Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)
However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the “statistical discrepancy.”
Appelbaum’s post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.
There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.
The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.
The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.
This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.
Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)
However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the “statistical discrepancy.”
Appelbaum’s post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.
There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.
The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.
The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.
This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.
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In order to advance inter-Atlantic dialogue, we’ve encouraged some of our friends in Europe to put together a list of useful European economic blogs. Here is a list compiled by Henning Meyer, the editor of Social Europe Journal. You can find his post here.
European Economic Blogs
Blog Centre for European Reform
Thomas Fricke@ Financial Times Deutschland
In order to advance inter-Atlantic dialogue, we’ve encouraged some of our friends in Europe to put together a list of useful European economic blogs. Here is a list compiled by Henning Meyer, the editor of Social Europe Journal. You can find his post here.
European Economic Blogs
Blog Centre for European Reform
Thomas Fricke@ Financial Times Deutschland
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
It’s always good to get the perspective of the people on the ground when reporting on a policy. However, when they say things that are clearly not true, reporters should provide readers with the correct information. The NYT fell down on the job in a piece that presented the views of a number of people in Massachusetts who were unhappy with the mandate and employer penalties in its health care law, which is the model for Obamacare.
The piece begins by telling us about Wayde Lodor, a 53 year-old independent product development consultant from Leominster. Mr. Lodor says that he is in good health and therefore does not want to buy insurance for himself and his college age daughter. The article tells us that Lodor estimates the cost of this insurance at $1,200 a month.
A quick visit to the Massachusetts insurance exchange reveals that the lowest cost plan for a 53-year old with one dependent child would be $685. This is only a bit more than half of Mr. Lodor’s estimate of what he would have to pay to comply with the mandate. It would have been helpful to tell readers that Lodor had seriously over-estimated the cost of complying with the mandate.
The piece then talks to Teofilo Cuevas, who it tells us earns about $40,000 a year as a meat cutter at a grocery store. Mr Cuevas has apparently dropped his employer provided insurance because he could not afford the co-payments. It would have been useful to note that Mr. Cuevas’ income would qualify him for subsidies under the Massachusetts plan. He would not be required to pay more than $235 a month. That may still be a serious burden, but it would have been useful to provide this information.
The next source is a small business owner, Ronn Garry Jr., owner of Tropical Foods, a grocery store in the Roxbury section of Boston. Mr Garry complained that the $295 per worker penalty for firms cost him nearly $30,000 a year. Actually, 70*$295 = $20,650. This would usually be thought of as close to $20,000, rather than nearly $30,000.
The piece also relies on Garry’s claim that he faces this fine only because not enough workers signed up for his employer provided plan. It is possible that Garry provides little subsidy with this plan so that it is unaffordable for most of his workers.
Finally, the piece turns to William Fields, who is described as “a consultant in Boston who helps employers comply with the law.” Mr. Fields is quoted saying:
“You have some of those who are truly bad guys and should be fined,. … But the ones that are personal to me are the $50,000 fine that puts my client out of business.”
Fields does not give any examples of businesses that were closed because of this fine. It would have been worth pressing him on the topic because it is not clear what he thinks he is saying.
Any business that goes under is by definition marginal. This means that any expense can be seen as putting it under. This could mean its electric bill, a dry-cleaning bill, or any other item. To owe a $50,000 fine the business would need to have 170 employees. A firm with 170 employees would typically have sales of at least $5 million a year. The odds are that if a $50,000 penalty caused such a firm to close, it probably would have gone out of business in any case. In other words, this firm was on its way down and paying the fine really did not affect its fate.
It would have been helpful to readers if this article had made an effort to determine the accuracy of the assertions these people were making rather than just reporting them unquestioningly.
It’s always good to get the perspective of the people on the ground when reporting on a policy. However, when they say things that are clearly not true, reporters should provide readers with the correct information. The NYT fell down on the job in a piece that presented the views of a number of people in Massachusetts who were unhappy with the mandate and employer penalties in its health care law, which is the model for Obamacare.
The piece begins by telling us about Wayde Lodor, a 53 year-old independent product development consultant from Leominster. Mr. Lodor says that he is in good health and therefore does not want to buy insurance for himself and his college age daughter. The article tells us that Lodor estimates the cost of this insurance at $1,200 a month.
