The Post’s Wonkblog has a piece telling us that we should thank the recession for the slowdown in health care cost growth. I was one of those in the camp who thought the recession was responsible for the slowdown in health care growth in 2008-2010, however I think the explanation weakens as time goes on and costs continue to grow slowly.
The point is simple. Suppose that you have $10k slashed from your income in 2008 compared to its 2007 level. We might expect that you would spend less on health care and everything else in 2008. Suppose that your income in 2009 is again $10k below where you expected it would have been back in 2007. This happens again in 2010, 2011, 2012, 2013, and 2014. In other words, your income grows at more or less the same pace that you would have expected in each of these years, but the level in each year is 10k below what you had expected it would be in back in 2007.
In this story, which more or less captures the recovery, we might expect that the level of health care spending in these later years would be lower than had been projected in 2007, but the growth rate would be pretty much the same. The Post piece tells us that ain’t so.
It cites two studies. Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses. This study finds a reasonably strong link between health care spending and GDP growth, however there is a long lag. The regressions for the growth of per capita health care spending use as independent variables current GDP growth and 5 lagged GDP terms using annual data. What is striking is that the strongest effect shows up on the fourth lagged term.
This is noteworthy in the current context because in 2013, the fourth lagged term gave us 2009 GDP growth, which was -2.8 percent. The fourth lagged term this year would give us 2010 GDP growth, which was 2.5 percent. The difference between these two implies a predicted rate of health care cost growth that is 1.6 percentage points higher in 2014 than in 2013. (This calculation uses the coefficients from column 1 of Table 1, the uptick in predicted cost growth would apply for all the regressions whose results are shown in the table, although the size would vary.)
The point is that if this study is the basis for expecting a sharp slowing of health care costs due to the weak economy, the period during which that would be true is over. Based on the study’s findings we should be seeing substantially more rapid increases in health care costs in 2014 than we did last year. Thus far this doesn’t appear to be the case, which may cause us to question the usefulness of this model for explaining recent patterns in health care cost growth.
Addendum:
Medgeek was good enough to send me the other study, a paper by David Dranove, Craig Garthwaite, and Christopher Ody, which I quickly read through. Looks to me like it provides good evidence that the recession was the major factor in reducing cost growth in 2008-2010. Their model shows that the recession would not lead to any further decline in cost growth in 2011 or later years (see Exhibit 3). In fact, the modest uptick in the employment to population ratio in subsequent years means that we should have been seeing somewhat above trend increases in health care costs in 2012-2014. So yes, there is good reason to believe that the recession was the major factor behind slower health care costs in the years 2008-2010. The continued slow growth over the last three and a half years requires another explanation.
The Post’s Wonkblog has a piece telling us that we should thank the recession for the slowdown in health care cost growth. I was one of those in the camp who thought the recession was responsible for the slowdown in health care growth in 2008-2010, however I think the explanation weakens as time goes on and costs continue to grow slowly.
The point is simple. Suppose that you have $10k slashed from your income in 2008 compared to its 2007 level. We might expect that you would spend less on health care and everything else in 2008. Suppose that your income in 2009 is again $10k below where you expected it would have been back in 2007. This happens again in 2010, 2011, 2012, 2013, and 2014. In other words, your income grows at more or less the same pace that you would have expected in each of these years, but the level in each year is 10k below what you had expected it would be in back in 2007.
In this story, which more or less captures the recovery, we might expect that the level of health care spending in these later years would be lower than had been projected in 2007, but the growth rate would be pretty much the same. The Post piece tells us that ain’t so.
It cites two studies. Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses. This study finds a reasonably strong link between health care spending and GDP growth, however there is a long lag. The regressions for the growth of per capita health care spending use as independent variables current GDP growth and 5 lagged GDP terms using annual data. What is striking is that the strongest effect shows up on the fourth lagged term.
