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.

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created almost 2.2 million jobs in fours months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.

Source: Bureau of Labor Statistics.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created almost 2.2 million jobs in fours months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.

Source: Bureau of Labor Statistics.

We’re relaunching an update to our critically acclaimed federal budget calculator (okay, I’m sure someone somewhere said something good about it) because it really is important that people have some idea about the budget. The basic issue is that almost no one has any sense of what’s big and what’s small in the budget because the numbers are standardly reported as millions, billions, or trillions, with no context whatsoever. Often, budget stories don’t even report the number of years over which an amount is expected to be spent.

The fact that almost no one has any idea what these really big budget numbers mean is not a secret. Margaret Sullivan, currently the Washington Post’s media columnist, wrote a very nice piece on this topic when she was the public editor at the New York Times. When she asked David Leonhardt, who was the paper’s Washington editor at the time, he said we might as well just write “really big number,” instead of putting in a huge number that will be meaningless to almost everyone who sees it.

The piece came with a commitment to put big numbers in a context that would make them meaningful to readers. They can be expressed as a share of the budget, as a per person amount, or in a number of other ways that would make them comprehensible to readers. This was a huge deal because if the New York Times adopted this practice, other major news outlets would almost certainly have followed.

Unfortunately, nothing changed. It is still possible to read budget articles in the New York Times referring to billions or trillions, giving no context whatsoever. This really does matter because we know the public is hugely confused about where the money in the budget goes.

They think that huge amounts go to things like foreign aid or Temporary Assistance to Needy Families (TANF), both programs that account for far less than 1.0 percent of the budget. Some of this exaggerated view of the cost of these programs is surely politically motivated, as people with a dislike for these programs may tend to exaggerate their cost, but polling shows that even many people who support the programs hugely exaggerate their share of the budget.

If we want to have serious debates on budget priorities it is important that people know where their money is being spent. While we would not want to waste even smaller amounts of money, people may be less upset over the $201 million that President Biden has proposed for the National Endowment for the Arts in 2022 if they knew it comes to less than 0.004 percent of projected spending, or a bit more than 60 cents per person. The $445 million that the Corporation for Public broadcasting gets from the government is a bit more than 0.007 percent of the budget proposed for 2022.

The real money in the budget is not any secret. For 2022, Social Security is projected to cost $1,196 billion, or 19.9 percent of total spending. The tab for the military is $756 billion, 12.6 percent of total spending. Medicare and Medicaid come to $766 billion and $571 billion, which are 12.7 percent and 9.5 percent of total spending. Interest on the debt is $305 billion, 5.1 percent of spending.

The total from these categories is 59.8 percent of spending. The rest is everything from federal prisons and the park service to the State Department and Education Department. But, you can get the numbers yourself and go to the CEPR budget calculator and see how big a deal an item is.     

We’re relaunching an update to our critically acclaimed federal budget calculator (okay, I’m sure someone somewhere said something good about it) because it really is important that people have some idea about the budget. The basic issue is that almost no one has any sense of what’s big and what’s small in the budget because the numbers are standardly reported as millions, billions, or trillions, with no context whatsoever. Often, budget stories don’t even report the number of years over which an amount is expected to be spent.

The fact that almost no one has any idea what these really big budget numbers mean is not a secret. Margaret Sullivan, currently the Washington Post’s media columnist, wrote a very nice piece on this topic when she was the public editor at the New York Times. When she asked David Leonhardt, who was the paper’s Washington editor at the time, he said we might as well just write “really big number,” instead of putting in a huge number that will be meaningless to almost everyone who sees it.

The piece came with a commitment to put big numbers in a context that would make them meaningful to readers. They can be expressed as a share of the budget, as a per person amount, or in a number of other ways that would make them comprehensible to readers. This was a huge deal because if the New York Times adopted this practice, other major news outlets would almost certainly have followed.

Unfortunately, nothing changed. It is still possible to read budget articles in the New York Times referring to billions or trillions, giving no context whatsoever. This really does matter because we know the public is hugely confused about where the money in the budget goes.

They think that huge amounts go to things like foreign aid or Temporary Assistance to Needy Families (TANF), both programs that account for far less than 1.0 percent of the budget. Some of this exaggerated view of the cost of these programs is surely politically motivated, as people with a dislike for these programs may tend to exaggerate their cost, but polling shows that even many people who support the programs hugely exaggerate their share of the budget.

If we want to have serious debates on budget priorities it is important that people know where their money is being spent. While we would not want to waste even smaller amounts of money, people may be less upset over the $201 million that President Biden has proposed for the National Endowment for the Arts in 2022 if they knew it comes to less than 0.004 percent of projected spending, or a bit more than 60 cents per person. The $445 million that the Corporation for Public broadcasting gets from the government is a bit more than 0.007 percent of the budget proposed for 2022.

The real money in the budget is not any secret. For 2022, Social Security is projected to cost $1,196 billion, or 19.9 percent of total spending. The tab for the military is $756 billion, 12.6 percent of total spending. Medicare and Medicaid come to $766 billion and $571 billion, which are 12.7 percent and 9.5 percent of total spending. Interest on the debt is $305 billion, 5.1 percent of spending.

The total from these categories is 59.8 percent of spending. The rest is everything from federal prisons and the park service to the State Department and Education Department. But, you can get the numbers yourself and go to the CEPR budget calculator and see how big a deal an item is.     

