I know that no one reads the Washington Post’s opinion pages for their insights on economic issues, but can’t we hope for at least some connection with reality. In his column today warning that productivity growth is likely to be weak forever more, George Will told readers:
“America’s entitlement state is buckling beneath the pressure of an aging population retiring into Social Security and Medicare during chronically slow economic growth.”
The entitlement state is “buckling.” If we tried to make sense of this assertion it presumably means that excessive spending on these programs is leading to high interest rates and/or high inflation. The problem is that we are creating more demand than the economy is able to supply. The only problem with this analysis is that long-term interest rates remain near post-World War II lows and inflation remains well below even the Fed’s unnecessarily low 2.0 percent target.
The only evidence the entitlement state is “buckling” from these programs seems to be the complaints from the folks at the Post and other Very Serious People. This does not appear to be a problem that exists in the real world.
On the more general claim about future productivity growth, which Will takes from Robert Gordon, it is worth recounting the past record of Gordon and other economists. There were three major shifts in productivity trends in the post-war era. There was a sharp slowdown in 1973, an upturn in 1995, and then a slowdown again beginning somewhere between 2005 and 2007.
No one saw the 1973 slowdown coming. More than forty years later there is no agreed upon explanation as to its cause. There were very few economists who saw the 1995 pick-up coming, although it is generally accepted that the information technology boom was its cause. Almost no one saw the slowdown coming in 2005-2007, and there is no agreement as to its cause.
Given the past record of economists (including Robert Gordon) in projecting the future path of productivity growth, we might be skeptical about a book that projects slow productivity growth for the indefinite future.
I know that no one reads the Washington Post’s opinion pages for their insights on economic issues, but can’t we hope for at least some connection with reality. In his column today warning that productivity growth is likely to be weak forever more, George Will told readers:
“America’s entitlement state is buckling beneath the pressure of an aging population retiring into Social Security and Medicare during chronically slow economic growth.”
The entitlement state is “buckling.” If we tried to make sense of this assertion it presumably means that excessive spending on these programs is leading to high interest rates and/or high inflation. The problem is that we are creating more demand than the economy is able to supply. The only problem with this analysis is that long-term interest rates remain near post-World War II lows and inflation remains well below even the Fed’s unnecessarily low 2.0 percent target.
The only evidence the entitlement state is “buckling” from these programs seems to be the complaints from the folks at the Post and other Very Serious People. This does not appear to be a problem that exists in the real world.
On the more general claim about future productivity growth, which Will takes from Robert Gordon, it is worth recounting the past record of Gordon and other economists. There were three major shifts in productivity trends in the post-war era. There was a sharp slowdown in 1973, an upturn in 1995, and then a slowdown again beginning somewhere between 2005 and 2007.
No one saw the 1973 slowdown coming. More than forty years later there is no agreed upon explanation as to its cause. There were very few economists who saw the 1995 pick-up coming, although it is generally accepted that the information technology boom was its cause. Almost no one saw the slowdown coming in 2005-2007, and there is no agreement as to its cause.
Given the past record of economists (including Robert Gordon) in projecting the future path of productivity growth, we might be skeptical about a book that projects slow productivity growth for the indefinite future.
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The wage share of GDP has recovered close to half of the ground lost in the downturn. Combining economy-wide wages and corporate profits, the wage share fell by 3.6 percentage points between 2007 and 2012. The data for 2015 show that the wage share has increased by 1.6 percentage points since its trough in 2012. This indicates that a tighter labor market is now allowing workers to achieve some gains at the expense of corporate profits.
This means a huge amount for Federal Reserve Board policy going forward. If the Fed raises interest rates to slow growth and job creation, it can prevent workers from recovering the ground they lost in the downturn.
It is striking that only one presidential candidate, Senator Bernie Sanders, has raised this issue. The others have for some reason chosen not to discuss the Federal Reserve Board and its impact on workers’ living standards. (Senator Ted Cruz has discussed the Fed, but said that he wants to bring the gold standard. This would prevent the Fed from taking any steps to boost the economy in a downturn.)
The wage share of GDP has recovered close to half of the ground lost in the downturn. Combining economy-wide wages and corporate profits, the wage share fell by 3.6 percentage points between 2007 and 2012. The data for 2015 show that the wage share has increased by 1.6 percentage points since its trough in 2012. This indicates that a tighter labor market is now allowing workers to achieve some gains at the expense of corporate profits.
This means a huge amount for Federal Reserve Board policy going forward. If the Fed raises interest rates to slow growth and job creation, it can prevent workers from recovering the ground they lost in the downturn.
It is striking that only one presidential candidate, Senator Bernie Sanders, has raised this issue. The others have for some reason chosen not to discuss the Federal Reserve Board and its impact on workers’ living standards. (Senator Ted Cruz has discussed the Fed, but said that he wants to bring the gold standard. This would prevent the Fed from taking any steps to boost the economy in a downturn.)