This is noteworthy in the current context because in 2013, the fourth lagged term gave us 2009 GDP growth, which was -2.8 percent. The fourth lagged term this year would give us 2010 GDP growth, which was 2.5 percent. The difference between these two implies a predicted rate of health care cost growth that is 1.6 percentage points higher in 2014 than in 2013. (This calculation uses the coefficients from column 1 of Table 1, the uptick in predicted cost growth would apply for all the regressions whose results are shown in the table, although the size would vary.)
The point is that if this study is the basis for expecting a sharp slowing of health care costs due to the weak economy, the period during which that would be true is over. Based on the study’s findings we should be seeing substantially more rapid increases in health care costs in 2014 than we did last year. Thus far this doesn’t appear to be the case, which may cause us to question the usefulness of this model for explaining recent patterns in health care cost growth.
Addendum:
Medgeek was good enough to send me the other study, a paper by David Dranove, Craig Garthwaite, and Christopher Ody, which I quickly read through. Looks to me like it provides good evidence that the recession was the major factor in reducing cost growth in 2008-2010. Their model shows that the recession would not lead to any further decline in cost growth in 2011 or later years (see Exhibit 3). In fact, the modest uptick in the employment to population ratio in subsequent years means that we should have been seeing somewhat above trend increases in health care costs in 2012-2014. So yes, there is good reason to believe that the recession was the major factor behind slower health care costs in the years 2008-2010. The continued slow growth over the last three and a half years requires another explanation.
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A New York Times article on New York City’s pension funds implied that its assumed rate of return going forward is too high based on past returns over a highly selective period:
“But excessive optimism can lead to financial disaster, because regular shortfalls could ultimately leave the city unable to fulfill its required payouts. For years, the investment return expectation was set at 8 percent. In reality, the system’s returns have often fallen well short of that, earning just 2 percent on average from 1999 to 2009, for instance.”
It should not have been surprising that returns would be well below 8 percent in a period that started in 1999 when the price to trend earnings ratio in the stock market was close to 30. The funds should have adjusted their return projections downward in line with the unprecedented run-up in the stock market.
On the other hand, the fact that it is possible to find a year where the market has slumped badly and thereby provided very low returns is completely irrelevant to the a pension fund that in principle can exist forever. It had no need to cash out large amounts of its holdings in 2009, nor is there a plausible scenario in which it would. Of course returns have been far above the 8 percent average in the years since 2009, as the piece notes.
Given this reality, it is entirely reasonable for pensions to use the expected rate of return on their pension assets as the discount rate for future liabilities. This would lead to the smoothest flow of funding. The alternative risk-free rate which is advocated by this article (it uses it in the main chart) would effectively have pensions pre-fund their obligations so that future payments would be much lower relative to revenue. This would be equivalent to building up a large account so that the police or fire department could be paid out of the interest. No policy experts would advocate such an approach.
The piece also misleadingly blames pensions for cutbacks in city programs;
“Already, the growing sums consumed by the pension funds have forced officials to scrimp on certain programs or abandon them, said Marc La Vorgna, a press secretary during Mr. Bloomberg’s administration. One casualty was the Advantage program, which helped homeless people move out of shelters and into apartments. It was eliminated in the Bloomberg administration.”
It is equally accurate to say that these programs were only possible (assuming no other revenue or spending cuts) because the city wasn’t meeting its obligations to the pension funds. In other words, rather than paying for possibly worthwhile programs, the city was taking the money from its workers’ pay in the form of their pensions. It seems more than a bit misguided to blame the pensions for putting an end to this practice.
The points the article makes on the needless cost of investment advisers and questionable returns from private equity investments are well-taken.
A New York Times article on New York City’s pension funds implied that its assumed rate of return going forward is too high based on past returns over a highly selective period:
“But excessive optimism can lead to financial disaster, because regular shortfalls could ultimately leave the city unable to fulfill its required payouts. For years, the investment return expectation was set at 8 percent. In reality, the system’s returns have often fallen well short of that, earning just 2 percent on average from 1999 to 2009, for instance.”
