The Washington Post gave a column to Robert Rubin, the man best known for setting the U.S. economy on a path of bubble-driven growth in the late 1990s, the opportunity to share his wisdom on the economy. Unsurprisingly, Rubin proposes to cut Social Security and Medicare, as he has in times past. Of course, Rubin is not likely to need these programs since he earned over $100 million in his stint at Citigroup in the housing bubble years. The Financial Crisis Inquiry Commission recommended that the Justice Department investigate Rubin’s conduct at Citigroup during this period but for some reason it seems the Justice Department did not follow through.
The Washington Post gave a column to Robert Rubin, the man best known for setting the U.S. economy on a path of bubble-driven growth in the late 1990s, the opportunity to share his wisdom on the economy. Unsurprisingly, Rubin proposes to cut Social Security and Medicare, as he has in times past. Of course, Rubin is not likely to need these programs since he earned over $100 million in his stint at Citigroup in the housing bubble years. The Financial Crisis Inquiry Commission recommended that the Justice Department investigate Rubin’s conduct at Citigroup during this period but for some reason it seems the Justice Department did not follow through.
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The desire to beat up on Donald Trump is understandable, but it is important to realize that not everything he says is wrong. For example, according to press accounts he adheres to the belief that the world is round.
Anyhow, Greg Ip goes a bit overboard in a Wall Street Journal piece where he argues that Trump’s claim that a trade deficit can be reduced or eliminated with tariffs is wrong. Referring to Trump’s approach to the trade deficit, Ip tells readers:
“But that is out of step with standard economics, which predicts that a country’s trade balance is determined by the gap between what it invests and saves, not by tariffs.”
As an accounting identity a country’s trade balance is always equal to the gap between what it invests and what it saves. This means that if the U.S. invests $200 billion a year more than it saves, then it will by definition be true that it has a trade deficit of $200 billion.
However, this accounting identity tells us nothing about causation. If we are below the full employment level of output, and Donald Trump’s tariffs or threats of tariffs, reduce our annual trade deficit by $200 billion (@ 1.1 percent of GDP), then this would lead to additional employment, output, and savings in the United States. A standard multiplier would suggest that a $200 billion reduction in the size of the trade deficit would lead to a $300 billion increase in GDP. This higher GDP would lead to more corporate and individual savings, as well as more tax revenue, which also count as savings. (The growth in GDP would also led to more imports, partially offsetting the initial improvement in the trade deficit.)
In other words, it is totally possible to reduce the size of the trade deficit as long as the economy is below its full employment-level of output. This is basic economic theory. Folks should be clear on this point, even if it suggests that Trump might be partly right on something.
The desire to beat up on Donald Trump is understandable, but it is important to realize that not everything he says is wrong. For example, according to press accounts he adheres to the belief that the world is round.
Anyhow, Greg Ip goes a bit overboard in a Wall Street Journal piece where he argues that Trump’s claim that a trade deficit can be reduced or eliminated with tariffs is wrong. Referring to Trump’s approach to the trade deficit, Ip tells readers:
“But that is out of step with standard economics, which predicts that a country’s trade balance is determined by the gap between what it invests and saves, not by tariffs.”
As an accounting identity a country’s trade balance is always equal to the gap between what it invests and what it saves. This means that if the U.S. invests $200 billion a year more than it saves, then it will by definition be true that it has a trade deficit of $200 billion.
However, this accounting identity tells us nothing about causation. If we are below the full employment level of output, and Donald Trump’s tariffs or threats of tariffs, reduce our annual trade deficit by $200 billion (@ 1.1 percent of GDP), then this would lead to additional employment, output, and savings in the United States. A standard multiplier would suggest that a $200 billion reduction in the size of the trade deficit would lead to a $300 billion increase in GDP. This higher GDP would lead to more corporate and individual savings, as well as more tax revenue, which also count as savings. (The growth in GDP would also led to more imports, partially offsetting the initial improvement in the trade deficit.)
In other words, it is totally possible to reduce the size of the trade deficit as long as the economy is below its full employment-level of output. This is basic economic theory. Folks should be clear on this point, even if it suggests that Trump might be partly right on something.
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There aren’t many people who still regard former Treasury Secretary Robert Rubin with much respect. After all, his high-dollar policy was what caused the U.S. trade deficit to explode beginning in the late 1990s. It went from just over 1.0 percent of GDP in 1996 to almost 4.0 percent by the time President Clinton left office in 2000, and eventually peaked at almost 6.0 percent of GDP ($1.1 trillion in today’s economy) in 2005. These trade deficits created enormous holes in demand which were filled by the stock bubble in the late 1990s and the housing bubble in the last decade.
