By Cherrie Bucknor and Dean Baker
Those of us unhappy with the Fed rate hike this month frequently point to the sharp drop in employment rates (EPOP) compared with the pre-recession level. The overall employment rate (the percentage of the adult population with jobs) is still down by more than 3.0 percentage points from pre-recession peaks. Even if the unemployment rate is not far above the pre-recession level, there remains a very large gap in the percent of the population that is working. This doesn’t show up in the unemployment rate because many people have dropped out of the labor force and are not looking for work, and therefore are not counted as unemployed.
One response is that because of the aging of the population many baby boomers are now retired and have no interest in working. A way to get around this issue is to restrict the comparison to the prime age population, people between the ages of 25–54. These people are not likely to be retired. This gives us pretty much the same story: the EPOP for prime age workers was down by 2.9 percentage points in November compared with its peak pre-recession level.
The next argument is that we have many prime age workers who have dropped out because they don’t have the skills needed to find work in today’s economy. This one might seem peculiar because these workers apparently did have the skills back in 2007 and the economy has not changed that much in the last eight years. But we can also test this one fairly easily.
If the drop in labor force participation was explained by less-skilled workers leaving the labor force then we should see most of the drop in employment rate among less-educated workers, with little or no change in employment rates for more educated workers. That is not what the data show.
Source: Authors’ analysis of Current Population Survey.
As can be seen, the overall EPOP is lower than the EPOP for people with college or advanced degrees. It has also dropped the most, falling by 3.3 percentage points from its 2007 level and 4.8 percentage points from its 2000 level. But the EPOP for prime age workers with college degrees has also fallen sharply, dropping by 1.7 percentage points from its 2007 level and 2.7 percentage points from the 2000 level. Even people with advanced degrees have seen substantial drops in employment with a decline in their EPOP of 1.6 percentage points from 2007 and 2.9 percentage points from 2000.
What should we make of these drops in employment among the most highly educated workers? We could twist the skills argument and say that even though these people are highly educated, they got their degrees in the wrong areas. Or, we could just say that we have a serious shortfall in demand in the economy and that it is not showing up in the unemployment rate because so many people have given up looking for work.
Or, we could say that millions of prime age workers suddenly decided they would take a long vacation. A shortfall in demand seems more likely and the Fed’s rate hike does not help in this case.
By Cherrie Bucknor and Dean Baker
Those of us unhappy with the Fed rate hike this month frequently point to the sharp drop in employment rates (EPOP) compared with the pre-recession level. The overall employment rate (the percentage of the adult population with jobs) is still down by more than 3.0 percentage points from pre-recession peaks. Even if the unemployment rate is not far above the pre-recession level, there remains a very large gap in the percent of the population that is working. This doesn’t show up in the unemployment rate because many people have dropped out of the labor force and are not looking for work, and therefore are not counted as unemployed.
One response is that because of the aging of the population many baby boomers are now retired and have no interest in working. A way to get around this issue is to restrict the comparison to the prime age population, people between the ages of 25–54. These people are not likely to be retired. This gives us pretty much the same story: the EPOP for prime age workers was down by 2.9 percentage points in November compared with its peak pre-recession level.
The next argument is that we have many prime age workers who have dropped out because they don’t have the skills needed to find work in today’s economy. This one might seem peculiar because these workers apparently did have the skills back in 2007 and the economy has not changed that much in the last eight years. But we can also test this one fairly easily.
If the drop in labor force participation was explained by less-skilled workers leaving the labor force then we should see most of the drop in employment rate among less-educated workers, with little or no change in employment rates for more educated workers. That is not what the data show.
Source: Authors’ analysis of Current Population Survey.
As can be seen, the overall EPOP is lower than the EPOP for people with college or advanced degrees. It has also dropped the most, falling by 3.3 percentage points from its 2007 level and 4.8 percentage points from its 2000 level. But the EPOP for prime age workers with college degrees has also fallen sharply, dropping by 1.7 percentage points from its 2007 level and 2.7 percentage points from the 2000 level. Even people with advanced degrees have seen substantial drops in employment with a decline in their EPOP of 1.6 percentage points from 2007 and 2.9 percentage points from 2000.
