The Fed rate hike gang got excited yesterday about the release of the June Consumer Price Index data. As the NYT reported, a 0.2 percent June rise in the core CPI took the year over year rate to 2.3 percent. That is slightly above the 2.0 percent target set by the Fed, although the Fed uses the core personal consumption expenditure index, which shows a 1.6 percent advance over the last year.
However even the CPI figure can be a bit deceiving. The shelter component (essentially rent and owners’ equivalent rent) accounts for over 40 percent of the core index. This component is the factor responsible for the modest increase in the core CPI in recent months. Excluding the shelter component the core CPI actually fell modestly from 1.6 percent to 1.4 percent over the prior twelve months.
Change in the Core CPI, Excluding Shelter Over Prior Twelve Months
Source: Bureau of Labor Statistics.
It is reasonable to exclude shelter when assessing patterns in inflation since its price follows a qualitatively different dynamic than most goods and services. Rent reflects supply and demand conditions in the housing market. The factor driving rent increases is an inadequate supply of housing.
While higher interest rates will in general be expected to dampen inflation by weakening the labor market and putting downward pressure on wages, this would not be the case with rents. Higher interest rates will slow construction and in this way make the shortage of housing worse. For this reason inflation caused by rising house costs would not be a good rationale for raising interest rates.
The piece also touted the Federal Reserve Board’s report of a 0.4 percent increase in manufacturing output for June. It is worth noting that this follows a reported decline of 0.3 percent in May. The Fed’s manufacturing index is still 0.2 percent below its February level so it is hard to make a case for robust growth in this sector.
The Fed rate hike gang got excited yesterday about the release of the June Consumer Price Index data. As the NYT reported, a 0.2 percent June rise in the core CPI took the year over year rate to 2.3 percent. That is slightly above the 2.0 percent target set by the Fed, although the Fed uses the core personal consumption expenditure index, which shows a 1.6 percent advance over the last year.
However even the CPI figure can be a bit deceiving. The shelter component (essentially rent and owners’ equivalent rent) accounts for over 40 percent of the core index. This component is the factor responsible for the modest increase in the core CPI in recent months. Excluding the shelter component the core CPI actually fell modestly from 1.6 percent to 1.4 percent over the prior twelve months.
Change in the Core CPI, Excluding Shelter Over Prior Twelve Months
Source: Bureau of Labor Statistics.
It is reasonable to exclude shelter when assessing patterns in inflation since its price follows a qualitatively different dynamic than most goods and services. Rent reflects supply and demand conditions in the housing market. The factor driving rent increases is an inadequate supply of housing.
While higher interest rates will in general be expected to dampen inflation by weakening the labor market and putting downward pressure on wages, this would not be the case with rents. Higher interest rates will slow construction and in this way make the shortage of housing worse. For this reason inflation caused by rising house costs would not be a good rationale for raising interest rates.
The piece also touted the Federal Reserve Board’s report of a 0.4 percent increase in manufacturing output for June. It is worth noting that this follows a reported decline of 0.3 percent in May. The Fed’s manufacturing index is still 0.2 percent below its February level so it is hard to make a case for robust growth in this sector.
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The Washington Post reported on new projections on national health care spending by the Centers for Medicare and Medicaid Services (CMS). The projections are that health care costs will outpace the growth of the economy, rising from the current 17 percent of GDP to 20 percent by 2025. It then provides readers with a warning from Katherine Hempstead, a researcher at the Robert Wood Johnson Foundation:
“Even under the rather optimistic assumption that health care spending grow no more quickly than the economy itself; we will, before long, be forced to choose between an unpleasant combination of significant tax increases and/or cuts in defense and non-health spending.”
(I believe Hempstead is referring to age-adjusted spending. Per capita spending is virtually certain to rise relative to per capita income, due to population aging.)
There are three points worth noting on these projections. First, the CMS projections have been notoriously inaccurate in the past. In the 1990s, health care spending was projected to be more than 25 percent of GDP by 2030. This doesn’t mean the most recent projections will be wrong, but people should know they are highly uncertain.