A quick visit to the Massachusetts insurance exchange reveals that the lowest cost plan for a 53-year old with one dependent child would be $685. This is only a bit more than half of Mr. Lodor’s estimate of what he would have to pay to comply with the mandate. It would have been helpful to tell readers that Lodor had seriously over-estimated the cost of complying with the mandate.
The piece then talks to Teofilo Cuevas, who it tells us earns about $40,000 a year as a meat cutter at a grocery store. Mr Cuevas has apparently dropped his employer provided insurance because he could not afford the co-payments. It would have been useful to note that Mr. Cuevas’ income would qualify him for subsidies under the Massachusetts plan. He would not be required to pay more than $235 a month. That may still be a serious burden, but it would have been useful to provide this information.
The next source is a small business owner, Ronn Garry Jr., owner of Tropical Foods, a grocery store in the Roxbury section of Boston. Mr Garry complained that the $295 per worker penalty for firms cost him nearly $30,000 a year. Actually, 70*$295 = $20,650. This would usually be thought of as close to $20,000, rather than nearly $30,000.
The piece also relies on Garry’s claim that he faces this fine only because not enough workers signed up for his employer provided plan. It is possible that Garry provides little subsidy with this plan so that it is unaffordable for most of his workers.
Finally, the piece turns to William Fields, who is described as “a consultant in Boston who helps employers comply with the law.” Mr. Fields is quoted saying:
“You have some of those who are truly bad guys and should be fined,. … But the ones that are personal to me are the $50,000 fine that puts my client out of business.”
Fields does not give any examples of businesses that were closed because of this fine. It would have been worth pressing him on the topic because it is not clear what he thinks he is saying.
Any business that goes under is by definition marginal. This means that any expense can be seen as putting it under. This could mean its electric bill, a dry-cleaning bill, or any other item. To owe a $50,000 fine the business would need to have 170 employees. A firm with 170 employees would typically have sales of at least $5 million a year. The odds are that if a $50,000 penalty caused such a firm to close, it probably would have gone out of business in any case. In other words, this firm was on its way down and paying the fine really did not affect its fate.
It would have been helpful to readers if this article had made an effort to determine the accuracy of the assertions these people were making rather than just reporting them unquestioningly.
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The NYT reported on a revision to 4th quarter GDP data in the UK that showed the economy shrinking at a 1.2 percent annual rate rather than the 0.8 percent rate previously reported. Unfortunately, the article reported the data giving quarterly rates, so most readers probably did not recognize that the 0.3 percent decline from the third quarter translated into a 1.2 percent annual rate.
Since this is written primarily for an audience in the United States, and GDP growth numbers are always reported as annual rates, the NYT should have converted the quarterly rate so that readers would understand what the number.
The NYT reported on a revision to 4th quarter GDP data in the UK that showed the economy shrinking at a 1.2 percent annual rate rather than the 0.8 percent rate previously reported. Unfortunately, the article reported the data giving quarterly rates, so most readers probably did not recognize that the 0.3 percent decline from the third quarter translated into a 1.2 percent annual rate.
Since this is written primarily for an audience in the United States, and GDP growth numbers are always reported as annual rates, the NYT should have converted the quarterly rate so that readers would understand what the number.
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Read More Leer más Join the discussion Participa en la discusión
The people who have been working for more than a decade to have states use their public employee pension systems to provide pensions to workers in the private sector will undoubtedly be happy to see the NYT’s piece on the topic this morning. However they will be surprised to have the idea referred to as “new.”
At the top of this list would be the Economic Opportunity Institute in Seattle, Washington, which has been promoting “Washington Voluntary Accounts” since 2000. They even got legislation approved a few years back, but the fiscal crisis resulting from the recession nixed the start-up funding.
There was a similar effort in California in 2007 to piggy back pensions on its CALPERS system. Connecticut and Maryland’s legislatures were also close to approving comparable measures. Anyhow, it’s great to see the NYT finally take notice now that some efforts are being made in New York on this issue, but it would be good if it did its homework.
(Here‘s one of my papers on the topic.)
