Gretchen Morgenson had a good piece this weekend on fees paid by public pension funds. These fees are large and have grown rapidly in recent decades. The fees go to some of the richest people in the country, such as private equity and hedge fund managers (think of Peter Peterson or Mitt Romney).
The fees often do not correspond to any benefits to the pension funds in the form of higher returns. In other words, these fees are the equivalent of a massive welfare program under which the taxpayers are putting money in the pockets of some of the richest people in the country — for doing nothing.
A simple way to combat this taxpayer handout to the very wealthy is strong transparency requirements. If pension funds were required to public post the full terms of all contracts with pension fund advisers, private equity companies, and others involved in managing their money, along with the returns on the assets, it would likely cut down on the heist.
It’s simple, but probably too big of a lift in the corrupt political environment of the U.S. today.
Gretchen Morgenson had a good piece this weekend on fees paid by public pension funds. These fees are large and have grown rapidly in recent decades. The fees go to some of the richest people in the country, such as private equity and hedge fund managers (think of Peter Peterson or Mitt Romney).
The fees often do not correspond to any benefits to the pension funds in the form of higher returns. In other words, these fees are the equivalent of a massive welfare program under which the taxpayers are putting money in the pockets of some of the richest people in the country — for doing nothing.
A simple way to combat this taxpayer handout to the very wealthy is strong transparency requirements. If pension funds were required to public post the full terms of all contracts with pension fund advisers, private equity companies, and others involved in managing their money, along with the returns on the assets, it would likely cut down on the heist.
It’s simple, but probably too big of a lift in the corrupt political environment of the U.S. today.
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Bloomberg reports that Esther George, perhaps the Fed’s biggest inflation hawk, has a new argument for raising interest rates: she claims that inflation is a big tax on the poor. This is peculiar for two reasons.
First, the people who are denied work as a result of higher interest rates will be disproportionately those at the bottom of the ladder: African Americans, Hispanics, and workers with less education. Furthermore, higher unemployment rates mean that the workers who have jobs will have less bargaining power and be less able to push up their wages. It’s hard to see how people who lose jobs and get lower pay increases will benefit from a slightly lower inflation rate.
The other reason why the argument doesn’t quite work is that even the modest inflation we have seen in recent years is driven almost entirely by rising rents.
Source: Bureau of Labor Statistics.
Higher interest rates could actually make rental inflation worse. An immediate effect of higher interest rates is lower construction. This will reduce the supply of housing in cities with rapidly rising rents, making the shortage of housing units worse. This will compound the negative effect of reduced labor market opportunities.
That hardly seems like a winning policy option for the poor.
Bloomberg reports that Esther George, perhaps the Fed’s biggest inflation hawk, has a new argument for raising interest rates: she claims that inflation is a big tax on the poor. This is peculiar for two reasons.
First, the people who are denied work as a result of higher interest rates will be disproportionately those at the bottom of the ladder: African Americans, Hispanics, and workers with less education. Furthermore, higher unemployment rates mean that the workers who have jobs will have less bargaining power and be less able to push up their wages. It’s hard to see how people who lose jobs and get lower pay increases will benefit from a slightly lower inflation rate.
The other reason why the argument doesn’t quite work is that even the modest inflation we have seen in recent years is driven almost entirely by rising rents.
Source: Bureau of Labor Statistics.
Higher interest rates could actually make rental inflation worse. An immediate effect of higher interest rates is lower construction. This will reduce the supply of housing in cities with rapidly rising rents, making the shortage of housing units worse. This will compound the negative effect of reduced labor market opportunities.
That hardly seems like a winning policy option for the poor.
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The Washington Post ran a column by
“Canadian authorities do not inspect every shipment of products headed for the U.S. marketplace to ensure that packages don’t contain adulterated, counterfeit or illegal drugs. Canada does not have the resources to undertake such comprehensive searches, and the Canadian and U.S. governments are not currently set up to facilitate such a program. Canada’s health-inspection regime is designed to ensure the safety of medications for Canadians, not for other countries.”
While this is undoubtedly true, there is a little secret that fans of economics and logic have long known. With additional money, Canada could expand the size of its regulatory agency so it would have the resources to undertake such comprehensive searches.