What should we make of these drops in employment among the most highly educated workers? We could twist the skills argument and say that even though these people are highly educated, they got their degrees in the wrong areas. Or, we could just say that we have a serious shortfall in demand in the economy and that it is not showing up in the unemployment rate because so many people have given up looking for work.
Or, we could say that millions of prime age workers suddenly decided they would take a long vacation. A shortfall in demand seems more likely and the Fed’s rate hike does not help in this case.
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A NYT article on the uncertain politics in Spain following an election which left no obvious path to a majority government noted that the outcome was in large part a revolt against the austerity imposed on the country. There have been similar revolts in Greece and Portugal. The piece points out the popular discontent and tells readers:
“As the result in Greece showed, even anti-austerity parties have to answer to financial markets and balance national budgets, and the numbers are still deeply stacked against the policies of the old left and their heavy spending on welfare states.”
The countries of southern Europe actually had relatively less developed welfare states. The countries with heavy spending on welfare states are mostly in northern Europe. They have relatively small budget deficits and face extremely low interest rates in financial markets. The difference between these countries and the countries in southern Europe is that the latter collect less money in tax revenue.
It is also worth noting that, least in the case of Spain, the problems with deficits followed the crisis. Before 2008, the country was running budget surpluses and had a very low national debt.
It is also worth mentioning that it is not the financial markets that are constraining Spain and other southern European governments. The decision by Germany and other northern European countries to deliberately keep their rates of inflation very low is requiring the southern European countries to adjust trade imbalances through deflation and austerity.
If these countries still had their own currencies, they would simply allow the value to decline. Within a currency union, it would be expected that the surplus countries would share in the adjustment process by having moderately higher rates of inflation, but Germany and its followers have refused to accept this responsibility.
A NYT article on the uncertain politics in Spain following an election which left no obvious path to a majority government noted that the outcome was in large part a revolt against the austerity imposed on the country. There have been similar revolts in Greece and Portugal. The piece points out the popular discontent and tells readers:
“As the result in Greece showed, even anti-austerity parties have to answer to financial markets and balance national budgets, and the numbers are still deeply stacked against the policies of the old left and their heavy spending on welfare states.”
The countries of southern Europe actually had relatively less developed welfare states. The countries with heavy spending on welfare states are mostly in northern Europe. They have relatively small budget deficits and face extremely low interest rates in financial markets. The difference between these countries and the countries in southern Europe is that the latter collect less money in tax revenue.
It is also worth noting that, least in the case of Spain, the problems with deficits followed the crisis. Before 2008, the country was running budget surpluses and had a very low national debt.
It is also worth mentioning that it is not the financial markets that are constraining Spain and other southern European governments. The decision by Germany and other northern European countries to deliberately keep their rates of inflation very low is requiring the southern European countries to adjust trade imbalances through deflation and austerity.
If these countries still had their own currencies, they would simply allow the value to decline. Within a currency union, it would be expected that the surplus countries would share in the adjustment process by having moderately higher rates of inflation, but Germany and its followers have refused to accept this responsibility.
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This is what the NYT told readers in an article that reported Secretary Clinton wants to embrace her husband’s economic record as president. While the last four years of the Clinton presidency did have low unemployment and rising real wages for workers at the middle and bottom of the income distribution, these gains were driven by the demand generated by the stock bubble.
The bubble led to a surge of investment in high tech, as start-ups were using the money they could raise from issuing stock to finance their investment. (Generally companies first issue stock to allow the founders to cash out some of their profits.) The stock wealth generated by the bubble also led to a consumption boom as savings rate fell to what were at the time record lows.
While the bubble did produce a period of prosperity, its collapse was both inevitable and predictable. While the recession resulting from the crash is usually thought to have been short and mild, it actually led to what was at the time the longest period without job growth since the Great Depression. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, the economy was being propelled by the housing bubble.
