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In an article on the prospect of a September interest rate hike by the Fed, the NYT pointed out that Esther George, the President of the Kansas City Federal Reserve Board Bank, expressed concern that low interest rates are fueling financial speculation. She has repeatedly given this as a basis for raising interest rates.
It is worth noting that George has never identified an area where prices are obviously out of line with fundamentals. In the two cases in the last 80 years where the collapse of a speculative bubble led to economic downturns, the stock bubble in the 1990s and the housing bubble in the last decade, it was easy for anyone who looked to recognize the bubbles and that they were moving the economy.
In both cases, the wealth generated by the bubbles led to a consumption boom, which would have been difficult to explain any other way. The stock bubble also led to a surge in tech investment as it was a simple matter for people with the right connections, who had no idea what they were doing, to raise hundreds of millions or even billions by issuing stock in Internet start-ups. In the case of the housing bubbles, residential construction hit a post-war high as a share of GDP even as the country’s demographics would have suggested it should have been falling.
For these reasons, it was predictable that a collapse of the bubble would lead to a recession, and an especially serious one in the case of the housing bubble. Also, it was easy to see that both were bubbles. In the late 1990s, bubble the price to earnings ratio reached levels that were twice the normal ratio. For this to make sense it would have required either a sustained growth rate of corporate profits that was hugely faster than any forecasters were predicting or a change in investor attitudes to stock, where they were prepared to accept returns that were the same or less than the returns on government bonds. In the case of the housing bubble, with vacancy rates hitting record highs and rents seeing no real increase whatsoever, it was pretty hard to see the run-up in house prices as anything except a bubble.
Given this recent history, it would be reasonable to ask Ms. George where she sees evidence of a dangerous bubble. If her argument is that she wants to slow growth and keep people from getting jobs because of her fear of bubbles, she should be able to produce some evidence to support this fear. To date, she has not. (It’s also worth noting that even if we face the risk of a bubble, it is far from clear that higher interest rates are the best tool for addressing the problem.)
In an article on the prospect of a September interest rate hike by the Fed, the NYT pointed out that Esther George, the President of the Kansas City Federal Reserve Board Bank, expressed concern that low interest rates are fueling financial speculation. She has repeatedly given this as a basis for raising interest rates.
It is worth noting that George has never identified an area where prices are obviously out of line with fundamentals. In the two cases in the last 80 years where the collapse of a speculative bubble led to economic downturns, the stock bubble in the 1990s and the housing bubble in the last decade, it was easy for anyone who looked to recognize the bubbles and that they were moving the economy.
In both cases, the wealth generated by the bubbles led to a consumption boom, which would have been difficult to explain any other way. The stock bubble also led to a surge in tech investment as it was a simple matter for people with the right connections, who had no idea what they were doing, to raise hundreds of millions or even billions by issuing stock in Internet start-ups. In the case of the housing bubbles, residential construction hit a post-war high as a share of GDP even as the country’s demographics would have suggested it should have been falling.
For these reasons, it was predictable that a collapse of the bubble would lead to a recession, and an especially serious one in the case of the housing bubble. Also, it was easy to see that both were bubbles. In the late 1990s, bubble the price to earnings ratio reached levels that were twice the normal ratio. For this to make sense it would have required either a sustained growth rate of corporate profits that was hugely faster than any forecasters were predicting or a change in investor attitudes to stock, where they were prepared to accept returns that were the same or less than the returns on government bonds. In the case of the housing bubble, with vacancy rates hitting record highs and rents seeing no real increase whatsoever, it was pretty hard to see the run-up in house prices as anything except a bubble.
Given this recent history, it would be reasonable to ask Ms. George where she sees evidence of a dangerous bubble. If her argument is that she wants to slow growth and keep people from getting jobs because of her fear of bubbles, she should be able to produce some evidence to support this fear. To date, she has not. (It’s also worth noting that even if we face the risk of a bubble, it is far from clear that higher interest rates are the best tool for addressing the problem.)
