That’s what readers of a Reuters article on complaints from a German business group must be asking themselves. At one point the article told readers:
“Major unions negotiated inflation-busting hikes in pay checks last year after years of wage restraint, although the Statistics Office said last month real wages across Germany were likely to have fallen in 2013.”
It’s not clear what the definition of “inflation-busting” is in this context, but it doesn’t sound like it involved large pay increases if wages did not even keep pace with inflation. Usually, they would be expected to rise somewhat in excess of inflation to reflect productivity growth in Germany’s economy.
That’s what readers of a Reuters article on complaints from a German business group must be asking themselves. At one point the article told readers:
“Major unions negotiated inflation-busting hikes in pay checks last year after years of wage restraint, although the Statistics Office said last month real wages across Germany were likely to have fallen in 2013.”
It’s not clear what the definition of “inflation-busting” is in this context, but it doesn’t sound like it involved large pay increases if wages did not even keep pace with inflation. Usually, they would be expected to rise somewhat in excess of inflation to reflect productivity growth in Germany’s economy.
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The media were filled with euphoric accounts about the run-up in the stock market in 2013. This was certainly good news for the people who own lots of stock, less so for everyone else. (The generational warriors who yap about government debt hurting our kids would also be yelling about the stock market run-up transferring resources from young to old, if they were honest.)
Anyhow, it would be reasonable if this reporting included some discussion of the implications of higher stock prices for future returns. With the ratio of stock prices to trend corporate earnings now in the neighborhood of 20 to 1, the expected return for the future is around 5 percent annually in real terms. By contrast, the historic average for stocks in the United States is over 7 percent.
Unless future growth vastly exceeds anyone’s predictions, given its current value it is not possible for the market to sustain 7 percent real returns for any substantial period of time. This means that investors in stock must be willing to accept lower than historic rates of return.
The media were filled with euphoric accounts about the run-up in the stock market in 2013. This was certainly good news for the people who own lots of stock, less so for everyone else. (The generational warriors who yap about government debt hurting our kids would also be yelling about the stock market run-up transferring resources from young to old, if they were honest.)
Anyhow, it would be reasonable if this reporting included some discussion of the implications of higher stock prices for future returns. With the ratio of stock prices to trend corporate earnings now in the neighborhood of 20 to 1, the expected return for the future is around 5 percent annually in real terms. By contrast, the historic average for stocks in the United States is over 7 percent.
Unless future growth vastly exceeds anyone’s predictions, given its current value it is not possible for the market to sustain 7 percent real returns for any substantial period of time. This means that investors in stock must be willing to accept lower than historic rates of return.
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That’s what readers of a NYT article on Latvia entering the euro would assume. The piece presented it as good news that the euro had risen against the dollar over the last year. This increase will make the goods and services produced by euro zone countries less competitive in the world economy, reducing their exports and increasing their imports. With nearly all of the euro zone countries operating at levels of output well below potential GDP, it is difficult to see why they would view this loss of demand as a positive development.
The article also quoted a statement by Olli Rehn, vice president of the European Commission responsible for economic and monetary affairs, in which he referred to Latvia’s strong recovery. It would have been useful to note that even with the recent growth it has experienced Lativia’s economy is still almost 10 percent smaller than its pre-recession peak in 2007.
That’s what readers of a NYT article on Latvia entering the euro would assume. The piece presented it as good news that the euro had risen against the dollar over the last year. This increase will make the goods and services produced by euro zone countries less competitive in the world economy, reducing their exports and increasing their imports. With nearly all of the euro zone countries operating at levels of output well below potential GDP, it is difficult to see why they would view this loss of demand as a positive development.
The article also quoted a statement by Olli Rehn, vice president of the European Commission responsible for economic and monetary affairs, in which he referred to Latvia’s strong recovery. It would have been useful to note that even with the recent growth it has experienced Lativia’s economy is still almost 10 percent smaller than its pre-recession peak in 2007.
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Do you remember back when we were worried that robots will take all of the jobs? There will be no work for any of us because we will have all been replaced by robots.
It turns out that we have even more to worry about. AP says that because of declining birth rates and increasing life expectancies, we face a huge demographic crunch. We will have hordes of retirees and no one to to do the work. Now that sounds really scary, at the same time we have no jobs because the robots took them we must also struggle with the fact that we have no one to do the work because everyone is old and retired.