I thought it was worth highlighting the drop in the profit share of corporate income reported for the first quarter of 2021. It did rise slightly from the 2020 average, but it is below the 2019 level. This means that, in spite of the high unemployment in 2020, the wage share actually rose slightly. (The graph is showing annual data, except for the first quarter of 2021.)

Source: Bureau of Economic Analysis and author’s calculations.

If we can maintain a tight labor market going forward, the wage share is likely to continue to rise, making up the ground lost in the Great Recession.

I thought it was worth highlighting the drop in the profit share of corporate income reported for the first quarter of 2021. It did rise slightly from the 2020 average, but it is below the 2019 level. This means that, in spite of the high unemployment in 2020, the wage share actually rose slightly. (The graph is showing annual data, except for the first quarter of 2021.)

Source: Bureau of Economic Analysis and author’s calculations.

If we can maintain a tight labor market going forward, the wage share is likely to continue to rise, making up the ground lost in the Great Recession.

China’s Demographic Crisis

Both the Post and NYT had pieces today on how China is encouraging families to have more babies in order to counter an alleged demographic crisis. The basic story, which has been repeated many times in the U.S., is that China will be seeing a decline in the ratio of workers to retirees since families have had relatively few children over the last four decades. This is supposed to be really bad news, in fact, a crisis.

In response, China’s government is apparently taking steps to encourage families to have more children. This follows several decades in which it had the opposite policy in place, encouraging families to have just one child.

The crisis story is a bit hard to understand for those of us familiar with arithmetic. Every wealthy country has seen a sharp reduction in the ratio of working-age people to retirees. That is something that happens when better living standards and improved health care allow people to live longer. Also, when countries have gotten wealthier, people have chosen to have fewer children.

This rise in the ratio of retirees to the working-age population has not prevented both working-age people and retirees from enjoying higher living standards. This isn’t magic, productivity rises through time as technology improves and workers become better educated. This means that each worker can produce more output in the hours they work.

The graph below projects the number of effective working-age people per retiree under various productivity assumptions. The first bar shows the 2020 ratio in China of 3.74 working-age people to retiree (people over age 60 for this calculation). This ratio is projected to fall to 1.68 by 2045.

Source: Statistica and author’s calculations.

 

That only looks bad until we factor in productivity growth over the next 25 years. In an extremely pessimistic case, where productivity growth averages just 1.0 percent annually (the lowest sustained rate the U.S. has ever experienced), the ratio of 2020 equivalent workers per retiree would be 2.15. This would mean that the average worker would have to see a decline in their income relative to retiree’s income (i.e. a tax increase), to ensure that retirees have the same income in 2045 as in 2020. This doesn’t imply a decline in workers’ wages, as will be shown shortly.

The next bar assumes a 2.0 percent annual rate of productivity growth over the next 25 years. That is roughly the average in the United States over the post-World War II era. In this case, the decline in the ratio of 2020 equivalent workers is more modest, dropping to 2.76.

China has actually been seeing very rapid productivity growth over the last four decades. Its productivity growth averaged more than 6.0 percent annually between 2009 and 2019. The next two bars show the ratio of 2020 equivalent workers to retirees assuming alternatively 4.0 percent annual productivity growth over the next quarter-century and 6.0 percent annual productivity growth over this period.

In the former case, the ratio of 2020 equivalent workers to retirees would be 4.48. In the latter case, it would be 7.21. This means that if the goal is to ensure that retirees enjoy the same living standard in 2045 as they did in 2020, this can be easily done without any increase in taxes on the working population.  In fact, if the goal is to just maintain retirees’ 2020 living standards, tax on workers can be reduced in these high productivity growth scenarios.

 

Output Per Person

If we’re looking at how demographics affect living standards, another way to evaluate the picture is to look at output per person. This calculation picks up directly the impact of a smaller segment of the population working. The graph below shows the story, with the same set of productivity assumptions in the earlier figure.

Source: Statistica and author’s calculations.

 

As can be seen, even in the very low productivity growth scenario, output per person would be slightly higher in 2045 than in 2020. That means that it should be possible to structure distribution so that everyone can see an improvement in living standards over this period, albeit a very small one.

If China’s productivity growth over the next quarter-century matches the U.S. post-World War II average, then incomes will be more than 30 percent higher in 2045 than they were in 2020. That would allow for substantial improvements in living standards for both workers and retirees.

In the 4.0 percent productivity growth scenario per-person income will be more than twice as high in 2045 as in 2020. And if China can sustain the 6.0 percent productivity growth of the last decade, per person income will be 3.4 times as high in 2045 as in 2020.

In short, even modest rates of productivity growth will easily offset the impact of a declining ratio of workers to retirees that China is expecting over the next quarter-century. If the country can sustain productivity growth rates anywhere near what it has been seeing, the impact of the drop in the ratio of workers to retirees will be trivial in comparison.

 

Four Factors that Make the Demographic Problem Less Serious

There are four major reasons why changing demographics pose even less of a problem than indicated in the discussion above. The first has to do with more accurately calculating the ratio of workers to retirees. I was deliberately sloppy about what we were measuring in using working-age people to retirees (people over age 60). Many people, generally women, between the ages of 20 and 60 are not in the paid labor force. If the share of women in the paid labor force increases over the next quarter-century, then the drop in the ratio of workers to retirees will be smaller than indicated in the calculations above.