The people who have been working for more than a decade to have states use their public employee pension systems to provide pensions to workers in the private sector will undoubtedly be happy to see the NYT’s piece on the topic this morning. However they will be surprised to have the idea referred to as “new.”
At the top of this list would be the Economic Opportunity Institute in Seattle, Washington, which has been promoting “Washington Voluntary Accounts” since 2000. They even got legislation approved a few years back, but the fiscal crisis resulting from the recession nixed the start-up funding.
There was a similar effort in California in 2007 to piggy back pensions on its CALPERS system. Connecticut and Maryland’s legislatures were also close to approving comparable measures. Anyhow, it’s great to see the NYT finally take notice now that some efforts are being made in New York on this issue, but it would be good if it did its homework.
(Here‘s one of my papers on the topic.)
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The NYT had a story about an uptick in confidence among German retailers, suggesting that German consumers will increase their spending. The piece noted that Germans save more than people in the U.S. then told readers:
“Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable.”
In Germany consumption accounts for 57 percent of GDP compared to around 70 percent in the U.S.. This difference is not the reason that retailers fail in Germany, because the gap is not new.
Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers. There are plenty of retail stores that are able to do just fine in Germany even with a smaller share of GDP going to consumption.
Addendum:
Andrew Watt at the European Trade Union Institute, offers a correction. He points out that the consumption share of GDP did in fact rise substantially in the United States from the mid-90s to the present. This would mean that the retail market had improved in the United States relative to Germany, where the consumption share remained pretty much constant over this period.
The NYT had a story about an uptick in confidence among German retailers, suggesting that German consumers will increase their spending. The piece noted that Germans save more than people in the U.S. then told readers:
“Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable.”
In Germany consumption accounts for 57 percent of GDP compared to around 70 percent in the U.S.. This difference is not the reason that retailers fail in Germany, because the gap is not new.
Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers. There are plenty of retail stores that are able to do just fine in Germany even with a smaller share of GDP going to consumption.
Addendum:
Andrew Watt at the European Trade Union Institute, offers a correction. He points out that the consumption share of GDP did in fact rise substantially in the United States from the mid-90s to the present. This would mean that the retail market had improved in the United States relative to Germany, where the consumption share remained pretty much constant over this period.
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Wow, nothing gets by Robert Samuelson. He tells us today that he has uncovered the secret as to why President Obama insisted on pushing for the Affordable Care Act (ACA). It all boils down to his big ego.
At the end of a piece titled “Obama’s Ego Trip,” Samuelson cites a section of book by Noam Scheiber on the Obama presidency:
“Obama’s advisers tell him he can be known for preventing a second Great Depression. ‘That’s not enough for me,’ Obama replies.”
There it is: President Obama’s big ego. Well, perhaps someone should share a little secret with Samuelson: all presidents have big egos. They wouldn’t end up with the job otherwise.
Also, perhaps Samuelson missed it, but President Obama campaigned on health care reform. This is a very important political issue to a large portion of his constituency. They would have been very angry, or least disappointed, if he failed to deliver.
In terms of making the case that it is a bad bill, Samuelson should do a better job of reading his own sources. He dismisses the impact of health insurance on health outcomes telling readers:
“Consider a study of Massachusetts’s universal coverage program, enacted under former governor Mitt Romney, by economists Charles J. Courtemanche of the University of Louisville and Daniela Zapata of the University of North Carolina at Greensboro. It estimated that about 1.4 percent of the state’s adult population moved into the ‘very good’ or ‘excellent’ health categories.”
Here’s part of the abstract from the study:
“Using individual-level data from the Behavioral Risk Factor Surveillance System, we provide evidence that health care reform in Massachusetts led to better overall self-assessed health. An assortment of robustness checks and placebo tests support a causal interpretation of the results. We also document improvements in several determinants of overall health, including physical health, mental health, functional limitations, joint disorders, body mass index, and moderate physical activity. The health effects were strongest among women, minorities, near-elderly adults, and those with incomes low enough to qualify for the law’s subsidies. Finally, we use the reform to instrument for health insurance and estimate a sizable impact of coverage on health. “
That doesn’t sound too shabby on its face. Samuelson is unimpressed that only 1.4 percent of the adult population moved into the “very good” or “excellent” health categories following the extension of insurance, but of course the vast majority of the adult population (over 88 percent) was already insured. This implies that close to 15 percent of the people who gained coverage as a result of the reform (coverage is now around 96 percent) saw a marked improvement in their health status.
