Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

I ridiculed the NYT and Washington Post yesterday for telling us that China, the world’s most populous country, is in danger of running out of people. Using a tool that seems relatively scarce in Washington policy discussions, arithmetic, I showed that China’s gains in productivity will dwarf the effects of a falling ratio of workers to retirees. To put it simply, with each worker being far more productive, China will be able to enjoy a society in which both workers and retirees enjoy much higher living standards 20 years out than they do today.

I was hoping that we would not see another of these China population crisis stories for a while. I was wrong. Today, Ross Douthat used his NYT column to tell us how “Communist cruelty and western folly built an underpopulation bomb.” Douthat tells us:

“Like the United States and most developed countries, China has a birthrate that is well below replacement level. Unlike most developed countries, China is growing old without first having grown rich.”

This is a master statement of illogic. Yes, China is poorer than the U.S. and other wealthy countries, but there are two simple points that make Douthat complaint look incredibly silly.

First, we would want to look at rates of growth, not just levels. If we look at I.M.F. projections, China’s per capita income is projected to grow at rate of just under 5.5 percent annually for the next four years. If it continues this pace of growth for the next twenty years, when today’s too small birth cohort is entering the workforce, its per capita GDP will have nearly tripled. That would make it $64,200 per person, about 7.0 percent higher than the U.S. is today. In other words, China would be rich.

But maybe the 5.5 percent growth rate is too much to assume will be sustained for twenty years. Let’s cut it in half to 2.8 percent annually. In that case, China’s per capita income would grow by a bit more than 73 percent over the next two decades, making it $38,400 in twenty years. That is more than one-third less than the current per capita GDP in the U.S., but it’s only slightly below where Japan and Korea are today, two countries who Douthat apparently feels comfortable in saying have grown rich. It’s also roughly where the U.S. economy was in 1994, a year when most of us would have thought we were relatively rich by world standards.

But this is actually the less important problem with Douthat’s complaint. In 2020, China is considerably poorer than the United States. This means that its people on average have fewer cars, smaller housing units, and in other ways have lower material living standards than people in the United States.

Is this a crisis? Most people in China probably would not call it a crisis, since they are doing hugely better than they did twenty years ago and kids enjoy much higher living standards than their parents.

Now suppose that over the next two decades living standards increase somewhat less rapidly than they would otherwise because there is a falling ratio of workers to retirees. Is there any reason to think this would mean some sort of crisis in China because both its workers and retirees have lower living standards than people in the United States?

It’s very hard to see that story. In other words, this crisis of growing old before it grows rich is an absurdity on its face. There is no reason for anyone to take it seriously.

It is also worth mentioning in this context that we do face this problem called “global warming.” In that context, we should be very happy that China’s population is not 50 percent larger today. That might make people like Ross Douthat very happy, but it would make it hugely more difficult to limit the damage caused by global warming.

I ridiculed the NYT and Washington Post yesterday for telling us that China, the world’s most populous country, is in danger of running out of people. Using a tool that seems relatively scarce in Washington policy discussions, arithmetic, I showed that China’s gains in productivity will dwarf the effects of a falling ratio of workers to retirees. To put it simply, with each worker being far more productive, China will be able to enjoy a society in which both workers and retirees enjoy much higher living standards 20 years out than they do today.

I was hoping that we would not see another of these China population crisis stories for a while. I was wrong. Today, Ross Douthat used his NYT column to tell us how “Communist cruelty and western folly built an underpopulation bomb.” Douthat tells us:

“Like the United States and most developed countries, China has a birthrate that is well below replacement level. Unlike most developed countries, China is growing old without first having grown rich.”

This is a master statement of illogic. Yes, China is poorer than the U.S. and other wealthy countries, but there are two simple points that make Douthat complaint look incredibly silly.

First, we would want to look at rates of growth, not just levels. If we look at I.M.F. projections, China’s per capita income is projected to grow at rate of just under 5.5 percent annually for the next four years. If it continues this pace of growth for the next twenty years, when today’s too small birth cohort is entering the workforce, its per capita GDP will have nearly tripled. That would make it $64,200 per person, about 7.0 percent higher than the U.S. is today. In other words, China would be rich.

But maybe the 5.5 percent growth rate is too much to assume will be sustained for twenty years. Let’s cut it in half to 2.8 percent annually. In that case, China’s per capita income would grow by a bit more than 73 percent over the next two decades, making it $38,400 in twenty years. That is more than one-third less than the current per capita GDP in the U.S., but it’s only slightly below where Japan and Korea are today, two countries who Douthat apparently feels comfortable in saying have grown rich. It’s also roughly where the U.S. economy was in 1994, a year when most of us would have thought we were relatively rich by world standards.

But this is actually the less important problem with Douthat’s complaint. In 2020, China is considerably poorer than the United States. This means that its people on average have fewer cars, smaller housing units, and in other ways have lower material living standards than people in the United States.

Is this a crisis? Most people in China probably would not call it a crisis, since they are doing hugely better than they did twenty years ago and kids enjoy much higher living standards than their parents.

Now suppose that over the next two decades living standards increase somewhat less rapidly than they would otherwise because there is a falling ratio of workers to retirees. Is there any reason to think this would mean some sort of crisis in China because both its workers and retirees have lower living standards than people in the United States?

It’s very hard to see that story. In other words, this crisis of growing old before it grows rich is an absurdity on its face. There is no reason for anyone to take it seriously.

It is also worth mentioning in this context that we do face this problem called “global warming.” In that context, we should be very happy that China’s population is not 50 percent larger today. That might make people like Ross Douthat very happy, but it would make it hugely more difficult to limit the damage caused by global warming.

Folks who have followed economic policy debates for the last few decades can never be surprised by the poor quality of reporting, but it still can get annoying. In a world where we are already doing irreparable damage to the environment through global warming, the idea that we will have fewer people in the future should be seen as a good thing.

Nonetheless, our leading news outlets are warning us that China, the world’s most heavily populated country may be seeing its population decline in the decades ahead. The story is that fewer babies will mean fewer workers twenty years out. We are warned that this would lead to a labor shortage and make it more difficult to support retirement pensions. The Post article warns that in Japan (it also talks about countries other than China), it could make it difficult to sustain economic growth.