There is a similar story on the over 60 part of the calculation. As the country gets richer and the workforce is better educated and healthier, a larger share of the population over age 60 is likely to continue working. This is both because jobs will be less physically demanding on average and also because better-educated people are more likely to have jobs they find inherently rewarding. In the United States in 2019, before the pandemic, 56.0 percent of the people between the ages of 60 and 64 were employed. Of people between the ages of 65 and 69, 33. 3 percent were employed on average. Insofar as a substantial segment of this older group is employed, it both raises the number of workers and reduces the number of retirees who need to be supported by the work of others.  

The third issue is the pollution and crowding that would result from efforts to increase the population. These negatives are not picked up in measures of GDP, and there is good reason to believe they are substantial. China has done much to clean up its air and water in the last two decades, but many areas still have severe problems. Other things equal, more people consuming more energy and material items, means greater problems with pollution. This can be offset with increased efforts at containing pollution, but these efforts carry a substantial cost.

The problem of more people goes well beyond what we just think of as pollution. More people means more traffic congestion. People will have to live further from work, which means longer distance commutes. Public infrastructure will see more wear and tear and everything from parks and museums to beaches and sporting events will be more crowded. These costs are picked up at best imperfectly in GDP measures, and in many cases, not at all. This means that if China’s solution to its declining ratio of workers to retirees is to have more children, it may be making matters worse for its population a quarter-century into the future.

This brings up the final point, which everyone should have guessed by now. Children are also dependents. If our plan for reducing the ratio of workers to retirees is to have more children, that provides zero help at all for the next two decades, and only modest help in the following decade or so.

Meanwhile, the ratio of dependent children to workers will have risen substantially. It will take a very very long time for an increase in fertility rates to lead to a fall in overall dependency ratios.[1] In the case of the United States, the total dependency ratio (both young people and older people relative to the working-age population) was 0.681 in 1945, at end of World War II. Then we had the baby boom, which led to a sharp increase in the ratio of young dependents to working-age people.

We did not see the ratio of total dependents to working-age population fall back below its 1945 until after 2000, more than 55 years later. We know that China’s leaders are often praised for having a longer-term view, but in this case, we are not talking about planning for 2045, but rather 2075.

The long and short is that China does not face a demographic crisis, contrary to what you read in the paper, and encouraging people to have more children is not a good solution.

 

[1] We can argue about the resource needs of children relative to retirees. For purposes of this discussion, let’s just say they are close.

Both the Post and NYT had pieces today on how China is encouraging families to have more babies in order to counter an alleged demographic crisis. The basic story, which has been repeated many times in the U.S., is that China will be seeing a decline in the ratio of workers to retirees since families have had relatively few children over the last four decades. This is supposed to be really bad news, in fact, a crisis.

In response, China’s government is apparently taking steps to encourage families to have more children. This follows several decades in which it had the opposite policy in place, encouraging families to have just one child.

The crisis story is a bit hard to understand for those of us familiar with arithmetic. Every wealthy country has seen a sharp reduction in the ratio of working-age people to retirees. That is something that happens when better living standards and improved health care allow people to live longer. Also, when countries have gotten wealthier, people have chosen to have fewer children.

This rise in the ratio of retirees to the working-age population has not prevented both working-age people and retirees from enjoying higher living standards. This isn’t magic, productivity rises through time as technology improves and workers become better educated. This means that each worker can produce more output in the hours they work.

The graph below projects the number of effective working-age people per retiree under various productivity assumptions. The first bar shows the 2020 ratio in China of 3.74 working-age people to retiree (people over age 60 for this calculation). This ratio is projected to fall to 1.68 by 2045.

Source: Statistica and author’s calculations.

 

That only looks bad until we factor in productivity growth over the next 25 years. In an extremely pessimistic case, where productivity growth averages just 1.0 percent annually (the lowest sustained rate the U.S. has ever experienced), the ratio of 2020 equivalent workers per retiree would be 2.15. This would mean that the average worker would have to see a decline in their income relative to retiree’s income (i.e. a tax increase), to ensure that retirees have the same income in 2045 as in 2020. This doesn’t imply a decline in workers’ wages, as will be shown shortly.

The next bar assumes a 2.0 percent annual rate of productivity growth over the next 25 years. That is roughly the average in the United States over the post-World War II era. In this case, the decline in the ratio of 2020 equivalent workers is more modest, dropping to 2.76.

China has actually been seeing very rapid productivity growth over the last four decades. Its productivity growth averaged more than 6.0 percent annually between 2009 and 2019. The next two bars show the ratio of 2020 equivalent workers to retirees assuming alternatively 4.0 percent annual productivity growth over the next quarter-century and 6.0 percent annual productivity growth over this period.

In the former case, the ratio of 2020 equivalent workers to retirees would be 4.48. In the latter case, it would be 7.21. This means that if the goal is to ensure that retirees enjoy the same living standard in 2045 as they did in 2020, this can be easily done without any increase in taxes on the working population.  In fact, if the goal is to just maintain retirees’ 2020 living standards, tax on workers can be reduced in these high productivity growth scenarios.

 

Output Per Person

If we’re looking at how demographics affect living standards, another way to evaluate the picture is to look at output per person. This calculation picks up directly the impact of a smaller segment of the population working. The graph below shows the story, with the same set of productivity assumptions in the earlier figure.