It should not have been surprising that returns would be well below 8 percent in a period that started in 1999 when the price to trend earnings ratio in the stock market was close to 30. The funds should have adjusted their return projections downward in line with the unprecedented run-up in the stock market.
On the other hand, the fact that it is possible to find a year where the market has slumped badly and thereby provided very low returns is completely irrelevant to the a pension fund that in principle can exist forever. It had no need to cash out large amounts of its holdings in 2009, nor is there a plausible scenario in which it would. Of course returns have been far above the 8 percent average in the years since 2009, as the piece notes.
Given this reality, it is entirely reasonable for pensions to use the expected rate of return on their pension assets as the discount rate for future liabilities. This would lead to the smoothest flow of funding. The alternative risk-free rate which is advocated by this article (it uses it in the main chart) would effectively have pensions pre-fund their obligations so that future payments would be much lower relative to revenue. This would be equivalent to building up a large account so that the police or fire department could be paid out of the interest. No policy experts would advocate such an approach.
The piece also misleadingly blames pensions for cutbacks in city programs;
“Already, the growing sums consumed by the pension funds have forced officials to scrimp on certain programs or abandon them, said Marc La Vorgna, a press secretary during Mr. Bloomberg’s administration. One casualty was the Advantage program, which helped homeless people move out of shelters and into apartments. It was eliminated in the Bloomberg administration.”
It is equally accurate to say that these programs were only possible (assuming no other revenue or spending cuts) because the city wasn’t meeting its obligations to the pension funds. In other words, rather than paying for possibly worthwhile programs, the city was taking the money from its workers’ pay in the form of their pensions. It seems more than a bit misguided to blame the pensions for putting an end to this practice.
The points the article makes on the needless cost of investment advisers and questionable returns from private equity investments are well-taken.
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Zachary Goldfarb has an interesting analysis of trends in before and after-tax income inequality in the Obama years. However he is mistaken in attributing the rise in before-tax inequality to the market rather than deliberate policy choices.
For example, the big banks still exist today because the government had a policy of saving them from the market. They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome. (The financial sector also profits by being exempted from taxes that apply to other industries.)
Globalization has increased inequality because of the way the government structured trade. It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.
In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies. The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy. Patent monopolies transfer hundreds of billions of dollars a year to patent holders, who are overwhelming high-income households.
Finally, by running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people. We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.
In short, there are a whole list of easily identifiable policies that have fostered the large upward redistribution we have seen in the last three decades. It is not just the market.
Zachary Goldfarb has an interesting analysis of trends in before and after-tax income inequality in the Obama years. However he is mistaken in attributing the rise in before-tax inequality to the market rather than deliberate policy choices.
For example, the big banks still exist today because the government had a policy of saving them from the market. They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome. (The financial sector also profits by being exempted from taxes that apply to other industries.)
Globalization has increased inequality because of the way the government structured trade. It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.
In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies. The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy. Patent monopolies transfer hundreds of billions of dollars a year to patent holders, who are overwhelming high-income households.
Finally, by running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people. We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.
In short, there are a whole list of easily identifiable policies that have fostered the large upward redistribution we have seen in the last three decades. It is not just the market.
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The “hard to get good help” crowd continue to dominate reporting at the Washington Post. An article on Japan’s efforts to facilitate women returning to jobs after childbirth told readers:
“Japan is sitting on a demographic time bomb: With its low birth rate, the population is on track to shrink 30 percent by 2060, at the same time 40 percent of its citizens will hit old age.”
There is no time bomb. Japan, like most countries, has seen an increasing ratio of retirees to workers. This has been going on for a century. This increase has been associated with rising living standards because of increases in productivity. By all projections, productivity in Japan will be vastly higher in 2060 than it is today, which means that both workers and retirees will be able to enjoy higher living standards even though there will be a lower ratio of workers to retirees.