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Seriously, that is what they said, more or less. An AP news article on the latest revision to fourth quarter GDP data told readers:
“Friday’s report also contained a potentially worrisome sign — a weak first estimate of corporate profits. It showed that pretax profits fell 7.8 percent in the fourth quarter after a 1.6 percent drop in the third quarter. Fourth quarter profits were also down 11.5 percent from a year earlier — the steepest annual drop since 30.8 percent plunge in the fourth quarter of 2008 at the depths of the financial crisis.”
It is not clear what about this drop in corporate profits is supposed to be worrisome. Corporate profits had risen at the expense of wages during the downturn. The profit share of national income is still well above its pre-recession level. Companies continue to have more profit than they know what to do with, since investment is still slightly below its pre-recession share of GDP, so there is not a plausible story that companies will somehow have to curtail investment due to shrinking profits. So why is AP worried that workers are getting back some of the income share they lost during the downturn.
As the piece notes, consumption was revised upward. The saving rate was reported as 5.0 percent in the fourth quarter, not much different from the 4.8 percent rate recorded in 2013, the low for recovery. The Post and other media outlets gave extensive coverage to economists explaining why consumers were being cautious and not spending their dividend from falling energy prices. The data now indicate that they were not being cautious, that they were pretty much spending it at the same rate as other income. (Well, at least it kept some economists employed.)
Seriously, that is what they said, more or less. An AP news article on the latest revision to fourth quarter GDP data told readers:
“Friday’s report also contained a potentially worrisome sign — a weak first estimate of corporate profits. It showed that pretax profits fell 7.8 percent in the fourth quarter after a 1.6 percent drop in the third quarter. Fourth quarter profits were also down 11.5 percent from a year earlier — the steepest annual drop since 30.8 percent plunge in the fourth quarter of 2008 at the depths of the financial crisis.”
It is not clear what about this drop in corporate profits is supposed to be worrisome. Corporate profits had risen at the expense of wages during the downturn. The profit share of national income is still well above its pre-recession level. Companies continue to have more profit than they know what to do with, since investment is still slightly below its pre-recession share of GDP, so there is not a plausible story that companies will somehow have to curtail investment due to shrinking profits. So why is AP worried that workers are getting back some of the income share they lost during the downturn.
As the piece notes, consumption was revised upward. The saving rate was reported as 5.0 percent in the fourth quarter, not much different from the 4.8 percent rate recorded in 2013, the low for recovery. The Post and other media outlets gave extensive coverage to economists explaining why consumers were being cautious and not spending their dividend from falling energy prices. The data now indicate that they were not being cautious, that they were pretty much spending it at the same rate as other income. (Well, at least it kept some economists employed.)
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Is there an editor at the NYT who insists that reporters arbitrarily throw in unneeded and inaccurate adjectives to make their articles longer? An article on President Obama’s trip to Argentina twice referred to the Free Trade Area of the Americas as a “free-trade” agreement. Most of the deal was about putting in place a common regulatory structure, not trade. It also increased some forms of protectionism in the forms of stronger and longer patents and copyright protection. The piece could have been shorter and more accurate if it had left out the word “free.”
Is there an editor at the NYT who insists that reporters arbitrarily throw in unneeded and inaccurate adjectives to make their articles longer? An article on President Obama’s trip to Argentina twice referred to the Free Trade Area of the Americas as a “free-trade” agreement. Most of the deal was about putting in place a common regulatory structure, not trade. It also increased some forms of protectionism in the forms of stronger and longer patents and copyright protection. The piece could have been shorter and more accurate if it had left out the word “free.”
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That’s what readers would learn from reading this NYT piece on a Chinese scientist living in exile in Wisconsin, Yi Fuxian, who has been a critic of China’s family planning policies. According to the piece, Dr. Yi has warned that China will see a rapid decline in population which will prevent its economy from ever surpassing the United States.
It is not clear what metric Dr. Yi would be using. Presumably he means in GDP, but he is then too late for his warning. According to the I.M.F., China’s economy is already more than 10 percent larger than the U.S. economy using a purchasing power parity measure of GDP (15 percent including Hong Kong). According to its projections, China’s economy will be more than 30 percent larger by the end of the decade.
While the media like to hype the impact of rising ratios of retirees to workers as somehow devastating to the economy, arithmetic fans know that the impact of demographics is swamped by the impact of productivity growth. If this sounds complicated, 150 years ago more than half of the U.S. population was working in agriculture. Today less than one percent of the workforce is in agriculture, yet we have plenty of food. It makes sense to promote concerns about demographics if the goal is to cut back benefits for seniors, but not if the intention is to discuss economic reality.
That’s what readers would learn from reading this NYT piece on a Chinese scientist living in exile in Wisconsin, Yi Fuxian, who has been a critic of China’s family planning policies. According to the piece, Dr. Yi has warned that China will see a rapid decline in population which will prevent its economy from ever surpassing the United States.