Let’s deal with these one by one. What does a labor shortage mean? Presumably it will be hard to get people to do the least productive, lowest paying jobs. The obvious response is, so what? This is called “capitalism.” If a particular job holds little value then it won’t get done. This is the reason half of our workforce is not still in agriculture. They are doing more productive tasks elsewhere.

Going forward, if we do see serious labor shortages we will probably see fewer people serving tables in restaurants, working as housekeepers in hotels or providing valet parking. And, the people who still work at these jobs will get much higher pay. Sounds like a terrible crisis!

The second point is that with fewer workers per retiree, it will be harder to support retirement programs. The problem with the story is that the benefits from higher productivity growth swamp any possible increase in costs associated with changes in demographics. Here is what I wrote a few years back in reference to China.

“Suppose that China starts out with five workers per retiree, each with a wage before payments for retirees of 100. Let’s assume that the living standard of retirees requires that them to have 80 percent of the income of an average worker. In this story, we would need a tax rate of 13.8 percentage points on wages to maintain this living standard for retirees. This makes the wage net of payments to support the retired population equal to 86.2.

“Now suppose that over two decades the population ages so that the ratio of workers to retirees is just two to one. However, suppose over this two decade period productivity growth (output per worker hour) averages 5.0 percent annually. If we first calculate the tax rate needed to maintain a living standard for retirees, it is now 28.6 percent, leaving our worker with 71.4 percent of their pre-tax wage.

“But as a result of 5.0 percent annual productivity growth, the before tax wage will 265.3 percent of its level from twenty years earlier. This means that the pay net of the tax to support retirees would be 189.3 percent of the average before tax wage from twenty years earlier. If we compare after-tax wages for the two periods, the after-tax wage in the second period would be 219.6 percent of the after-tax wage in the first period. The living standards of retirees would also be correspondingly higher. So what’s the problem?

“This example is obviously highly stylized, but the assumptions used are almost certainly more negative than the reality. The demographic transition is taken place over 3–4 decades, not the two decades I have assumed here. Also, productivity growth has averaged 7–8 percent, not the 5.0 percent I assumed in these calculations. In short, China should have no problem supporting its retirees at a far higher standard of living than they enjoyed during most of their working lifetimes even as workers also see rising standards of living.”

While a 5 percent annual rate of productivity growth is plausible for China, it is certainly too high for the U.S., Europe and Japan. A more reasonable rate would be 1.0-1.5 percent. (Sorry, there is no evidence in these data that the robots are coming.) But even taking a 1.0 percent rate of productivity growth, the before tax wage (assuming wages keep pace with productivity growth) will be 22 percent higher in two decades. That is far more than enough to offset any tax increases needed to support plausible increases in the ratio of retirees to workers.

Many point out that wages for most workers have not kept pace with productivity growth. That is indeed a very serious problem, but the problem is wages not keeping pace with productivity growth, not the increasing numbers of retirees. There are many groups with lots of money that would like us to focus on the latter, but that doesn’t change the fact that the problem is intra-generational inequality, not inter-generational inequality.

Finally, we have the story that in a country like Japan, a declining population might mean that it cannot sustain economic growth. The proper response here is, who cares? Insofar as we are interested in growth at all, we care about per capita growth. If Japan’s population declines 1.0 percent a year and its economy shrinks modestly (say 0.2-0.3 percent annually), this is still consistent with a rise in per capita GDP of 0.7-0.8 percent annually. That’s not super-fast, but still decent for a wealthy country. And, if Japan chooses to take the benefits of higher productivity in the form of shorter work weeks and work years, as it has done over the last three decades, why is this is a problem?

In short, the concern about shrinking populations is complete nonsense. It is unfortunate that serious news outlets would waste time trying to scare people with this non-problem.

Folks who have followed economic policy debates for the last few decades can never be surprised by the poor quality of reporting, but it still can get annoying. In a world where we are already doing irreparable damage to the environment through global warming, the idea that we will have fewer people in the future should be seen as a good thing.

Nonetheless, our leading news outlets are warning us that China, the world’s most heavily populated country may be seeing its population decline in the decades ahead. The story is that fewer babies will mean fewer workers twenty years out. We are warned that this would lead to a labor shortage and make it more difficult to support retirement pensions. The Post article warns that in Japan (it also talks about countries other than China), it could make it difficult to sustain economic growth.

Let’s deal with these one by one. What does a labor shortage mean? Presumably it will be hard to get people to do the least productive, lowest paying jobs. The obvious response is, so what? This is called “capitalism.” If a particular job holds little value then it won’t get done. This is the reason half of our workforce is not still in agriculture. They are doing more productive tasks elsewhere.

Going forward, if we do see serious labor shortages we will probably see fewer people serving tables in restaurants, working as housekeepers in hotels or providing valet parking. And, the people who still work at these jobs will get much higher pay. Sounds like a terrible crisis!

The second point is that with fewer workers per retiree, it will be harder to support retirement programs. The problem with the story is that the benefits from higher productivity growth swamp any possible increase in costs associated with changes in demographics. Here is what I wrote a few years back in reference to China.

“Suppose that China starts out with five workers per retiree, each with a wage before payments for retirees of 100. Let’s assume that the living standard of retirees requires that them to have 80 percent of the income of an average worker. In this story, we would need a tax rate of 13.8 percentage points on wages to maintain this living standard for retirees. This makes the wage net of payments to support the retired population equal to 86.2.

“Now suppose that over two decades the population ages so that the ratio of workers to retirees is just two to one. However, suppose over this two decade period productivity growth (output per worker hour) averages 5.0 percent annually. If we first calculate the tax rate needed to maintain a living standard for retirees, it is now 28.6 percent, leaving our worker with 71.4 percent of their pre-tax wage.

“But as a result of 5.0 percent annual productivity growth, the before tax wage will 265.3 percent of its level from twenty years earlier. This means that the pay net of the tax to support retirees would be 189.3 percent of the average before tax wage from twenty years earlier. If we compare after-tax wages for the two periods, the after-tax wage in the second period would be 219.6 percent of the after-tax wage in the first period. The living standards of retirees would also be correspondingly higher. So what’s the problem?