Clintonomics set the economy on this path of bubble driven growth through its engineering of the bailout from the East Asian financial crisis. The result of the bailout was a huge run-up in the dollar against other currencies. Developing countries, which had been borrowing capital, switched to become huge lenders of capital as they tried to accumulate all the reserves they could to protect themselves from facing a similar situation as the East Asian countries.
The direct result of the run-up in the dollar was an explosion in size of the U.S. trade deficit, as the over-valued dollar made U.S. produced goods and services less competitive in the world economy. The trade deficit has led to a huge gap in demand (now around $500 billion annually) which can be filled only by large budget deficits or bubble-driven growth.
It is striking that Secretary Clinton would embrace policies that have led to so much pain for large segments of the American public. This could hurt her prospects in getting the nomination or winning the general election.
This is what the NYT told readers in an article that reported Secretary Clinton wants to embrace her husband’s economic record as president. While the last four years of the Clinton presidency did have low unemployment and rising real wages for workers at the middle and bottom of the income distribution, these gains were driven by the demand generated by the stock bubble.
The bubble led to a surge of investment in high tech, as start-ups were using the money they could raise from issuing stock to finance their investment. (Generally companies first issue stock to allow the founders to cash out some of their profits.) The stock wealth generated by the bubble also led to a consumption boom as savings rate fell to what were at the time record lows.
While the bubble did produce a period of prosperity, its collapse was both inevitable and predictable. While the recession resulting from the crash is usually thought to have been short and mild, it actually led to what was at the time the longest period without job growth since the Great Depression. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, the economy was being propelled by the housing bubble.
Clintonomics set the economy on this path of bubble driven growth through its engineering of the bailout from the East Asian financial crisis. The result of the bailout was a huge run-up in the dollar against other currencies. Developing countries, which had been borrowing capital, switched to become huge lenders of capital as they tried to accumulate all the reserves they could to protect themselves from facing a similar situation as the East Asian countries.
The direct result of the run-up in the dollar was an explosion in size of the U.S. trade deficit, as the over-valued dollar made U.S. produced goods and services less competitive in the world economy. The trade deficit has led to a huge gap in demand (now around $500 billion annually) which can be filled only by large budget deficits or bubble-driven growth.
It is striking that Secretary Clinton would embrace policies that have led to so much pain for large segments of the American public. This could hurt her prospects in getting the nomination or winning the general election.
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It’s hardly a surprise to see a column in the Washington Post opinion pages calling for lower federal budget deficits. In spite of the continued weakness of the labor market and the economy, the Washington Post continues to push for less demand, growth, and employment.
Fred Hiatt did the job today by praising Rhode Island Governor Gina Raimondo for cutting public employee pensions, and contrasting these cuts with increased tax cuts and spending at the federal level. Hiatt’s complaint is that Congress agreed to extend tax cuts, which with interest are projected to cost $780 billion over the next decade. This comes to roughly 0.4 percent of GDP over this period.
In a context where the economy is likely to face a shortfall in demand, this addition to the deficit will lead to more growth and jobs, although its impact would be larger if more of the money were committed to items like education and infrastructure or the tax cuts went to lower or middle income people. Assuming a multiplier of 1, the addition to GDP would be approximately 0.4 percent of GDP, implying around 500,000 more jobs. (If the Fed is deliberately blocking growth by raising interest rates, then the tax cuts will not boost growth.)
It is also worth noting that Raimondo’s pension strategy in Rhode Island has meant a windfall for hedge funds, which are now collecting substantial fees from the state’s pension funds. While the Washington Post is generally happy to see cuts to ordinary workers’ pensions and Social Security, it consistently applauds actions, such as the TARP, which give public money to the financial sector.
It’s hardly a surprise to see a column in the Washington Post opinion pages calling for lower federal budget deficits. In spite of the continued weakness of the labor market and the economy, the Washington Post continues to push for less demand, growth, and employment.