Source: Statistica and author’s calculations.

 

As can be seen, even in the very low productivity growth scenario, output per person would be slightly higher in 2045 than in 2020. That means that it should be possible to structure distribution so that everyone can see an improvement in living standards over this period, albeit a very small one.

If China’s productivity growth over the next quarter-century matches the U.S. post-World War II average, then incomes will be more than 30 percent higher in 2045 than they were in 2020. That would allow for substantial improvements in living standards for both workers and retirees.

In the 4.0 percent productivity growth scenario per-person income will be more than twice as high in 2045 as in 2020. And if China can sustain the 6.0 percent productivity growth of the last decade, per person income will be 3.4 times as high in 2045 as in 2020.

In short, even modest rates of productivity growth will easily offset the impact of a declining ratio of workers to retirees that China is expecting over the next quarter-century. If the country can sustain productivity growth rates anywhere near what it has been seeing, the impact of the drop in the ratio of workers to retirees will be trivial in comparison.

 

Four Factors that Make the Demographic Problem Less Serious

There are four major reasons why changing demographics pose even less of a problem than indicated in the discussion above. The first has to do with more accurately calculating the ratio of workers to retirees. I was deliberately sloppy about what we were measuring in using working-age people to retirees (people over age 60). Many people, generally women, between the ages of 20 and 60 are not in the paid labor force. If the share of women in the paid labor force increases over the next quarter-century, then the drop in the ratio of workers to retirees will be smaller than indicated in the calculations above.

There is a similar story on the over 60 part of the calculation. As the country gets richer and the workforce is better educated and healthier, a larger share of the population over age 60 is likely to continue working. This is both because jobs will be less physically demanding on average and also because better-educated people are more likely to have jobs they find inherently rewarding. In the United States in 2019, before the pandemic, 56.0 percent of the people between the ages of 60 and 64 were employed. Of people between the ages of 65 and 69, 33. 3 percent were employed on average. Insofar as a substantial segment of this older group is employed, it both raises the number of workers and reduces the number of retirees who need to be supported by the work of others.  

The third issue is the pollution and crowding that would result from efforts to increase the population. These negatives are not picked up in measures of GDP, and there is good reason to believe they are substantial. China has done much to clean up its air and water in the last two decades, but many areas still have severe problems. Other things equal, more people consuming more energy and material items, means greater problems with pollution. This can be offset with increased efforts at containing pollution, but these efforts carry a substantial cost.

The problem of more people goes well beyond what we just think of as pollution. More people means more traffic congestion. People will have to live further from work, which means longer distance commutes. Public infrastructure will see more wear and tear and everything from parks and museums to beaches and sporting events will be more crowded. These costs are picked up at best imperfectly in GDP measures, and in many cases, not at all. This means that if China’s solution to its declining ratio of workers to retirees is to have more children, it may be making matters worse for its population a quarter-century into the future.

This brings up the final point, which everyone should have guessed by now. Children are also dependents. If our plan for reducing the ratio of workers to retirees is to have more children, that provides zero help at all for the next two decades, and only modest help in the following decade or so.

Meanwhile, the ratio of dependent children to workers will have risen substantially. It will take a very very long time for an increase in fertility rates to lead to a fall in overall dependency ratios.[1] In the case of the United States, the total dependency ratio (both young people and older people relative to the working-age population) was 0.681 in 1945, at end of World War II. Then we had the baby boom, which led to a sharp increase in the ratio of young dependents to working-age people.

We did not see the ratio of total dependents to working-age population fall back below its 1945 until after 2000, more than 55 years later. We know that China’s leaders are often praised for having a longer-term view, but in this case, we are not talking about planning for 2045, but rather 2075.

The long and short is that China does not face a demographic crisis, contrary to what you read in the paper, and encouraging people to have more children is not a good solution.

 

[1] We can argue about the resource needs of children relative to retirees. For purposes of this discussion, let’s just say they are close.

Most of the data on the economy is looking very good these days. The number of weekly unemployment claims has fallen sharply. Levels are still high, but just over half the level we were seeing earlier this year. And, this is before all the moves by Republican governors to cut back benefits, so the decline reflects the availability of jobs, not more stringent eligibility.

Consumer spending has been rising rapidly, with the March and April levels both above where they were before the pandemic. Even restaurant sales have largely recovered. Adjusted for inflation, the April levels were just 2.7 percent below where they were in February 2020.

The housing market continues to be very strong, especially in lower-priced areas. The increase in the Federal Housing Finance Administration’s house price index from the first quarter of 2020 to the first quarter of 2021 was 16.0 percent in Wichita, KS, 15.8 percent in Buffalo, NY, 15.6 percent in Dayton, OH, 14.6 percent in Nashville, TN, and 13.8 percent in Gary, IN. By contrast, prices are up just 9.7 percent in the New York metro area and 6.5 percent in San Francisco.

It is too early to know if this is the start of a trend, where people take advantage of increased opportunities for remote work to live in lower-cost areas, or whether it is a one-time blip. However, if the opportunities for increased remote work stay in place after the pandemic is over, it is likely that more people will move to low-cost areas. This will both benefit those areas by bringing in new consumers and taxpayers, and also the high-cost areas, by relieving pressure on house prices.