“This example is obviously highly stylized, but the assumptions used are almost certainly more negative than the reality. The demographic transition is taken place over 3–4 decades, not the two decades I have assumed here. Also, productivity growth has averaged 7–8 percent, not the 5.0 percent I assumed in these calculations. In short, China should have no problem supporting its retirees at a far higher standard of living than they enjoyed during most of their working lifetimes even as workers also see rising standards of living.”

While a 5 percent annual rate of productivity growth is plausible for China, it is certainly too high for the U.S., Europe and Japan. A more reasonable rate would be 1.0-1.5 percent. (Sorry, there is no evidence in these data that the robots are coming.) But even taking a 1.0 percent rate of productivity growth, the before tax wage (assuming wages keep pace with productivity growth) will be 22 percent higher in two decades. That is far more than enough to offset any tax increases needed to support plausible increases in the ratio of retirees to workers.

Many point out that wages for most workers have not kept pace with productivity growth. That is indeed a very serious problem, but the problem is wages not keeping pace with productivity growth, not the increasing numbers of retirees. There are many groups with lots of money that would like us to focus on the latter, but that doesn’t change the fact that the problem is intra-generational inequality, not inter-generational inequality.

Finally, we have the story that in a country like Japan, a declining population might mean that it cannot sustain economic growth. The proper response here is, who cares? Insofar as we are interested in growth at all, we care about per capita growth. If Japan’s population declines 1.0 percent a year and its economy shrinks modestly (say 0.2-0.3 percent annually), this is still consistent with a rise in per capita GDP of 0.7-0.8 percent annually. That’s not super-fast, but still decent for a wealthy country. And, if Japan chooses to take the benefits of higher productivity in the form of shorter work weeks and work years, as it has done over the last three decades, why is this is a problem?

In short, the concern about shrinking populations is complete nonsense. It is unfortunate that serious news outlets would waste time trying to scare people with this non-problem.

(This is a guest post by Shawn Fremstad.)

In his column today, Paul Krugman rightly calls for more attention in the presidential campaign on family benefits and child poverty. As he points out, in Europe public social expenditures on family benefits (including benefits like child allowances, paid family leave, and child care) “average between 2 and 3 percent of G.D.P. The corresponding number for the United States is 0.6 percent of G.D.P.”  

I’d add there are at least three notable non-European examples of countries that substantially boosted their expenditures on family benefits over the last decades. In Canada, family benefits have increased from .9 percent of GDP in 2000 to 1.6 percent in 2015 (this is the latest year for Canada in the OECD’s comparative database, but their spending is likely even higher today for reasons noted below). In Japan, family benefits have increased from .6 percent of GDP in 2000 to 1.3 percent  in 2015. In Korea, family benefits have increased from .1 percent of GDP in 2000 to 1.2 percent 2017. 

While Krugman highlights child care and mentions paid family leave, he doesn’t mention a third important family-benefit reform that we need to make: turning the Child Tax Credit into an inclusive child allowance. In 2015, Justin Trudeau ran on reforming Canada’s then-byzantine set of tax credits for families with children into a single, simple, and progressive benefit. I was in Quebec during the run up to that election and remember seeing regular campaign ads touting his Child Benefit proposal. Notably, Trudeau pitched his plan in a way that was designed to appeal to both low- and middle-income families:

“… with [conservative Prime Minister] Harper you need to be a certain family to get his $2 billion tax break. For our plan, all you need is to be middle class, or hoping to join it. You can be a single mom, a stay-at-home dad, a family where both parents work or are divorced. It doesn’t matter. Our plan helps you.”

Trudeau won, and today the maximum credit is $6,639 (CA$) per child under age 6 and $5,602 per child age 6 through 17. Unlike in the United States, all very low-income families get the maximum credit, and child poverty has declined substantially in Canada as a result. 

Finally, I have to say that Krugman gets offtrack at the end when he argues that the Sanders campaign is to blame for the lack of attention to children because he made Medicare for All “a bright shiny object chased by the news media at the expense of other policies that could greatly improve American lives….” (My colleague Dean Baker has written about past Krugman critiques of Sanders on Medicare for All). While the media certainly needs to expand its focus to include family policy issues beyond health care, it is unfair to blame Sanders for their failings.

(This is a guest post by Shawn Fremstad.)

In his column today, Paul Krugman rightly calls for more attention in the presidential campaign on family benefits and child poverty. As he points out, in Europe public social expenditures on family benefits (including benefits like child allowances, paid family leave, and child care) “average between 2 and 3 percent of G.D.P. The corresponding number for the United States is 0.6 percent of G.D.P.”  

I’d add there are at least three notable non-European examples of countries that substantially boosted their expenditures on family benefits over the last decades. In Canada, family benefits have increased from .9 percent of GDP in 2000 to 1.6 percent in 2015 (this is the latest year for Canada in the OECD’s comparative database, but their spending is likely even higher today for reasons noted below). In Japan, family benefits have increased from .6 percent of GDP in 2000 to 1.3 percent  in 2015. In Korea, family benefits have increased from .1 percent of GDP in 2000 to 1.2 percent 2017. 

While Krugman highlights child care and mentions paid family leave, he doesn’t mention a third important family-benefit reform that we need to make: turning the Child Tax Credit into an inclusive child allowance. In 2015, Justin Trudeau ran on reforming Canada’s then-byzantine set of tax credits for families with children into a single, simple, and progressive benefit. I was in Quebec during the run up to that election and remember seeing regular campaign ads touting his Child Benefit proposal. Notably, Trudeau pitched his plan in a way that was designed to appeal to both low- and middle-income families:

“… with [conservative Prime Minister] Harper you need to be a certain family to get his $2 billion tax break. For our plan, all you need is to be middle class, or hoping to join it. You can be a single mom, a stay-at-home dad, a family where both parents work or are divorced. It doesn’t matter. Our plan helps you.”

Trudeau won, and today the maximum credit is $6,639 (CA$) per child under age 6 and $5,602 per child age 6 through 17. Unlike in the United States, all very low-income families get the maximum credit, and child poverty has declined substantially in Canada as a result. 

