Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

George Will used his Washington Post column to go on a diatribe against proposals for subsidizing local news outlets. After noting the plunge in the number of local newspapers, and an even sharper drop in the employment of journalists (down two-thirds since 2005), Will attacks the ideas for public support of journalism developed by Illinois Task Force on Local Journalism.

Will lists various forms of proposed subsidies and then tells readers:

“What could go wrong? Everything.

“Soon, government would mandate hiring and coverage quotas for “underrepresented” groups, would enforce government’s idea of editorial “balance,” would censor what government considers “misinformation” about public health, diversity, equity and inclusion, and would dictate all things pertinent to government’s ever-lengthening agenda. The task force’s recommendations — journalism throwing itself into government’s muscular arms — are a recipe for making local news sources as admired and trusted as government is.”

If Will is really this adverse to government subsidies, then it is bizarre that he is not also ranting against government subsidies for cultural institutions, charitable organizations, and churches through the charitable contribution tax deduction. This deduction, which is almost exclusively used by high-income people, allows people to reduce their taxable income by the amount of their contribution.

For a rich person who faces roughly a 40 percent marginal tax rate, this means that the government pays for 40 percent of their contribution. That means if a rich person chooses to give $1 billion to a think tank, a church, or some other qualifying organization, the taxpayers pick up $400 million of the tab, effectively meaning this $1 billion contribution only cost the rich person $600 million.

For some reason, we haven’t seen a George Will rant in the Washington Post against this very large government subsidy. Is he unconcerned that the government will mandate hiring quotas, have diversity, equity, and inclusion requirements and other things he views as evil as conditions for being the tax deduction?

If this is not a concern with the charitable contribution tax deduction, why would it be a concern with other forms of government subsidies for news organizations? In fact, many news outlets, such ProPublica, are now organized as charitable organizations and benefit directly from this tax deduction.

In fact, some forms of subsidies are explicitly modelled on the charitable contribution tax deduction. Proposals in Washington, DC and Seattle, Washington would effectively give each resident a tax credit (e.g. $100) to support the local news outlet of their choice. This is comparable to the tax deduction, except that it would give the same amount to everyone, even people who are not paying taxes.

If Will is comfortable that we can handle the charitable contribution tax deduction without serious abuses, it is difficult to see why he is so confident that a tax credit would be subject to massive abuse. (It’s also worth mentioning that government-granted copyright monopolies are an explicit subsidy, as readers of the constitution know well.)   

Will has an important point in his column. We do want to encourage a press that is independent of government interference. This is a fair warning about how subsidies for local journalism should be structured. However, the track record shows that this turf can be, and is being, navigated well. That could change in the future (Donald Trump has explicitly indicated that he doesn’t give a damn about freedom of the press), but the risks here seem small relative to the potential benefits.

George Will used his Washington Post column to go on a diatribe against proposals for subsidizing local news outlets. After noting the plunge in the number of local newspapers, and an even sharper drop in the employment of journalists (down two-thirds since 2005), Will attacks the ideas for public support of journalism developed by Illinois Task Force on Local Journalism.

Will lists various forms of proposed subsidies and then tells readers:

“What could go wrong? Everything.

“Soon, government would mandate hiring and coverage quotas for “underrepresented” groups, would enforce government’s idea of editorial “balance,” would censor what government considers “misinformation” about public health, diversity, equity and inclusion, and would dictate all things pertinent to government’s ever-lengthening agenda. The task force’s recommendations — journalism throwing itself into government’s muscular arms — are a recipe for making local news sources as admired and trusted as government is.”

If Will is really this adverse to government subsidies, then it is bizarre that he is not also ranting against government subsidies for cultural institutions, charitable organizations, and churches through the charitable contribution tax deduction. This deduction, which is almost exclusively used by high-income people, allows people to reduce their taxable income by the amount of their contribution.

For a rich person who faces roughly a 40 percent marginal tax rate, this means that the government pays for 40 percent of their contribution. That means if a rich person chooses to give $1 billion to a think tank, a church, or some other qualifying organization, the taxpayers pick up $400 million of the tab, effectively meaning this $1 billion contribution only cost the rich person $600 million.

For some reason, we haven’t seen a George Will rant in the Washington Post against this very large government subsidy. Is he unconcerned that the government will mandate hiring quotas, have diversity, equity, and inclusion requirements and other things he views as evil as conditions for being the tax deduction?

If this is not a concern with the charitable contribution tax deduction, why would it be a concern with other forms of government subsidies for news organizations? In fact, many news outlets, such ProPublica, are now organized as charitable organizations and benefit directly from this tax deduction.

In fact, some forms of subsidies are explicitly modelled on the charitable contribution tax deduction. Proposals in Washington, DC and Seattle, Washington would effectively give each resident a tax credit (e.g. $100) to support the local news outlet of their choice. This is comparable to the tax deduction, except that it would give the same amount to everyone, even people who are not paying taxes.

If Will is comfortable that we can handle the charitable contribution tax deduction without serious abuses, it is difficult to see why he is so confident that a tax credit would be subject to massive abuse. (It’s also worth mentioning that government-granted copyright monopolies are an explicit subsidy, as readers of the constitution know well.)   

Will has an important point in his column. We do want to encourage a press that is independent of government interference. This is a fair warning about how subsidies for local journalism should be structured. However, the track record shows that this turf can be, and is being, navigated well. That could change in the future (Donald Trump has explicitly indicated that he doesn’t give a damn about freedom of the press), but the risks here seem small relative to the potential benefits.

There have been numerous stories in recent months about how housing is unaffordable for millions of people. This is certainly true. An inadequate supply of affordable housing is one of the major problems facing the country, and especially young people and minorities.

However, data from the Bureau of Labor Statistics indicate that rent on average has become more affordable for people now than it had been when Donald Trump was in the White House. Wage growth has actually exceeded the rate of rental inflation since President Biden took office.

Here’s the picture for the two presidents.

Source: Bureau of Labor Statistics and author’s calculations.

The chart shows wage growth for production and non-supervisory workers. This group comprises roughly 80 percent of employees. It excludes managers and highly paid professionals, so it is not affected by rapid wage growth at the top end of the wage distribution. It closely tracks the median wage.

For Trump, I took the period from January of 2017, when he took office, until February of 2020, the last month before the pandemic began skewing the data. For Biden, I took the period from February 2020 to January 2024. This effectively compares current wages to their pre-pandemic level.

As can be seen, nominal wages grew by 10.1 percent under Trump. However, average rents increased 11.7 percent, meaning workers’ wages fell behind rental inflation under Trump.

Rental inflation jumped sharply during the pandemic, as people working from home needed more room. They also had the money saved from commuting-related expenses to pay for it. Rents rose by 21.6 percent under Biden. However, the average wage increased by 23.5 percent, almost 2.0 full percentage points more than rent.

Averages don’t tell us everything, there are many areas where rents rose more rapidly than the national average. And not all workers saw wage increases that kept pace with the average, although we do know that wage increases were more rapid for those at the bottom end of the distribution. This means that rent should be more affordable today for the typical worker than was the case when Donald Trump was in the White House.