Fred Hiatt did the job today by praising Rhode Island Governor Gina Raimondo for cutting public employee pensions, and contrasting these cuts with increased tax cuts and spending at the federal level. Hiatt’s complaint is that Congress agreed to extend tax cuts, which with interest are projected to cost $780 billion over the next decade. This comes to roughly 0.4 percent of GDP over this period.
In a context where the economy is likely to face a shortfall in demand, this addition to the deficit will lead to more growth and jobs, although its impact would be larger if more of the money were committed to items like education and infrastructure or the tax cuts went to lower or middle income people. Assuming a multiplier of 1, the addition to GDP would be approximately 0.4 percent of GDP, implying around 500,000 more jobs. (If the Fed is deliberately blocking growth by raising interest rates, then the tax cuts will not boost growth.)
It is also worth noting that Raimondo’s pension strategy in Rhode Island has meant a windfall for hedge funds, which are now collecting substantial fees from the state’s pension funds. While the Washington Post is generally happy to see cuts to ordinary workers’ pensions and Social Security, it consistently applauds actions, such as the TARP, which give public money to the financial sector.
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Brad posted a short note commenting on my paper on rents as the basis for upward redistribution in the last thirty five years. The paper outlines ways in which rents in various areas can explain this upward redistribution, as opposed to the sort of argument advanced by Thomas Piketty that it is some natural process that is inherent to capitalism.
Brad suggested that Piketty would respond by saying that the beneficiaries of this upward redistribution are behind the mechanisms (e.g. stronger and longer patent protection and a bloated financial sector) that have led to this upward redistribution. I agree that this is likely Piketty’s response, but I would raise two points.
First, do we believe that all of these mechanisms were somehow preordained? Was it inevitable that we would have TRIPS, extending and strengthening patent and copyright protection throughout the world? Was there no way to avoid the financial deregulation that gave us too big to fail banks and an explosion of short-term trading and proliferation of new financial instruments? We can look back and know who won these battles, but surely it was possible that some or most of them could have gone the other way.
The other point is how we envision political battles going forward. We know the rich will fight any policy that jeopardizes their wealth and power, but let’s consider two scenarios. On the one hand, we have policies that give shareholders more power to contain CEO pay and proposals to publicly fund clinical trials so that new drugs can be put on the market at generic prices. On the other hand we have a proposal for a global tax on wealth. Which direction has better prospects?
Addendum
Joe Seydl raises a good question in his comment, asking: “who are the selfless activists who are supposed to continuously keep competiton fair?”
The answer is that I am not expecting anyone to be a selfless activist. I am expecting people to act in their own interest. The pharmaceutical companies rip people off by getting longer and stronger patent protection. Doctors rip people off by creating protectionists barriers that restrict supply. The financial industry rips people off on the fees they charge to manage pensions, IRAs, and 401(k)s, and CEOs rip off shareholders by paying themselves exorbitant salaries.
This is not a story that requires selfless activists, but there is a collective action problem. For example, people paying more money for their health care due to high doctors’ pay have to act to remove the protections that get them high pay. The shareholders being ripped off by CEOs have to act to check CEO pay.
Collective action problems are difficult, but the other side has managed to overcome them. They have been able to reduce or eliminate trade barriers that allowed U.S. manufacturing workers to enjoy relatively high wages. The same story applies to the reduction or elimination of agricultural subsidies that have supported small farmers.
The problem for progressives is figuring out how to mobilize people who have a direct stake in leading the efforts to rein in abuses. In the case of the drug companies, the insurance industry would be an obvious suspect. In the case of doctors, nurses and other health care professionals who could do many of the tasks that doctors try to preserve for themselves, would be an obvious group. Also foreign educated physicians who are excluded from the U.S. could make an appeal to all the “free traders” who consider any protectionist barrier a crime against humanity if the beneficiary is a less-educated workers. (Yes, these people are pathetic hypocrites.)
Anyhow, the point of the rent argument is that there is money on the table. We just have to get people to notice the money so that they will take it.