Yes, these are the complete opposite arguments. It is possible for one or the other to be true, but only in Washington can both be problems simultaneously. In this case, I happen to be a good moderate and say that neither is true. There is no plausible story in which robots are going to make us all unemployed any time in the foreseeable future. Nor is there a case that the demographic will impoverish us.
The basic story is that we have a rising ratio of retirees to workers, which should promote outraged cries of “so what?” Yes folks, we have had rising ratios of retirees to workers for a long time. In 1960 there was just one retiree for every five workers. Today there is one retiree for every 2.8 workers, and the Social Security trustees tell us that in 2035 there will be one retiree for every 2.1 workers.
Source: Social Security Trustees Report.
Just as the fall in the ratio of workers to retirees between 1960 and 2013 did not prevent both workers and retirees from enjoying substantially higher living standards, there is no reason to expect the further decline in the ratio to 2035 to lead to a fall in living standards.
This point can be seen by comparing the average wage in 2013 with the average wage projected for 2035. The chart also includes the after-Social Security tax wage. The figure for 2035 assumes a 4.0 percentage point rise in the Social Security tax, an increase that is far larger than would be needed to keep the program fully funded under almost any conceivable circumstances. Even in this case, the average after tax wage would more than 38 percent higher than it is today.
Source: Social Security Trustees Report.
There is of course an issue of distribution. Most workers have not seen much benefit from the growth in average wages over the last three decades as most of the gains have gone to those at the top. But this points out yet again the urgency of addressing wage inequality. A continuing upward redistribution of income could make our children poor. Social Security and Medicare will not.
Finally, this AP article warns of the demographic nightmare facing China. Really?
China has seen incredible economic growth over the last three decades. As a result it is hugely richer today than it was in 1980. The chart below shows the ratio of real per capita income projected by the IMF for China in 2018 compared to its 1980 level. The projection for 2018 is more than 22 times as high as the 1980 level. The chart shows average wages under the assumption that wages grew in step with per capita income and a hypothetical after Social Security tax wage. The latter is calculated under the assumption that there was zero tax in 1980 and a 30 percent tax in 2018. (These are intended to be extreme assumptions.) Even in this case the average after-Social Security tax wage in 2018 would still be 15 times as high as the wage in 1980.
Source: International Monetary Fund.
Of course in China, as with the United States, there has been an upward redistribution of income associated with a huge shift from wages to profits. As a result workers have not fully shared in the gains from growth over this period. But the limit in the gains to workers is clearly this distributional shift, not a deterioration in the country’s demographic picture.
In short, we have a seriously flawed scare story. The upward redistribution of income does pose a serious threat to the well-being of future generations of workers in the United States and elsewhere. The rise in the ratio of retirees to workers is not even an issue by comparison.
Do you remember back when we were worried that robots will take all of the jobs? There will be no work for any of us because we will have all been replaced by robots.
It turns out that we have even more to worry about. AP says that because of declining birth rates and increasing life expectancies, we face a huge demographic crunch. We will have hordes of retirees and no one to to do the work. Now that sounds really scary, at the same time we have no jobs because the robots took them we must also struggle with the fact that we have no one to do the work because everyone is old and retired.
Yes, these are the complete opposite arguments. It is possible for one or the other to be true, but only in Washington can both be problems simultaneously. In this case, I happen to be a good moderate and say that neither is true. There is no plausible story in which robots are going to make us all unemployed any time in the foreseeable future. Nor is there a case that the demographic will impoverish us.
The basic story is that we have a rising ratio of retirees to workers, which should promote outraged cries of “so what?” Yes folks, we have had rising ratios of retirees to workers for a long time. In 1960 there was just one retiree for every five workers. Today there is one retiree for every 2.8 workers, and the Social Security trustees tell us that in 2035 there will be one retiree for every 2.1 workers.
Source: Social Security Trustees Report.
Just as the fall in the ratio of workers to retirees between 1960 and 2013 did not prevent both workers and retirees from enjoying substantially higher living standards, there is no reason to expect the further decline in the ratio to 2035 to lead to a fall in living standards.