Finally, I have to say that Krugman gets offtrack at the end when he argues that the Sanders campaign is to blame for the lack of attention to children because he made Medicare for All “a bright shiny object chased by the news media at the expense of other policies that could greatly improve American lives….” (My colleague Dean Baker has written about past Krugman critiques of Sanders on Medicare for All). While the media certainly needs to expand its focus to include family policy issues beyond health care, it is unfair to blame Sanders for their failings.

I am speaking here in my capacity as “no one,” as in “no one saw the housing bubble and the risks it posed to the economy.” The reason for my comeback is the new consensus that we have to do something about China’s “bad practices,” which generally mean its lack of respect for the intellectual property claims of U.S. corporations.

This Washington Post piece gives us a good example, telling us:

“There is now a wide consensus in the United States to challenge China on its worst actions. After this agreement, U.S. firms in China are no longer supposed to be forced to hand their technology over to Chinese companies, a long-standing problem.”

Okay, at the risk of not getting included in the happy consensus, I will make a few points here.

The first should be the obvious one, if U.S. corporations don’t have to worry about being forced to transfer technology when they set up operations in China, then they will be more likely to set up operations in China. That’s pretty much Econ 101. Boeing obviously is happier when it is not forced to transfer technology to a future competitor, Boeings’ workers have no reason to be happy about more of their jobs going to China.

The second point is that China’s economy is already 30 percent larger than the U.S. economy. By the end of the decade it will almost certainly be more than twice as large as the U.S. economy. It spends roughly the same share of its GDP on research and development as the United States.

I know that the media are dominated by America First Trumper types, but if a country is spending twice as much on R&D as the U.S. it is likely to have more technology that we will want from them, then we will have technology that they will want from us. A trade policy that actually looked to benefit the United States and the world would be looking to share innovation as quickly as possible rather than lock down the patent and copyright monopolies of U.S. corporations.

Think of how much we could gain if clean technologies developed in both countries were immediately available for the whole world to use. The same applies to breakthroughs in health care and other areas. Yeah patents might have been a great system in the 16th century, but it might be worth a bit of rethinking on whether they are the best way to promote innovation in the 21st century. (This is the topic of chapter 5 in Rigged [it’s free].)

Finally, stronger and longer patent and copyright monopolies give more money to the people in a position to benefit from the rents from patent and copyrights (think Bill Gates). One of the great pieces of idiocy in economics (there are many) is the idea that technology is responsible for the upward redistribution of the last four decades. Sorry folks, it was not technology, it was our policy on technology. In a world without patents and copyrights, Bill Gates would probably still be working for a living. (Actually he is old enough to be getting Social Security.)

It was our policies on technology which allowed some people to get hugely rich while devaluing the skills of tens of millions of others. It is possible to argue that these policies were still best for the country as a whole in that they provided incentives to develop new technologies (that seems a hard argument, given the pathetic productivity growth of the last fifteen years), but the point is that it was a policy choice that redistributed income upward, not the technology itself.

The China case is just a classic example of this story. We are being told about the wide consensus by our media, without any indication that there is actually a policy choice here. That is the simple and obvious point that no one is saying.

I am speaking here in my capacity as “no one,” as in “no one saw the housing bubble and the risks it posed to the economy.” The reason for my comeback is the new consensus that we have to do something about China’s “bad practices,” which generally mean its lack of respect for the intellectual property claims of U.S. corporations.

This Washington Post piece gives us a good example, telling us:

“There is now a wide consensus in the United States to challenge China on its worst actions. After this agreement, U.S. firms in China are no longer supposed to be forced to hand their technology over to Chinese companies, a long-standing problem.”

Okay, at the risk of not getting included in the happy consensus, I will make a few points here.

The first should be the obvious one, if U.S. corporations don’t have to worry about being forced to transfer technology when they set up operations in China, then they will be more likely to set up operations in China. That’s pretty much Econ 101. Boeing obviously is happier when it is not forced to transfer technology to a future competitor, Boeings’ workers have no reason to be happy about more of their jobs going to China.

The second point is that China’s economy is already 30 percent larger than the U.S. economy. By the end of the decade it will almost certainly be more than twice as large as the U.S. economy. It spends roughly the same share of its GDP on research and development as the United States.

I know that the media are dominated by America First Trumper types, but if a country is spending twice as much on R&D as the U.S. it is likely to have more technology that we will want from them, then we will have technology that they will want from us. A trade policy that actually looked to benefit the United States and the world would be looking to share innovation as quickly as possible rather than lock down the patent and copyright monopolies of U.S. corporations.

Think of how much we could gain if clean technologies developed in both countries were immediately available for the whole world to use. The same applies to breakthroughs in health care and other areas. Yeah patents might have been a great system in the 16th century, but it might be worth a bit of rethinking on whether they are the best way to promote innovation in the 21st century. (This is the topic of chapter 5 in Rigged [it’s free].)

Finally, stronger and longer patent and copyright monopolies give more money to the people in a position to benefit from the rents from patent and copyrights (think Bill Gates). One of the great pieces of idiocy in economics (there are many) is the idea that technology is responsible for the upward redistribution of the last four decades. Sorry folks, it was not technology, it was our policy on technology. In a world without patents and copyrights, Bill Gates would probably still be working for a living. (Actually he is old enough to be getting Social Security.)

It was our policies on technology which allowed some people to get hugely rich while devaluing the skills of tens of millions of others. It is possible to argue that these policies were still best for the country as a whole in that they provided incentives to develop new technologies (that seems a hard argument, given the pathetic productivity growth of the last fifteen years), but the point is that it was a policy choice that redistributed income upward, not the technology itself.

The China case is just a classic example of this story. We are being told about the wide consensus by our media, without any indication that there is actually a policy choice here. That is the simple and obvious point that no one is saying.

(This post first appeared on my Patreon page.)

This is not an abstract philosophical question. Boeing forced out its CEO, Dennis Muilenburg last week. Muilenberg had played a major role in overseeing the development and production of the Boeing 737 Max, a plane which was recently involved in two major crashes, resulting in hundreds of deaths. Following these crashes, and the grounding of the plane in March, evidence has come out that Boeing did not take seriously many safety issues that were raised by people working on the plane.   