Brad posted a short note commenting on my paper on rents as the basis for upward redistribution in the last thirty five years. The paper outlines ways in which rents in various areas can explain this upward redistribution, as opposed to the sort of argument advanced by Thomas Piketty that it is some natural process that is inherent to capitalism.
Brad suggested that Piketty would respond by saying that the beneficiaries of this upward redistribution are behind the mechanisms (e.g. stronger and longer patent protection and a bloated financial sector) that have led to this upward redistribution. I agree that this is likely Piketty’s response, but I would raise two points.
First, do we believe that all of these mechanisms were somehow preordained? Was it inevitable that we would have TRIPS, extending and strengthening patent and copyright protection throughout the world? Was there no way to avoid the financial deregulation that gave us too big to fail banks and an explosion of short-term trading and proliferation of new financial instruments? We can look back and know who won these battles, but surely it was possible that some or most of them could have gone the other way.
The other point is how we envision political battles going forward. We know the rich will fight any policy that jeopardizes their wealth and power, but let’s consider two scenarios. On the one hand, we have policies that give shareholders more power to contain CEO pay and proposals to publicly fund clinical trials so that new drugs can be put on the market at generic prices. On the other hand we have a proposal for a global tax on wealth. Which direction has better prospects?
Addendum
Joe Seydl raises a good question in his comment, asking: “who are the selfless activists who are supposed to continuously keep competiton fair?”
The answer is that I am not expecting anyone to be a selfless activist. I am expecting people to act in their own interest. The pharmaceutical companies rip people off by getting longer and stronger patent protection. Doctors rip people off by creating protectionists barriers that restrict supply. The financial industry rips people off on the fees they charge to manage pensions, IRAs, and 401(k)s, and CEOs rip off shareholders by paying themselves exorbitant salaries.
This is not a story that requires selfless activists, but there is a collective action problem. For example, people paying more money for their health care due to high doctors’ pay have to act to remove the protections that get them high pay. The shareholders being ripped off by CEOs have to act to check CEO pay.
Collective action problems are difficult, but the other side has managed to overcome them. They have been able to reduce or eliminate trade barriers that allowed U.S. manufacturing workers to enjoy relatively high wages. The same story applies to the reduction or elimination of agricultural subsidies that have supported small farmers.
The problem for progressives is figuring out how to mobilize people who have a direct stake in leading the efforts to rein in abuses. In the case of the drug companies, the insurance industry would be an obvious suspect. In the case of doctors, nurses and other health care professionals who could do many of the tasks that doctors try to preserve for themselves, would be an obvious group. Also foreign educated physicians who are excluded from the U.S. could make an appeal to all the “free traders” who consider any protectionist barrier a crime against humanity if the beneficiary is a less-educated workers. (Yes, these people are pathetic hypocrites.)
Anyhow, the point of the rent argument is that there is money on the table. We just have to get people to notice the money so that they will take it.
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In its usual bipartisan way the Post took even-handed swipes at Republican Representative Jeb Hensarling and Bernie Sanders, a senator and candidate for the Democratic presidential nomination, over their criticisms of the Federal Reserve Board. Never mind that Hensarling’s criticisms were over the Fed’s failure to raise interest rates to prevent hyper-inflation over the last five years, while Sanders’ criticism was over the fact that the Fed’s recent rate hike will slow growth and the rate of job creation. In Washington post bi-partisan land, both are equally damnable offenses.
But what is even more striking is the Post’s ability to treat the Fed as a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed’s 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates.
It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many bank presidents with voting seats on the Fed’s Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.
Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country’s monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.
In its usual bipartisan way the Post took even-handed swipes at Republican Representative Jeb Hensarling and Bernie Sanders, a senator and candidate for the Democratic presidential nomination, over their criticisms of the Federal Reserve Board. Never mind that Hensarling’s criticisms were over the Fed’s failure to raise interest rates to prevent hyper-inflation over the last five years, while Sanders’ criticism was over the fact that the Fed’s recent rate hike will slow growth and the rate of job creation. In Washington post bi-partisan land, both are equally damnable offenses.