Residential construction has also been very strong, running at close to 25 percent above the pre-pandemic pace. Starts did slow some in April, which is likely in part due to a shortage of materials, most importantly lumber. This should be alleviated in the months ahead.

Investment also is strong. New orders for capital goods are running more than 10 percent above the pre-pandemic level. This is noteworthy because it doesn’t appear that the prospect of higher corporate income taxes is doing much to discourage new investment.

With the rapid growth we are now seeing across most sectors in the economy, many have raised concerns about inflation. We did see high inflation numbers in April. There are two main factors here. First, much of this is a bounce-back effect, where the price of many items that plunged during the recession is now rebounding back to more normal levels. This is true in areas like hotels, airfares, and car insurance.

The other factor is that there are shortages in many areas as the economy is again getting up to steam. This is the case with lumber, where many mills shut down, anticipating a longer recession. It will take some time to get them up and running again. It is also the case with cars, where a shortage of semiconductors, due to a fire at a plant in Japan, has hampered production. New car prices rose 0.5 percent in April, while used car prices rose an incredible 10.0 percent in the month, adding almost 0.3 percentage points to the CPI.

Both of these effects will be temporary. If we are to see sustained inflation then we really need a story where wage growth is substantially outpacing productivity growth. There is not the case at present. Wage growth has at best accelerated modestly, with the average hourly wage rising at an annual rate of 3.1 percent, comparing the last three months (February, March, April) with the prior three months (November, December, January).

This would not be the basis for real concerns with inflation, even if productivity had stayed on its pre-pandemic pace of just over 1.0 percent annually. However, productivity growth has accelerated sharply in the last year, rising 4.1 percent from the first quarter of 2020 to the first quarter of 2021. With GDP growth projected at close to 10 percent for the second quarter, we will almost certainly add another strong quarter of productivity growth.

It is not plausible that we will sustain productivity growth of 4.0 percent, but if the pace falls back to 2.0 percent, instead of its pre-pandemic 1.0 percent rate, it is hard to see inflation becoming a problem. A 2.0 percent rate of productivity growth is consistent with 4.0 percent wage growth and 2.0 percent inflation.

There has been some evidence that wages are increasing more rapidly in the lowest paying sectors, like hotels and restaurants. This is good news for these workers and it is not especially inflationary. The average weekly earnings at the cutoff for the bottom decile is less than $500. Suppose this rises by $50. This would come to $2,500 a year. With 15 million workers in the bottom decile, that comes to less than $40 billion annually, less than 0.2 percent of GDP.

That would not be the sort of thing that is likely to set off an inflationary spiral, and we are also not likely to see wages for the bottom decile rise by 10 percent in the immediate future.  

What About the Debt?

With the release of President Biden’s new budget, there were a slew of news stories warning about the large deficit and projected debt. The usual story about high levels of debt is that they will cause bond markets to panic and interest rates to soar.

Back in the Clinton and Obama years, we were regularly regaled with stories about how the bond market vigilantes would send interest rates soaring if we didn’t rein in the deficit. And of course, they would reward us with low-interest rates if we were good boys and girls and got deficits down, usually by cutting spending.

It turns out that we didn’t have as much to fear from higher interest rates as advertised. Ever since the Great Recession, long-term interest rates have consistently run well below the projections from the Congressional Budget Office and most other forecasters. The interest rate on 10-year Treasury bonds was hovering near 2.7 percent just before the pandemic hit, in spite of the large tax cut induced deficits of the Trump years. That compares to rates that were typically well over 5.0 percent when we were running budget surpluses in the Clinton years.

Rates plunged after the pandemic hit and the Fed stepped in with its rescue package. Even now, with the large deficits resulting from the CARES Act and President Biden’s recovery package, the rate remains near 1.6 percent.

But the deficit hawks tell us this is all a temporary story. Soon the bond market vigilantes will get back on the job and send interest rates soaring. Perhaps this will happen at some point in the future, but there does not seem to be much evidence for it. The graph below shows the ratio of debt-to-GDP for most wealthy countries, compared with the interest rate on 10-year government bonds.

Source: International Monetary Fund and Financial Times.

As can be seen, there is essentially no relationship between the two. Many countries with much larger debt-to-GDP ratios have far lower interest rates on their long-term bond. Japan takes the prize here with a debt-to-GDP ratio of more than 170 percent and an interest rate on its long-term bonds of less than 0.1 percent. However, many other countries with far higher debt-to-GDP ratios than the United States, including France, Belgium, and Greece, have much lower interest rates on their government debt.

In short, it doesn’t seem like the deficit hawks have much of a case. To be clear, there is a real concern that the boost to the economy from the Biden recovery package may go too far and lead to problems with inflation. I have argued before that I think this risk is limited, and one well worth taking given the political obstacles Biden will face in getting future packages approved by Congress.

But this issue is very different from the concern that excessive debt will cause a flight from U.S. government bonds and send interest rates soaring. This one seems more like a scare story designed to fool children rather than serious economic analysis.

Most of the data on the economy is looking very good these days. The number of weekly unemployment claims has fallen sharply. Levels are still high, but just over half the level we were seeing earlier this year. And, this is before all the moves by Republican governors to cut back benefits, so the decline reflects the availability of jobs, not more stringent eligibility.