There have been many other studies done over the years, such as this one on breast cancer and this one on the health of newborns, showing the health benefits of insurance coverage. Samuelson is fighting a losing battle if he is trying to argue that increased coverage rates will not lead to better health outcomes.
It is also arguable that extending coverage is the less important effect of the ACA. The law also effectively ensures the people have genuine insurance. As it stands now, most people are insured through their job. If a person develops a serious illness that causes them to lose their job (e.g. cancer), they will also lose their insurance. Then they are forced to seek in the individual market.
Because they have a pre-existing condition, insurers will typically charge exorbitant fees that will make insurance unaffordable to all but the wealthiest people. One of the key provisions of the ACA is a ban on charging higher fees for pre-existing conditions, ensuring that people in this situation will be able to purchase affordable coverage.
Next we have Samuelson complaining about the $1.5 trillion cost over ten years. This is supposed to be a big scary number. Let’s put in a little context. GDP over this period will be roughly $200 trillion, which means that the tab will be roughly 0.8 percent of GDP.
Furthermore, Samuelson is just flat out wrong when he says that the revenue raised to cover this cost could have been used for other purposes. Much of this projected revenue is specific to health care, as in the fines that large companies will pay for not insuring their workers. In principle we could fine companies for not insuring their workers to pay for a tax cut for rich people or another war, but that might be a hard sell politically.
Samuelson also gets the economics wrong on the burden of this cost. He says that it will increase the cost of labor, making firms less willing to hire. Economists across the political spectrum agree that non-wage compensation costs (like health insurance premiums or penalties) come out of wages. This means that some workers may see lower take-home pay as a result of the ACA, but there should be little impact on employers’ willingness to hire.
Samuelson also ignores the cost control measures in the bill. The Republicans in Congress have been yelling about “rationing” and “death panels” based on the ACA’s Independent Payment Advisory Board (IPAB), which is supposed to limit increases in the cost of Medicare.
We can’t know how effective this and other measures will be in containing costs, but it is worth pointing out that you can’t have it both ways. Either the Republicans are off on another planet in claiming that IPAB will limit care or Samuelson is wrong in saying that ACA does nothing to contain costs.
There is one final point worth noting in reference to the quote from Scheiber’s book. President Obama cannot honestly take credit for saving the United States from a second Great Depression. The first Great Depression came about because of a decade of inadequate responses to the downturn, not just from mistakes in the initial crisis.
We now know how to get out of a depression, we just have to spend money. Even if we had seen a full-fledged financial collapse in the fall-winter of 2008-2009, this would not have condemned us to a decade of double-digit unemployment.
This point can be seen clearly in the case of Argentina, which did have a full-fledged financial meltdown following its default in December of 2001. It took the country 1.5 years to make up the ground lost in the crisis after which it sustained strong growth until the world economic crisis led to a downturn in 2009.
Source: International Monetary Fund.
Even if we assume that the economic policymakers in the United States are less competent than Argentina’s, so that it takes twice as long to recover lost ground, that would imply it would only take 3 years to recover the ground lost in a financial crisis. That is well short of what would be considered a second Great Depression.
Wow, nothing gets by Robert Samuelson. He tells us today that he has uncovered the secret as to why President Obama insisted on pushing for the Affordable Care Act (ACA). It all boils down to his big ego.
At the end of a piece titled “Obama’s Ego Trip,” Samuelson cites a section of book by Noam Scheiber on the Obama presidency:
“Obama’s advisers tell him he can be known for preventing a second Great Depression. ‘That’s not enough for me,’ Obama replies.”
There it is: President Obama’s big ego. Well, perhaps someone should share a little secret with Samuelson: all presidents have big egos. They wouldn’t end up with the job otherwise.
Also, perhaps Samuelson missed it, but President Obama campaigned on health care reform. This is a very important political issue to a large portion of his constituency. They would have been very angry, or least disappointed, if he failed to deliver.