The second point is that U.S. costs are already hugely out of line with costs in other wealthy countries with no obvious benefits in terms of outcomes. We currently pay more than twice as much per person for our health care as people in other wealthy countries yet rank near the bottom in life expectancy.
As our costs grow further relative to costs in other countries, it will require a strengthening of protectionist measures to sustain this growing gap. In other words, there are huge potential savings from people receiving health care in other countries. (Also, there would be enormous savings from allowing adequately trained foreign doctors to practice in the United States.) If the protectionists ever lose their control of national policy we could see a sharp drop in costs from opening up to trade in health care services. (The potential savings would more than an order of magnitude larger than even the most optimistic projections of gains from the Trans-Pacific Partnership.)
The third point is that the U.S. economy has suffered from a shortfall in demand ever since the collapse of the housing bubble. If this “secular stagnation” continues, then we will not need tax increases and/or spending cuts to pay for health care. If we face a shortfall in demand then we can simply finance additional health care spending with deficits. In the context of an underemployed economy, this will boost growth and create jobs.
The Washington Post reported on new projections on national health care spending by the Centers for Medicare and Medicaid Services (CMS). The projections are that health care costs will outpace the growth of the economy, rising from the current 17 percent of GDP to 20 percent by 2025. It then provides readers with a warning from Katherine Hempstead, a researcher at the Robert Wood Johnson Foundation:
“Even under the rather optimistic assumption that health care spending grow no more quickly than the economy itself; we will, before long, be forced to choose between an unpleasant combination of significant tax increases and/or cuts in defense and non-health spending.”
(I believe Hempstead is referring to age-adjusted spending. Per capita spending is virtually certain to rise relative to per capita income, due to population aging.)
There are three points worth noting on these projections. First, the CMS projections have been notoriously inaccurate in the past. In the 1990s, health care spending was projected to be more than 25 percent of GDP by 2030. This doesn’t mean the most recent projections will be wrong, but people should know they are highly uncertain.
The second point is that U.S. costs are already hugely out of line with costs in other wealthy countries with no obvious benefits in terms of outcomes. We currently pay more than twice as much per person for our health care as people in other wealthy countries yet rank near the bottom in life expectancy.
As our costs grow further relative to costs in other countries, it will require a strengthening of protectionist measures to sustain this growing gap. In other words, there are huge potential savings from people receiving health care in other countries. (Also, there would be enormous savings from allowing adequately trained foreign doctors to practice in the United States.) If the protectionists ever lose their control of national policy we could see a sharp drop in costs from opening up to trade in health care services. (The potential savings would more than an order of magnitude larger than even the most optimistic projections of gains from the Trans-Pacific Partnership.)
The third point is that the U.S. economy has suffered from a shortfall in demand ever since the collapse of the housing bubble. If this “secular stagnation” continues, then we will not need tax increases and/or spending cuts to pay for health care. If we face a shortfall in demand then we can simply finance additional health care spending with deficits. In the context of an underemployed economy, this will boost growth and create jobs.
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Bloomberg is really pushing the frontiers in journalism. In order to give readers a balanced account of a proposal by Representative Peter DeFazio to impose a 0.03 percent tax on financial transactions (that’s 3 cents on every hundred dollars) it went to the spokesperson for the Investment Company Institute, the chief investment officer from Vanguard, and an academic with extensive ties to the financial industry. It also presented an assertion on the savings from electronic trading from Markit Ltd. Based on this diverse range of sources, Bloomberg ran a headline:
“Democrats assail Wall Street with plan that may hit mom and pop.”
If Bloomberg was interested in views other than those from the financial industry, it might have found some people who supported the tax to provide comments for the article. Or, it might have tried some basic arithmetic itself.
Most research finds that trading is price elastic, meaning that the percentage change in trading in response to a tax is larger than the percentage increase in trading costs that result from the tax. The non-partisan Tax Policy Center assumed an elasticity of -1.25 in its analysis of financial transactions taxes.
This means that it the tax proposed by DeFazio would raise the cost of trading by 20 percent, then trading volume would decline by 1.25 times as much, or 25 percent. Investors would pay 20 percent more on each trade, but would be trading 25 percent less. This means that their trading costs would actually fall as a result of the tax. (With trading at 75 percent of the previous level, but the per trade cost at 120 percent of the previous level, the total cost of trading would be 90 percent of the prior level.)