Since Muilenberg was the person in charge for the last four and a half years, it is certainly understandable that the company would want to send the guy packing. Boeing had long been a company with a solid record of putting safety as a top priority. It no longer has that reputation, which is hugely important for a maker of civilian airplanes. While this was clearly not all Muilenberg’s fault, as CEO he has considerable responsibility.

All of this is pretty straightforward. The part of the story that many people may find jarring is that Muilenberg walked away with $62 million in pay and benefits when he left the company.

This is jarring because it would be pretty hard to argue that Muilenberg had done a good job running the company. He leaves it with a horrible reputation problem, for which it may take many years to recover.

But we know shareholders don’t care about reputation, they care about money in their pockets. They might be okay with handing Muilenberg $62 million if he made them a lot of money.

However, that doesn’t seem to be the case. Boeings stock did do quite well under Muilenberg, rising by just under 130 percent over the four and half years that he was at the helm. But the stock of Airbus, Boeing’s main global competitor, almost matched this performance, and that was without the assistance of the big cut in corporate taxes that Trump gave to U.S. corporations in 2017. In other words, there is little reason to think that Muilenberg did anything for shareholders that any other Boeing CEO would not have done.

According to the press statements about Muilenberg’s parting gift, this was money that Muilenberg was owed, not some sort of severance package. It would take a careful reading of his contract to determine whether this is completely true, but from an economic standpoint, it doesn’t really matter.

The people on Boeing’s board presumably are not stupid, and in any case, they hire lawyers to write contracts who should understand the law. They all know how to write a contract that says the CEO walks away with little or nothing if they have done major damage to the company in their tenure, sort of like custodians and dishwashers typically walk away with little or nothing when they get fired for messing up on the job. For some reason, Boeing’s board chose not to write a contract like this for its CEO.

This would just be a peculiar quirk if Boeing was the only company whose board didn’t seem to know how to write contracts, but in fact this seems to be the norm. To take another recent example, John Stumpf walked away with $130 million from Wells Fargo after he was caught in a major scandal where the bank issued phony accounts for hundreds of thousands of customers.

Going back another decade, Home Depot CEO, Robert Nardelli, got a $210 million severance package in 2007 even though the company’s stock price had been cut in half under his tenure. The stock price of Lowes, the company’s major competitor, went up 40 percent over the same period.

There are no shortages of examples where CEO pay doesn’t bear any relationship to the returns provides to shareholders. Corporate boards surely can write contracts that more closely tie CEO pay to the returns that they provide to shareholders, above someone just spinning their wheels in the CEO position. The fact that boards fail to tie CEO pay closely to value actually provided to shareholders strongly suggests that the boards are not working for shareholders, they are working for the CEOs.

For some reason, most progressives have been determined to say that CEOs get their outlandish pay for serving shareholders, in spite of evidence to the contrary. This matters if we are interested in bringing down CEO pay, both because shareholders can be powerful allies and also because it says a lot about the legitimacy of CEO pay.

If CEO pay is justified by the extraordinary returns they provide to shareholders, then the $10 million, $20 million, or even $30 million paychecks are a story of capitalism working as it is supposed to. In this story, CEOs are hugely productive people who manage to produce enormous benefits to shareholders, who should be happy to give back a fraction of their gains in CEO pay. (For this discussion, I’m ignoring the fact that the gains may be the result of breaking unions, making unsafe products, wrecking the environment, or other anti-social acts. I’m just focusing narrowly on returns to shareholders.)

But if the pay is not closely related to returns to shareholders, but rather the result of having their friends on corporate boards deciding how much they get paid, then it implies that these outlandish paychecks are not justified by the logic of the market. This is just flat out corruption.

And, the exorbitant pay of CEOs has an enormous spillover effect. If the CEO is getting $20 million, the other top executives are likely getting paychecks close to $10 million, even the third tier of corporate executives is likely earning $1-2 million a year. Imagine we were back in the world of fifty years ago when CEO pay was 20-30 times the pay of a typical worker. This would mean paychecks in the neighborhood of $2 to $3 million. In that world, the next echelon of the corporate hierarchy is likely earning not too much over $1 million, and the third tier is way back in the high six figures.

Exorbitant CEO pay also affects pay outside the corporate sector. It is common for the heads of major charities and universities presidents to earn well over $1 million a year. Other top executives can be earning at least in the high six figures, if not also crossing $1 million. These salaries would be radically lower if these top executives could not claim that they would be able to earn ten times as much in the private sector.

At the most basic level, the idea that the huge run-up in CEO pay over the last four decades is justified by the returns they produce for shareholders is undermined by the fact that returns have been relatively low by historical standards. They were high in the 1980s and 1990s, as there was a historic run-up in price to earnings ratios, but since then they have been relatively much lower than in the decades of the 1950s and 1960s.

This largely reflects the fact that when the price-to-earnings ratio is high, it is impossible to give shareholders the same percentage return on their investment. When the PE is 15 to 1, a 3 percent dividend is just 45 percent of earnings. However, when the PE is 30 to 1, a 3 percent dividend would be 90 percent of corporate earnings. The dividend yield, or its equivalent in buybacks, almost certainly has to fall when the PE rises.

Slower growth, now averaging close to 2.0 percent annually, (compared to 3-4 percent in prior decades) also means lower capital gains on average. To maintain historical stock yields, it would be necessary for PEs to fall in a period of slow growth.

A possible explanation for the rise in PEs is that share buybacks drive up the price-to-earnings ratios in a way that dividend payouts do not. (I hope to be able to test this later this year.) This would be completely irrational behavior by investors, but we have seen plenty of irrational behavior by big investors in recent decades, such as the stock and housing bubbles.

If paying out money as share buybacks does raise PEs, then it would create a scenario in which corporate management is effectively making money for itself and current shareholders, at the expense of future returns to shareholders. At a point in time, shareholders are presumably largely indifferent between getting their money in dividends or buybacks (tax considerations can make the latter more desirable), but a higher PE means returns will be lower for people buying stock in the future.