In terms of making the case that it is a bad bill, Samuelson should do a better job of reading his own sources. He dismisses the impact of health insurance on health outcomes telling readers:
“Consider a study of Massachusetts’s universal coverage program, enacted under former governor Mitt Romney, by economists Charles J. Courtemanche of the University of Louisville and Daniela Zapata of the University of North Carolina at Greensboro. It estimated that about 1.4 percent of the state’s adult population moved into the ‘very good’ or ‘excellent’ health categories.”
Here’s part of the abstract from the study:
“Using individual-level data from the Behavioral Risk Factor Surveillance System, we provide evidence that health care reform in Massachusetts led to better overall self-assessed health. An assortment of robustness checks and placebo tests support a causal interpretation of the results. We also document improvements in several determinants of overall health, including physical health, mental health, functional limitations, joint disorders, body mass index, and moderate physical activity. The health effects were strongest among women, minorities, near-elderly adults, and those with incomes low enough to qualify for the law’s subsidies. Finally, we use the reform to instrument for health insurance and estimate a sizable impact of coverage on health. “
That doesn’t sound too shabby on its face. Samuelson is unimpressed that only 1.4 percent of the adult population moved into the “very good” or “excellent” health categories following the extension of insurance, but of course the vast majority of the adult population (over 88 percent) was already insured. This implies that close to 15 percent of the people who gained coverage as a result of the reform (coverage is now around 96 percent) saw a marked improvement in their health status.
There have been many other studies done over the years, such as this one on breast cancer and this one on the health of newborns, showing the health benefits of insurance coverage. Samuelson is fighting a losing battle if he is trying to argue that increased coverage rates will not lead to better health outcomes.
It is also arguable that extending coverage is the less important effect of the ACA. The law also effectively ensures the people have genuine insurance. As it stands now, most people are insured through their job. If a person develops a serious illness that causes them to lose their job (e.g. cancer), they will also lose their insurance. Then they are forced to seek in the individual market.
Because they have a pre-existing condition, insurers will typically charge exorbitant fees that will make insurance unaffordable to all but the wealthiest people. One of the key provisions of the ACA is a ban on charging higher fees for pre-existing conditions, ensuring that people in this situation will be able to purchase affordable coverage.
Next we have Samuelson complaining about the $1.5 trillion cost over ten years. This is supposed to be a big scary number. Let’s put in a little context. GDP over this period will be roughly $200 trillion, which means that the tab will be roughly 0.8 percent of GDP.
Furthermore, Samuelson is just flat out wrong when he says that the revenue raised to cover this cost could have been used for other purposes. Much of this projected revenue is specific to health care, as in the fines that large companies will pay for not insuring their workers. In principle we could fine companies for not insuring their workers to pay for a tax cut for rich people or another war, but that might be a hard sell politically.
Samuelson also gets the economics wrong on the burden of this cost. He says that it will increase the cost of labor, making firms less willing to hire. Economists across the political spectrum agree that non-wage compensation costs (like health insurance premiums or penalties) come out of wages. This means that some workers may see lower take-home pay as a result of the ACA, but there should be little impact on employers’ willingness to hire.
Samuelson also ignores the cost control measures in the bill. The Republicans in Congress have been yelling about “rationing” and “death panels” based on the ACA’s Independent Payment Advisory Board (IPAB), which is supposed to limit increases in the cost of Medicare.
We can’t know how effective this and other measures will be in containing costs, but it is worth pointing out that you can’t have it both ways. Either the Republicans are off on another planet in claiming that IPAB will limit care or Samuelson is wrong in saying that ACA does nothing to contain costs.
There is one final point worth noting in reference to the quote from Scheiber’s book. President Obama cannot honestly take credit for saving the United States from a second Great Depression. The first Great Depression came about because of a decade of inadequate responses to the downturn, not just from mistakes in the initial crisis.
We now know how to get out of a depression, we just have to spend money. Even if we had seen a full-fledged financial collapse in the fall-winter of 2008-2009, this would not have condemned us to a decade of double-digit unemployment.