The only way “mom and pop” get hurt in this story is if they make money on average on their trades. That is a hard story to tell. If mom and pop are lucky and sell their stock when it is high then some other mom and pop are unlucky and buy the stock when it is over-valued. As a general rule, trading will end up being a wash. (If we stopped trading altogether that would be a problem, but the taxes on the table would just raise costs to where they were 10 or 20 years ago.)
Of course there is someone that gets hurt by less trading — the folks who were making money on the trades — that’s right the financial industry. So, Bloomberg’s sources could expect to take a huge hit if Congress were to pass a tax like the one proposed by Mr. DeFazio. Based on the elasticity figure used by the Tax Policy Center and the revenue estimate from the Joint Tax Committee, DeFazio’s proposed tax would cost the financial industry more than $50 billion a year. Since it may not sound very compelling to hear a multi-millionaire complain about the prospect of a pay cut, it sounds much better to make up a story about mom and pop investors.
Bloomberg is really pushing the frontiers in journalism. In order to give readers a balanced account of a proposal by Representative Peter DeFazio to impose a 0.03 percent tax on financial transactions (that’s 3 cents on every hundred dollars) it went to the spokesperson for the Investment Company Institute, the chief investment officer from Vanguard, and an academic with extensive ties to the financial industry. It also presented an assertion on the savings from electronic trading from Markit Ltd. Based on this diverse range of sources, Bloomberg ran a headline:
“Democrats assail Wall Street with plan that may hit mom and pop.”
If Bloomberg was interested in views other than those from the financial industry, it might have found some people who supported the tax to provide comments for the article. Or, it might have tried some basic arithmetic itself.
Most research finds that trading is price elastic, meaning that the percentage change in trading in response to a tax is larger than the percentage increase in trading costs that result from the tax. The non-partisan Tax Policy Center assumed an elasticity of -1.25 in its analysis of financial transactions taxes.
This means that it the tax proposed by DeFazio would raise the cost of trading by 20 percent, then trading volume would decline by 1.25 times as much, or 25 percent. Investors would pay 20 percent more on each trade, but would be trading 25 percent less. This means that their trading costs would actually fall as a result of the tax. (With trading at 75 percent of the previous level, but the per trade cost at 120 percent of the previous level, the total cost of trading would be 90 percent of the prior level.)
The only way “mom and pop” get hurt in this story is if they make money on average on their trades. That is a hard story to tell. If mom and pop are lucky and sell their stock when it is high then some other mom and pop are unlucky and buy the stock when it is over-valued. As a general rule, trading will end up being a wash. (If we stopped trading altogether that would be a problem, but the taxes on the table would just raise costs to where they were 10 or 20 years ago.)
Of course there is someone that gets hurt by less trading — the folks who were making money on the trades — that’s right the financial industry. So, Bloomberg’s sources could expect to take a huge hit if Congress were to pass a tax like the one proposed by Mr. DeFazio. Based on the elasticity figure used by the Tax Policy Center and the revenue estimate from the Joint Tax Committee, DeFazio’s proposed tax would cost the financial industry more than $50 billion a year. Since it may not sound very compelling to hear a multi-millionaire complain about the prospect of a pay cut, it sounds much better to make up a story about mom and pop investors.
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Eduardo Porter argued in his column that part of the story of growing inequality is a failure of competition policy. The argument is that increased concentration in a number of industries has led to rents being shared by high earning employees in the largest firms. Porter cites research from Jason Furman, the current head of the Council of Economic Advisers, and Peter Orszag, the former chief of the Office of Management and Budget, which support this view.
While Porter mentions a number of firms that might fit this story, he neglected to mention Uber. Uber is striking in that it appears to be trying to form a monopoly by using its political power (it hired David Plouffe, President Obama’s chief political adviser, as a lobbyist) to maintain an unsettled regulatory structure in the industry. While Uber is prepared to act in defiance of existing regulations, and then use its power to prevent legal sanctions, smaller competitors are likely to be less comfortable operating in defiance of the law. While a clear set of regulations would help to level the playing field, Uber is working hard to prevent modernized regulations from coming into effect.