Anyhow, it is clear from the data that the last two decades have not been especially good ones for shareholders, which is consistent with the idea that they are being ripped off by top management. It is also the case that the vast majority of the upward redistribution of the last four decades has been from ordinary workers to high-end earners, not from labor to capital.

This means that if we want to reverse the upward redistribution we should be focusing on the high-end earners who got the money. CEOs should be among our prime targets, both for the money they directly receive and for the impact that their pay has on the wage distribution as whole.

It is unfortunate that few progressives seem interested in pursuing the evidence that CEOs are ripping off their companies. Part of this may be due to the usual difficulty that progressives have in dealing with new ideas, but part of it likely stems from their desire to lash out at the market rather than asking how the market can be structured to produce different outcomes.

It was not the market that led to a situation where mediocre CEOs can earn $20 million a year, it was a corrupt structure of corporate governance. The latter can be changed much more easily than eliminating the market economy.

(This post first appeared on my Patreon page.)

This is not an abstract philosophical question. Boeing forced out its CEO, Dennis Muilenburg last week. Muilenberg had played a major role in overseeing the development and production of the Boeing 737 Max, a plane which was recently involved in two major crashes, resulting in hundreds of deaths. Following these crashes, and the grounding of the plane in March, evidence has come out that Boeing did not take seriously many safety issues that were raised by people working on the plane.   

Since Muilenberg was the person in charge for the last four and a half years, it is certainly understandable that the company would want to send the guy packing. Boeing had long been a company with a solid record of putting safety as a top priority. It no longer has that reputation, which is hugely important for a maker of civilian airplanes. While this was clearly not all Muilenberg’s fault, as CEO he has considerable responsibility.

All of this is pretty straightforward. The part of the story that many people may find jarring is that Muilenberg walked away with $62 million in pay and benefits when he left the company.

This is jarring because it would be pretty hard to argue that Muilenberg had done a good job running the company. He leaves it with a horrible reputation problem, for which it may take many years to recover.

But we know shareholders don’t care about reputation, they care about money in their pockets. They might be okay with handing Muilenberg $62 million if he made them a lot of money.

However, that doesn’t seem to be the case. Boeings stock did do quite well under Muilenberg, rising by just under 130 percent over the four and half years that he was at the helm. But the stock of Airbus, Boeing’s main global competitor, almost matched this performance, and that was without the assistance of the big cut in corporate taxes that Trump gave to U.S. corporations in 2017. In other words, there is little reason to think that Muilenberg did anything for shareholders that any other Boeing CEO would not have done.

According to the press statements about Muilenberg’s parting gift, this was money that Muilenberg was owed, not some sort of severance package. It would take a careful reading of his contract to determine whether this is completely true, but from an economic standpoint, it doesn’t really matter.

The people on Boeing’s board presumably are not stupid, and in any case, they hire lawyers to write contracts who should understand the law. They all know how to write a contract that says the CEO walks away with little or nothing if they have done major damage to the company in their tenure, sort of like custodians and dishwashers typically walk away with little or nothing when they get fired for messing up on the job. For some reason, Boeing’s board chose not to write a contract like this for its CEO.

This would just be a peculiar quirk if Boeing was the only company whose board didn’t seem to know how to write contracts, but in fact this seems to be the norm. To take another recent example, John Stumpf walked away with $130 million from Wells Fargo after he was caught in a major scandal where the bank issued phony accounts for hundreds of thousands of customers.

Going back another decade, Home Depot CEO, Robert Nardelli, got a $210 million severance package in 2007 even though the company’s stock price had been cut in half under his tenure. The stock price of Lowes, the company’s major competitor, went up 40 percent over the same period.

There are no shortages of examples where CEO pay doesn’t bear any relationship to the returns provides to shareholders. Corporate boards surely can write contracts that more closely tie CEO pay to the returns that they provide to shareholders, above someone just spinning their wheels in the CEO position. The fact that boards fail to tie CEO pay closely to value actually provided to shareholders strongly suggests that the boards are not working for shareholders, they are working for the CEOs.

For some reason, most progressives have been determined to say that CEOs get their outlandish pay for serving shareholders, in spite of evidence to the contrary. This matters if we are interested in bringing down CEO pay, both because shareholders can be powerful allies and also because it says a lot about the legitimacy of CEO pay.

If CEO pay is justified by the extraordinary returns they provide to shareholders, then the $10 million, $20 million, or even $30 million paychecks are a story of capitalism working as it is supposed to. In this story, CEOs are hugely productive people who manage to produce enormous benefits to shareholders, who should be happy to give back a fraction of their gains in CEO pay. (For this discussion, I’m ignoring the fact that the gains may be the result of breaking unions, making unsafe products, wrecking the environment, or other anti-social acts. I’m just focusing narrowly on returns to shareholders.)

But if the pay is not closely related to returns to shareholders, but rather the result of having their friends on corporate boards deciding how much they get paid, then it implies that these outlandish paychecks are not justified by the logic of the market. This is just flat out corruption.

And, the exorbitant pay of CEOs has an enormous spillover effect. If the CEO is getting $20 million, the other top executives are likely getting paychecks close to $10 million, even the third tier of corporate executives is likely earning $1-2 million a year. Imagine we were back in the world of fifty years ago when CEO pay was 20-30 times the pay of a typical worker. This would mean paychecks in the neighborhood of $2 to $3 million. In that world, the next echelon of the corporate hierarchy is likely earning not too much over $1 million, and the third tier is way back in the high six figures.

Exorbitant CEO pay also affects pay outside the corporate sector. It is common for the heads of major charities and universities presidents to earn well over $1 million a year. Other top executives can be earning at least in the high six figures, if not also crossing $1 million. These salaries would be radically lower if these top executives could not claim that they would be able to earn ten times as much in the private sector.

At the most basic level, the idea that the huge run-up in CEO pay over the last four decades is justified by the returns they produce for shareholders is undermined by the fact that returns have been relatively low by historical standards. They were high in the 1980s and 1990s, as there was a historic run-up in price to earnings ratios, but since then they have been relatively much lower than in the decades of the 1950s and 1960s.