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That’s what a NYT article told readers, although the $1.0 trillion figure may not have been clear. The European Union determined that Apple owes Ireland $14.5 billion in back taxes. While the article indicated that this is a substantial sum, since most readers are probably not familair with the size of Ireland’s economy, they likely would not realize how substantial it is.
Since Ireland’s GDP is projected to be 229 billion euros this year, the back taxes would be roughly the equivalent of $1 trillion in the U.S. economy. The piece also indicates that with interest included the sum could be $23 billion. This would be the equivalent of $1.5 trillion in the U.S. economy.
Put another way, Ireland’s population is just under 4.6 million. This means the $14.5 billion figure would translate into $3,150 for every person in the country. The larger $23 billion figure would come to $5,110 per person.
That’s what a NYT article told readers, although the $1.0 trillion figure may not have been clear. The European Union determined that Apple owes Ireland $14.5 billion in back taxes. While the article indicated that this is a substantial sum, since most readers are probably not familair with the size of Ireland’s economy, they likely would not realize how substantial it is.
Since Ireland’s GDP is projected to be 229 billion euros this year, the back taxes would be roughly the equivalent of $1 trillion in the U.S. economy. The piece also indicates that with interest included the sum could be $23 billion. This would be the equivalent of $1.5 trillion in the U.S. economy.
Put another way, Ireland’s population is just under 4.6 million. This means the $14.5 billion figure would translate into $3,150 for every person in the country. The larger $23 billion figure would come to $5,110 per person.
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A recurring theme of much of the coverage of support for Donald Trump in Appalachian states is that President Obama’s efforts to reduce greenhouse gas emissions, and thereby reduce the use of coal, have led to a large loss of coal mining jobs. This loss of jobs supposedly devastated the economy of the region. Voters hope that Trump will bring back the mining jobs and thereby restore the economy of the region. A New York Times article on support for Trump in Eastern Kentucky repeats this theme.
The problem with the story is that most of the mining jobs in Kentucky were lost long ago. Even when President Obama took office it was a relatively minor source of employment in the state. The figure below shows coal mining jobs in Kentucky. The number had fallen from close to 30,000 at the start of the 1990s to less than 15,000 by the end of the decade. (It had been close to 50,000 in 1980.)
There was somewhat of an uptick as President Obama came into office due to the surge in world oil prices, but this lasted for less than two years. The current employment level of 6,900 is down about 8,500 from the 2007 levels. By comparison, total employment in Kentucky is over 1,900,000. This means the jobs lost in the mining industry over the last decade are a bit less than 0.5 percent of total employment in the state.
The loss of these jobs has undoubtedly been a huge tragedy for the people directly affected and for the communities in which these jobs are located. However, it does not seem plausible that the actual job loss can explain much about political attitudes across the state.
A recurring theme of much of the coverage of support for Donald Trump in Appalachian states is that President Obama’s efforts to reduce greenhouse gas emissions, and thereby reduce the use of coal, have led to a large loss of coal mining jobs. This loss of jobs supposedly devastated the economy of the region. Voters hope that Trump will bring back the mining jobs and thereby restore the economy of the region. A New York Times article on support for Trump in Eastern Kentucky repeats this theme.
The problem with the story is that most of the mining jobs in Kentucky were lost long ago. Even when President Obama took office it was a relatively minor source of employment in the state. The figure below shows coal mining jobs in Kentucky. The number had fallen from close to 30,000 at the start of the 1990s to less than 15,000 by the end of the decade. (It had been close to 50,000 in 1980.)
There was somewhat of an uptick as President Obama came into office due to the surge in world oil prices, but this lasted for less than two years. The current employment level of 6,900 is down about 8,500 from the 2007 levels. By comparison, total employment in Kentucky is over 1,900,000. This means the jobs lost in the mining industry over the last decade are a bit less than 0.5 percent of total employment in the state.
The loss of these jobs has undoubtedly been a huge tragedy for the people directly affected and for the communities in which these jobs are located. However, it does not seem plausible that the actual job loss can explain much about political attitudes across the state.