Consumer spending has been rising rapidly, with the March and April levels both above where they were before the pandemic. Even restaurant sales have largely recovered. Adjusted for inflation, the April levels were just 2.7 percent below where they were in February 2020.

The housing market continues to be very strong, especially in lower-priced areas. The increase in the Federal Housing Finance Administration’s house price index from the first quarter of 2020 to the first quarter of 2021 was 16.0 percent in Wichita, KS, 15.8 percent in Buffalo, NY, 15.6 percent in Dayton, OH, 14.6 percent in Nashville, TN, and 13.8 percent in Gary, IN. By contrast, prices are up just 9.7 percent in the New York metro area and 6.5 percent in San Francisco.

It is too early to know if this is the start of a trend, where people take advantage of increased opportunities for remote work to live in lower-cost areas, or whether it is a one-time blip. However, if the opportunities for increased remote work stay in place after the pandemic is over, it is likely that more people will move to low-cost areas. This will both benefit those areas by bringing in new consumers and taxpayers, and also the high-cost areas, by relieving pressure on house prices.

Residential construction has also been very strong, running at close to 25 percent above the pre-pandemic pace. Starts did slow some in April, which is likely in part due to a shortage of materials, most importantly lumber. This should be alleviated in the months ahead.

Investment also is strong. New orders for capital goods are running more than 10 percent above the pre-pandemic level. This is noteworthy because it doesn’t appear that the prospect of higher corporate income taxes is doing much to discourage new investment.

With the rapid growth we are now seeing across most sectors in the economy, many have raised concerns about inflation. We did see high inflation numbers in April. There are two main factors here. First, much of this is a bounce-back effect, where the price of many items that plunged during the recession is now rebounding back to more normal levels. This is true in areas like hotels, airfares, and car insurance.

The other factor is that there are shortages in many areas as the economy is again getting up to steam. This is the case with lumber, where many mills shut down, anticipating a longer recession. It will take some time to get them up and running again. It is also the case with cars, where a shortage of semiconductors, due to a fire at a plant in Japan, has hampered production. New car prices rose 0.5 percent in April, while used car prices rose an incredible 10.0 percent in the month, adding almost 0.3 percentage points to the CPI.

Both of these effects will be temporary. If we are to see sustained inflation then we really need a story where wage growth is substantially outpacing productivity growth. There is not the case at present. Wage growth has at best accelerated modestly, with the average hourly wage rising at an annual rate of 3.1 percent, comparing the last three months (February, March, April) with the prior three months (November, December, January).

This would not be the basis for real concerns with inflation, even if productivity had stayed on its pre-pandemic pace of just over 1.0 percent annually. However, productivity growth has accelerated sharply in the last year, rising 4.1 percent from the first quarter of 2020 to the first quarter of 2021. With GDP growth projected at close to 10 percent for the second quarter, we will almost certainly add another strong quarter of productivity growth.

It is not plausible that we will sustain productivity growth of 4.0 percent, but if the pace falls back to 2.0 percent, instead of its pre-pandemic 1.0 percent rate, it is hard to see inflation becoming a problem. A 2.0 percent rate of productivity growth is consistent with 4.0 percent wage growth and 2.0 percent inflation.

There has been some evidence that wages are increasing more rapidly in the lowest paying sectors, like hotels and restaurants. This is good news for these workers and it is not especially inflationary. The average weekly earnings at the cutoff for the bottom decile is less than $500. Suppose this rises by $50. This would come to $2,500 a year. With 15 million workers in the bottom decile, that comes to less than $40 billion annually, less than 0.2 percent of GDP.

That would not be the sort of thing that is likely to set off an inflationary spiral, and we are also not likely to see wages for the bottom decile rise by 10 percent in the immediate future.  

What About the Debt?

With the release of President Biden’s new budget, there were a slew of news stories warning about the large deficit and projected debt. The usual story about high levels of debt is that they will cause bond markets to panic and interest rates to soar.

Back in the Clinton and Obama years, we were regularly regaled with stories about how the bond market vigilantes would send interest rates soaring if we didn’t rein in the deficit. And of course, they would reward us with low-interest rates if we were good boys and girls and got deficits down, usually by cutting spending.

It turns out that we didn’t have as much to fear from higher interest rates as advertised. Ever since the Great Recession, long-term interest rates have consistently run well below the projections from the Congressional Budget Office and most other forecasters. The interest rate on 10-year Treasury bonds was hovering near 2.7 percent just before the pandemic hit, in spite of the large tax cut induced deficits of the Trump years. That compares to rates that were typically well over 5.0 percent when we were running budget surpluses in the Clinton years.

Rates plunged after the pandemic hit and the Fed stepped in with its rescue package. Even now, with the large deficits resulting from the CARES Act and President Biden’s recovery package, the rate remains near 1.6 percent.

But the deficit hawks tell us this is all a temporary story. Soon the bond market vigilantes will get back on the job and send interest rates soaring. Perhaps this will happen at some point in the future, but there does not seem to be much evidence for it. The graph below shows the ratio of debt-to-GDP for most wealthy countries, compared with the interest rate on 10-year government bonds.

Source: International Monetary Fund and Financial Times.

As can be seen, there is essentially no relationship between the two. Many countries with much larger debt-to-GDP ratios have far lower interest rates on their long-term bond. Japan takes the prize here with a debt-to-GDP ratio of more than 170 percent and an interest rate on its long-term bonds of less than 0.1 percent. However, many other countries with far higher debt-to-GDP ratios than the United States, including France, Belgium, and Greece, have much lower interest rates on their government debt.