As labor markets tighten in Japan, workers will go from less productive to more productive jobs. This will mean that people who want workers for menial jobs such as cleaning their house or tending their garden will have to pay more money. This is bad news for them, but it does not amount to a time bomb for the country.
The “hard to get good help” crowd continue to dominate reporting at the Washington Post. An article on Japan’s efforts to facilitate women returning to jobs after childbirth told readers:
“Japan is sitting on a demographic time bomb: With its low birth rate, the population is on track to shrink 30 percent by 2060, at the same time 40 percent of its citizens will hit old age.”
There is no time bomb. Japan, like most countries, has seen an increasing ratio of retirees to workers. This has been going on for a century. This increase has been associated with rising living standards because of increases in productivity. By all projections, productivity in Japan will be vastly higher in 2060 than it is today, which means that both workers and retirees will be able to enjoy higher living standards even though there will be a lower ratio of workers to retirees.
As labor markets tighten in Japan, workers will go from less productive to more productive jobs. This will mean that people who want workers for menial jobs such as cleaning their house or tending their garden will have to pay more money. This is bad news for them, but it does not amount to a time bomb for the country.
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The NYT tells us the good news on the cost of giving people Sovaldi for treating Hepatitis C. First, the annual costs are likely to fall in the years ahead as the backlog of people with the disease are cured and the numbers needing treatment declines sharply. Second, new effective drugs will come on the market and compete with Sovaldi, driving the price down.
In a context where the government gives Savaldi a patent monopoly it is good to have multiple drugs that can provide competition. However from the standpoint of the efficiency of the drug development process this implies an enormous amount of waste.
Once an effective treatment for Hepatitis C has been developed, there is little medical benefit in having a second or third effective treatment. The resources to develop these alternatives to Sovaldi could have been much better utilized researching treatments for diseases which do not presently have a cure. However the incentives provided by the massive patent rents being earned by Gilead Sciences (the patent holder for Sovaldi) give a huge incentive to other companies to carry through duplicative research. If anyone cared about efficiency in the health care system this point would be widely publicized.
The NYT tells us the good news on the cost of giving people Sovaldi for treating Hepatitis C. First, the annual costs are likely to fall in the years ahead as the backlog of people with the disease are cured and the numbers needing treatment declines sharply. Second, new effective drugs will come on the market and compete with Sovaldi, driving the price down.
In a context where the government gives Savaldi a patent monopoly it is good to have multiple drugs that can provide competition. However from the standpoint of the efficiency of the drug development process this implies an enormous amount of waste.
Once an effective treatment for Hepatitis C has been developed, there is little medical benefit in having a second or third effective treatment. The resources to develop these alternatives to Sovaldi could have been much better utilized researching treatments for diseases which do not presently have a cure. However the incentives provided by the massive patent rents being earned by Gilead Sciences (the patent holder for Sovaldi) give a huge incentive to other companies to carry through duplicative research. If anyone cared about efficiency in the health care system this point would be widely publicized.
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The NYT gave us a prime example of frat boy budget reporting today, presenting readers with really big numbers which mean almost nothing to any of them. The article referred to the Senate passage of bills providing funding for veterans health care and transportation. It told readers:
“Prompted by the long waiting lists at veterans’ health centers and the bureaucratic efforts to hide them, the $17 billion bill aims to clean up the scandal-scarred Department of Veterans Affairs by granting the agency’s secretary broad new authority to fire and demote senior executives.
“It would also authorize the leasing or construction of 27 new health facilities; and set aside $5 billion to hire doctors, nurses and other health care providers, and $10 billion to pay for veterans’ care at private and public facilities not run by the department.”
Anyone know how large a share of the budget $17 billion is? Will it bankrupt our kids? Are the $5 billion for hiring doctors and $10 billion for care at private facilities in addition to or part of the $17 billion? Is this for one year or multiple years?
(The cost is approximately 0.45 percent of annual spending. The spending on doctors and private care is part of the $17 billion. It seems to cover multiple years [reducing its share of spending], but a quick look at the summary doesn’t make the time period clear.)