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It is unfortunate that it now acceptable in polite circles to connect a view with Donald Trump and then dismiss it. The result is that many fallacious arguments can now be accepted without being seriously questioned. (Hey folks, I hear Donald Trump believes in evolution.)
The Post plays this game in noting that the U.S. trade deficit with Germany is now larger than its deficit with Mexico, putting Germany second only to China. It then asks why people aren’t upset about the trade deficit with Germany.
It partly answers this story itself. Germany’s huge trade surplus stems in large part from the fact that it is in the euro zone. The euro might be properly valued against the dollar, but because Germany is the most competitive country in the euro zone, it effectively has an under-valued currency relative to the dollar.
The answer to this problem would be to get Germany to have more inflationary policies to allow other countries to regain competitiveness — just as the other euro zone countries were generous enough to run inflationary policies in the first half of the last decade to allow Germany to regain competitiveness. However, the Germans refuse to return this favor because their great, great, great, great grandparents lived through the hyper-inflation in Weimar Germany. (Yes, they say this.)
Anyhow, this issue has actually gotten considerable attention from economists and other policy types. Unfortunately, it is very difficult to force a country in the euro zone — especially the largest country — to run more expansionary policies. As a result, Germany is forcing depression conditions on the countries of southern Europe and running a large trade surplus with the United States.
The other part of the difference between Germany and China and Mexico is that Germany is a rich country, while China and Mexico are developing countries. Folks that took intro econ courses know that rich countries are expected to run trade surpluses.
The story is that rich countries are slow growing with a large amount of capital. By contrast, developing countries are supposed to be fast growing (okay, that doesn’t apply to post-NAFTA Mexico), with relatively little capital. Capital then flows from where it is relatively plentiful and getting a low return to developing countries where it is scarce and can get a high return.
The outflow of capital from rich countries implies a trade surplus with developing countries. Developing countries are in turn supposed to be borrowing capital to finance trade deficits. These trade deficits allow them to build up their capital stocks even as they maintain the consumption standards of their populations.
In the case of the large trade surpluses run by China and other developing countries, we are seeing the opposite of the textbook story. We are seeing fast growing developing countries with outflows of capital. This is largely because they have had a policy of deliberately depressing the value of their currencies by buying up large amounts of foreign reserves (mostly dollars.)
So the economics textbooks explain clearly why we should see the trade deficits that the U.S. runs with China and Mexico as being different than the one it runs with Germany. And that happens to be true regardless of what Donald Trump may or may not say.
By the way, this piece also asserts that “Germany on average has lower wages than Belgium or Ireland.” This is not true according to our friends at the Bureau of Labor Statistics.
It is unfortunate that it now acceptable in polite circles to connect a view with Donald Trump and then dismiss it. The result is that many fallacious arguments can now be accepted without being seriously questioned. (Hey folks, I hear Donald Trump believes in evolution.)
The Post plays this game in noting that the U.S. trade deficit with Germany is now larger than its deficit with Mexico, putting Germany second only to China. It then asks why people aren’t upset about the trade deficit with Germany.
It partly answers this story itself. Germany’s huge trade surplus stems in large part from the fact that it is in the euro zone. The euro might be properly valued against the dollar, but because Germany is the most competitive country in the euro zone, it effectively has an under-valued currency relative to the dollar.
The answer to this problem would be to get Germany to have more inflationary policies to allow other countries to regain competitiveness — just as the other euro zone countries were generous enough to run inflationary policies in the first half of the last decade to allow Germany to regain competitiveness. However, the Germans refuse to return this favor because their great, great, great, great grandparents lived through the hyper-inflation in Weimar Germany. (Yes, they say this.)
Anyhow, this issue has actually gotten considerable attention from economists and other policy types. Unfortunately, it is very difficult to force a country in the euro zone — especially the largest country — to run more expansionary policies. As a result, Germany is forcing depression conditions on the countries of southern Europe and running a large trade surplus with the United States.