This doesn’t mean that housing is not a serious problem. Tens of millions of people are inadequately housed, and hundreds of thousands are homeless altogether, living on streets and in shelters. In the short term measures like rent control, converting vacant office space to residential units, and restrictions on vacation rentals can help. In the longer term we need to relax zoning restrictions and take other measures to build more housing.

But the bottom line here is clear. It is hard to tell a story based on the data where affordable housing is a greater problem today than before President Biden took office. For some reason the media have chosen to highlight the problem today to a much greater extent than before the pandemic.  

There have been numerous stories in recent months about how housing is unaffordable for millions of people. This is certainly true. An inadequate supply of affordable housing is one of the major problems facing the country, and especially young people and minorities.

However, data from the Bureau of Labor Statistics indicate that rent on average has become more affordable for people now than it had been when Donald Trump was in the White House. Wage growth has actually exceeded the rate of rental inflation since President Biden took office.

Here’s the picture for the two presidents.

Source: Bureau of Labor Statistics and author’s calculations.

The chart shows wage growth for production and non-supervisory workers. This group comprises roughly 80 percent of employees. It excludes managers and highly paid professionals, so it is not affected by rapid wage growth at the top end of the wage distribution. It closely tracks the median wage.

For Trump, I took the period from January of 2017, when he took office, until February of 2020, the last month before the pandemic began skewing the data. For Biden, I took the period from February 2020 to January 2024. This effectively compares current wages to their pre-pandemic level.

As can be seen, nominal wages grew by 10.1 percent under Trump. However, average rents increased 11.7 percent, meaning workers’ wages fell behind rental inflation under Trump.

Rental inflation jumped sharply during the pandemic, as people working from home needed more room. They also had the money saved from commuting-related expenses to pay for it. Rents rose by 21.6 percent under Biden. However, the average wage increased by 23.5 percent, almost 2.0 full percentage points more than rent.

Averages don’t tell us everything, there are many areas where rents rose more rapidly than the national average. And not all workers saw wage increases that kept pace with the average, although we do know that wage increases were more rapid for those at the bottom end of the distribution. This means that rent should be more affordable today for the typical worker than was the case when Donald Trump was in the White House.

This doesn’t mean that housing is not a serious problem. Tens of millions of people are inadequately housed, and hundreds of thousands are homeless altogether, living on streets and in shelters. In the short term measures like rent control, converting vacant office space to residential units, and restrictions on vacation rentals can help. In the longer term we need to relax zoning restrictions and take other measures to build more housing.

But the bottom line here is clear. It is hard to tell a story based on the data where affordable housing is a greater problem today than before President Biden took office. For some reason the media have chosen to highlight the problem today to a much greater extent than before the pandemic.  

When it comes to economic issues, you can reliably count on the NYT opinion pages (except Paul Krugman) to be behind the times. In keeping with its reputation, the NYT had a column by Adelle Waldman about workers not being able to control their hours of work, and often getting fewer hours than they need to support themselves and their families.

To be clear, this is a very real problem. It matters if workers can’t count on a regular schedule and it certainly is a big deal if a worker who needs to put in 40 hours a week can only get 30 hours, or even less.

The problem with Waldman’s piece is that this issue of not controlling hours is almost certainly less of a problem in the current strong labor market than it has been in the past. The graph below shows the percentage of prime-age (25 to 54) workers who work part-time (less than 35 hours a week) as a share of total employment.

Source: Bureau of Labor Statistics and author’s calculations.

There are a few things to note about this graph. First, I’m showing the shares for prime-age workers because many younger and older workers choose to work part-time. The second point is that the share moves counter-cyclically, it rises when the economy falls into recession, as it did in the early 1990 and the Great Recession and falls when the labor market is strong. This brings up the third point, that the part-time share is now near a record low.

In other words, the news about part-time employment is that the story today is relatively good, exactly the opposite of the thrust of this piece. This is likely one reason why workplace satisfaction is at a record high.

This is not to say that control over work hours is not an important issue. Millions of workers still can’t work as many hours as they need to support their families. Also, workers are often forced to work overtime, at risk of losing their jobs, or irregular hours that conflict with family obligations.  

However, what is most bizarre about the piece is the ignorance it displays about battles over these issues:

“One of the most surprising aspects of this movement toward part-time work is how few white-collar people — including economists and policy analysts — have seemed to notice or appreciate it. So entrenched is the assumption that full-time work is on offer for most people who want it that even some Bureau of Labor Statistics data calculate annual earnings in various sectors by taking the hourly wage reported by participating employers and multiplying it by 2,080, the number of hours you’d work if you worked 40 hours a week, 52 weeks a year. Never mind that in the real world few workers in certain sectors are given the option of working full-time.”

The reason economists tend to focus on hourly wages is that many people opt to work part-time employment. (Roughly 80 percent of part-time employment is voluntary.) There is nothing wrong with people opting to work less than a full-time job if they want to have time to deal with family responsibilities, go to school, or simply pursue other activities. We usually want to distinguish between people seeing a fall in annual pay because they are paid less, as opposed to working fewer hours.

As far as economists ignoring involuntary part-time, as someone who has been writing about monthly employment reports for more than three decades, I always look at the number of people who report working part-time involuntarily. The same is true for most of the other people writing on these reports. It is hard to imagine a claim further from the truth.

And the issue of not controlling hours has been well-tread ground for decades. The same is the case with irregular and bad hours. This has long been a topic for labor activism, most notably efforts to impose restrictions of “clopening,” requiring workers to come in early to open a restaurant after they stayed late to close it the night before.

In short, control over work hours is in fact a very important issue. Unfortunately, Adelle Waldman’s piece has little to contribute to the debate.

When it comes to economic issues, you can reliably count on the NYT opinion pages (except Paul Krugman) to be behind the times. In keeping with its reputation, the NYT had a column by Adelle Waldman about workers not being able to control their hours of work, and often getting fewer hours than they need to support themselves and their families.

To be clear, this is a very real problem. It matters if workers can’t count on a regular schedule and it certainly is a big deal if a worker who needs to put in 40 hours a week can only get 30 hours, or even less.

The problem with Waldman’s piece is that this issue of not controlling hours is almost certainly less of a problem in the current strong labor market than it has been in the past. The graph below shows the percentage of prime-age (25 to 54) workers who work part-time (less than 35 hours a week) as a share of total employment.

Source: Bureau of Labor Statistics and author’s calculations.

There are a few things to note about this graph. First, I’m showing the shares for prime-age workers because many younger and older workers choose to work part-time. The second point is that the share moves counter-cyclically, it rises when the economy falls into recession, as it did in the early 1990 and the Great Recession and falls when the labor market is strong. This brings up the third point, that the part-time share is now near a record low.

In other words, the news about part-time employment is that the story today is relatively good, exactly the opposite of the thrust of this piece. This is likely one reason why workplace satisfaction is at a record high.