This point can be seen by comparing the average wage in 2013 with the average wage projected for 2035. The chart also includes the after-Social Security tax wage. The figure for 2035 assumes a 4.0 percentage point rise in the Social Security tax, an increase that is far larger than would be needed to keep the program fully funded under almost any conceivable circumstances. Even in this case, the average after tax wage would more than 38 percent higher than it is today.
Source: Social Security Trustees Report.
There is of course an issue of distribution. Most workers have not seen much benefit from the growth in average wages over the last three decades as most of the gains have gone to those at the top. But this points out yet again the urgency of addressing wage inequality. A continuing upward redistribution of income could make our children poor. Social Security and Medicare will not.
Finally, this AP article warns of the demographic nightmare facing China. Really?
China has seen incredible economic growth over the last three decades. As a result it is hugely richer today than it was in 1980. The chart below shows the ratio of real per capita income projected by the IMF for China in 2018 compared to its 1980 level. The projection for 2018 is more than 22 times as high as the 1980 level. The chart shows average wages under the assumption that wages grew in step with per capita income and a hypothetical after Social Security tax wage. The latter is calculated under the assumption that there was zero tax in 1980 and a 30 percent tax in 2018. (These are intended to be extreme assumptions.) Even in this case the average after-Social Security tax wage in 2018 would still be 15 times as high as the wage in 1980.
Source: International Monetary Fund.
Of course in China, as with the United States, there has been an upward redistribution of income associated with a huge shift from wages to profits. As a result workers have not fully shared in the gains from growth over this period. But the limit in the gains to workers is clearly this distributional shift, not a deterioration in the country’s demographic picture.
In short, we have a seriously flawed scare story. The upward redistribution of income does pose a serious threat to the well-being of future generations of workers in the United States and elsewhere. The rise in the ratio of retirees to workers is not even an issue by comparison.
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To the amazement of millions David Brooks had an interesting observation in his column today. He picked up an article by my friend Steve Teles which outlines the story of kludgeocracy.
Steve’s idea is that we often end up advancing policy goals in incredible indirect and inefficient ways because this is the only way to move forward. The Affordable Care Act could be the poster child for this point. We got an incredibly complicated and unnecessarily expensive system because the insurers, the drug companies, the medical equipment suppliers, and the doctors all pushed to ensure that they would get their cut of the pie on the way to getting closer to universal coverage.
Steve gives many other examples in this article. My personal favorite is flexible spending accounts, which allow people to squirrel away some amount of money on a pre-tax basis to pay for health care expenses, child care expenses, or work-related transportation expenses. The point is to have the federal government subsidize these activities.
The absurdity is that the payroll costs to employers for administering these accounts are often a substantial portion of the money being saved. A fee of $20 per employee would not be unusual. If that employee puts aside $1000 a year in an account and is in the 25 percent tax bracket, this implies the tax subsidy is a bit less than $400. (The money is also exempted from the payroll tax.) A $20 fee would imply that 5 percent of the savings are being eaten up in administrative costs.
In addition, the worker loses money not spent by the end of the year. This gives them an incentive to buy items not really needed (e.g. an extra pair of glasses) to avoid losing the money. Filling out the forms can also be very time-consuming for workers.
The shape of the subsidy is also awful from a distributional standpoint. Wealthier people stand to get the largest subsidies.
Of course the government could just subsidize health care directly, which would be far more efficient. But, all the people in the financial industry who make profits from managing flexible spending accounts would be very upset. Therefore we can expect these accounts to be around for some time. This is kludgeocracy.
To the amazement of millions David Brooks had an interesting observation in his column today. He picked up an article by my friend Steve Teles which outlines the story of kludgeocracy.
Steve’s idea is that we often end up advancing policy goals in incredible indirect and inefficient ways because this is the only way to move forward. The Affordable Care Act could be the poster child for this point. We got an incredibly complicated and unnecessarily expensive system because the insurers, the drug companies, the medical equipment suppliers, and the doctors all pushed to ensure that they would get their cut of the pie on the way to getting closer to universal coverage.
Steve gives many other examples in this article. My personal favorite is flexible spending accounts, which allow people to squirrel away some amount of money on a pre-tax basis to pay for health care expenses, child care expenses, or work-related transportation expenses. The point is to have the federal government subsidize these activities.
