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.

The Inflation Reduction Act includes a remarkable innovation. If it becomes law in its current form, share buybacks will be taxed at a 1.0 percent rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, to taxing returns to shareholders.

The big issue here is that corporate profits are not a well-defined concept. There are a thousand issues that arise in determining profit, which depend to a substantial extent on judgement calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites.

There is also nothing that corporations can do to hide the returns on their stock, unless they want to rip off their shareholders in addition to ripping off the government. If we want to have a 25 percent corporate income tax, we can simply tax the returns to shareholders at a 25 percent rate, and we know exactly what we will get. (We can allow averaging, say over five-year periods, to smooth out tax payments.)

In addition to making the corporate income tax more easily collectable, shifting the basis of the tax to returns to shareholders will radically reduce the size of the tax shelter industry. As it stands now, companies spend tens of billions of dollars each year hiring lawyers and accountants to minimize their tax burden.

These expenditures on tax dodges are a complete waste of resources and undermine the purpose of the corporate income tax. As the Modern Monetary Theory crew reminds us, the purpose of taxes at the national level is to reduce demand in the economy. Insofar as companies spend large amounts of money trying to avoid paying taxes, the goal of the corporate income tax is undermined.

The tax avoidance industry is also itself a major source of inequality. Creative tax lawyers and accountants can make huge salaries by developing innovative tax dodges. We can put many of these people out of business by basing the corporate income tax on stock returns, which are completely transparent.

The taxation of share buybacks in the Inflation Reduction Act is a small but important step in this direction. It shows that we do not have to make profit the basis for the corporate income tax. After it has been in place for a few years, and we have the opportunity to see how effective it is in raising revenue, perhaps we can shift the basis for the rest of the corporate income tax to the stock returns we can all see, rather than the profit statements that are conjured up by accountants.

 

The Inflation Reduction Act includes a remarkable innovation. If it becomes law in its current form, share buybacks will be taxed at a 1.0 percent rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, to taxing returns to shareholders.

The big issue here is that corporate profits are not a well-defined concept. There are a thousand issues that arise in determining profit, which depend to a substantial extent on judgement calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites.

There is also nothing that corporations can do to hide the returns on their stock, unless they want to rip off their shareholders in addition to ripping off the government. If we want to have a 25 percent corporate income tax, we can simply tax the returns to shareholders at a 25 percent rate, and we know exactly what we will get. (We can allow averaging, say over five-year periods, to smooth out tax payments.)

In addition to making the corporate income tax more easily collectable, shifting the basis of the tax to returns to shareholders will radically reduce the size of the tax shelter industry. As it stands now, companies spend tens of billions of dollars each year hiring lawyers and accountants to minimize their tax burden.

These expenditures on tax dodges are a complete waste of resources and undermine the purpose of the corporate income tax. As the Modern Monetary Theory crew reminds us, the purpose of taxes at the national level is to reduce demand in the economy. Insofar as companies spend large amounts of money trying to avoid paying taxes, the goal of the corporate income tax is undermined.

The tax avoidance industry is also itself a major source of inequality. Creative tax lawyers and accountants can make huge salaries by developing innovative tax dodges. We can put many of these people out of business by basing the corporate income tax on stock returns, which are completely transparent.

The taxation of share buybacks in the Inflation Reduction Act is a small but important step in this direction. It shows that we do not have to make profit the basis for the corporate income tax. After it has been in place for a few years, and we have the opportunity to see how effective it is in raising revenue, perhaps we can shift the basis for the rest of the corporate income tax to the stock returns we can all see, rather than the profit statements that are conjured up by accountants.

 

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021.

That is almost 1.5 percent of GDP. It is difficult to envision a scenario where we could increase domestic production of manufactured goods by anything close to that amount in the middle of a pandemic. In short, our supply chains actually served us pretty well in providing us with a lot more imported stuff as large parts of the domestic economy were shut down, even if there were shortages of many items, pushing prices higher.

The other misleading aspect of the virtues of this bill is the idea that the working class (noncollege educated workers) will benefit from more manufacturing jobs in the United States. While this would have been true 30 years ago, it is no longer true today. Thanks to our trade policies over this period, the wage premium in manufacturing has largely disappeared.