This is exactly the sort of situation that leads to concentration of wealth (Uber’s stock now has a market value of $68 billion), without generating efficiency gains for the economy. It is a good illustration of the problem noted in Porter’s column.
Eduardo Porter argued in his column that part of the story of growing inequality is a failure of competition policy. The argument is that increased concentration in a number of industries has led to rents being shared by high earning employees in the largest firms. Porter cites research from Jason Furman, the current head of the Council of Economic Advisers, and Peter Orszag, the former chief of the Office of Management and Budget, which support this view.
While Porter mentions a number of firms that might fit this story, he neglected to mention Uber. Uber is striking in that it appears to be trying to form a monopoly by using its political power (it hired David Plouffe, President Obama’s chief political adviser, as a lobbyist) to maintain an unsettled regulatory structure in the industry. While Uber is prepared to act in defiance of existing regulations, and then use its power to prevent legal sanctions, smaller competitors are likely to be less comfortable operating in defiance of the law. While a clear set of regulations would help to level the playing field, Uber is working hard to prevent modernized regulations from coming into effect.
This is exactly the sort of situation that leads to concentration of wealth (Uber’s stock now has a market value of $68 billion), without generating efficiency gains for the economy. It is a good illustration of the problem noted in Porter’s column.
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That’s what folks must have been wondering after reading this Bloomberg piece singing the praises of Antonio Weiss’s work on restructuring Puerto Rico’s debt. The piece told readers:
“Weiss, 49, a former Lazard Ltd. investment banker who spent almost two decades on Wall Street, became a champion for the island’s cause — a debt crisis with a human toll.”
A debt crisis having a human toll, imagine that.
That’s what folks must have been wondering after reading this Bloomberg piece singing the praises of Antonio Weiss’s work on restructuring Puerto Rico’s debt. The piece told readers:
“Weiss, 49, a former Lazard Ltd. investment banker who spent almost two decades on Wall Street, became a champion for the island’s cause — a debt crisis with a human toll.”
A debt crisis having a human toll, imagine that.
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The media often feel the need to be balanced in its coverage of Republicans and Democrats even when the evidence doesn’t lend itself to much balance. We got a strange example of such an effort at balance in a NYT article reporting on a piece on the Affordable Care Act by President Obama that ran in the Journal of the American Medical Association. According to the NYT piece, Obama said that he would like to see larger subsidies for the health insurance policies in the exchanges, that he would like people to be able to buy into a public plan like Medicare, and he would like to rein in the drug companies.
After laying out the changes that President Obama would like to see in the Affordable Care Act the piece tells readers:
“Mr. Obama accused Republicans of ‘hyperpartisanship’ without saying what he might have done differently.”
This assertion makes no sense since the whole article is describing an agenda that President Obama would like to see, if not for the obstruction of Republicans. In other words, Obama was very specific about what he might have done differently, at least according to the article.
The media often feel the need to be balanced in its coverage of Republicans and Democrats even when the evidence doesn’t lend itself to much balance. We got a strange example of such an effort at balance in a NYT article reporting on a piece on the Affordable Care Act by President Obama that ran in the Journal of the American Medical Association. According to the NYT piece, Obama said that he would like to see larger subsidies for the health insurance policies in the exchanges, that he would like people to be able to buy into a public plan like Medicare, and he would like to rein in the drug companies.
After laying out the changes that President Obama would like to see in the Affordable Care Act the piece tells readers:
“Mr. Obama accused Republicans of ‘hyperpartisanship’ without saying what he might have done differently.”
This assertion makes no sense since the whole article is describing an agenda that President Obama would like to see, if not for the obstruction of Republicans. In other words, Obama was very specific about what he might have done differently, at least according to the article.
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It speaks to the truly bizarre nature of political reporting that a person who calls for eliminating most areas of the federal government in the next three decades (exceptions are Social Security, Medicare and Medicaid, and the Defense Department) is viewed as a thoughtful moderate, but that is how the NYT and the rest of the media treat House Speaker Paul Ryan. Somehow, we are supposed to ignore the fact that Speaker Ryan has repeatedly proposed budgets that would eliminate federal funding for education, infrastructure, the Justice Department, the National Institutes of Health and just about every other area of federal spending.