The article also told readers:
“The Senate bowed to the House, which had approved an $11 billion measure financed largely by a sleight of budgetary hand that avoids any tax increases. Under the maneuver, known as “pension smoothing,” corporations will be allowed to set aside less money for pensions, which will increase profits and raise business tax receipts.”
The $11 billion comes to 0.3 percent of annual spending. This spending also covers multiple years, although the time period is certainly not clear from this article.
Anyhow, this should be really good one for the fraternity of budget reporting. It provides virtually no information to readers but apparently meets the quality standards of the NYT.
The NYT gave us a prime example of frat boy budget reporting today, presenting readers with really big numbers which mean almost nothing to any of them. The article referred to the Senate passage of bills providing funding for veterans health care and transportation. It told readers:
“Prompted by the long waiting lists at veterans’ health centers and the bureaucratic efforts to hide them, the $17 billion bill aims to clean up the scandal-scarred Department of Veterans Affairs by granting the agency’s secretary broad new authority to fire and demote senior executives.
“It would also authorize the leasing or construction of 27 new health facilities; and set aside $5 billion to hire doctors, nurses and other health care providers, and $10 billion to pay for veterans’ care at private and public facilities not run by the department.”
Anyone know how large a share of the budget $17 billion is? Will it bankrupt our kids? Are the $5 billion for hiring doctors and $10 billion for care at private facilities in addition to or part of the $17 billion? Is this for one year or multiple years?
(The cost is approximately 0.45 percent of annual spending. The spending on doctors and private care is part of the $17 billion. It seems to cover multiple years [reducing its share of spending], but a quick look at the summary doesn’t make the time period clear.)
The article also told readers:
“The Senate bowed to the House, which had approved an $11 billion measure financed largely by a sleight of budgetary hand that avoids any tax increases. Under the maneuver, known as “pension smoothing,” corporations will be allowed to set aside less money for pensions, which will increase profits and raise business tax receipts.”
The $11 billion comes to 0.3 percent of annual spending. This spending also covers multiple years, although the time period is certainly not clear from this article.
Anyhow, this should be really good one for the fraternity of budget reporting. It provides virtually no information to readers but apparently meets the quality standards of the NYT.
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A New York Times article on new economic data from the euro zone noted a 0.1 percentage point rise in the unemployment rate in France. It told readers that this rise (which is almost certainly not statistically significant):
“is likely to bolster concerns that France is stuck in an economic rut and politically incapable of making changes to labor rules or putting in place other overhauls needed to improve economic performance.”
There is no one quoted making this claim, it is simply an assertion of the article. In this context, it is worth noting a piece in the NYT Upshot section by Justin Wolfers, which was also highlighted in Paul Krugman’s column today. Wolfers noted the nearly unanimous view among the economists surveyed by the University of Chicago’s Initiative in Global Markets that President Obama’s stimulus created jobs and that it was more than worth its cost.
In the economics profession there is not much dispute that additional government spending in a depressed economy will lead to more jobs and growth. However, this view appears to have no place in the NYT’s reporting on Europe’s economy, instead we get unattributed assertions about bolstering concerns.
A New York Times article on new economic data from the euro zone noted a 0.1 percentage point rise in the unemployment rate in France. It told readers that this rise (which is almost certainly not statistically significant):
“is likely to bolster concerns that France is stuck in an economic rut and politically incapable of making changes to labor rules or putting in place other overhauls needed to improve economic performance.”
There is no one quoted making this claim, it is simply an assertion of the article. In this context, it is worth noting a piece in the NYT Upshot section by Justin Wolfers, which was also highlighted in Paul Krugman’s column today. Wolfers noted the nearly unanimous view among the economists surveyed by the University of Chicago’s Initiative in Global Markets that President Obama’s stimulus created jobs and that it was more than worth its cost.
In the economics profession there is not much dispute that additional government spending in a depressed economy will lead to more jobs and growth. However, this view appears to have no place in the NYT’s reporting on Europe’s economy, instead we get unattributed assertions about bolstering concerns.