But what is even more striking is the Post’s ability to treat the Fed as a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed’s 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates.
It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many bank presidents with voting seats on the Fed’s Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.
Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country’s monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.
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The NYT reported on the reaction in financial markets to the Federal Reserve Board’s decision to raise interest rates on Wednesday. The piece notes the generally calm reaction, but also indicates there continue to be some concern about asset bubbles. It comments:
“Regulators have pointed to a number of worrisome signs in recent weeks. A federal agency said on Tuesday that credit risks were ‘elevated and rising’ for American corporations and many foreign borrowers, even as investors are demanding significantly higher interest rates on junk bonds and foreign debt. The report, by the Office of Financial Research, however, said overall risks to stability remained ‘moderate.'”
It is worth distinguishing the possible bubble in junk bonds and foreign debt from the stock and housing bubbles whose collapse brought on the last two recessions. Both the stock and housing bubbles were driving the economy. They directly generated large amounts of demand through investment spending in the case of the stock bubble and residential construction spending in the case of the housing bubble. Both bubbles also led to consumption booms, as households increased spending based on the ephemeral wealth generated by these bubbles. For this reason, it was 100 percent predictable that the collapse of the bubbles would lead to recessions.
The current bubbles in junk bonds and foreign debt are not in any way driving the economy. Presumably we are seeing somewhat more investment as a result of the fact that uncreditworthy companies were able to borrow at a low cost, but there is no notable boom in such investment. Similarly, if foreign borrowers have a harder time getting access to credit, it may be bad news for them, but the impact on the U.S. economy will be limited.
If some banks or other financial institutions have over committed themselves in these areas, the plunge in prices may threaten their survival. This could lead to some late nights for folks at the Fed and other regulators, but it will not pose a major risk to the economy.
The NYT reported on the reaction in financial markets to the Federal Reserve Board’s decision to raise interest rates on Wednesday. The piece notes the generally calm reaction, but also indicates there continue to be some concern about asset bubbles. It comments:
“Regulators have pointed to a number of worrisome signs in recent weeks. A federal agency said on Tuesday that credit risks were ‘elevated and rising’ for American corporations and many foreign borrowers, even as investors are demanding significantly higher interest rates on junk bonds and foreign debt. The report, by the Office of Financial Research, however, said overall risks to stability remained ‘moderate.'”
It is worth distinguishing the possible bubble in junk bonds and foreign debt from the stock and housing bubbles whose collapse brought on the last two recessions. Both the stock and housing bubbles were driving the economy. They directly generated large amounts of demand through investment spending in the case of the stock bubble and residential construction spending in the case of the housing bubble. Both bubbles also led to consumption booms, as households increased spending based on the ephemeral wealth generated by these bubbles. For this reason, it was 100 percent predictable that the collapse of the bubbles would lead to recessions.
The current bubbles in junk bonds and foreign debt are not in any way driving the economy. Presumably we are seeing somewhat more investment as a result of the fact that uncreditworthy companies were able to borrow at a low cost, but there is no notable boom in such investment. Similarly, if foreign borrowers have a harder time getting access to credit, it may be bad news for them, but the impact on the U.S. economy will be limited.
If some banks or other financial institutions have over committed themselves in these areas, the plunge in prices may threaten their survival. This could lead to some late nights for folks at the Fed and other regulators, but it will not pose a major risk to the economy.
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In an article on the Federal Reserve Board’s decision to raise interest rates, the Washington Post referred to the 2.4 percent median growth forecast of the Fed’s Open Market Committee. It might have worth mentioning that the Fed’s forecasts have consistently been higher than actual growth. For example, last December their median forecast for growth in 2015 was 2.8 percent. It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be near the middle of major forecasts, forecast 2.9 percent growth for 2015.