The NYT is worried that the rise of Donald Trump and the conservatives in the House will prevent him from continuing his serious discussions of budget issues. Or at least that is what they claim to be worried about.
It speaks to the truly bizarre nature of political reporting that a person who calls for eliminating most areas of the federal government in the next three decades (exceptions are Social Security, Medicare and Medicaid, and the Defense Department) is viewed as a thoughtful moderate, but that is how the NYT and the rest of the media treat House Speaker Paul Ryan. Somehow, we are supposed to ignore the fact that Speaker Ryan has repeatedly proposed budgets that would eliminate federal funding for education, infrastructure, the Justice Department, the National Institutes of Health and just about every other area of federal spending.
The NYT is worried that the rise of Donald Trump and the conservatives in the House will prevent him from continuing his serious discussions of budget issues. Or at least that is what they claim to be worried about.
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No, I’m not engaging in name calling, this is based on Barton Swaim’s self-description of his abilities in his Washington Post column on the United States being in decline. Swaim, a contributing columnist to the Washington Post complained to readers that the United States is becoming a European-style regulatory state, then added:
“…neither the country’s political class nor its voters seem to care that the national debt has reached literally incomprehensible levels…”
In fact, the numerate among us have little difficulty comprehending the level of debt. If we look at the publicly held debt, it’s a bit more than 75 percent of GDP. If we include the debt held by Social Security and other government trust funds it is a bit more than 100 percent of GDP.
Of greater relevance than these debt to GDP figures is the interest burden associated with the debt. Currently this is around 0.8 percent of GDP, after we net out the money rebated from the Fed. This compares to an interest burden of over 3.0 percent of GDP in the early 1990s.
This article referring to the debt by someone who claims that he finds it “literally incomprehensible,” follows by a day a NYT column by Steven Rattner who told readers that he found Social Security and Medicare’s projected shortfalls “terrifying.”
It might be helpful if these papers could insist that the people who write on the debt and deficit have some understanding of the issues, as opposed to people who by their own admission find the topics “literally incomprehensible” or “terrifying.” If Swaim had a better understanding of the debt he might have even re-evaluated his thesis that the United States is in decline.
I should add that the United States today has a much larger implicit liability, relative to the size of the economy, in the form of patent and copyright liabilities than would have been the case in prior decades. These are commitments that the government has made of the public’s money to the holders of these property claims in order to compensate them for innovative and creative work. Unfortunately, there is no record of the size of these commitments in the government’s accounts.
No, I’m not engaging in name calling, this is based on Barton Swaim’s self-description of his abilities in his Washington Post column on the United States being in decline. Swaim, a contributing columnist to the Washington Post complained to readers that the United States is becoming a European-style regulatory state, then added:
“…neither the country’s political class nor its voters seem to care that the national debt has reached literally incomprehensible levels…”
In fact, the numerate among us have little difficulty comprehending the level of debt. If we look at the publicly held debt, it’s a bit more than 75 percent of GDP. If we include the debt held by Social Security and other government trust funds it is a bit more than 100 percent of GDP.
Of greater relevance than these debt to GDP figures is the interest burden associated with the debt. Currently this is around 0.8 percent of GDP, after we net out the money rebated from the Fed. This compares to an interest burden of over 3.0 percent of GDP in the early 1990s.
This article referring to the debt by someone who claims that he finds it “literally incomprehensible,” follows by a day a NYT column by Steven Rattner who told readers that he found Social Security and Medicare’s projected shortfalls “terrifying.”
It might be helpful if these papers could insist that the people who write on the debt and deficit have some understanding of the issues, as opposed to people who by their own admission find the topics “literally incomprehensible” or “terrifying.” If Swaim had a better understanding of the debt he might have even re-evaluated his thesis that the United States is in decline.
I should add that the United States today has a much larger implicit liability, relative to the size of the economy, in the form of patent and copyright liabilities than would have been the case in prior decades. These are commitments that the government has made of the public’s money to the holders of these property claims in order to compensate them for innovative and creative work. Unfortunately, there is no record of the size of these commitments in the government’s accounts.
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