In both cases, the collapse of the bubbles were really bad news for the country. The labor force didn’t get back the jobs lost from the recession following the collapse of the stock bubble until January of 2005. At the time it was the longest period without net job growth since the Great Depression. Of course, the impact of the recession following the collapse of the housing bubble was even more severe.
Given this history, most folks don’t hold Robert Rubin in high regard today, with the exception of the Washington Post. Yesterday, the paper gave Rubin the opportunity to share his wisdom in his own column. Today, it gave a column to two of the leaders of the Wall Street-funded group Third Way. The column was a warning to Hillary Clinton not to fill her cabinet with progressives. It instead argued for the importance of people who understand capital markets, with Robert Rubin topping its list as an example of the sort of person that Secretary Clinton should be looking for.
While the rest of us may not think too well of Rubin at this point, there is a sense in which it is possible to think highly of the guy. Rubin managed to walk away with over $100 million from his stint at Citigroup, a bank which was at the epicenter of the financial crisis and perhaps the bank that most directly benefitted from the deregulation that Rubin engineered as Treasury Secretary.
In this sense, just as Rudy Giuliani argued that Donald Trump was a genius for managing to avoid paying taxes for 18 years, perhaps our Third Wayers think of Rubin as a genius for being able to personally profit from an economic catastrophe. It’s good to know that we have such geniuses in both political parties.
There aren’t many people who still regard former Treasury Secretary Robert Rubin with much respect. After all, his high-dollar policy was what caused the U.S. trade deficit to explode beginning in the late 1990s. It went from just over 1.0 percent of GDP in 1996 to almost 4.0 percent by the time President Clinton left office in 2000, and eventually peaked at almost 6.0 percent of GDP ($1.1 trillion in today’s economy) in 2005. These trade deficits created enormous holes in demand which were filled by the stock bubble in the late 1990s and the housing bubble in the last decade.
In both cases, the collapse of the bubbles were really bad news for the country. The labor force didn’t get back the jobs lost from the recession following the collapse of the stock bubble until January of 2005. At the time it was the longest period without net job growth since the Great Depression. Of course, the impact of the recession following the collapse of the housing bubble was even more severe.
Given this history, most folks don’t hold Robert Rubin in high regard today, with the exception of the Washington Post. Yesterday, the paper gave Rubin the opportunity to share his wisdom in his own column. Today, it gave a column to two of the leaders of the Wall Street-funded group Third Way. The column was a warning to Hillary Clinton not to fill her cabinet with progressives. It instead argued for the importance of people who understand capital markets, with Robert Rubin topping its list as an example of the sort of person that Secretary Clinton should be looking for.
While the rest of us may not think too well of Rubin at this point, there is a sense in which it is possible to think highly of the guy. Rubin managed to walk away with over $100 million from his stint at Citigroup, a bank which was at the epicenter of the financial crisis and perhaps the bank that most directly benefitted from the deregulation that Rubin engineered as Treasury Secretary.
In this sense, just as Rudy Giuliani argued that Donald Trump was a genius for managing to avoid paying taxes for 18 years, perhaps our Third Wayers think of Rubin as a genius for being able to personally profit from an economic catastrophe. It’s good to know that we have such geniuses in both political parties.
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A NYT piece discussing the tax rules surrounding business losses like the $916 million loss taken by Donald Trump on his 1995 tax return left out an important aspect of the law. The piece points out that many small businesses are organized as “pass-through” corporations, which means that the profits, or losses in this case, are directly passed through to the owners to declare on their tax returns.
However, these corporations also have the important benefit of limited liability. This means that if Donald Trump’s business dumps hazardous waste in a poor neighborhood, leading to an increase in birth defects and cancer, the victims can only sue Donald Trump’s corporation, not Donald Trump. If the corporation goes bankrupt, then the victims would be out of luck, even if Donald Trump still was a very rich person. They would not be able to go after his personal assets.
The rationale for the corporate income tax is that the corporation is an artificial individual. (This is also the basis under which the Supreme Court has bestowed it with free speech rights.) The income tax is a quid pro quo for the benefits of corporate status. A pass-through corporation gets to enjoy the benefits of corporate status without having to pay the corresponding taxes.
It may not take a “genius” like Donald Trump to take advantage of this loophole, but it was a pretty good sleight of hand to slip it into the tax code. It’s yet another way to redistribute income upward.