The absurdity is that the payroll costs to employers for administering these accounts are often a substantial portion of the money being saved. A fee of $20 per employee would not be unusual. If that employee puts aside $1000 a year in an account and is in the 25 percent tax bracket, this implies the tax subsidy is a bit less than $400. (The money is also exempted from the payroll tax.) A $20 fee would imply that 5 percent of the savings are being eaten up in administrative costs.
In addition, the worker loses money not spent by the end of the year. This gives them an incentive to buy items not really needed (e.g. an extra pair of glasses) to avoid losing the money. Filling out the forms can also be very time-consuming for workers.
The shape of the subsidy is also awful from a distributional standpoint. Wealthier people stand to get the largest subsidies.
Of course the government could just subsidize health care directly, which would be far more efficient. But, all the people in the financial industry who make profits from managing flexible spending accounts would be very upset. Therefore we can expect these accounts to be around for some time. This is kludgeocracy.
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That would have been a reasonable headline for a NYT article on India’s resistance to U.S.-type patent rights on expensive drugs. The focus of the piece is Herceptin, a cancer drug that costs $18,000 for a single round of treatment, which makes it unaffordable to almost anyone suffering from cancer in India. A generic version of this drug would likely cost two or three percent of this price.
As a result of the enormous price difference between patent protected drugs and free market drugs the Indian government is taking a very critical view of many patents. In this case, the manufacturer, Roche Holdings, has decided not to challenge the production of generics in Indian court since it believes it would lose the case.
The piece presents this issue as a problem because the widespread availability of low cost generics in India and elsewhere will reduce the returns to innovation and will mean that drug companies will have less incentive to invest in developing new drugs. While this is true if we rely exclusively on government granted monopolies to finance research, this is far from the only mechanism that could be or is used to finance research.
There are other more modern mechanisms for financing research than this relic from the feudal guild system. For example, Nobel laureate Joe Stiglitz has advocated a prize system whereby innovators are compensated for breakthroughs from a public prize fund and then the patent is placed in the public domain so that the drug can be freely produced as a generic. It is also possible to simply fund the research up front, as is already done to a substantial extent with the $30 billion a year provided to the National Institutes of Health.
If we eliminated monopolies it would both reduce the cost of drugs and also likely lead to better medicine. The enormous mark-ups provided by these government monopolies gives drug companies an incentive to mislead the public about the safety and effectiveness of their drugs. It is a standard practice to conceal or even misrepresent research findings (e.g. Vioxx). This leads to bad health outcomes, the cost of which likely exceeds the money invested in research and development by the drug companies by an order of magnitude.
For these reasons, a piece like this in the NYT should be highlighting the increasing difficulty that the United States and Europe are facing in imposing patent monopolies on prescription drugs in the developing world. It is wrong to imply that there is some inherent tension between affordable drugs and innovation. This tension only arises with the archaic patent system.
That would have been a reasonable headline for a NYT article on India’s resistance to U.S.-type patent rights on expensive drugs. The focus of the piece is Herceptin, a cancer drug that costs $18,000 for a single round of treatment, which makes it unaffordable to almost anyone suffering from cancer in India. A generic version of this drug would likely cost two or three percent of this price.
As a result of the enormous price difference between patent protected drugs and free market drugs the Indian government is taking a very critical view of many patents. In this case, the manufacturer, Roche Holdings, has decided not to challenge the production of generics in Indian court since it believes it would lose the case.
The piece presents this issue as a problem because the widespread availability of low cost generics in India and elsewhere will reduce the returns to innovation and will mean that drug companies will have less incentive to invest in developing new drugs. While this is true if we rely exclusively on government granted monopolies to finance research, this is far from the only mechanism that could be or is used to finance research.
There are other more modern mechanisms for financing research than this relic from the feudal guild system. For example, Nobel laureate Joe Stiglitz has advocated a prize system whereby innovators are compensated for breakthroughs from a public prize fund and then the patent is placed in the public domain so that the drug can be freely produced as a generic. It is also possible to simply fund the research up front, as is already done to a substantial extent with the $30 billion a year provided to the National Institutes of Health.