This largely reflects the fact that when the price-to-earnings ratio is high, it is impossible to give shareholders the same percentage return on their investment. When the PE is 15 to 1, a 3 percent dividend is just 45 percent of earnings. However, when the PE is 30 to 1, a 3 percent dividend would be 90 percent of corporate earnings. The dividend yield, or its equivalent in buybacks, almost certainly has to fall when the PE rises.

Slower growth, now averaging close to 2.0 percent annually, (compared to 3-4 percent in prior decades) also means lower capital gains on average. To maintain historical stock yields, it would be necessary for PEs to fall in a period of slow growth.

A possible explanation for the rise in PEs is that share buybacks drive up the price-to-earnings ratios in a way that dividend payouts do not. (I hope to be able to test this later this year.) This would be completely irrational behavior by investors, but we have seen plenty of irrational behavior by big investors in recent decades, such as the stock and housing bubbles.

If paying out money as share buybacks does raise PEs, then it would create a scenario in which corporate management is effectively making money for itself and current shareholders, at the expense of future returns to shareholders. At a point in time, shareholders are presumably largely indifferent between getting their money in dividends or buybacks (tax considerations can make the latter more desirable), but a higher PE means returns will be lower for people buying stock in the future.

Anyhow, it is clear from the data that the last two decades have not been especially good ones for shareholders, which is consistent with the idea that they are being ripped off by top management. It is also the case that the vast majority of the upward redistribution of the last four decades has been from ordinary workers to high-end earners, not from labor to capital.

This means that if we want to reverse the upward redistribution we should be focusing on the high-end earners who got the money. CEOs should be among our prime targets, both for the money they directly receive and for the impact that their pay has on the wage distribution as whole.

It is unfortunate that few progressives seem interested in pursuing the evidence that CEOs are ripping off their companies. Part of this may be due to the usual difficulty that progressives have in dealing with new ideas, but part of it likely stems from their desire to lash out at the market rather than asking how the market can be structured to produce different outcomes.

It was not the market that led to a situation where mediocre CEOs can earn $20 million a year, it was a corrupt structure of corporate governance. The latter can be changed much more easily than eliminating the market economy.

Another Timothy Geithner Scandal

Tim Geithner might have left his job as Treasury Secretary seven years ago, but his legacy lives on. The Wall Street Journal reported that the financial firm Morningstar had reached a settlement with the SEC over marketing it had done for firms whose bonds it had rated.

SEC rules prohibit rating agencies from doing promotional work for firms whose bonds it rates. This is done to prevent the obvious conflict of interest, that it may give better ratings as part of a promotional effort.

This conflict of interest is inherent in the rating process as it is now designed. Rating agencies have an incentive to give high ratings as a way to attract business.

This was one of the problems that led to the run-up in the housing bubble, the collapse of which caused the Great Recession. Rating agencies gave investment grade ratings to mortgage backed securities that they knew were filled with bad mortgages because they did not want to lose the business.

There is a very simple solution to this problem which was addressed in an amendment to the Dodd-Frank financial reform bill inserted by Senator Al Franken. (I worked with Senator Franken’s staff on this amendment.) The amendment would require issuers to contact the SEC, who would then select the rating agency. This would eliminate the incentive to give good ratings to attract more business. The Franken amendment passed with bipartisan support, getting 65 votes in the Senate.

Unfortunately, as he discusses in his autobiography, Tim Geithner arranged to have the amendment killed in the conference committee. Ensuring that the corrupt system we had in the housing bubble years was left in place.

Tim Geithner might have left his job as Treasury Secretary seven years ago, but his legacy lives on. The Wall Street Journal reported that the financial firm Morningstar had reached a settlement with the SEC over marketing it had done for firms whose bonds it had rated.

SEC rules prohibit rating agencies from doing promotional work for firms whose bonds it rates. This is done to prevent the obvious conflict of interest, that it may give better ratings as part of a promotional effort.

This conflict of interest is inherent in the rating process as it is now designed. Rating agencies have an incentive to give high ratings as a way to attract business.

This was one of the problems that led to the run-up in the housing bubble, the collapse of which caused the Great Recession. Rating agencies gave investment grade ratings to mortgage backed securities that they knew were filled with bad mortgages because they did not want to lose the business.

There is a very simple solution to this problem which was addressed in an amendment to the Dodd-Frank financial reform bill inserted by Senator Al Franken. (I worked with Senator Franken’s staff on this amendment.) The amendment would require issuers to contact the SEC, who would then select the rating agency. This would eliminate the incentive to give good ratings to attract more business. The Franken amendment passed with bipartisan support, getting 65 votes in the Senate.

Unfortunately, as he discusses in his autobiography, Tim Geithner arranged to have the amendment killed in the conference committee. Ensuring that the corrupt system we had in the housing bubble years was left in place.

This assertion appeared in the middle of an article about how the Trump administration plans to reduce the number of days that federal employees can telework rather than show up in their office. Of course seeking more accountability is a legitimate reason to change a policy, however there is absolutely zero evidence presented in the piece that reducing telework will actually increase accountability.

In fact, the very end of the piece reports on the impact of a decision to sharply reduce telework in the Education Department:

“The results were universally negative, according to a copy of the survey obtained by The Washington Post.

“Sick leave and vacation requests grew. A majority of employees reported no increased productivity, collaboration or communication with colleagues when they returned to the office — the stated reason telework was cut. And two-thirds of employees said they were considering leaving.”

The piece concluded with a statement from the Education Department, that it will:

“continue the agency’s ‘efforts to achieve the intended outcomes of improved collaboration and productivity’ and limit working from home.”

This strongly implies that efforts to limit telework have little to do with increasing accountability as earlier asserted. An alternative is that they are about harassing federal employees, who have been a frequent target of the Trump administration.The open hostility of the Trump adminsitration to federal employees should have been a reason for questioning any reasons given for making their jobs less pleasant, instead of passing them on to readers as though they are true.

This assertion appeared in the middle of an article about how the Trump administration plans to reduce the number of days that federal employees can telework rather than show up in their office. Of course seeking more accountability is a legitimate reason to change a policy, however there is absolutely zero evidence presented in the piece that reducing telework will actually increase accountability.