In short, it doesn’t seem like the deficit hawks have much of a case. To be clear, there is a real concern that the boost to the economy from the Biden recovery package may go too far and lead to problems with inflation. I have argued before that I think this risk is limited, and one well worth taking given the political obstacles Biden will face in getting future packages approved by Congress.

But this issue is very different from the concern that excessive debt will cause a flight from U.S. government bonds and send interest rates soaring. This one seems more like a scare story designed to fool children rather than serious economic analysis.

Here’s a pro tip for reporters: employers’ complaints about getting workers are not always honest. This one may have been helpful for a piece about employers at summer beach locations who are having a hard time finding workers. The piece discusses the difficulty several employers face in finding workers. At one point it recounts the story of a restaurant owner:

“He attributed the lack of workers to unemployment benefits. A worker in New Jersey could receive up to $1,000 a week with the $300 federal bonus, according to state data.”

While some workers in New Jersey can get close to $1,000 a week, with the $300 federal supplement (the state has a maximum payment of $681 a week), this is not likely relevant for restaurant workers. The piece reports that the minimum wage in New Jersey for seasonal employees is $10.10 an hour or $404 for a forty-hour week. Most restaurant workers likely earn close to this minimum. Also, many do not work a forty-hour week. (The average for the country as a whole is 25 hours.)

If we use the $404 as a rough average, a worker could be getting $242 from their regular benefit, which would translate into $542 with the federal supplement. The benefit would somewhat higher if they had a higher wage history, but almost certainly nowhere near $1,000 a week for people considering restaurant work.

Here’s a pro tip for reporters: employers’ complaints about getting workers are not always honest. This one may have been helpful for a piece about employers at summer beach locations who are having a hard time finding workers. The piece discusses the difficulty several employers face in finding workers. At one point it recounts the story of a restaurant owner:

“He attributed the lack of workers to unemployment benefits. A worker in New Jersey could receive up to $1,000 a week with the $300 federal bonus, according to state data.”

While some workers in New Jersey can get close to $1,000 a week, with the $300 federal supplement (the state has a maximum payment of $681 a week), this is not likely relevant for restaurant workers. The piece reports that the minimum wage in New Jersey for seasonal employees is $10.10 an hour or $404 for a forty-hour week. Most restaurant workers likely earn close to this minimum. Also, many do not work a forty-hour week. (The average for the country as a whole is 25 hours.)

If we use the $404 as a rough average, a worker could be getting $242 from their regular benefit, which would translate into $542 with the federal supplement. The benefit would somewhat higher if they had a higher wage history, but almost certainly nowhere near $1,000 a week for people considering restaurant work.

A New York Times article on efforts to create a cooperative for an Uber-like service reported without comment the claim by Uber that its drivers in the city have a median wage of $37.44 an hour. It is important to note that this is a gross figure. It does not subtract expenses like gas, insurance, and depreciation on the driver’s car.

If we assume that these expenses average 60 cents a mile (roughly the federal government figure) and that a driver covers 20 miles in an hour, they would average $12 an hour. That would make the net pay $25.44 an hour. (Uber does have the mileage data, but apparently did not choose to release it.) It is also not clear if Uber’s calculation is based on the time drivers actually spend driving with a passenger or the time where they have their app activated. If it is the former, then their true hourly pay would be considerably less.

A New York Times article on efforts to create a cooperative for an Uber-like service reported without comment the claim by Uber that its drivers in the city have a median wage of $37.44 an hour. It is important to note that this is a gross figure. It does not subtract expenses like gas, insurance, and depreciation on the driver’s car.

If we assume that these expenses average 60 cents a mile (roughly the federal government figure) and that a driver covers 20 miles in an hour, they would average $12 an hour. That would make the net pay $25.44 an hour. (Uber does have the mileage data, but apparently did not choose to release it.) It is also not clear if Uber’s calculation is based on the time drivers actually spend driving with a passenger or the time where they have their app activated. If it is the former, then their true hourly pay would be considerably less.

There have been a number of reports that people are getting increasingly concerned about inflation. That could be due to the fact that they are seeing the prices of the things they buy go up rapidly. Or, it could be because they hear from the media that prices are soaring.

The Washington Post looks to be making that latter case. A piece on its homepage was headlined:

“Even in the face of surging grocery prices, retail beef and pork prices cause sticker shock.”

Well, that sounds pretty bad. Fortunately, the first full paragraph contradicts the headline.

“Overall food prices rose 0.4 percent from March, and are up 1 percent from a year ago, according to data released by the Bureau of Economic Analysis on Friday. The price of pork soared 2.6 percent in the month of April and 4.8 percent from a year ago, adjusting for seasonality. And while beef and veal prices stayed fairly flat for the month, they are up 3.3 percent from a year ago.”

A 1.0 percent year-over-year rise in food prices (actually, it’s 1.2 percent) would hardly count as “surging” in most people’s minds. It’s considerably less than the overall rate of inflation and down from a 4.0 percent increase going from April 2019 to April 2020.

But what about the price of beef and pork creating sticker shock? Well, inflation fans know that the price of these items are highly erratic. It is easy to go back over the last two decades and find many occasions where there were far larger increases.