The other part of the difference between Germany and China and Mexico is that Germany is a rich country, while China and Mexico are developing countries. Folks that took intro econ courses know that rich countries are expected to run trade surpluses.
The story is that rich countries are slow growing with a large amount of capital. By contrast, developing countries are supposed to be fast growing (okay, that doesn’t apply to post-NAFTA Mexico), with relatively little capital. Capital then flows from where it is relatively plentiful and getting a low return to developing countries where it is scarce and can get a high return.
The outflow of capital from rich countries implies a trade surplus with developing countries. Developing countries are in turn supposed to be borrowing capital to finance trade deficits. These trade deficits allow them to build up their capital stocks even as they maintain the consumption standards of their populations.
In the case of the large trade surpluses run by China and other developing countries, we are seeing the opposite of the textbook story. We are seeing fast growing developing countries with outflows of capital. This is largely because they have had a policy of deliberately depressing the value of their currencies by buying up large amounts of foreign reserves (mostly dollars.)
So the economics textbooks explain clearly why we should see the trade deficits that the U.S. runs with China and Mexico as being different than the one it runs with Germany. And that happens to be true regardless of what Donald Trump may or may not say.
By the way, this piece also asserts that “Germany on average has lower wages than Belgium or Ireland.” This is not true according to our friends at the Bureau of Labor Statistics.
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A few days ago I argued that one way to get around the tax games that Apple and other corporations play is to require them to turn over a proportion of their stock in the form of non-voting shares. These shares would get the same benefits that any voting shares would receive in the form of dividends and share buybacks, but would give the government no say in the running of the company. This should get rid of most of the opportunities for gaming the tax system and assure the government its targeted percentage of corporate profits.
Bruce Bartlett, who was an economist in the Reagan and Bush I administrations, reminded me of his even simpler approach. Bruce suggests that the government tax corporations at some percentage of their market capitalization on a randomly selected date in the prior calendar quarter.
Suppose that the goal is to get an amount of tax revenue equal to 25 percent of corporate profits (a bit more than we now take in). If the ratio of stock prices to after-tax profits is 24 to 1 (roughly current levels), then the ratio of stock prices to before-tax profit is 18 to 1, implying that profits are 5.6 percent of the share price. If we want to collect 25 percent of the profits in taxes, then we would require companies to pay 1.9 percent of their share price on a randomly selected date from the prior quarter. (Actually, since we are looking at four quarterly payments, each would be one-fourth of this amount, or 0.475 percent of the share price.)
It’s difficult to see how corporations can game this one. We also need to have a mechanism for taxing privately held companies. (My addendum would be to have an annual assessment of the company to determine its market value. This would be less precise than actually having a market value to directly rely upon, but there is no reason to assume an obvious bias in the mechanism. Also, if a company felt that the auditors were consistently giving it an excessive valuation, it would provide a strong incentive to go public.)
Anyhow, progressives should be looking for these sort of simple mechanisms for getting the money out of the Apples and other tax schemers in the world. We need the revenue and we also should want to put the tax gaming industry out of business. There are a lot of people getting very rich because of their cleverness in finding ways to get around the tax code. This is a major source of inequality and a waste from an economic standpoint.
Note: Bruce directs me to a 2007 Tax Notes article by Calvin Johnson as the basis for this idea.
A few days ago I argued that one way to get around the tax games that Apple and other corporations play is to require them to turn over a proportion of their stock in the form of non-voting shares. These shares would get the same benefits that any voting shares would receive in the form of dividends and share buybacks, but would give the government no say in the running of the company. This should get rid of most of the opportunities for gaming the tax system and assure the government its targeted percentage of corporate profits.
Bruce Bartlett, who was an economist in the Reagan and Bush I administrations, reminded me of his even simpler approach. Bruce suggests that the government tax corporations at some percentage of their market capitalization on a randomly selected date in the prior calendar quarter.