This is not to say that control over work hours is not an important issue. Millions of workers still can’t work as many hours as they need to support their families. Also, workers are often forced to work overtime, at risk of losing their jobs, or irregular hours that conflict with family obligations.  

However, what is most bizarre about the piece is the ignorance it displays about battles over these issues:

“One of the most surprising aspects of this movement toward part-time work is how few white-collar people — including economists and policy analysts — have seemed to notice or appreciate it. So entrenched is the assumption that full-time work is on offer for most people who want it that even some Bureau of Labor Statistics data calculate annual earnings in various sectors by taking the hourly wage reported by participating employers and multiplying it by 2,080, the number of hours you’d work if you worked 40 hours a week, 52 weeks a year. Never mind that in the real world few workers in certain sectors are given the option of working full-time.”

The reason economists tend to focus on hourly wages is that many people opt to work part-time employment. (Roughly 80 percent of part-time employment is voluntary.) There is nothing wrong with people opting to work less than a full-time job if they want to have time to deal with family responsibilities, go to school, or simply pursue other activities. We usually want to distinguish between people seeing a fall in annual pay because they are paid less, as opposed to working fewer hours.

As far as economists ignoring involuntary part-time, as someone who has been writing about monthly employment reports for more than three decades, I always look at the number of people who report working part-time involuntarily. The same is true for most of the other people writing on these reports. It is hard to imagine a claim further from the truth.

And the issue of not controlling hours has been well-tread ground for decades. The same is the case with irregular and bad hours. This has long been a topic for labor activism, most notably efforts to impose restrictions of “clopening,” requiring workers to come in early to open a restaurant after they stayed late to close it the night before.

In short, control over work hours is in fact a very important issue. Unfortunately, Adelle Waldman’s piece has little to contribute to the debate.

Yes, I am serious. Today’s “Dealbook Newsletter,” is headlined “Rethinking the Prospects of a Soft Landing.” The piece makes the case that the higher-than-expected January CPI, coupled with other data points, raises questions whether inflation is under control.

In making this case one section tells readers:

Worry extends beyond the markets. The prospect of higher inflation is weighing on consumers and small-business owners.

“Meanwhile, Krispy Kreme, Coca-Cola and Heineken each warned this week that stubborn inflation could hurt their earnings.”

Just to say the obvious (I guess not obvious to Dealbook writers and editors), if these big consumer product companies are worried that they are going to be hurt by inflation, it means that they think they lack the pricing power to raise their prices further. As many have noted, part of the pandemic inflation story has been large companies taking advantage of their market power to jack up profit margins.

The story here, insofar as it is accurate, is that the economy has changed enough that big firms no longer have the pricing power they did one or two years ago. That is good news in the battle against inflation, not the bad news we are being told here.

Yes, I am serious. Today’s “Dealbook Newsletter,” is headlined “Rethinking the Prospects of a Soft Landing.” The piece makes the case that the higher-than-expected January CPI, coupled with other data points, raises questions whether inflation is under control.

In making this case one section tells readers:

Worry extends beyond the markets. The prospect of higher inflation is weighing on consumers and small-business owners.

“Meanwhile, Krispy Kreme, Coca-Cola and Heineken each warned this week that stubborn inflation could hurt their earnings.”

Just to say the obvious (I guess not obvious to Dealbook writers and editors), if these big consumer product companies are worried that they are going to be hurt by inflation, it means that they think they lack the pricing power to raise their prices further. As many have noted, part of the pandemic inflation story has been large companies taking advantage of their market power to jack up profit margins.

The story here, insofar as it is accurate, is that the economy has changed enough that big firms no longer have the pricing power they did one or two years ago. That is good news in the battle against inflation, not the bad news we are being told here.

Biden’s Record on Income Growth

Nate Silver had a piece in the New York Times Monday arguing that people had good reason to be upset about the economy under Biden, and that it was not just perceptions that were out of touch with economic reality. Silver tells us:

“But it’s a mistake to assume that consumers have just been reacting to news accounts of high gasoline or fast-food prices instead of actually observing the impact on their bottom lines. People’s pocketbooks really aren’t in great shape — income growth has struggled to keep up with inflation.”

To make his point, he includes a graph of real (inflation-adjusted) per capita disposable income. This is a reasonable measure of people’s income, although it doesn’t quite show the story Silver claims. I have included the same graph but taken it back a bit further to the start of the Trump administration so that people can get a better sense of what is going on.

 

Source: NIPA Tables 2.1 and Table 1.7.5 and author’s calculations, see text.

As can be seen, there are big jumps in 2020 and 2021. These are primarily due to the pandemic checks that we got, first in the CARES Acts, passed while Trump was still president, but then a second round of $1,400 a person after Biden’s recovery package took effect. Income was also boosted by other pandemic relief programs such as expanded unemployment benefits and the expanded child tax credit.

These programs mostly went away after 2021, which explains most of the drop in 2022. That was also a year of sharp inflation, which outpaced wage growth for most workers. That further lowered real income.

However, we see a reversal in 2023. Wages substantially outpace inflation for the year. In addition, the rapid pace of job creation meant that a larger share of the population was working. As a result, real disposable income was considerably higher in the 4th quarter of 2023 than in the 4th quarter of 2019, before the pandemic hit.

To be precise, real per capita disposable income was 6.0 percent higher in the 4th quarter of 2023 than in the fourth quarter of 2019. We can debate what “struggled to keep pace with inflation means,” but we can also do a simple comparison. Between the 4th quarter of 2016, before Trump took office, and the 4th quarter of 2019, real per capita disposable income rose by 8.3 percent.

Now, 8.3 percent is obviously larger than 6.0 percent, and we’re looking at three years rather than four, but it is hard to believe that 6.0 percent growth over four years is serious hardship, while 8.0 percent over three years is great. It is also worth noting in passing that we had a worldwide pandemic that, in addition to killing tens of millions of people, disrupted economies and led to inflation everywhere.

If people were willing to accept a pandemic excuse for the ten million extra unemployed workers at the end of the Trump administration, it seems they would be willing to buy that the pandemic may have slowed income growth somewhat. If not, that sounds more like a story of perceptions than reality.

In any case, there are some other factors that make the story of the Biden economy look better than the 6.0 percent growth figure. First, I have included an “adjusted” line for per capita disposable income alongside the line with the published data from the Bureau of Economic Analysis.

This adjustment takes account of the fact that there has been an unusual gap between measured GDP growth and measured growth in gross domestic income over the last couple of years. This is unusual since in principle we are measuring the same thing.

We can either measure GDP by adding up the goods and services produced, or we can add up the incomes generated in the production process (wages, profits, interest, etc.). The two numbers are never exactly the same, but they usually end up being pretty close.   

In the last two years they have grown far apart, with GDP measured on the output side exceeding the income measure by 2.4 percent in the third quarter. (We don’t have fourth quarter data available yet, so I have assumed the same gap persisted into the fourth quarter.)