And, where might Canada get the additional money? It can tax the drugs being sold to people in the United States. With the price of drugs in the United States often two or three times the price of drugs in Canada, there is plenty of room to impose a tax to cover the additional inspection costs and still leave massive savings for people in the United States.
The entire Food and Drug Administration budget for medical product safety last year was $2.7 billion. We will spend over $440 billion on prescription drugs in 2017. A small tax on whatever passes through Canada should easily cover the cost of inspections and, in fact, could cover the cost for Canada as well. This is a classic win-win through trade under which everyone can benefit.
Of course, Ms. Aglukkaq is correct that this is not a good solution to the problem of making drugs affordable in the U.S. We should be looking for alternatives to supporting research through government granted patent monopolies, as Senator Sanders has been doing. Along with Sherrod Brown and 15 other Democratic senators, Sanders has proposed money for a prize fund which would buy up the patents for approved drugs and put them in the public domain so that they could be sold at their free market price.
The bill also proposes that the government pay for the clinical testing of new drugs. The test results would be in the public domain, which would enormously benefit researchers and doctors when deciding which drugs to prescribe. And, the approved drug would also be available at free market prices.
The big problem is that, while drugs are cheap, patent monopolies make them expensive. Unfortunately, the Washington Post doesn’t like people pointing things like this out on its opinion page. (It is probably worth mentioning that the Post gets large amounts of advertising revenue from drug companies.)
The Washington Post ran a column by
“Canadian authorities do not inspect every shipment of products headed for the U.S. marketplace to ensure that packages don’t contain adulterated, counterfeit or illegal drugs. Canada does not have the resources to undertake such comprehensive searches, and the Canadian and U.S. governments are not currently set up to facilitate such a program. Canada’s health-inspection regime is designed to ensure the safety of medications for Canadians, not for other countries.”
While this is undoubtedly true, there is a little secret that fans of economics and logic have long known. With additional money, Canada could expand the size of its regulatory agency so it would have the resources to undertake such comprehensive searches.
And, where might Canada get the additional money? It can tax the drugs being sold to people in the United States. With the price of drugs in the United States often two or three times the price of drugs in Canada, there is plenty of room to impose a tax to cover the additional inspection costs and still leave massive savings for people in the United States.
The entire Food and Drug Administration budget for medical product safety last year was $2.7 billion. We will spend over $440 billion on prescription drugs in 2017. A small tax on whatever passes through Canada should easily cover the cost of inspections and, in fact, could cover the cost for Canada as well. This is a classic win-win through trade under which everyone can benefit.
Of course, Ms. Aglukkaq is correct that this is not a good solution to the problem of making drugs affordable in the U.S. We should be looking for alternatives to supporting research through government granted patent monopolies, as Senator Sanders has been doing. Along with Sherrod Brown and 15 other Democratic senators, Sanders has proposed money for a prize fund which would buy up the patents for approved drugs and put them in the public domain so that they could be sold at their free market price.
The bill also proposes that the government pay for the clinical testing of new drugs. The test results would be in the public domain, which would enormously benefit researchers and doctors when deciding which drugs to prescribe. And, the approved drug would also be available at free market prices.
The big problem is that, while drugs are cheap, patent monopolies make them expensive. Unfortunately, the Washington Post doesn’t like people pointing things like this out on its opinion page. (It is probably worth mentioning that the Post gets large amounts of advertising revenue from drug companies.)
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This is more of the “which way is up” problem in economics. Right now, we have lots of economists debating how best to reform the tax code. Most of them see increasing the incentive to save (which means not spending money) as an important goal.
Of course, more saving is not a good idea if we think the economy doesn’t have enough demand to fully employ the workforce. I put myself in the group of economists who hold this view, but we are the minority these days. Most economists think that the economy is pretty close to full employment. That is why the Fed is raising interest rates. Presumably, this is also why people are worried about budget deficits, at least insofar as their concern about budget deficits has any real world rationale.
Anyhow, in this context the NYT is completely off the mark when it tells readers:
“Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season.”
If people are spending less on real estate commissions and other costs associated with buying and selling homes, then they are saving more. Which, according to the economists trying to restructure the tax code, is a good thing. It will leave more resources for investment, leading to more rapid increases in productivity. (Again, I don’t buy this. I think investment is being held back by a lack of demand, but that’s just my fringe position.)