For example, in the case of beef, the price went up 24.6 percent in the year from June 2019 to June 2020. It rose by 19.0 percent in the year from January 2014 to January 2015, and by 23.5 percent in the year from December 2002 to December 2003.

There is a similar story with pork prices. They rose by 12.4 percent from May 2013 to May 2014 and by 13.0 percent from November 2009 to November 2010.

The long and short of it is that there is zero real story here of soaring food prices. The price rises in beef and pork that are allegedly causing sticker shock are much smaller than price increases we have seen in these products in the recent past.

Maybe the Post should just stick to reporting the inflation that actually exists and not try to invent some on its own.

There have been a number of reports that people are getting increasingly concerned about inflation. That could be due to the fact that they are seeing the prices of the things they buy go up rapidly. Or, it could be because they hear from the media that prices are soaring.

The Washington Post looks to be making that latter case. A piece on its homepage was headlined:

“Even in the face of surging grocery prices, retail beef and pork prices cause sticker shock.”

Well, that sounds pretty bad. Fortunately, the first full paragraph contradicts the headline.

“Overall food prices rose 0.4 percent from March, and are up 1 percent from a year ago, according to data released by the Bureau of Economic Analysis on Friday. The price of pork soared 2.6 percent in the month of April and 4.8 percent from a year ago, adjusting for seasonality. And while beef and veal prices stayed fairly flat for the month, they are up 3.3 percent from a year ago.”

A 1.0 percent year-over-year rise in food prices (actually, it’s 1.2 percent) would hardly count as “surging” in most people’s minds. It’s considerably less than the overall rate of inflation and down from a 4.0 percent increase going from April 2019 to April 2020.

But what about the price of beef and pork creating sticker shock? Well, inflation fans know that the price of these items are highly erratic. It is easy to go back over the last two decades and find many occasions where there were far larger increases.

For example, in the case of beef, the price went up 24.6 percent in the year from June 2019 to June 2020. It rose by 19.0 percent in the year from January 2014 to January 2015, and by 23.5 percent in the year from December 2002 to December 2003.

There is a similar story with pork prices. They rose by 12.4 percent from May 2013 to May 2014 and by 13.0 percent from November 2009 to November 2010.

The long and short of it is that there is zero real story here of soaring food prices. The price rises in beef and pork that are allegedly causing sticker shock are much smaller than price increases we have seen in these products in the recent past.

Maybe the Post should just stick to reporting the inflation that actually exists and not try to invent some on its own.

Sometimes budget battles can get confusing, which is why it is important to keep your eye on the ball. That’s good advice for readers of the Washington Post’s article on President Biden’s proposed budget for 2022. The short piece deals with various aspects of the budget and then gets to Biden’s proposed tax increases:

“Conservatives also warn that the administration’s tax plans could slow growth. The administration has proposed increasing the corporate tax rate from 21 percent to 28 percent, while also imposing dramatically higher taxes on multinational corporations operating abroad. The White House has denied those plans will slow the growth rate, though Biden has said he’s willing to negotiate with Republicans on other solutions.”

The reason that Biden is proposing tax increases is to offset additional spending. The spending adds to demand and boosts growth. This can lead to concerns about inflation, which are discussed in this piece. The tax increases pull money out of the economy, which means that people will have less money to spend, thereby slowing growth, so as to relieve inflationary pressures. Slower growth is not an unfortunate side effect of the tax increases, it is the point.

There is an issue that the proposed tax increases, which largely undo Trump’s 2017 tax cut, could lead to less investment. This could have the effect of reducing growth in the longer term since less investment would mean slower productivity growth and therefore slower GDP growth.

However, there is zero evidence that Trump’s tax cut led to any noticeable uptick in investment, and therefore no reason to believe that reversing the tax cut would slow investment. Furthermore, orders for new capital goods, the largest component of investment, have been very strong. This indicates the fear of higher taxes is not discouraging companies from investing in new equipment.

Sometimes budget battles can get confusing, which is why it is important to keep your eye on the ball. That’s good advice for readers of the Washington Post’s article on President Biden’s proposed budget for 2022. The short piece deals with various aspects of the budget and then gets to Biden’s proposed tax increases:

“Conservatives also warn that the administration’s tax plans could slow growth. The administration has proposed increasing the corporate tax rate from 21 percent to 28 percent, while also imposing dramatically higher taxes on multinational corporations operating abroad. The White House has denied those plans will slow the growth rate, though Biden has said he’s willing to negotiate with Republicans on other solutions.”

The reason that Biden is proposing tax increases is to offset additional spending. The spending adds to demand and boosts growth. This can lead to concerns about inflation, which are discussed in this piece. The tax increases pull money out of the economy, which means that people will have less money to spend, thereby slowing growth, so as to relieve inflationary pressures. Slower growth is not an unfortunate side effect of the tax increases, it is the point.

There is an issue that the proposed tax increases, which largely undo Trump’s 2017 tax cut, could lead to less investment. This could have the effect of reducing growth in the longer term since less investment would mean slower productivity growth and therefore slower GDP growth.

However, there is zero evidence that Trump’s tax cut led to any noticeable uptick in investment, and therefore no reason to believe that reversing the tax cut would slow investment. Furthermore, orders for new capital goods, the largest component of investment, have been very strong. This indicates the fear of higher taxes is not discouraging companies from investing in new equipment.

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