Revisions to the data usually bring the two measures closer in line, but given the data we have, it is normal to assume that the true figure will be somewhere in the middle. For my adjusted line, I assume that the true measure of GDP and income growth is halfway between the two reported measures. Making this assumption raises real per capita income growth under Biden to 7.0 percent. That is still less than under Trump but seems pretty far from a struggle to keep pace with inflation.

I’ll add two other important issues that are often overlooked in these discussions of living standards.

Mortgage Refinancing

There was a massive mortgage refinancing boom during the pandemic with 14 million households refinancing their mortgages. The New York Fed estimated that the 9 million households who refinanced without taking out additional money are saving an average of more than $2,500 a year.

The other five million took advantage of low interest rates and rising house prices to borrow more money against their home. The end of the refinancing boom brought an end to this channel of credit, leading to the increase in credit card debt that has gotten many analysts worried.

The savings on mortgage payments do not show up as an increase in disposable income in the GDP accounts. The reduction in mortgage interest payments translates into less interest income among lenders. However the lenders in this story tend to have higher income than the borrowers, so we might think this is in general a good story.

It is striking that this massive wave of refinancing is rarely mentioned in reporting on the economy, while the higher mortgage rates facing potential new home buyers are a frequent topic of reporting. There are many more people in the refinancing camp than potential first-time homebuyers.  

Working from Home

There has been an explosion in the number of people working from home as an enduring effect of the pandemic. According to the Bureau of Labor Statistics, 38 million people worked from home on an average day last year. That’s an increase of more than 11 million from before the pandemic.

This is a huge benefit for these workers. The average amount of time spent commuting in 2019 was 27.6 minutes for a one-way trip, or 55.2 minutes for the round-trip. If we assume an eight-hour workday, time spent commuting added an average of 11.5 percent to the length of the workday. We can think of this as equivalent to an 11.5 percent reduction in the hourly pay rate, compared to a situation where no time is spent commuting.

Commuting to work doesn’t just take time, it is expensive. The average commuting distance to work is more than 15 miles. That means 30 miles for the round-trip. At the federal government’s mileage reimbursement rate of 62.5 cents per mile, this comes to $18.75 a day or almost $4,900 a year. That is 7.0 percent of the annual pay of a worker earning $70,000 a year.

It’s not just travel expenses that people save by being able to work at home. They can save on paying for business clothes, dry cleaning, and buying a purchased lunch at work. For many families, working from home may also save on childcare, insofar as they are able to care for young children without seriously disrupting their work.

In short, the option to work from home can mean large savings in time and money. Also avoiding traffic jams may mean a major quality of life improvement. It is true that the option to work from home is available primarily to the top half of earners, and especially the top fifth, but this is still a very large number that extends far beyond just the rich.

The Data Don’t Support the Complaints About the Economy

The basic story here is that we have seen improvement in living standards for most of the population during Biden’s term in office. Even if we just take Silver’s measure of real per capita disposable income, there were healthy gains, even if not as rapid as during the Trump presidency.

We have also seen substantial reductions in wage inequality in the Biden years. The wage gains were strongest at the bottom end of the wage distribution.

It seems implausible that anger about the economy can be based on the somewhat slower rate of income growth in the Biden year. This is especially the case when we consider that the economy was whacked by a worldwide pandemic, which ended up hurting other economies far more than the U.S.

The public was largely willing to forgive Trump for the high unemployment created by the pandemic, if it’s not willing to forgive Biden for its negative impact on the economy that reflects something other than objective reality. In other words, the media is failing to point out the impact of the pandemic on inflation and growth.

And the Silver measure of income does not include the gains to tens of millions of households from refinancing mortgages and the increased ability to work from home. We know from polling that people are not happy about the economy, but contrary to what Silver would have us believe, there is not a case for their unhappiness in the economic data.

Nate Silver had a piece in the New York Times Monday arguing that people had good reason to be upset about the economy under Biden, and that it was not just perceptions that were out of touch with economic reality. Silver tells us:

“But it’s a mistake to assume that consumers have just been reacting to news accounts of high gasoline or fast-food prices instead of actually observing the impact on their bottom lines. People’s pocketbooks really aren’t in great shape — income growth has struggled to keep up with inflation.”

To make his point, he includes a graph of real (inflation-adjusted) per capita disposable income. This is a reasonable measure of people’s income, although it doesn’t quite show the story Silver claims. I have included the same graph but taken it back a bit further to the start of the Trump administration so that people can get a better sense of what is going on.

 

Source: NIPA Tables 2.1 and Table 1.7.5 and author’s calculations, see text.

As can be seen, there are big jumps in 2020 and 2021. These are primarily due to the pandemic checks that we got, first in the CARES Acts, passed while Trump was still president, but then a second round of $1,400 a person after Biden’s recovery package took effect. Income was also boosted by other pandemic relief programs such as expanded unemployment benefits and the expanded child tax credit.

These programs mostly went away after 2021, which explains most of the drop in 2022. That was also a year of sharp inflation, which outpaced wage growth for most workers. That further lowered real income.

However, we see a reversal in 2023. Wages substantially outpace inflation for the year. In addition, the rapid pace of job creation meant that a larger share of the population was working. As a result, real disposable income was considerably higher in the 4th quarter of 2023 than in the 4th quarter of 2019, before the pandemic hit.

To be precise, real per capita disposable income was 6.0 percent higher in the 4th quarter of 2023 than in the fourth quarter of 2019. We can debate what “struggled to keep pace with inflation means,” but we can also do a simple comparison. Between the 4th quarter of 2016, before Trump took office, and the 4th quarter of 2019, real per capita disposable income rose by 8.3 percent.

Now, 8.3 percent is obviously larger than 6.0 percent, and we’re looking at three years rather than four, but it is hard to believe that 6.0 percent growth over four years is serious hardship, while 8.0 percent over three years is great. It is also worth noting in passing that we had a worldwide pandemic that, in addition to killing tens of millions of people, disrupted economies and led to inflation everywhere.

If people were willing to accept a pandemic excuse for the ten million extra unemployed workers at the end of the Trump administration, it seems they would be willing to buy that the pandemic may have slowed income growth somewhat. If not, that sounds more like a story of perceptions than reality.

In any case, there are some other factors that make the story of the Biden economy look better than the 6.0 percent growth figure. First, I have included an “adjusted” line for per capita disposable income alongside the line with the published data from the Bureau of Economic Analysis.

This adjustment takes account of the fact that there has been an unusual gap between measured GDP growth and measured growth in gross domestic income over the last couple of years. This is unusual since in principle we are measuring the same thing.

We can either measure GDP by adding up the goods and services produced, or we can add up the incomes generated in the production process (wages, profits, interest, etc.). The two numbers are never exactly the same, but they usually end up being pretty close.   

In the last two years they have grown far apart, with GDP measured on the output side exceeding the income measure by 2.4 percent in the third quarter. (We don’t have fourth quarter data available yet, so I have assumed the same gap persisted into the fourth quarter.)