At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole. A fuller comparison has to include nonwage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

The disappearance of the manufacturing wage premium has been associated with the closing of the gap in unionization rates between manufacturing and the private sector as a whole. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had been hugely reduced, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

In this context, the increase in manufacturing jobs that might result from this bill is not likely to be any great boon for noncollege educated workers. There is little reason to believe that the manufacturing jobs created by this bill will be qualitatively better than the alternative jobs these workers might be holding.

To be clear, it is probably best to have more diverse sources for such an important input in the modern economy, so an increase in domestic capacity is desirable. And, being so dependent on sources that could be closed off in a confrontation with China is a problem, although the idea of pushing forward with a new Cold War with China is almost certain to prove disastrous for the United States and the world.

Subsidies for Research and Inequality

The other part of this bill is a substantial boost to research funding that will be focused on developing new generations of semiconductors and related technologies. This is positive in the sense that we would benefit from more research in these areas. However, the problem is that the gains from developments in these areas will go disproportionately to those already at the top of the income ladder.

The development of the mRNA technologies and Moderna are the case study here. The development of mRNA technology over the last four decades was largely on the public dime, mostly through grants from the National Institutes of Health. Moderna recently began its own research, although it had not yet brought a successful vaccine to the market at the time the pandemic began.

The federal government paid Moderna $450 million dollars to develop its vaccine against the coronavirus. It then paid roughly the same amount for Moderna to conduct clinical trials to demonstrate its effectiveness.

It then let Moderna keep ownership of the intellectual property it had developed while working for the government. In effect, the government paid Moderna twice, once with the public funding, the second time by giving them monopoly control over what they developed.

As a result, according to Forbes, we had created at least five Moderna billionaires as of last summer. Undoubtedly many other well-placed people in the company pocketed tens or hundreds of millions. While the origins of rising inequality may be a mystery to many economists, it really shouldn’t be very surprising to anyone who follows the news.

We will spend over $500 billion on prescription drugs this year. If we did not give out patent monopolies or related protections the cost would almost certainly be less than $100 billion. The difference of more than $400 billion a year comes to roughly $3,000 a family or more than half of the military budget.

If we actually want to promote technology in a way that doesn’t hugely increase inequality we can use a system that only pays companies once. We can make it a condition of the funding that all the products developed have short patents. I proposed four years as a general rule, with everything in the public domain immediately in the case of biomedical research and climate. (See chapter five of Rigged [it’s free].)

If US companies find these terms too onerous, there are sure to be plenty of researchers elsewhere in the world happy to take our research dollars on these terms. Remember, we shouldn’t care at all where the researchers are located, the research will be open and available for our manufacturers here, as well as elsewhere, as a condition of the contracts. It is what economists and policy types always hype: free trade.

We Can Support the Economy Without Redistributing Upward

In short, with a bit of thought, the semiconductor bill could have been designed in ways that did not redistribute income upward. We need to get over the idea that manufacturing jobs are a fix for the problems of noncollege educated workers. That was true 30 years ago when our political leaders were vigorously pushing policies to destroy these jobs. However, thanks to their success in these efforts, bringing the jobs back won’t fix the problem.

The other point is that it is not technology that gives lots of money to those with skills in STEM and other areas, it is our policies on technology. As long as we can’t have a serious policy debate on altering these policies, we will continue to see further upward redistribution. It is that simple.

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021.

That is almost 1.5 percent of GDP. It is difficult to envision a scenario where we could increase domestic production of manufactured goods by anything close to that amount in the middle of a pandemic. In short, our supply chains actually served us pretty well in providing us with a lot more imported stuff as large parts of the domestic economy were shut down, even if there were shortages of many items, pushing prices higher.

The other misleading aspect of the virtues of this bill is the idea that the working class (noncollege educated workers) will benefit from more manufacturing jobs in the United States. While this would have been true 30 years ago, it is no longer true today. Thanks to our trade policies over this period, the wage premium in manufacturing has largely disappeared.

At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole. A fuller comparison has to include nonwage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

The disappearance of the manufacturing wage premium has been associated with the closing of the gap in unionization rates between manufacturing and the private sector as a whole. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had been hugely reduced, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

In this context, the increase in manufacturing jobs that might result from this bill is not likely to be any great boon for noncollege educated workers. There is little reason to believe that the manufacturing jobs created by this bill will be qualitatively better than the alternative jobs these workers might be holding.