It is not clear what metric Dr. Yi would be using. Presumably he means in GDP, but he is then too late for his warning. According to the I.M.F., China’s economy is already more than 10 percent larger than the U.S. economy using a purchasing power parity measure of GDP (15 percent including Hong Kong). According to its projections, China’s economy will be more than 30 percent larger by the end of the decade.
While the media like to hype the impact of rising ratios of retirees to workers as somehow devastating to the economy, arithmetic fans know that the impact of demographics is swamped by the impact of productivity growth. If this sounds complicated, 150 years ago more than half of the U.S. population was working in agriculture. Today less than one percent of the workforce is in agriculture, yet we have plenty of food. It makes sense to promote concerns about demographics if the goal is to cut back benefits for seniors, but not if the intention is to discuss economic reality.
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Arthur Brooks, the President of the American Enterprise Institute and a regular New York Times columnist told readers that he doesn’t have access to the Internet. This admission came in the context of a published exchange with Gail Collins, another New York Times columnist.
This fact was revealed in the context of a discussion of the Republican presidential candidates’ proposals to have large tax cuts and then make up the lost revenue from waste, fraud, and abuse. Brooks acknowledged this was ridiculous, but then commented:
“The cognitive dissonance isn’t just on the Republican side, however. Sanders proposes showering cash out of helicopters, and as far as I can tell, he is really only proposing higher taxes on the much-regretted billionaires. The truth is that middle-class taxes would have to rise under his spending scenarios.”
Actually, if Brooks had access to the Internet he would have been able to discover that Senator Sanders has actually proposed very specific tax increases on the non-billionaire population. He has proposed an increase in the payroll tax to finance his proposal for paid family leave and he also proposed an increase in the payroll tax to pay for his universal Medicare plan.
Sanders does propose to have the bulk of the revenue for his agenda come from taxing the wealthy, but he is quite explicit on this point. The wealthy have been the big gainers from economic growth over the last 35 years, so it doesn’t seem absurd on its face to envision that they should bear the bulk of the burden from any need for increased revenue.
Since this conversation expressed a concern with unrealistic proposals from the presidential candidates it is surprising that no one mentioned the Federal Reserve Board. Several candidates have suggested that they would have substantially more rapid growth and job creation. The Fed has made it quite clear that it does not want to see more rapid job creation. They have expressed concern that if the unemployment rate fell substantially below current levels that it would lead to an inflationary spiral. In order to ensure that such a spiral does not develop most members of the Federal Reserve Board’s Open Market Committee (FOMC) have indicated a willingness to raise interest rates to keep the unemployment rate from falling.
Given the views of FOMC members, any candidate who indicates a desire to substantially lower the unemployment rate without addressing the Fed’s plans is engaged in magical thinking. (Senator Sanders has criticized the Fed’s plans to raise interest rates.) For some reason no one in the media has chosen to write about this obvious inconsistency in the plans of the presidential candidates.
Thanks to Robert Salzberg for calling this to my attention.
Arthur Brooks, the President of the American Enterprise Institute and a regular New York Times columnist told readers that he doesn’t have access to the Internet. This admission came in the context of a published exchange with Gail Collins, another New York Times columnist.
This fact was revealed in the context of a discussion of the Republican presidential candidates’ proposals to have large tax cuts and then make up the lost revenue from waste, fraud, and abuse. Brooks acknowledged this was ridiculous, but then commented:
“The cognitive dissonance isn’t just on the Republican side, however. Sanders proposes showering cash out of helicopters, and as far as I can tell, he is really only proposing higher taxes on the much-regretted billionaires. The truth is that middle-class taxes would have to rise under his spending scenarios.”
Actually, if Brooks had access to the Internet he would have been able to discover that Senator Sanders has actually proposed very specific tax increases on the non-billionaire population. He has proposed an increase in the payroll tax to finance his proposal for paid family leave and he also proposed an increase in the payroll tax to pay for his universal Medicare plan.
Sanders does propose to have the bulk of the revenue for his agenda come from taxing the wealthy, but he is quite explicit on this point. The wealthy have been the big gainers from economic growth over the last 35 years, so it doesn’t seem absurd on its face to envision that they should bear the bulk of the burden from any need for increased revenue.
Since this conversation expressed a concern with unrealistic proposals from the presidential candidates it is surprising that no one mentioned the Federal Reserve Board. Several candidates have suggested that they would have substantially more rapid growth and job creation. The Fed has made it quite clear that it does not want to see more rapid job creation. They have expressed concern that if the unemployment rate fell substantially below current levels that it would lead to an inflationary spiral. In order to ensure that such a spiral does not develop most members of the Federal Reserve Board’s Open Market Committee (FOMC) have indicated a willingness to raise interest rates to keep the unemployment rate from falling.
Given the views of FOMC members, any candidate who indicates a desire to substantially lower the unemployment rate without addressing the Fed’s plans is engaged in magical thinking. (Senator Sanders has criticized the Fed’s plans to raise interest rates.) For some reason no one in the media has chosen to write about this obvious inconsistency in the plans of the presidential candidates.
Thanks to Robert Salzberg for calling this to my attention.
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