Revisions to the data usually bring the two measures closer in line, but given the data we have, it is normal to assume that the true figure will be somewhere in the middle. For my adjusted line, I assume that the true measure of GDP and income growth is halfway between the two reported measures. Making this assumption raises real per capita income growth under Biden to 7.0 percent. That is still less than under Trump but seems pretty far from a struggle to keep pace with inflation.

I’ll add two other important issues that are often overlooked in these discussions of living standards.

Mortgage Refinancing

There was a massive mortgage refinancing boom during the pandemic with 14 million households refinancing their mortgages. The New York Fed estimated that the 9 million households who refinanced without taking out additional money are saving an average of more than $2,500 a year.

The other five million took advantage of low interest rates and rising house prices to borrow more money against their home. The end of the refinancing boom brought an end to this channel of credit, leading to the increase in credit card debt that has gotten many analysts worried.

The savings on mortgage payments do not show up as an increase in disposable income in the GDP accounts. The reduction in mortgage interest payments translates into less interest income among lenders. However the lenders in this story tend to have higher income than the borrowers, so we might think this is in general a good story.

It is striking that this massive wave of refinancing is rarely mentioned in reporting on the economy, while the higher mortgage rates facing potential new home buyers are a frequent topic of reporting. There are many more people in the refinancing camp than potential first-time homebuyers.  

Working from Home

There has been an explosion in the number of people working from home as an enduring effect of the pandemic. According to the Bureau of Labor Statistics, 38 million people worked from home on an average day last year. That’s an increase of more than 11 million from before the pandemic.

This is a huge benefit for these workers. The average amount of time spent commuting in 2019 was 27.6 minutes for a one-way trip, or 55.2 minutes for the round-trip. If we assume an eight-hour workday, time spent commuting added an average of 11.5 percent to the length of the workday. We can think of this as equivalent to an 11.5 percent reduction in the hourly pay rate, compared to a situation where no time is spent commuting.

Commuting to work doesn’t just take time, it is expensive. The average commuting distance to work is more than 15 miles. That means 30 miles for the round-trip. At the federal government’s mileage reimbursement rate of 62.5 cents per mile, this comes to $18.75 a day or almost $4,900 a year. That is 7.0 percent of the annual pay of a worker earning $70,000 a year.

It’s not just travel expenses that people save by being able to work at home. They can save on paying for business clothes, dry cleaning, and buying a purchased lunch at work. For many families, working from home may also save on childcare, insofar as they are able to care for young children without seriously disrupting their work.

In short, the option to work from home can mean large savings in time and money. Also avoiding traffic jams may mean a major quality of life improvement. It is true that the option to work from home is available primarily to the top half of earners, and especially the top fifth, but this is still a very large number that extends far beyond just the rich.

The Data Don’t Support the Complaints About the Economy

The basic story here is that we have seen improvement in living standards for most of the population during Biden’s term in office. Even if we just take Silver’s measure of real per capita disposable income, there were healthy gains, even if not as rapid as during the Trump presidency.

We have also seen substantial reductions in wage inequality in the Biden years. The wage gains were strongest at the bottom end of the wage distribution.

It seems implausible that anger about the economy can be based on the somewhat slower rate of income growth in the Biden year. This is especially the case when we consider that the economy was whacked by a worldwide pandemic, which ended up hurting other economies far more than the U.S.

The public was largely willing to forgive Trump for the high unemployment created by the pandemic, if it’s not willing to forgive Biden for its negative impact on the economy that reflects something other than objective reality. In other words, the media is failing to point out the impact of the pandemic on inflation and growth.

And the Silver measure of income does not include the gains to tens of millions of households from refinancing mortgages and the increased ability to work from home. We know from polling that people are not happy about the economy, but contrary to what Silver would have us believe, there is not a case for their unhappiness in the economic data.

The Biden administration has run into a brick wall, or at least MAGA lunacy, in its $60 billion funding request for Ukraine. A big part of its problem is that many people are debating this funding with the idea that it requires pulling away money from other important programs or that it will be a huge increase in the nation’s debt. This is not true, but the widespread belief that $60 billion is a large amount of money to the federal government is a major obstacle to getting the request through Congress.

The federal government is projected to spend more than $6.6 trillion this year, which means that the Ukraine funding request will be a bit more than 0.9 percent of the federal budget. If people prefer to see the funding proposal relative to the whole economy, our GDP will be around $28.2 trillion this year, so the Ukraine money will be a bit more than 0.2 percent of GDP. If we want another comparison, we will spend roughly $850 billion on the military in 2024, so the Ukraine request is a bit more than 7.0 percent of the size of the military’s budget.  

These, and other, comparisons can help to make the impact of the proposed spending request meaningful to people. As it is, almost no one will ever see a sum anything like $60 billion. The figure likely means almost nothing to most people other than being a really big number. It would probably look pretty much the same to people if we added a zero or took one away, since most people have no reason ever to think about numbers in the billions or tens of billions.

Reporters know that these really big numbers are largely meaningless to the people who see or hear them. Margaret Sullivan, who was at the time the New York Times public editor, had a great column back in  2013 where she strongly argued this point.

The column took the paper to task for writing really big numbers, especially in the context of the federal budget, that were meaningless to almost everyone who read them. David Leonhardt, who was then the Washington editor, strongly agreed, saying that they might as well just write “really big number” instead of putting in the billions, tens of billions, or hundreds of billions. There seemed to be a genuine commitment to expressing these numbers in a context that made them meaningful to readers.

I went out to celebrate that night, expecting a new era of reporting in the NYT, which would likely transform reporting more generally, given the importance of the paper. That new era never came.

We’re seeing the repercussions of that failure now in the debate over Ukraine aid. The opponents of the aid are benefitting enormously by the fact that most people hugely exaggerate the size of the aid relative to the budget or the economy.

To be clear, there are good arguments that can be made against aiding Ukraine and the larger war. The fact that the aid is not depressing U.S. living standards or keeping us from spending on other important programs, does not mean it is a good thing.

But we should be having a debate over its actual merits, with a clear knowledge of how much of a burden sending $60 billion to Ukraine is. That is not the case today, and this reality is almost entirely the media’s fault.  

The Biden administration has run into a brick wall, or at least MAGA lunacy, in its $60 billion funding request for Ukraine. A big part of its problem is that many people are debating this funding with the idea that it requires pulling away money from other important programs or that it will be a huge increase in the nation’s debt. This is not true, but the widespread belief that $60 billion is a large amount of money to the federal government is a major obstacle to getting the request through Congress.

The federal government is projected to spend more than $6.6 trillion this year, which means that the Ukraine funding request will be a bit more than 0.9 percent of the federal budget. If people prefer to see the funding proposal relative to the whole economy, our GDP will be around $28.2 trillion this year, so the Ukraine money will be a bit more than 0.2 percent of GDP. If we want another comparison, we will spend roughly $850 billion on the military in 2024, so the Ukraine request is a bit more than 7.0 percent of the size of the military’s budget.  