To be clear, it is probably best to have more diverse sources for such an important input in the modern economy, so an increase in domestic capacity is desirable. And, being so dependent on sources that could be closed off in a confrontation with China is a problem, although the idea of pushing forward with a new Cold War with China is almost certain to prove disastrous for the United States and the world.

Subsidies for Research and Inequality

The other part of this bill is a substantial boost to research funding that will be focused on developing new generations of semiconductors and related technologies. This is positive in the sense that we would benefit from more research in these areas. However, the problem is that the gains from developments in these areas will go disproportionately to those already at the top of the income ladder.

The development of the mRNA technologies and Moderna are the case study here. The development of mRNA technology over the last four decades was largely on the public dime, mostly through grants from the National Institutes of Health. Moderna recently began its own research, although it had not yet brought a successful vaccine to the market at the time the pandemic began.

The federal government paid Moderna $450 million dollars to develop its vaccine against the coronavirus. It then paid roughly the same amount for Moderna to conduct clinical trials to demonstrate its effectiveness.

It then let Moderna keep ownership of the intellectual property it had developed while working for the government. In effect, the government paid Moderna twice, once with the public funding, the second time by giving them monopoly control over what they developed.

As a result, according to Forbes, we had created at least five Moderna billionaires as of last summer. Undoubtedly many other well-placed people in the company pocketed tens or hundreds of millions. While the origins of rising inequality may be a mystery to many economists, it really shouldn’t be very surprising to anyone who follows the news.

We will spend over $500 billion on prescription drugs this year. If we did not give out patent monopolies or related protections the cost would almost certainly be less than $100 billion. The difference of more than $400 billion a year comes to roughly $3,000 a family or more than half of the military budget.

If we actually want to promote technology in a way that doesn’t hugely increase inequality we can use a system that only pays companies once. We can make it a condition of the funding that all the products developed have short patents. I proposed four years as a general rule, with everything in the public domain immediately in the case of biomedical research and climate. (See chapter five of Rigged [it’s free].)

If US companies find these terms too onerous, there are sure to be plenty of researchers elsewhere in the world happy to take our research dollars on these terms. Remember, we shouldn’t care at all where the researchers are located, the research will be open and available for our manufacturers here, as well as elsewhere, as a condition of the contracts. It is what economists and policy types always hype: free trade.

We Can Support the Economy Without Redistributing Upward

In short, with a bit of thought, the semiconductor bill could have been designed in ways that did not redistribute income upward. We need to get over the idea that manufacturing jobs are a fix for the problems of noncollege educated workers. That was true 30 years ago when our political leaders were vigorously pushing policies to destroy these jobs. However, thanks to their success in these efforts, bringing the jobs back won’t fix the problem.

The other point is that it is not technology that gives lots of money to those with skills in STEM and other areas, it is our policies on technology. As long as we can’t have a serious policy debate on altering these policies, we will continue to see further upward redistribution. It is that simple.

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class.

The big problem with Stryker’s argument is that it assumes that the working class will somehow benefit from having more manufacturing jobs. This would have been true 20-years-ago when noncollege educated workers in manufacturing enjoyed a substantial pay premium over workers employed in other sectors. It is no longer true today.

Due to our trade deals (especially Clinton’s), which cost millions of manufacturing jobs, the sector no longer offers any substantial pay premium over employment in other sectors. At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole.[1]

Much of the deterioration in the quality of manufacturing jobs is associated with the decline of unions in the sector. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

Furthermore, in the last decade, as the manufacturing sector has gotten back some of the jobs lost to trade and the Great Recession, these have mostly not been union jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing dropped by 400,000 over this period.

This means that winning back manufacturing jobs from China or other countries, is not likely to produce any substantial gains for ordinary workers. The jobs that we gain back are not likely to pay any substantial wage premium over other jobs in the economy, nor are they any more likely to be union jobs.  

Attacking Policies That Redistribute Upward

This is the reason Stryker’s agenda offers little real hope for the working class, regardless of how it polls. On the other hand, today’s inflation should show us very directly how attacking the policies that redistribute so much income upward would help the working class.

The basic story is simple: policies that give more money to people at the top are inflationary. The fact that we structured our patent rules and pandemic handouts to create five Moderna billionaires, and many other very wealthy people at Moderna and other pharmaceutical companies, meant that we had people at the top spending more on housing, cars, vacations and other items that increased demand in the economy. Just as it can be inflationary when the government sends people $2,000 checks, and they spend it, it can be inflationary when the government transfers to hundreds of billions of dollars annually to the people in a position to benefit from the patent monopolies it has granted.