Suppose that the goal is to get an amount of tax revenue equal to 25 percent of corporate profits (a bit more than we now take in). If the ratio of stock prices to after-tax profits is 24 to 1 (roughly current levels), then the ratio of stock prices to before-tax profit is 18 to 1, implying that profits are 5.6 percent of the share price. If we want to collect 25 percent of the profits in taxes, then we would require companies to pay 1.9 percent of their share price on a randomly selected date from the prior quarter. (Actually, since we are looking at four quarterly payments, each would be one-fourth of this amount, or 0.475 percent of the share price.)
It’s difficult to see how corporations can game this one. We also need to have a mechanism for taxing privately held companies. (My addendum would be to have an annual assessment of the company to determine its market value. This would be less precise than actually having a market value to directly rely upon, but there is no reason to assume an obvious bias in the mechanism. Also, if a company felt that the auditors were consistently giving it an excessive valuation, it would provide a strong incentive to go public.)
Anyhow, progressives should be looking for these sort of simple mechanisms for getting the money out of the Apples and other tax schemers in the world. We need the revenue and we also should want to put the tax gaming industry out of business. There are a lot of people getting very rich because of their cleverness in finding ways to get around the tax code. This is a major source of inequality and a waste from an economic standpoint.
Note: Bruce directs me to a 2007 Tax Notes article by Calvin Johnson as the basis for this idea.
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The efforts by many elite types to deny basic statistics and to tout the new technologies transforming the workplace are truly Trumpian in their nature. According to the OECD, productivity growth in the UK was essentially zero between 2007 and 2014 (the most recent year for which it has data). So we would naturally expect that the Guardian would run a column telling us that globalization and new technologies are making old workplace relations obsolete.
As John Harris tells readers:
“In a world in which businesses can survey their order books on an hourly basis and temporarily hire staff at the touch of a button, why would they base their arrangements on agreements that last for years?”
Well, a big part of the story is that the UK (like the U.S.) has a very weak labor market. This was a result of conscious policy decisions. The Conservative government put in a policy of austerity that had the effect of reducing demand in the UK and slowing the rate of job creation. In this context, of course employers get to call the shots.
Serious people would address the context which has denied workers bargaining power. It is not “technology” as Harris and his elite Trumpians would like to pretend, it is macroeconomic policy. But Harris has no time for talking about macroeconomic policy. He dismisses a plan put forward by Labor Party Leader Jeremy Corbyn to produce full employment as, “either naive or dishonest” adding “but they reflect delusions that run throughout Labour and the left.”
There we have it, in elite Trumpland we don’t have to deal with data or arguments; we can just dismiss people and ideas with ad hominem arguments.
If the Guardian allowed a serious person to address the set of questions raised in this piece they would look not only at the macroeconomic policies that have denied ordinary workers bargaining power, but also the government policies that allow the winners to win.
At the top of the list would be the policies that have favored the financial sector. Even the I.M.F. has noted that the financial sector is undertaxed relative to other industries. A modest financial transactions tax applied to the non-equity UK market would do wonders for increasing the efficiency of the sector. (The U.K. already taxes equity trades at a rate of 0.5 percent.)
We should also ask about the extent to which government granted patent and copyright monopolies are redistributing income upward. Patent monopolies are created by governments, they don’t grow out of the technology. And we should also ask whether the corporate governance structure is effectively allowing shareholders to control the pay of CEOs and other top executives. The structure clearly does not work in the case of the U.S., I suspect the problems are similar in the U.K., if not as bad.[1]
Not everything in Harris’ piece is wrong. It would be great to see the left more focused on shorter workweeks and longer vacations. (Many on the left already are.) And certainly there needs to be more focus on non work aspects of life. But the diagnosis of the basic problem in this piece has more to do with Donald Trumpland than the real world.
[1] These and other topics are discussed in my forthcoming book, “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” Coming soon to a website near you.
Note: An earlier version identified Labor’s leader as “Jerry Corbin.” Thanks to several people for pointing out this error.