These, and other, comparisons can help to make the impact of the proposed spending request meaningful to people. As it is, almost no one will ever see a sum anything like $60 billion. The figure likely means almost nothing to most people other than being a really big number. It would probably look pretty much the same to people if we added a zero or took one away, since most people have no reason ever to think about numbers in the billions or tens of billions.

Reporters know that these really big numbers are largely meaningless to the people who see or hear them. Margaret Sullivan, who was at the time the New York Times public editor, had a great column back in  2013 where she strongly argued this point.

The column took the paper to task for writing really big numbers, especially in the context of the federal budget, that were meaningless to almost everyone who read them. David Leonhardt, who was then the Washington editor, strongly agreed, saying that they might as well just write “really big number” instead of putting in the billions, tens of billions, or hundreds of billions. There seemed to be a genuine commitment to expressing these numbers in a context that made them meaningful to readers.

I went out to celebrate that night, expecting a new era of reporting in the NYT, which would likely transform reporting more generally, given the importance of the paper. That new era never came.

We’re seeing the repercussions of that failure now in the debate over Ukraine aid. The opponents of the aid are benefitting enormously by the fact that most people hugely exaggerate the size of the aid relative to the budget or the economy.

To be clear, there are good arguments that can be made against aiding Ukraine and the larger war. The fact that the aid is not depressing U.S. living standards or keeping us from spending on other important programs, does not mean it is a good thing.

But we should be having a debate over its actual merits, with a clear knowledge of how much of a burden sending $60 billion to Ukraine is. That is not the case today, and this reality is almost entirely the media’s fault.  

In prior decades we used to try to restrict the ability of the rich and very rich to buy elections. We have limits on campaign contributions to candidates and political parties. Until the Supreme Court’s 2009 decision in Citizens United case, corporations were prohibited altogether from contributing to politicians and political campaigns.

This is no longer the case. The rich have found ways to largely circumvent campaign funding restrictions with independent campaign committees. And corporations can support whatever candidates or causes they want.

But the problem of money is even worse than it seems. Not only do the rich get to spend as much as they want to advance their interests, they can actually get taxpayer subsidies for pushing their political agenda. Through a loophole in the tax code, they can donate an asset, like shares of stock, that has appreciated in value, and not ever pay tax on the capital gain.

To see how this works, suppose that Elon Musk bought shares of Tesla for $100 million that are now worth $1 billion. If Mr. Musk wanted to contribute $1 billion to his favorite political cause, he could sell these shares and then hand over a check for $1 billion.

However, in this case, he would have to pay capital gains taxes on the $900 million gain ($1 billion sales price, minus the $100 million he paid for the stock). His tax bill in this case would be 20 percent of his gains or $180 million.

But due to a loophole in the tax code, Elon Musk’s accountant can arrange to simply transfer the Tesla stock to the campaign committee. In that situation neither Musk nor the campaign committee ever has to pay taxes on the gain. By reducing his taxes, we have effectively given Elon Musk $180 million to support his favorite political cause.

This clearly does not make sense. Whether or not we think we should be limiting rich people’s ability to use their money to influence politics, it is hard to see an argument that the taxpayers need to subsidize their contributions. 

To level the playing field at least a little bit, so that we won’t be subsidizing the political contributions of the rich, Rhode Island Senator Sheldon Whitehouse and California Representative Judy Chu are introducing the End Tax Breaks for Dark Money Act. This bill would eliminate the current loophole in the tax code. If it passes, rich people would simply have to pay their taxes on their income like everyone else, before they make their campaign contributions.

The rich and very rich will not like giving up their special subsidy, but it is hard to see why anyone else would object to this proposal.  

Addendum

A reader reminded me that high-income people would also pay a 3.8 percent Medicare surtax on capital gains. Also, many states have their own income tax on capital gains, with California’s being the highest at 13.3 percent. This means I substantially understated the subsidy to the political contributions of the rich. In the example here, If Elon Musk still lived in California, the taxpayer subsidy for his $1 billion contribution would be over $300 million.

In prior decades we used to try to restrict the ability of the rich and very rich to buy elections. We have limits on campaign contributions to candidates and political parties. Until the Supreme Court’s 2009 decision in Citizens United case, corporations were prohibited altogether from contributing to politicians and political campaigns.

This is no longer the case. The rich have found ways to largely circumvent campaign funding restrictions with independent campaign committees. And corporations can support whatever candidates or causes they want.

But the problem of money is even worse than it seems. Not only do the rich get to spend as much as they want to advance their interests, they can actually get taxpayer subsidies for pushing their political agenda. Through a loophole in the tax code, they can donate an asset, like shares of stock, that has appreciated in value, and not ever pay tax on the capital gain.

To see how this works, suppose that Elon Musk bought shares of Tesla for $100 million that are now worth $1 billion. If Mr. Musk wanted to contribute $1 billion to his favorite political cause, he could sell these shares and then hand over a check for $1 billion.

However, in this case, he would have to pay capital gains taxes on the $900 million gain ($1 billion sales price, minus the $100 million he paid for the stock). His tax bill in this case would be 20 percent of his gains or $180 million.

But due to a loophole in the tax code, Elon Musk’s accountant can arrange to simply transfer the Tesla stock to the campaign committee. In that situation neither Musk nor the campaign committee ever has to pay taxes on the gain. By reducing his taxes, we have effectively given Elon Musk $180 million to support his favorite political cause.

This clearly does not make sense. Whether or not we think we should be limiting rich people’s ability to use their money to influence politics, it is hard to see an argument that the taxpayers need to subsidize their contributions. 

To level the playing field at least a little bit, so that we won’t be subsidizing the political contributions of the rich, Rhode Island Senator Sheldon Whitehouse and California Representative Judy Chu are introducing the End Tax Breaks for Dark Money Act. This bill would eliminate the current loophole in the tax code. If it passes, rich people would simply have to pay their taxes on their income like everyone else, before they make their campaign contributions.

The rich and very rich will not like giving up their special subsidy, but it is hard to see why anyone else would object to this proposal.  

Addendum

A reader reminded me that high-income people would also pay a 3.8 percent Medicare surtax on capital gains. Also, many states have their own income tax on capital gains, with California’s being the highest at 13.3 percent. This means I substantially understated the subsidy to the political contributions of the rich. In the example here, If Elon Musk still lived in California, the taxpayer subsidy for his $1 billion contribution would be over $300 million.

It is not hard to get access to government data on homeownership. You just need an Internet connection, that’s it.

Unfortunately, it seems that cost-cutting or other measures prevent reporters at CNN and the New York Times from getting the data that the Census Bureau publishes quarterly on homeownership rates among young people. They keep telling their audiences that young people will never be able to own a home. This is in spite of the fact that homeownership rates among young people are higher today than in 2019 when they did not constantly run stories about young people not being able to own a home.

Here’s the picture from the Census Bureau.

Source: Census Bureau, Table 6.

To be clear, there are some real issues. The homeownership rate among young people is still below what it was before the collapse of the housing bubble and there was a longer-term decline beginning in the late seventies. (This decline is partially concealed in data that looks at homeownership rates among households, since a smaller percentage of young people have their own households today than in the late seventies, since they are still living with their parents.)