The rest of the claim also doesn’t make much sense. If more people sold their homes and then turned around and bought new homes, this would increase the number of homes for sale, but it would also increase the number of buyers on the market by roughly the same amount. There is only a net improvement for buyers if some of the sellers opt to rent, but the piece is not talking about people switching from owning to renting.
The data also don’t support the claim that people are moving less frequently, as can be seen in one of the charts included with the article. It shows that the most recent rate of sales of existing homes, at 5.7 million annually, is somewhat above the level at the start of the last decade. It is even further above the mid-1990s pre-housing bubble rate. In other words, the rate of sales of existing homes is pretty much back to, or possibly even above, the rate we saw in more normal times — even if it is below the frenzy levels of the bubble years.
This is more of the “which way is up” problem in economics. Right now, we have lots of economists debating how best to reform the tax code. Most of them see increasing the incentive to save (which means not spending money) as an important goal.
Of course, more saving is not a good idea if we think the economy doesn’t have enough demand to fully employ the workforce. I put myself in the group of economists who hold this view, but we are the minority these days. Most economists think that the economy is pretty close to full employment. That is why the Fed is raising interest rates. Presumably, this is also why people are worried about budget deficits, at least insofar as their concern about budget deficits has any real world rationale.
Anyhow, in this context the NYT is completely off the mark when it tells readers:
“Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season.”
If people are spending less on real estate commissions and other costs associated with buying and selling homes, then they are saving more. Which, according to the economists trying to restructure the tax code, is a good thing. It will leave more resources for investment, leading to more rapid increases in productivity. (Again, I don’t buy this. I think investment is being held back by a lack of demand, but that’s just my fringe position.)
The rest of the claim also doesn’t make much sense. If more people sold their homes and then turned around and bought new homes, this would increase the number of homes for sale, but it would also increase the number of buyers on the market by roughly the same amount. There is only a net improvement for buyers if some of the sellers opt to rent, but the piece is not talking about people switching from owning to renting.
The data also don’t support the claim that people are moving less frequently, as can be seen in one of the charts included with the article. It shows that the most recent rate of sales of existing homes, at 5.7 million annually, is somewhat above the level at the start of the last decade. It is even further above the mid-1990s pre-housing bubble rate. In other words, the rate of sales of existing homes is pretty much back to, or possibly even above, the rate we saw in more normal times — even if it is below the frenzy levels of the bubble years.
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The Washington Post had a very useful front page piece on the poor quality of dental care received by large segments of the population. It noted the high price of dental care, but never examines why it costs so much in the United States.
A big part of the story is that dentists earn on average $200,000 a year, roughly twice the average of their counterparts in Western Europe and Canada. This is in large part because our dentists benefit from protectionism. We prohibit qualified foreign dentists from practicing in the United States unless they graduate from a U.S. dental school (or in recent years, a Canadian school).
The price of dental equipment is also inflated due to the fact that it enjoys government-granted patent monopolies. In most cases, this equipment would be relatively cheap if it were sold in a free market. (Yes, we need to pay for the research that supports technological innovation, but there are alternative mechanisms. This issue and protection for dentists is discussed in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].)
Anyhow, this is yet another example of how the religiously pro-free trade Washington Post happily turns a blind eye to protectionism when it is the wealthy who benefit.
The Washington Post had a very useful front page piece on the poor quality of dental care received by large segments of the population. It noted the high price of dental care, but never examines why it costs so much in the United States.
A big part of the story is that dentists earn on average $200,000 a year, roughly twice the average of their counterparts in Western Europe and Canada. This is in large part because our dentists benefit from protectionism. We prohibit qualified foreign dentists from practicing in the United States unless they graduate from a U.S. dental school (or in recent years, a Canadian school).
The price of dental equipment is also inflated due to the fact that it enjoys government-granted patent monopolies. In most cases, this equipment would be relatively cheap if it were sold in a free market. (Yes, we need to pay for the research that supports technological innovation, but there are alternative mechanisms. This issue and protection for dentists is discussed in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].)
Anyhow, this is yet another example of how the religiously pro-free trade Washington Post happily turns a blind eye to protectionism when it is the wealthy who benefit.