If we eliminated monopolies it would both reduce the cost of drugs and also likely lead to better medicine. The enormous mark-ups provided by these government monopolies gives drug companies an incentive to mislead the public about the safety and effectiveness of their drugs. It is a standard practice to conceal or even misrepresent research findings (e.g. Vioxx). This leads to bad health outcomes, the cost of which likely exceeds the money invested in research and development by the drug companies by an order of magnitude.
For these reasons, a piece like this in the NYT should be highlighting the increasing difficulty that the United States and Europe are facing in imposing patent monopolies on prescription drugs in the developing world. It is wrong to imply that there is some inherent tension between affordable drugs and innovation. This tension only arises with the archaic patent system.
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Morning Edition picked up the theme of patent protection for prescription drugs providing a trade-off between affordability and innovation seen in the NYT today. This is an inaccurate description of the issues, since there are other more efficient mechanisms for financing research. The patent system for financing drug research both leads to bad health outcomes and is a substantial drag on growth and job creation since it pulls hundreds of billions of dollars out of consumers’ pockets every year. It would be good if NPR would stop getting the framing for such pieces from the drug industry.
Morning Edition picked up the theme of patent protection for prescription drugs providing a trade-off between affordability and innovation seen in the NYT today. This is an inaccurate description of the issues, since there are other more efficient mechanisms for financing research. The patent system for financing drug research both leads to bad health outcomes and is a substantial drag on growth and job creation since it pulls hundreds of billions of dollars out of consumers’ pockets every year. It would be good if NPR would stop getting the framing for such pieces from the drug industry.
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That’s the calculation for those of you who didn’t know offhand whether $24 billion is a big deal to the federal government. It takes about two seconds to do this sort of calculation on CEPR’s nifty keep Responsible Budget Reporting Calculator.
That’s the calculation for those of you who didn’t know offhand whether $24 billion is a big deal to the federal government. It takes about two seconds to do this sort of calculation on CEPR’s nifty keep Responsible Budget Reporting Calculator.
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Paul Sullivan gave NYT readers some pretty bizarre investment advice in his “Wealth Matters” column. He noted the Fed’s announcement that it would begin to cut back on its quantitative easing (QE) program, telling readers:
“Bonds are one area of concern. Since interest rates on fixed income, particularly benchmarks like 10-year United States Treasury notes, fell so much over the last few years, the view is they will begin to rise as the Fed ends its bond-buying program and the economy improves. As that happens, the value of bonds that people already own decreases.”
The problem with this story is that bond prices have already fallen, a lot. The yield on 10-year Treasury bonds fell as low as 1.5 percent last year. It is now at 3.0 percent. While it is possible, if not likely, that yields will rise further in the year ahead, the risk of big losses in value is much smaller now than it was in 2012.
The basic story here is a simple one. The markets anticipated the ending of QE and have largely incorporated it into bond prices. Other events could push bond yields higher and prices lower, but the ending of QE is not going to be one of them.
Note: Original said bond prices have risen — this was corrected.
Paul Sullivan gave NYT readers some pretty bizarre investment advice in his “Wealth Matters” column. He noted the Fed’s announcement that it would begin to cut back on its quantitative easing (QE) program, telling readers:
“Bonds are one area of concern. Since interest rates on fixed income, particularly benchmarks like 10-year United States Treasury notes, fell so much over the last few years, the view is they will begin to rise as the Fed ends its bond-buying program and the economy improves. As that happens, the value of bonds that people already own decreases.”
The problem with this story is that bond prices have already fallen, a lot. The yield on 10-year Treasury bonds fell as low as 1.5 percent last year. It is now at 3.0 percent. While it is possible, if not likely, that yields will rise further in the year ahead, the risk of big losses in value is much smaller now than it was in 2012.
The basic story here is a simple one. The markets anticipated the ending of QE and have largely incorporated it into bond prices. Other events could push bond yields higher and prices lower, but the ending of QE is not going to be one of them.
Note: Original said bond prices have risen — this was corrected.
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The NYT had a good piece explaining how some of the financial industry’s biggest defenders in academia are paid by the industry for their work.
The NYT had a good piece explaining how some of the financial industry’s biggest defenders in academia are paid by the industry for their work.
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