This point can be seen clearly in the case of Argentina, which did have a full-fledged financial meltdown following its default in December of 2001. It took the country 1.5 years to make up the ground lost in the crisis after which it sustained strong growth until the world economic crisis led to a downturn in 2009.
Source: International Monetary Fund.
Even if we assume that the economic policymakers in the United States are less competent than Argentina’s, so that it takes twice as long to recover lost ground, that would imply it would only take 3 years to recover the ground lost in a financial crisis. That is well short of what would be considered a second Great Depression.
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Steve Rattner seems to have found a new career in getting things wrong in the NYT. He was last seen ranting against those who say that “debt doesn’t matter.” Today the topic is inequality.
While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that:
“Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.”
A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent?
However the more important issue is a substantive one. He tells readers:
“Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That’s the provision that caused Warren E. Buffett’s secretary to have a higher tax rate than he does.
“As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades.”
Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before-tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.
For example, maintaining government guarantees for the banking system (remember the bailouts?) while relaxing Glass-Steagall and other restrictions amounted to a massive subsidy to the financial sector. Many of the top 1 percent get their money here.
There has also been a tightening and extending of patent monopolies. One result of this has been to hugely increase the amount of money being paid in patent rents, much of which goes to the 1 percent. We currently spend close to $300 billion a year for prescription drugs. We would spend close to $30 billion a year if drugs were sold in a free market without patent protection.
The difference of $270 billion annually is roughly 5 times as much money as is at stake with the Bush tax cuts. We would need alternative methods of financing drug research, but the 1 percent so completely dominate debate that alternatives to patent monopolies are not even considered in policy circles even though they would almost certainly be far more efficient and lead to better health outcomes.
The government has also taken steps to directly drive down the wages of less educated workers. Trade policy has deliberately placed U.S. manufacturing workers in direct competition with low paid workers in the developing world. By contrast, the barriers that make it difficult for foreign professionals, like doctors and lawyers, from working in the United States have largely been maintained or even increased.
The predicted and actual result of this policy is to depress the wages of less educated workers relative to the most highly educated workers. This effect is amplified by the high dollar policy that the United States began pursuing under Robert Rubin and used the muscle of the IMF to advance following the East Asian financial crisis.
There are many other ways in which government policy has redistributed income upward over the last three decades. Rattner misdirects attention when he focuses on tax policy as a major cause of inequality.
Steve Rattner seems to have found a new career in getting things wrong in the NYT. He was last seen ranting against those who say that “debt doesn’t matter.” Today the topic is inequality.
While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that:
“Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.”
A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent?
However the more important issue is a substantive one. He tells readers:
“Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That’s the provision that caused Warren E. Buffett’s secretary to have a higher tax rate than he does.
“As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades.”
Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before-tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.
For example, maintaining government guarantees for the banking system (remember the bailouts?) while relaxing Glass-Steagall and other restrictions amounted to a massive subsidy to the financial sector. Many of the top 1 percent get their money here.
There has also been a tightening and extending of patent monopolies. One result of this has been to hugely increase the amount of money being paid in patent rents, much of which goes to the 1 percent. We currently spend close to $300 billion a year for prescription drugs. We would spend close to $30 billion a year if drugs were sold in a free market without patent protection.
The difference of $270 billion annually is roughly 5 times as much money as is at stake with the Bush tax cuts. We would need alternative methods of financing drug research, but the 1 percent so completely dominate debate that alternatives to patent monopolies are not even considered in policy circles even though they would almost certainly be far more efficient and lead to better health outcomes.
The government has also taken steps to directly drive down the wages of less educated workers. Trade policy has deliberately placed U.S. manufacturing workers in direct competition with low paid workers in the developing world. By contrast, the barriers that make it difficult for foreign professionals, like doctors and lawyers, from working in the United States have largely been maintained or even increased.
The predicted and actual result of this policy is to depress the wages of less educated workers relative to the most highly educated workers. This effect is amplified by the high dollar policy that the United States began pursuing under Robert Rubin and used the muscle of the IMF to advance following the East Asian financial crisis.
There are many other ways in which government policy has redistributed income upward over the last three decades. Rattner misdirects attention when he focuses on tax policy as a major cause of inequality.
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