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Binyamin Appelbaum had a good piece in the NYT presenting how mainstream economists assess the prospects for boosting growth with the sort of tax cuts proposed by the Trump administration. While the piece accurately conveys the range of views among the mainstream of the profession about the extent to which it is possible to boost GDP growth, it is worth noting that the mainstream of the profession has an absolutely horrible track record in this area.
The piece tells us that the Federal Reserve Board puts the economy’s potential growth rate at just 1.8 percent a year. It then presents views of several economists suggesting that a well-designed tax reform could raise this by 0.3 to 0.5 percentage points.
As recently as 2012, the Congressional Budget Office (CBO) projected that the economy could grow at a 2.5 percent annual rate for the period between 2018 and 2022 (see Summary Table 2). CBO’s projections are usually near the center of the economic mainstream, so in the not distant past, many economists believed that the economy could sustain a 2.5 percent annual rate of growth.
It is also worth noting that there is enormous uncertainty about how low the unemployment rate can go without sparking inflation. CBO put the non-accelerating inflation rate of unemployment (NAIRU) in the 5.2–5.4 percent range five years ago. In the most recent month, the unemployment rate was 4.4 percent. There is no evidence in the data of any acceleration in the rate of inflation.
This is important background. While it is probably true that the sort of tax reform proposed by Trump (i.e. giving rich people more money and creating more opportunities to game the tax code) will not provide much boost to growth, economists really don’t have much basis for confidence in their own projections of the economy’s potential. They have repeatedly been wrong by huge amounts in the past, so unless they suddenly learned a great deal of economics, we should view current projections with considerable skepticism.
Binyamin Appelbaum had a good piece in the NYT presenting how mainstream economists assess the prospects for boosting growth with the sort of tax cuts proposed by the Trump administration. While the piece accurately conveys the range of views among the mainstream of the profession about the extent to which it is possible to boost GDP growth, it is worth noting that the mainstream of the profession has an absolutely horrible track record in this area.
The piece tells us that the Federal Reserve Board puts the economy’s potential growth rate at just 1.8 percent a year. It then presents views of several economists suggesting that a well-designed tax reform could raise this by 0.3 to 0.5 percentage points.
As recently as 2012, the Congressional Budget Office (CBO) projected that the economy could grow at a 2.5 percent annual rate for the period between 2018 and 2022 (see Summary Table 2). CBO’s projections are usually near the center of the economic mainstream, so in the not distant past, many economists believed that the economy could sustain a 2.5 percent annual rate of growth.
It is also worth noting that there is enormous uncertainty about how low the unemployment rate can go without sparking inflation. CBO put the non-accelerating inflation rate of unemployment (NAIRU) in the 5.2–5.4 percent range five years ago. In the most recent month, the unemployment rate was 4.4 percent. There is no evidence in the data of any acceleration in the rate of inflation.
This is important background. While it is probably true that the sort of tax reform proposed by Trump (i.e. giving rich people more money and creating more opportunities to game the tax code) will not provide much boost to growth, economists really don’t have much basis for confidence in their own projections of the economy’s potential. They have repeatedly been wrong by huge amounts in the past, so unless they suddenly learned a great deal of economics, we should view current projections with considerable skepticism.
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As I like to point out, debates on economic policy suffer badly from the “which way is up problem.” At the same time we are constantly hearing concerns about aging baby boomers and large budget deficits (too little supply and too much demand) we also hear stories about robots displacing workers and creating mass unemployment (too much supply and too little demand).
Either of these stories could, in principle, be true, but they can’t possibly both be true at the same time. It speaks volumes for the confusion perpetuated in public debates that we do simultaneously hear both concerns raises. (I was once on a radio show where the other person was warning about robots taking all the jobs. He then said things will get even worse when the baby boomers retire and we have to pay for Social Security. Just think, we first have no jobs and then have no workers.)
Anyhow, the NYT had a story about a state-of-the-art auto factory in China which relies largely on robots to put together cars. This is interesting because there have been numerous stories about how China is going to meet some terrible fate as a result of its one child policy, which sharply curtailed population growth. Its labor force is projected to shrink over the next two decades.
In fact, there is basically zero reason for China to be worried about its shrinking labor force. China still has tens of millions of people employed in extremely low productivity agricultural work. It also has many older factories with outmoded technologies. These can be readily replaced with new factories, like the one highlighted here, which will have much higher productivity.