Similarly, the fact that our doctors earn more than twice as much as their counterparts in other wealthy countries, because we protect them from the sort of competition to which we subject our manufacturing workers, means that we have almost 1 million doctors with the equivalent of $150,000 checks from the government each year.[2] The same is true of dentists, lawyers, and other high-end professionals who our politicians look to protect from competition rather than seek economic efficiency.

We also transfer tens of billions of dollars upward to CEOs and other top corporate executives through the corrupt corporate governance structure that we have instituted. A recent study surveyed corporate directors and found that the vast majority did not even see it as their job to contain CEO pay. Instead, they saw their role as supporting top management.

In this context, it is not surprising that even mediocre CEOs can get paychecks in the tens of millions of dollars annually. And, it is not just the CEO. If the CEO gets $20 million, the chief financial officer might get $10 to $12 million, and even third tier executives may get $2 to $3 million. This is all inflationary. Again, it has the same impact on the economy as if the government were sending checks of this size to top executives.

To Help the Working Class, Attack Upward Redistribution

There are other ways in which the economy has been structured to give more money to those at the top, at the expense of the working class. (See Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].) But the point here should be clear, if we want to help the working class, rather than just win their votes, we have to pursue policies that reverse upward redistribution, not promise the return of manufacturing jobs that no longer offer a wage premium.

This can be done, but it requires that we think a bit differently. For example, instead of just handing out tens of billions of dollars in subsidies to the semi-conductor industry, we could say that a condition of getting the money is that the research that is publicly funded be in the public domain. That means that the chips and other products produced as a result of the research would be far cheaper.

We could and should do the same with prescription drugs, potentially saving us hundreds of billions of dollars annually on drug spending. (As much as four times the food  stamp budget.) We could also change the rules of corporate governance to make it more difficult for inept CEOs to pocket tens of millions. And, we could look to cut back the massive waste in our financial sector that supports many of the richest people in the economy.

Anyhow, Stryker is right that Democrats need to pursue policies to win back the working class. This is necessary both to win elections and because it is the right thing to do. Unfortunately, the policies he is pushing will not help the working class. It may be painful, but we badly need some new thinking here.

[1] A fuller comparison has to include non-wage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

 

[2] That’s an average, family practitioners and other lower paid specialists do not earn that much more than their counterparts in other countries.

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class.

The big problem with Stryker’s argument is that it assumes that the working class will somehow benefit from having more manufacturing jobs. This would have been true 20-years-ago when noncollege educated workers in manufacturing enjoyed a substantial pay premium over workers employed in other sectors. It is no longer true today.

Due to our trade deals (especially Clinton’s), which cost millions of manufacturing jobs, the sector no longer offers any substantial pay premium over employment in other sectors. At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole.[1]

Much of the deterioration in the quality of manufacturing jobs is associated with the decline of unions in the sector. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

Furthermore, in the last decade, as the manufacturing sector has gotten back some of the jobs lost to trade and the Great Recession, these have mostly not been union jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing dropped by 400,000 over this period.

This means that winning back manufacturing jobs from China or other countries, is not likely to produce any substantial gains for ordinary workers. The jobs that we gain back are not likely to pay any substantial wage premium over other jobs in the economy, nor are they any more likely to be union jobs.  

Attacking Policies That Redistribute Upward

This is the reason Stryker’s agenda offers little real hope for the working class, regardless of how it polls. On the other hand, today’s inflation should show us very directly how attacking the policies that redistribute so much income upward would help the working class.

The basic story is simple: policies that give more money to people at the top are inflationary. The fact that we structured our patent rules and pandemic handouts to create five Moderna billionaires, and many other very wealthy people at Moderna and other pharmaceutical companies, meant that we had people at the top spending more on housing, cars, vacations and other items that increased demand in the economy. Just as it can be inflationary when the government sends people $2,000 checks, and they spend it, it can be inflationary when the government transfers to hundreds of billions of dollars annually to the people in a position to benefit from the patent monopolies it has granted.

Similarly, the fact that our doctors earn more than twice as much as their counterparts in other wealthy countries, because we protect them from the sort of competition to which we subject our manufacturing workers, means that we have almost 1 million doctors with the equivalent of $150,000 checks from the government each year.[2] The same is true of dentists, lawyers, and other high-end professionals who our politicians look to protect from competition rather than seek economic efficiency.