In fact, the very end of the piece reports on the impact of a decision to sharply reduce telework in the Education Department:

“The results were universally negative, according to a copy of the survey obtained by The Washington Post.

“Sick leave and vacation requests grew. A majority of employees reported no increased productivity, collaboration or communication with colleagues when they returned to the office — the stated reason telework was cut. And two-thirds of employees said they were considering leaving.”

The piece concluded with a statement from the Education Department, that it will:

“continue the agency’s ‘efforts to achieve the intended outcomes of improved collaboration and productivity’ and limit working from home.”

This strongly implies that efforts to limit telework have little to do with increasing accountability as earlier asserted. An alternative is that they are about harassing federal employees, who have been a frequent target of the Trump administration.The open hostility of the Trump adminsitration to federal employees should have been a reason for questioning any reasons given for making their jobs less pleasant, instead of passing them on to readers as though they are true.

David Leonhardt argues in his column that Democrats have to make the benefits of government more visible to people and criticizes them for failing to do so. While he does have a very good point, he ignores all the ways that conservatives (defined as people who want to redistribute money upward) use the government to structure the market to give more money to those on top.

This includes items like longer and stronger patent and copyright protection and trade deals which are designed to subject manufacturing workers to competition with low-paid workers in the developing world, while protecting the most highly paid professionals, like doctors and lawyers. This stealth effort has led to enormous upward redistribution over the last four decades, which economists and reporters at elite news outlets like the New York Times then attribute to the blind forces of technology and globalization.

But apart from this more general point, Leonhardt seriously misrepresents one of the major policy decisions he criticizes. Leonhardt tells readers;

“Out of a well-intended desire to get Americans to spend more of their stimulus tax cut, the administration snuck the money into people’s paychecks, rather than sending one-time checks (as George W. Bush had done in 2001) that families might have saved.

“Economically, it worked. Spending rose, helping to end the financial crisis. Politically, it was a dud. Many Americans gave Obama little credit and voted for Republicans in the 2010 midterms, virtually killing his larger legislative agenda.”

The issue was not a zero/one question of spending versus no spending. The issue was the percentage of the tax cut which would be spent. At most, the decision to have the tax cut slipped into people’s paychecks, rather than a one-time check from the government, increased the share that would be spent by 10 percentage points.

The tax cut was roughly $60 billion a year in both 2009 and 2010. This means that a high-end estimate of the addition to spending would be $6 billion a year. If we add in a multiplier of 50 percent, this would imply an increase in GDP of $9 billion a year as a result of this method paying out the tax cut. In a $15 trillion economy, this implies a boost to growth equal to 0.06 percent of GDP, an increment that is far too small to be noticed by the public.

This point is important, because the plausible impact on growth from hiding the tax cut in people’s paychecks was trivial. On the other hand, the lost in political goodwill from not sending out a check, as George W. Bush had done, was substantial.

The Obama people did not sacrifice politics for the good of the economy, they sacrificed politics to be able to conduct an experiment in economic policy. It proved to be a very costly experiment.

David Leonhardt argues in his column that Democrats have to make the benefits of government more visible to people and criticizes them for failing to do so. While he does have a very good point, he ignores all the ways that conservatives (defined as people who want to redistribute money upward) use the government to structure the market to give more money to those on top.

This includes items like longer and stronger patent and copyright protection and trade deals which are designed to subject manufacturing workers to competition with low-paid workers in the developing world, while protecting the most highly paid professionals, like doctors and lawyers. This stealth effort has led to enormous upward redistribution over the last four decades, which economists and reporters at elite news outlets like the New York Times then attribute to the blind forces of technology and globalization.

But apart from this more general point, Leonhardt seriously misrepresents one of the major policy decisions he criticizes. Leonhardt tells readers;

“Out of a well-intended desire to get Americans to spend more of their stimulus tax cut, the administration snuck the money into people’s paychecks, rather than sending one-time checks (as George W. Bush had done in 2001) that families might have saved.

“Economically, it worked. Spending rose, helping to end the financial crisis. Politically, it was a dud. Many Americans gave Obama little credit and voted for Republicans in the 2010 midterms, virtually killing his larger legislative agenda.”

The issue was not a zero/one question of spending versus no spending. The issue was the percentage of the tax cut which would be spent. At most, the decision to have the tax cut slipped into people’s paychecks, rather than a one-time check from the government, increased the share that would be spent by 10 percentage points.

The tax cut was roughly $60 billion a year in both 2009 and 2010. This means that a high-end estimate of the addition to spending would be $6 billion a year. If we add in a multiplier of 50 percent, this would imply an increase in GDP of $9 billion a year as a result of this method paying out the tax cut. In a $15 trillion economy, this implies a boost to growth equal to 0.06 percent of GDP, an increment that is far too small to be noticed by the public.

This point is important, because the plausible impact on growth from hiding the tax cut in people’s paychecks was trivial. On the other hand, the lost in political goodwill from not sending out a check, as George W. Bush had done, was substantial.

The Obama people did not sacrifice politics for the good of the economy, they sacrificed politics to be able to conduct an experiment in economic policy. It proved to be a very costly experiment.

Just wondering, since they do it so often in contexts where it is inappropriate, like this Washington Post piece on Bernie Sanders foreign policy. After noting how Trump has upended U.S. foreign policy in many areas, it adds:

“Sanders would deliver another jolt — echoing some of Trump’s criticisms of military actions and free trade but realigning the country’s priorities even more thoroughly.”

The piece could have far more accurately said “U.S. trade policy.” Of course patent and copyright proteections, which have been at the center of this policy, are 180 degrees at odds with free trade — even if people might like tthem.

 

Just wondering, since they do it so often in contexts where it is inappropriate, like this Washington Post piece on Bernie Sanders foreign policy. After noting how Trump has upended U.S. foreign policy in many areas, it adds:

“Sanders would deliver another jolt — echoing some of Trump’s criticisms of military actions and free trade but realigning the country’s priorities even more thoroughly.”

The piece could have far more accurately said “U.S. trade policy.” Of course patent and copyright proteections, which have been at the center of this policy, are 180 degrees at odds with free trade — even if people might like tthem.

 

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