In short, there is pretty much nothing to the China labor shortage story. But on the plus side, many economists can be employed talking about it.
As I like to point out, debates on economic policy suffer badly from the “which way is up problem.” At the same time we are constantly hearing concerns about aging baby boomers and large budget deficits (too little supply and too much demand) we also hear stories about robots displacing workers and creating mass unemployment (too much supply and too little demand).
Either of these stories could, in principle, be true, but they can’t possibly both be true at the same time. It speaks volumes for the confusion perpetuated in public debates that we do simultaneously hear both concerns raises. (I was once on a radio show where the other person was warning about robots taking all the jobs. He then said things will get even worse when the baby boomers retire and we have to pay for Social Security. Just think, we first have no jobs and then have no workers.)
Anyhow, the NYT had a story about a state-of-the-art auto factory in China which relies largely on robots to put together cars. This is interesting because there have been numerous stories about how China is going to meet some terrible fate as a result of its one child policy, which sharply curtailed population growth. Its labor force is projected to shrink over the next two decades.
In fact, there is basically zero reason for China to be worried about its shrinking labor force. China still has tens of millions of people employed in extremely low productivity agricultural work. It also has many older factories with outmoded technologies. These can be readily replaced with new factories, like the one highlighted here, which will have much higher productivity.
In short, there is pretty much nothing to the China labor shortage story. But on the plus side, many economists can be employed talking about it.
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In his presidential campaign, Donald Trump made a big point of beating up on China for its “currency manipulation.” He said that China was ripping off the United States because of its large trade surplus with the U.S., which had cost us millions of manufacturing jobs.
Trump said the trade deficit was due to the fact that our “stupid” trade negotiators allowed China to get away with depressing the value of the yuan against the dollar. This makes Chinese goods relatively cheaper in world markets, giving them a competitive advantage. Trump promised to put an end to this currency manipulation.
Last month, Trump met with China’s President Xi Jinping. According to his own account, the topic of currency values did not come up. Trump said that he got along very well with President Xi and looked forward to his assistance in dealing with North Korea. He didn’t want to spoil the relationship by bringing up currency.
The Washington Post today reported on a trade deal the Trump administration worked out with China. The piece says that the deal will open the door for beef exports to China. It also will remove obstacles that prevented U.S. financial services companies (e.g. Goldman Sachs) from operating in China. This agreement is undoubtedly good news for beef exporters, even if the impact is exaggerated (it might trivially raise the price of U.S. beef) and it surely is good news for the financial industry, but it doesn’t do anything for the manufacturing workers who lost their jobs in places like Ohio and Pennsylvania.
In his presidential campaign, Donald Trump made a big point of beating up on China for its “currency manipulation.” He said that China was ripping off the United States because of its large trade surplus with the U.S., which had cost us millions of manufacturing jobs.
Trump said the trade deficit was due to the fact that our “stupid” trade negotiators allowed China to get away with depressing the value of the yuan against the dollar. This makes Chinese goods relatively cheaper in world markets, giving them a competitive advantage. Trump promised to put an end to this currency manipulation.
Last month, Trump met with China’s President Xi Jinping. According to his own account, the topic of currency values did not come up. Trump said that he got along very well with President Xi and looked forward to his assistance in dealing with North Korea. He didn’t want to spoil the relationship by bringing up currency.
The Washington Post today reported on a trade deal the Trump administration worked out with China. The piece says that the deal will open the door for beef exports to China. It also will remove obstacles that prevented U.S. financial services companies (e.g. Goldman Sachs) from operating in China. This agreement is undoubtedly good news for beef exporters, even if the impact is exaggerated (it might trivially raise the price of U.S. beef) and it surely is good news for the financial industry, but it doesn’t do anything for the manufacturing workers who lost their jobs in places like Ohio and Pennsylvania.
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The betting still seems to be that the Fed will raise rates in June, but it doesn’t seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.
However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.
Here’s the picture.
The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining.
So why does the Fed feel it has to raise rates?
The betting still seems to be that the Fed will raise rates in June, but it doesn’t seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.
However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.
Here’s the picture.
The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining.
So why does the Fed feel it has to raise rates?
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