We also transfer tens of billions of dollars upward to CEOs and other top corporate executives through the corrupt corporate governance structure that we have instituted. A recent study surveyed corporate directors and found that the vast majority did not even see it as their job to contain CEO pay. Instead, they saw their role as supporting top management.

In this context, it is not surprising that even mediocre CEOs can get paychecks in the tens of millions of dollars annually. And, it is not just the CEO. If the CEO gets $20 million, the chief financial officer might get $10 to $12 million, and even third tier executives may get $2 to $3 million. This is all inflationary. Again, it has the same impact on the economy as if the government were sending checks of this size to top executives.

To Help the Working Class, Attack Upward Redistribution

There are other ways in which the economy has been structured to give more money to those at the top, at the expense of the working class. (See Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].) But the point here should be clear, if we want to help the working class, rather than just win their votes, we have to pursue policies that reverse upward redistribution, not promise the return of manufacturing jobs that no longer offer a wage premium.

This can be done, but it requires that we think a bit differently. For example, instead of just handing out tens of billions of dollars in subsidies to the semi-conductor industry, we could say that a condition of getting the money is that the research that is publicly funded be in the public domain. That means that the chips and other products produced as a result of the research would be far cheaper.

We could and should do the same with prescription drugs, potentially saving us hundreds of billions of dollars annually on drug spending. (As much as four times the food  stamp budget.) We could also change the rules of corporate governance to make it more difficult for inept CEOs to pocket tens of millions. And, we could look to cut back the massive waste in our financial sector that supports many of the richest people in the economy.

Anyhow, Stryker is right that Democrats need to pursue policies to win back the working class. This is necessary both to win elections and because it is the right thing to do. Unfortunately, the policies he is pushing will not help the working class. It may be painful, but we badly need some new thinking here.

[1] A fuller comparison has to include non-wage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

 

[2] That’s an average, family practitioners and other lower paid specialists do not earn that much more than their counterparts in other countries.

In yet another episode in the Washington Post’s efforts to tell readers the economy is horrible, in spite of unemployment being near a half century low, the paper told us about the problem of multiple job holders.

It headlined a piece on multiple job holders: “Workers are picking up multiple jobs just to pay for food and gas.” The subhead told readers: “Prices are rising faster than wages, and more Americans than ever are working two full-time jobs simultaneously.”

There are two problems with this story. The first is that while it is true that more workers are now working two full time jobs than ever before, that is not true if we look at this as a percentage of the labor force. A larger share of the workforce was working two full time jobs last June, and the percent of the labor force hits its high point in July 2000, as can be seen.

 

 

 

The more important problem is that increases in the share of the workforce working to full-time jobs seem to be associated with good economic times. The data are erratic, but we see the share rise in the 1990s boom, fall in the 2001 recession, rise somewhat with the housing boom of the 00s, and then fall again in the Great Recession.

From the data, it looks like people are more likely to work two full-time jobs when they can get two full-time jobs, when the economy is strong. In effect, the Washington Post highlighted a sign of economic strength as evidence of a bad economy.   

In yet another episode in the Washington Post’s efforts to tell readers the economy is horrible, in spite of unemployment being near a half century low, the paper told us about the problem of multiple job holders.

It headlined a piece on multiple job holders: “Workers are picking up multiple jobs just to pay for food and gas.” The subhead told readers: “Prices are rising faster than wages, and more Americans than ever are working two full-time jobs simultaneously.”

There are two problems with this story. The first is that while it is true that more workers are now working two full time jobs than ever before, that is not true if we look at this as a percentage of the labor force. A larger share of the workforce was working two full time jobs last June, and the percent of the labor force hits its high point in July 2000, as can be seen.

 

 

 

The more important problem is that increases in the share of the workforce working to full-time jobs seem to be associated with good economic times. The data are erratic, but we see the share rise in the 1990s boom, fall in the 2001 recession, rise somewhat with the housing boom of the 00s, and then fall again in the Great Recession.

From the data, it looks like people are more likely to work two full-time jobs when they can get two full-time jobs, when the economy is strong. In effect, the Washington Post highlighted a sign of economic strength as evidence of a bad economy.   

After the constant hyping of higher gas prices by the media, you might think that falling gas prices would also be big news. After all, everyone has to buy gas and it is a price that is in their face every time they are on the highway.

