friends from criminal prosecution and to use the Justice Department to harass his political enemies. Sessions has instead allowed the professional staff in the Justice Department, including the special prosecutor, to determine who should be investigated and which charges should be filed.
There is no reason to think Trump views trade policy any differently than he does the Justice Department. When someone gets him angry, he wants to be able to slap a tariff on them. If he wants to help his political backers, he gives them special exemptions.
There is no policy here, that would require far more thought than we have ever seen from this president. It’s just a spoiled child punishing his enemies and helping his friends.
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The Washington Post had a piece on how Trump’s tariffs on goods produced in China is promoting unauthorized copies of many fashion items. The reason is that his 10 percent tariff is hitting the brand products, but the unauthorized copies are often smuggled in and escape the tariff. This increases the price differential by 10 percent of the brand product price, giving people more incentive to buy the unauthorized copy. Since these companies depend on brand loyalty, the impact could be lasting if many buyers decide that they are just as happy with an unauthorized product that may cost a small fraction of the price of the brand product.
This piece is sloppy in repeatedly referring to the unauthorized copies as “counterfeits.” If the product is a true counterfeit than it is being sold as the brand product. In that case, the customer is being deceived and paying a higher price to get something they are not getting.
That does not seem to be the case with these products. People buy them knowing that they are not the brand product, but they willingly do so to save the money.
This is not just a semantic distinction. Since the customer is being deceived by an actual counterfeit, they would be allies in cracking down on sellers. On the other hand, they benefit from being able to buy an unauthorized copy since they pay considerably less than they would for the brand product.
This is a simple distinction which reporters should be able to make in covering issues like this.
The Washington Post had a piece on how Trump’s tariffs on goods produced in China is promoting unauthorized copies of many fashion items. The reason is that his 10 percent tariff is hitting the brand products, but the unauthorized copies are often smuggled in and escape the tariff. This increases the price differential by 10 percent of the brand product price, giving people more incentive to buy the unauthorized copy. Since these companies depend on brand loyalty, the impact could be lasting if many buyers decide that they are just as happy with an unauthorized product that may cost a small fraction of the price of the brand product.
This piece is sloppy in repeatedly referring to the unauthorized copies as “counterfeits.” If the product is a true counterfeit than it is being sold as the brand product. In that case, the customer is being deceived and paying a higher price to get something they are not getting.
That does not seem to be the case with these products. People buy them knowing that they are not the brand product, but they willingly do so to save the money.
This is not just a semantic distinction. Since the customer is being deceived by an actual counterfeit, they would be allies in cracking down on sellers. On the other hand, they benefit from being able to buy an unauthorized copy since they pay considerably less than they would for the brand product.
This is a simple distinction which reporters should be able to make in covering issues like this.
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