A NYT piece discussing the tax rules surrounding business losses like the $916 million loss taken by Donald Trump on his 1995 tax return left out an important aspect of the law. The piece points out that many small businesses are organized as “pass-through” corporations, which means that the profits, or losses in this case, are directly passed through to the owners to declare on their tax returns.
However, these corporations also have the important benefit of limited liability. This means that if Donald Trump’s business dumps hazardous waste in a poor neighborhood, leading to an increase in birth defects and cancer, the victims can only sue Donald Trump’s corporation, not Donald Trump. If the corporation goes bankrupt, then the victims would be out of luck, even if Donald Trump still was a very rich person. They would not be able to go after his personal assets.
The rationale for the corporate income tax is that the corporation is an artificial individual. (This is also the basis under which the Supreme Court has bestowed it with free speech rights.) The income tax is a quid pro quo for the benefits of corporate status. A pass-through corporation gets to enjoy the benefits of corporate status without having to pay the corresponding taxes.
It may not take a “genius” like Donald Trump to take advantage of this loophole, but it was a pretty good sleight of hand to slip it into the tax code. It’s yet another way to redistribute income upward.
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At a time when we are seeing the slowest productivity growth on record the NYT decided to devote a Room for Debate section to the question of how we will deal with surging productivity (called “automation” in the description). Blaming the problems of high unemployment and low wages on automation has certain attractive features. It makes our major social problems the result of the development of technology rather than bad economic policy. This is a longer topic (yes, it will be addressed in my forthcoming book), but let’s just say that it is not only Donald Trump’s supporters who have a tenuous grip on reality.
At a time when we are seeing the slowest productivity growth on record the NYT decided to devote a Room for Debate section to the question of how we will deal with surging productivity (called “automation” in the description). Blaming the problems of high unemployment and low wages on automation has certain attractive features. It makes our major social problems the result of the development of technology rather than bad economic policy. This is a longer topic (yes, it will be addressed in my forthcoming book), but let’s just say that it is not only Donald Trump’s supporters who have a tenuous grip on reality.
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Economists just hate to let the data get in the way of a good morality tale. For this reason we keep seeing stories about the problem of men not working, and in particular less-educated men not working. The big theme here is that technology has eliminated the need for the sort of work these less-educated men do. We got another example in this genre from Justin Fox in a Bloomberg piece.
The big problem with this story is that there has been a decline in employment rates for both men and women, including those with college degrees, since 2000. Furthermore, if we focus on less-educated workers (those without college degrees) the drop in prime-age employment rates has been larger for women than for men. (The Fox piece tries to make a case for the technology story with data that refuse to cooperate. A chart in the piece that is supposed to show men dropping out of the labor force everywhere, shows that in Canada the rate of non-participation went from 9.5 percent in 1995 to 9.5 percent in 2015. In Germany it fell from 8.4 percent in 1995 to 7.6 percent in 2015.)
This suggests that the problem is a lack of demand in the economy, not the destruction of jobs held by less-educated men due to technology. The remedy in this case would be create more demand by policies like getting the government to run larger budget deficits or by getting the trade deficit down through a lower valued dollar. We can also look to create more jobs by reducing the duration of the average work year through policies like paid sick days and family leave and mandated vacation time. In this story, we certainly wouldn’t want the Fed to deliberately slow the economy and rate of job creation with higher interest rates.
It is worth noting that the dismal labor market prospects of formerly incarcerated people is a real issue. The piece is right to highlight this issue, it just cannot explain the larger falloff in employment rates over the last 15 years.
Economists just hate to let the data get in the way of a good morality tale. For this reason we keep seeing stories about the problem of men not working, and in particular less-educated men not working. The big theme here is that technology has eliminated the need for the sort of work these less-educated men do. We got another example in this genre from Justin Fox in a Bloomberg piece.
The big problem with this story is that there has been a decline in employment rates for both men and women, including those with college degrees, since 2000. Furthermore, if we focus on less-educated workers (those without college degrees) the drop in prime-age employment rates has been larger for women than for men. (The Fox piece tries to make a case for the technology story with data that refuse to cooperate. A chart in the piece that is supposed to show men dropping out of the labor force everywhere, shows that in Canada the rate of non-participation went from 9.5 percent in 1995 to 9.5 percent in 2015. In Germany it fell from 8.4 percent in 1995 to 7.6 percent in 2015.)