The recent run-up in mortgage rates has also made it difficult for many young people to buy a home. If high rates persist, then unless house prices fall, it will be hard for those who do not already own a home to buy one.

However, mortgage interest rates have already fallen, from a peak of over 8.0 percent last fall to around 6.6 percent at present. Most analysts expect further declines, although we are unlikely to see anything like the 3.0 percent rates of the pandemic era.

In any case, it would be dishonest to write as though persistently high rates is a given. No one wrote pieces in 1981 on the impossibility of homeownership based on the assumption that the 18.0 percent mortgage rates of that time would persist indefinitely.

It is not easy for young people to own a home, and that is a problem. But that problem is not new. Perhaps the major news outlets have just discovered this problem, but that is due to their own ignorance, not reality.   

It is not hard to get access to government data on homeownership. You just need an Internet connection, that’s it.

Unfortunately, it seems that cost-cutting or other measures prevent reporters at CNN and the New York Times from getting the data that the Census Bureau publishes quarterly on homeownership rates among young people. They keep telling their audiences that young people will never be able to own a home. This is in spite of the fact that homeownership rates among young people are higher today than in 2019 when they did not constantly run stories about young people not being able to own a home.

Here’s the picture from the Census Bureau.

Source: Census Bureau, Table 6.

To be clear, there are some real issues. The homeownership rate among young people is still below what it was before the collapse of the housing bubble and there was a longer-term decline beginning in the late seventies. (This decline is partially concealed in data that looks at homeownership rates among households, since a smaller percentage of young people have their own households today than in the late seventies, since they are still living with their parents.)

The recent run-up in mortgage rates has also made it difficult for many young people to buy a home. If high rates persist, then unless house prices fall, it will be hard for those who do not already own a home to buy one.

However, mortgage interest rates have already fallen, from a peak of over 8.0 percent last fall to around 6.6 percent at present. Most analysts expect further declines, although we are unlikely to see anything like the 3.0 percent rates of the pandemic era.

In any case, it would be dishonest to write as though persistently high rates is a given. No one wrote pieces in 1981 on the impossibility of homeownership based on the assumption that the 18.0 percent mortgage rates of that time would persist indefinitely.

It is not easy for young people to own a home, and that is a problem. But that problem is not new. Perhaps the major news outlets have just discovered this problem, but that is due to their own ignorance, not reality.   

 A Delaware state court judge ruled that the $56 billion pay package awarded to Elon Musk by Tesla’s board of directors in 2018 was illegal. The gist of the ruling was that the board was composed of people who were close friends or relatives of Musk. The judge ruled that they gave him an outlandish compensation package, based on targets that they knew would be easily reached. She therefore threw out the contract.

To get an idea of the size of the pay package, Elon Musk’s compensation came to 89 percent of Tesla’s gross (pre-tax) profits over the years 2019-2023. It seems unlikely that that the company could not have attracted a competent CEO who would have agreed to work for a sum substantially less than 90 percent of the company’s profits. It is also seems likely that if an independent board had offered Musk a contract for 1-2 percent of the current contract ($560 million to $1,120 million) that he would have taken it, since it is unlikely that he had better paying options.

It is worth noting that the contract was not thrown out for moral reasons – the judge did not indicate that she felt Musk was making too much money in a general philosophical sense. It was thrown out because the judge determined that a board closely controlled by the CEO was ripping off shareholders with his generous compensation package.

Although most boards are not as tightly controlled by a CEO as Tesla’s, boards generally view their allegiances as being first and foremost to top management and not to shareholders. This is a main cause of outlandish CEO pay.

Last fall, when the UAW negotiated new contracts with the Big Three, it was striking how out of line CEO pay at the U.S. companies was compared with their counterparts in other wealthy countries. The pay of the top execs at Stellantis, Ford, and GM was $21 million, $25 million, and $29 million, respectively. By contrast, at BMW, Mercedes, and Porsche, it was $5.6 million, $7.5 million, and $7.9 million. At the large Japanese manufacturers, it was $2.3 million at Honda, $4.5 million at Nissan, and $6.7 million at Toyota.

It would be difficult to claim that the fact that, GM’s CEO got more than five times the pay of BMW’s CEO, and more than ten times the pay of Honda’s CEO, is explained by superior performance. Clearly the issue is different rules and norms of corporate governance that restrain CEO pay in other countries more than in the United States.

If we looked to change the rules of corporate governance, to give more control to shareholders, it is likely that we can bring pay of CEOs here more in line with their pay elsewhere in the world. This is a big deal, not just because a small number of CEOs get outlandish pay, but because the pay of CEOs distorts the pay structure at the top more generally.

If CEOs got $3 million or $4 million, rather than $20 million or $30 million, the CFO and other top execs would see corresponding cuts in pay, as would third tier executives. This would also spill over into the non-corporate sector. Currently, university presidents or heads of major foundations and charities often get paid $2 million or $3 million a year. When a senior person in the corporate takes a top-level government position at $200,000 a year, that is considered a major sacrifice.

We would be in a very different world if pay for CEOs in the U.S. looked more like pay in Europe and Japan. Elon Musk’s outlandish pay package shows us the route to getting there. It is fine to complain about the morality of CEOs getting $20 million or $30 million or even more, but the more practical issue is that they are ripping off the companies they work for.

If shareholders had more ability to challenge CEO pay, it is likely that we would see serious downward pressure on the size of pay packages CEOs now get. Shareholders have no more interest in CEOs getting two or three times what the market would bear than they do in having assembly line workers or retail clerks getting two or three times the market wage. There is a mechanism in place for restraining the pay of assembly line workers and retail clerks, we need a comparable mechanism for restraining the pay of CEOs and other top management.

 A Delaware state court judge ruled that the $56 billion pay package awarded to Elon Musk by Tesla’s board of directors in 2018 was illegal. The gist of the ruling was that the board was composed of people who were close friends or relatives of Musk. The judge ruled that they gave him an outlandish compensation package, based on targets that they knew would be easily reached. She therefore threw out the contract.

To get an idea of the size of the pay package, Elon Musk’s compensation came to 89 percent of Tesla’s gross (pre-tax) profits over the years 2019-2023. It seems unlikely that that the company could not have attracted a competent CEO who would have agreed to work for a sum substantially less than 90 percent of the company’s profits. It is also seems likely that if an independent board had offered Musk a contract for 1-2 percent of the current contract ($560 million to $1,120 million) that he would have taken it, since it is unlikely that he had better paying options.

It is worth noting that the contract was not thrown out for moral reasons – the judge did not indicate that she felt Musk was making too much money in a general philosophical sense. It was thrown out because the judge determined that a board closely controlled by the CEO was ripping off shareholders with his generous compensation package.

Although most boards are not as tightly controlled by a CEO as Tesla’s, boards generally view their allegiances as being first and foremost to top management and not to shareholders. This is a main cause of outlandish CEO pay.