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In his write-up of the new data on GDP, Wonkblog’s Matt O’Brien noted that Gross Domestic Income grew considerably more rapidly (or more accurately, shrank less rapidly) than GDP in the first quarter. O’Brien sees this as evidence that the economy grew more rapidly than the GDP data indicate.
That is possible, but it is also possible that the GDI data are simply in error. In principle GDP and GDI should be the same. GDP measures everything that was produced based on the sales of goods and services. GDI measures all the incomes generated in the production process. As a practical matter, they never add to be exactly the same. The Bureau of Economic Analysis generally considers the GDP measures to be more accurate since its ability to measure the sales of goods and services is better than its ability to measure income.
However there are patterns to the divergences. When there are large run-ups in asset prices (i.e. stocks and housing), the GDI measure tends to show stronger growth than the GDP measure. There is a simple explanation as to why this would be the case. If a portion of the capital gain income from a run-up in asset prices ends up being recorded as ordinary income, then the larger the capital gains, the more income will be wrongly reported. (Capital gains or losses should not be counted in GDI.)
It is likely that this would be the case. While people pay lower taxes on long-term capital gains than ordinary income, they pay the same tax rate on short-term capital gains. This means that they have no reason to be careful to distinguish these capital gains from ordinary income on their tax returns. Since tax returns provide the ultimate basis for GDI data, insofar as income is misrepresented on these returns it will lead to a misreporting of GDI.
In fact, we find a consistent pattern where GDI grew more than GDP in both the stock and housing bubble and again in the last few years with the sharp run-up in stock prices. If the capital gains explanation is correct, it means that income in the national accounts is overstated. This means that the saving rates are substantially lower than the official data show. (Saving is defined as income minus consumption, if income is overstated by 2 percent, then the saving rate is overstated by 2 percentage points, which would be close to half in recent years.)
It also means that we can take no special solace in GDI numbers that are stronger than GDP numbers. It’s just a mistake.
In his write-up of the new data on GDP, Wonkblog’s Matt O’Brien noted that Gross Domestic Income grew considerably more rapidly (or more accurately, shrank less rapidly) than GDP in the first quarter. O’Brien sees this as evidence that the economy grew more rapidly than the GDP data indicate.
That is possible, but it is also possible that the GDI data are simply in error. In principle GDP and GDI should be the same. GDP measures everything that was produced based on the sales of goods and services. GDI measures all the incomes generated in the production process. As a practical matter, they never add to be exactly the same. The Bureau of Economic Analysis generally considers the GDP measures to be more accurate since its ability to measure the sales of goods and services is better than its ability to measure income.
However there are patterns to the divergences. When there are large run-ups in asset prices (i.e. stocks and housing), the GDI measure tends to show stronger growth than the GDP measure. There is a simple explanation as to why this would be the case. If a portion of the capital gain income from a run-up in asset prices ends up being recorded as ordinary income, then the larger the capital gains, the more income will be wrongly reported. (Capital gains or losses should not be counted in GDI.)
It is likely that this would be the case. While people pay lower taxes on long-term capital gains than ordinary income, they pay the same tax rate on short-term capital gains. This means that they have no reason to be careful to distinguish these capital gains from ordinary income on their tax returns. Since tax returns provide the ultimate basis for GDI data, insofar as income is misrepresented on these returns it will lead to a misreporting of GDI.
In fact, we find a consistent pattern where GDI grew more than GDP in both the stock and housing bubble and again in the last few years with the sharp run-up in stock prices. If the capital gains explanation is correct, it means that income in the national accounts is overstated. This means that the saving rates are substantially lower than the official data show. (Saving is defined as income minus consumption, if income is overstated by 2 percent, then the saving rate is overstated by 2 percentage points, which would be close to half in recent years.)
It also means that we can take no special solace in GDI numbers that are stronger than GDP numbers. It’s just a mistake.
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