In an article on the Federal Reserve Board’s decision to raise interest rates, the Washington Post referred to the 2.4 percent median growth forecast of the Fed’s Open Market Committee. It might have worth mentioning that the Fed’s forecasts have consistently been higher than actual growth. For example, last December their median forecast for growth in 2015 was 2.8 percent. It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be near the middle of major forecasts, forecast 2.9 percent growth for 2015.
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Most people realize that politicians don’t always give the true explanation for their actions. For example, few politicians are likely to say that they vote against gun control measures because the NRA is a powerful lobby that could derail their political career, even if this is the real reason for their vote. They are more likely to claim they vote against gun control measures because of their belief in the rights of gun owners.
While most people may recognize this fact, apparently the folks at the NYT do not. In an article on the new budget deal it noted that several Democrats had joined with Republicans in suspending the Affordable Care Act’s (ACA) tax on medical devices through 2017. The piece told readers:
“Republicans said the device tax discouraged the development and sales of innovative, lifesaving medical technology. Some Democrats from states with thriving medical technology companies agreed.”
Of course the NYT does not know that the Democrats who voted to suspend the tax agreed with the claim that it would discourage the development of new technologies. They may have just voted against the tax because the companies in their states and districts are powerful lobbies.
The economics of the medical device industry are similar to the economics of the prescription drug industry. Companies have large research costs, but then are able to sell devices for a markup of several hundred or several thousand percent above their marginal cost. By giving more people access to health care, the ACA was increasing the demand for medical devices and therefore increasing the number of devices that could be sold at high markups, creating a windfall for the industry. The purpose of the tax was to take back some of this windfall.
Opponents of the tax may actually disagree with this logic. Alternatively, they may just be doing the bidding of a politically powerful industry. It is worth noting that the Obama administration did not propose a similar tax on pharmaceuticals, even though the logic would be identical. The pharmaceutical industry is of course even bigger and more powerful than the medical device industry.
On the topic of the article itself, we are told in the first sentence:
“Republican and Democratic negotiators in the House clinched a deal late Tuesday on a $1.1 trillion spending bill and a huge package of tax breaks.”
A denominator would be helpful here. Most of the package covers the next two years, a period in which the government is projected to spend a bit less than $8 trillion.
Most people realize that politicians don’t always give the true explanation for their actions. For example, few politicians are likely to say that they vote against gun control measures because the NRA is a powerful lobby that could derail their political career, even if this is the real reason for their vote. They are more likely to claim they vote against gun control measures because of their belief in the rights of gun owners.
While most people may recognize this fact, apparently the folks at the NYT do not. In an article on the new budget deal it noted that several Democrats had joined with Republicans in suspending the Affordable Care Act’s (ACA) tax on medical devices through 2017. The piece told readers:
“Republicans said the device tax discouraged the development and sales of innovative, lifesaving medical technology. Some Democrats from states with thriving medical technology companies agreed.”
Of course the NYT does not know that the Democrats who voted to suspend the tax agreed with the claim that it would discourage the development of new technologies. They may have just voted against the tax because the companies in their states and districts are powerful lobbies.
The economics of the medical device industry are similar to the economics of the prescription drug industry. Companies have large research costs, but then are able to sell devices for a markup of several hundred or several thousand percent above their marginal cost. By giving more people access to health care, the ACA was increasing the demand for medical devices and therefore increasing the number of devices that could be sold at high markups, creating a windfall for the industry. The purpose of the tax was to take back some of this windfall.
Opponents of the tax may actually disagree with this logic. Alternatively, they may just be doing the bidding of a politically powerful industry. It is worth noting that the Obama administration did not propose a similar tax on pharmaceuticals, even though the logic would be identical. The pharmaceutical industry is of course even bigger and more powerful than the medical device industry.
On the topic of the article itself, we are told in the first sentence:
“Republican and Democratic negotiators in the House clinched a deal late Tuesday on a $1.1 trillion spending bill and a huge package of tax breaks.”
A denominator would be helpful here. Most of the package covers the next two years, a period in which the government is projected to spend a bit less than $8 trillion.
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