Last fall, when the UAW negotiated new contracts with the Big Three, it was striking how out of line CEO pay at the U.S. companies was compared with their counterparts in other wealthy countries. The pay of the top execs at Stellantis, Ford, and GM was $21 million, $25 million, and $29 million, respectively. By contrast, at BMW, Mercedes, and Porsche, it was $5.6 million, $7.5 million, and $7.9 million. At the large Japanese manufacturers, it was $2.3 million at Honda, $4.5 million at Nissan, and $6.7 million at Toyota.

It would be difficult to claim that the fact that, GM’s CEO got more than five times the pay of BMW’s CEO, and more than ten times the pay of Honda’s CEO, is explained by superior performance. Clearly the issue is different rules and norms of corporate governance that restrain CEO pay in other countries more than in the United States.

If we looked to change the rules of corporate governance, to give more control to shareholders, it is likely that we can bring pay of CEOs here more in line with their pay elsewhere in the world. This is a big deal, not just because a small number of CEOs get outlandish pay, but because the pay of CEOs distorts the pay structure at the top more generally.

If CEOs got $3 million or $4 million, rather than $20 million or $30 million, the CFO and other top execs would see corresponding cuts in pay, as would third tier executives. This would also spill over into the non-corporate sector. Currently, university presidents or heads of major foundations and charities often get paid $2 million or $3 million a year. When a senior person in the corporate takes a top-level government position at $200,000 a year, that is considered a major sacrifice.

We would be in a very different world if pay for CEOs in the U.S. looked more like pay in Europe and Japan. Elon Musk’s outlandish pay package shows us the route to getting there. It is fine to complain about the morality of CEOs getting $20 million or $30 million or even more, but the more practical issue is that they are ripping off the companies they work for.

If shareholders had more ability to challenge CEO pay, it is likely that we would see serious downward pressure on the size of pay packages CEOs now get. Shareholders have no more interest in CEOs getting two or three times what the market would bear than they do in having assembly line workers or retail clerks getting two or three times the market wage. There is a mechanism in place for restraining the pay of assembly line workers and retail clerks, we need a comparable mechanism for restraining the pay of CEOs and other top management.

The Washington Post ran a piece by Georgetown University professor Erwin Tiongson telling readers that to find out about the state of the world economy, look at the bottom of toy cars. The point was that toy cars are produced by a relatively simple manufacturing process. The countries that manufacture these cars are likely to have large supplies of relatively low-cost labor.

These countries often are seeing rapid growth as workers are shifting from agriculture to manufacturing, but are not wealthy, since they have large numbers of workers doing cheap labor. The article points out that seventy years ago, it would been common to see these cars produced in the United States. Then they were produced in Japan and Korea. As these countries became wealthier, they were no longer a source for cheap labor, instead China was a likely manufacturer.

With China getting wealthier, and more recently political efforts to reduce dependency on China, Tiongson said that he expected production to move to poorer countries like Mexico, Bangladesh, or Ethiopia. He said that he was surprised to find that many cars were being made in China and also Malaysia.

Tiongson then tells readers:

“In addition, toy manufacturing reflects not only the promise of industrialization but also its disappointments. In late 2022, Mattel commemorated its 40th year of manufacturing in Malaysia by announcing the growth of its Hot Wheels factory there, the world’s biggest. This was a positive development, but Malaysia’s economy reached middle-income status decades ago; in the familiar pattern, it would by now have progressed to manufacturing more complex, profitable products. Instead, the country has remained in what economists Indermit Gill and Homi Kharas defined as the “middle-income trap” — caught between developing and rich nations.”

Actually, the evidence does not indicate Malaysia is in a middle-income trap. Per capita income in Malaysia has continued to catch up rapidly with income in the United States and other wealthy countries, as shown below.

Its current level of per capita GDP is less than 7.0 percent below that of Greece, which would make most people’s list of wealthy countries. It also continues to maintain a rapid pace of growth. The I.M.F. recently projected its growth for 2023 at 4.0 percent, following 8.7 percent growth in 2022. It is projected to continue to grow at roughly a 4.0 percent rate for the rest of the I.M.F. projection period.  With population growth of roughly 1.0 percent, this translates into 3.0 percent per capita GDP growth, implying that incomes would double in just over twenty years.

The I.M.F. projections could well prove to be wrong, but they certainly do not support the case for Malaysia being in a middle-income trap. For whatever reason, despite now being a relatively wealthy country, Malaysia is still exporting low-cost manufactured goods. Perhaps looking at the bottom of toy cars doesn’t tell us as much about the world economy as Mr. Tiongson claims.

The Washington Post ran a piece by Georgetown University professor Erwin Tiongson telling readers that to find out about the state of the world economy, look at the bottom of toy cars. The point was that toy cars are produced by a relatively simple manufacturing process. The countries that manufacture these cars are likely to have large supplies of relatively low-cost labor.

These countries often are seeing rapid growth as workers are shifting from agriculture to manufacturing, but are not wealthy, since they have large numbers of workers doing cheap labor. The article points out that seventy years ago, it would been common to see these cars produced in the United States. Then they were produced in Japan and Korea. As these countries became wealthier, they were no longer a source for cheap labor, instead China was a likely manufacturer.

With China getting wealthier, and more recently political efforts to reduce dependency on China, Tiongson said that he expected production to move to poorer countries like Mexico, Bangladesh, or Ethiopia. He said that he was surprised to find that many cars were being made in China and also Malaysia.

Tiongson then tells readers:

“In addition, toy manufacturing reflects not only the promise of industrialization but also its disappointments. In late 2022, Mattel commemorated its 40th year of manufacturing in Malaysia by announcing the growth of its Hot Wheels factory there, the world’s biggest. This was a positive development, but Malaysia’s economy reached middle-income status decades ago; in the familiar pattern, it would by now have progressed to manufacturing more complex, profitable products. Instead, the country has remained in what economists Indermit Gill and Homi Kharas defined as the “middle-income trap” — caught between developing and rich nations.”

Actually, the evidence does not indicate Malaysia is in a middle-income trap. Per capita income in Malaysia has continued to catch up rapidly with income in the United States and other wealthy countries, as shown below.

Its current level of per capita GDP is less than 7.0 percent below that of Greece, which would make most people’s list of wealthy countries. It also continues to maintain a rapid pace of growth. The I.M.F. recently projected its growth for 2023 at 4.0 percent, following 8.7 percent growth in 2022. It is projected to continue to grow at roughly a 4.0 percent rate for the rest of the I.M.F. projection period.  With population growth of roughly 1.0 percent, this translates into 3.0 percent per capita GDP growth, implying that incomes would double in just over twenty years.

The I.M.F. projections could well prove to be wrong, but they certainly do not support the case for Malaysia being in a middle-income trap. For whatever reason, despite now being a relatively wealthy country, Malaysia is still exporting low-cost manufactured goods. Perhaps looking at the bottom of toy cars doesn’t tell us as much about the world economy as Mr. Tiongson claims.

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