This suggests that the problem is a lack of demand in the economy, not the destruction of jobs held by less-educated men due to technology. The remedy in this case would be create more demand by policies like getting the government to run larger budget deficits or by getting the trade deficit down through a lower valued dollar. We can also look to create more jobs by reducing the duration of the average work year through policies like paid sick days and family leave and mandated vacation time. In this story, we certainly wouldn’t want the Fed to deliberately slow the economy and rate of job creation with higher interest rates.
It is worth noting that the dismal labor market prospects of formerly incarcerated people is a real issue. The piece is right to highlight this issue, it just cannot explain the larger falloff in employment rates over the last 15 years.
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The NYT had a major article on the problems of the health care exchanges established under the Affordable Care Act (ACA). The piece implied that the problem is that too many people are opting to go without insurance, even bringing up the silly old line about the lack of young healthy people. (The exchanges need healthy people, it doesn’t matter if they are young. In fact, older healthy people are more profitable since they pay higher premiums.)
In fact, fewer people are going without insurance than had been predicted when the ACA was passed. In 2012, before the key provisions of the ACA took effect, the Congressional Budget Office (CBO) projected that the uninsured population would fall to 32 million by 2015. In fact, it fell to 32 million by 2014, a year in which it was projected there would still be 38 million uninsured people. According to data from Gallup, the number of uninsured non-elderly fell to less than 28 million by the fourth quarter of 2015. (The 2012 projections also assumed that all states would expand Medicaid since it preceded the Supreme Court ruling that allowed states to opt out.)
The reason that the health care exchanges have had lower than predicted enrollments is that fewer employers have dropped employer based insurance than expected. This is the sort of thing that a major article on unexpected problems in the exchanges should have noted.
The NYT had a major article on the problems of the health care exchanges established under the Affordable Care Act (ACA). The piece implied that the problem is that too many people are opting to go without insurance, even bringing up the silly old line about the lack of young healthy people. (The exchanges need healthy people, it doesn’t matter if they are young. In fact, older healthy people are more profitable since they pay higher premiums.)
In fact, fewer people are going without insurance than had been predicted when the ACA was passed. In 2012, before the key provisions of the ACA took effect, the Congressional Budget Office (CBO) projected that the uninsured population would fall to 32 million by 2015. In fact, it fell to 32 million by 2014, a year in which it was projected there would still be 38 million uninsured people. According to data from Gallup, the number of uninsured non-elderly fell to less than 28 million by the fourth quarter of 2015. (The 2012 projections also assumed that all states would expand Medicaid since it preceded the Supreme Court ruling that allowed states to opt out.)
The reason that the health care exchanges have had lower than predicted enrollments is that fewer employers have dropped employer based insurance than expected. This is the sort of thing that a major article on unexpected problems in the exchanges should have noted.
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Gretchen Morgenson had an interesting piece pointing out that it is rare that corporate boards ever clawback substantial sums from CEOs involved in illegal or inappropriate activity. (The immediate context is the clawback of some future performance pay from Wells Fargo CEO John Stumpf.) The issue, as Morgenson presents it, is that boards don’t generally do clawbacks except where it is legally required.
The point is that boards do not want to do clawbacks. This raises the obvious question as to why boards would not want to clawback money from CEOs?
Corporate boards are supposed to be working for shareholders. If they have a legal basis for getting extra money for shareholders by taking back pay from a CEO, they should want to do it. The assumption in Morgenson’s piece, which is undoubtedly accurate, is that the boards are allied with the CEO. They don’t want to take away from money from him/her unless they are forced to by the law.
This is the context in which CEOs like John Stumpf can earn close to $20 million a year, more than 500 times the pay of the median worker. And then we can count on leading policy experts to tell us the problem is that most workers lack the skills to compete in the modern economy.
Gretchen Morgenson had an interesting piece pointing out that it is rare that corporate boards ever clawback substantial sums from CEOs involved in illegal or inappropriate activity. (The immediate context is the clawback of some future performance pay from Wells Fargo CEO John Stumpf.) The issue, as Morgenson presents it, is that boards don’t generally do clawbacks except where it is legally required.
The point is that boards do not want to do clawbacks. This raises the obvious question as to why boards would not want to clawback money from CEOs?
Corporate boards are supposed to be working for shareholders. If they have a legal basis for getting extra money for shareholders by taking back pay from a CEO, they should want to do it. The assumption in Morgenson’s piece, which is undoubtedly accurate, is that the boards are allied with the CEO. They don’t want to take away from money from him/her unless they are forced to by the law.
This is the context in which CEOs like John Stumpf can earn close to $20 million a year, more than 500 times the pay of the median worker. And then we can count on leading policy experts to tell us the problem is that most workers lack the skills to compete in the modern economy.
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