The efforts by many elite types to deny basic statistics and to tout the new technologies transforming the workplace are truly Trumpian in their nature. According to the OECD, productivity growth in the UK was essentially zero between 2007 and 2014 (the most recent year for which it has data). So we would naturally expect that the Guardian would run a column telling us that globalization and new technologies are making old workplace relations obsolete.
As John Harris tells readers:
“In a world in which businesses can survey their order books on an hourly basis and temporarily hire staff at the touch of a button, why would they base their arrangements on agreements that last for years?”
Well, a big part of the story is that the UK (like the U.S.) has a very weak labor market. This was a result of conscious policy decisions. The Conservative government put in a policy of austerity that had the effect of reducing demand in the UK and slowing the rate of job creation. In this context, of course employers get to call the shots.
Serious people would address the context which has denied workers bargaining power. It is not “technology” as Harris and his elite Trumpians would like to pretend, it is macroeconomic policy. But Harris has no time for talking about macroeconomic policy. He dismisses a plan put forward by Labor Party Leader Jeremy Corbyn to produce full employment as, “either naive or dishonest” adding “but they reflect delusions that run throughout Labour and the left.”
There we have it, in elite Trumpland we don’t have to deal with data or arguments; we can just dismiss people and ideas with ad hominem arguments.
If the Guardian allowed a serious person to address the set of questions raised in this piece they would look not only at the macroeconomic policies that have denied ordinary workers bargaining power, but also the government policies that allow the winners to win.
At the top of the list would be the policies that have favored the financial sector. Even the I.M.F. has noted that the financial sector is undertaxed relative to other industries. A modest financial transactions tax applied to the non-equity UK market would do wonders for increasing the efficiency of the sector. (The U.K. already taxes equity trades at a rate of 0.5 percent.)
We should also ask about the extent to which government granted patent and copyright monopolies are redistributing income upward. Patent monopolies are created by governments, they don’t grow out of the technology. And we should also ask whether the corporate governance structure is effectively allowing shareholders to control the pay of CEOs and other top executives. The structure clearly does not work in the case of the U.S., I suspect the problems are similar in the U.K., if not as bad.[1]
Not everything in Harris’ piece is wrong. It would be great to see the left more focused on shorter workweeks and longer vacations. (Many on the left already are.) And certainly there needs to be more focus on non work aspects of life. But the diagnosis of the basic problem in this piece has more to do with Donald Trumpland than the real world.
[1] These and other topics are discussed in my forthcoming book, “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” Coming soon to a website near you.
Note: An earlier version identified Labor’s leader as “Jerry Corbin.” Thanks to several people for pointing out this error.
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While Elizabeth Warren is praising the European Union’s crackdown on Apple’s Ireland tax scheme, Jack Lew and the Obama Treasury Department are going to bat for corporate tax cheating. Warren is far too optimistic about the prospect of a successful crackdown. These folks are prepared to spend a lot of money to hide their profits from tax authorities and they are likely to find accomplices in many Irelands around the world.
It would be good to look in a different direction. I remain a big fan of my proposal for companies to turn over non-voting shares of stock to the government. In that case, what goes to the shareholders also goes to the government. Unless you cheat your shareholders, you can’t cheat the government.
I know this is probably too simple to be taken seriously in policy circles, but those who care about an efficient and effective way to collect corporate taxes should be thinking about it.
While Elizabeth Warren is praising the European Union’s crackdown on Apple’s Ireland tax scheme, Jack Lew and the Obama Treasury Department are going to bat for corporate tax cheating. Warren is far too optimistic about the prospect of a successful crackdown. These folks are prepared to spend a lot of money to hide their profits from tax authorities and they are likely to find accomplices in many Irelands around the world.
It would be good to look in a different direction. I remain a big fan of my proposal for companies to turn over non-voting shares of stock to the government. In that case, what goes to the shareholders also goes to the government. Unless you cheat your shareholders, you can’t cheat the government.
I know this is probably too simple to be taken seriously in policy circles, but those who care about an efficient and effective way to collect corporate taxes should be thinking about it.
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