Of course, the Washington Post is not ignoring the drop in gas prices. Yesterday they warned readers, “Gas prices may surge again ahead of midterm elections.”

The gist of the story is that as stronger sanctions on Russian oil go into effect in December, it could mean that more Russian oil is pulled off world markets. The piece tells us:

“An internal U.S. Treasury analysis projects that could send the price of oil soaring 50 percent above where it is today. Some market analysts are warning of potentially steeper climbs, which could push gas prices beyond $6 a gallon.”

Okay, that would be bad news if it happens, but as the piece itself points out, the sanctions to date have not removed much Russian oil from world markets. The oil that Russia is not selling to Europe and the United States is instead going to India, China, and other countries not honoring the sanctions.

It is very likely this will continue, which the Biden administration itself recognizes. That is why it is trying to push through a complex scheme for capping the price on Russian oil. If most of Russia’s current exports continue to find their way to other countries, there would be little impact on world oil prices.

While it may turn out to be the case that the sanctions are more effective in the future than they have been to date, the futures markets apparently do not expect this outcome. The current price for December oil futures is more than 10 percent below the mid-July price. Markets can be, and often are, wrong, but it would have been worth giving the perspective of some of the people who expect oil prices to fall, rather than rise.

After the constant hyping of higher gas prices by the media, you might think that falling gas prices would also be big news. After all, everyone has to buy gas and it is a price that is in their face every time they are on the highway.

Of course, the Washington Post is not ignoring the drop in gas prices. Yesterday they warned readers, “Gas prices may surge again ahead of midterm elections.”

The gist of the story is that as stronger sanctions on Russian oil go into effect in December, it could mean that more Russian oil is pulled off world markets. The piece tells us:

“An internal U.S. Treasury analysis projects that could send the price of oil soaring 50 percent above where it is today. Some market analysts are warning of potentially steeper climbs, which could push gas prices beyond $6 a gallon.”

Okay, that would be bad news if it happens, but as the piece itself points out, the sanctions to date have not removed much Russian oil from world markets. The oil that Russia is not selling to Europe and the United States is instead going to India, China, and other countries not honoring the sanctions.

It is very likely this will continue, which the Biden administration itself recognizes. That is why it is trying to push through a complex scheme for capping the price on Russian oil. If most of Russia’s current exports continue to find their way to other countries, there would be little impact on world oil prices.

While it may turn out to be the case that the sanctions are more effective in the future than they have been to date, the futures markets apparently do not expect this outcome. The current price for December oil futures is more than 10 percent below the mid-July price. Markets can be, and often are, wrong, but it would have been worth giving the perspective of some of the people who expect oil prices to fall, rather than rise.

The New York Times had a piece earlier this week on how millennials, people born between 1981 and 1996, are having a really tough time paying their bills. Implicitly, the argument is that this generation is doing much worse financially than their parents.

While the piece profiles several millennials who are having a tough time making ends meet, it might have been useful if it looked at actual data. At the most basic level, younger workers would have a much easier time finding a job today than their parents did three decades ago.

In June 1992, the unemployment rate was 7.9 percent for workers between the ages of 25 and 35. The data for June of this year shows the unemployment rate for this group was 3.4 percent. The economy had a recession from March of 1990 to 1991, but even prior to the recession, the unemployment rate for young workers was far higher than it is today.

 

 

The other obvious item to consider is wages. Here too it is hard to paint a picture where young workers are worse off today than they were three decades ago. According to the Economic Policy Institute, the median hourly wage in 2021 was $21.35. That is 19.6 percent higher than the median of $17.85 in 1992 (both numbers in 2021 dollars).

These facts don’t mean that many millennials are not struggling to make ends meet, to pay off student debt, or trying to buy a home, but the idea that their parents had it markedly better is just nonsense. Of course, both millennials and their parents would be much better off if we had not pursued so many policies (e.g. longer and stronger patent monopolies, protection for doctors and other highly paid professionals) to redistribute so much income upward. But apparently the NYT doesn’t have space to discuss this issue.

The New York Times had a piece earlier this week on how millennials, people born between 1981 and 1996, are having a really tough time paying their bills. Implicitly, the argument is that this generation is doing much worse financially than their parents.

While the piece profiles several millennials who are having a tough time making ends meet, it might have been useful if it looked at actual data. At the most basic level, younger workers would have a much easier time finding a job today than their parents did three decades ago.

In June 1992, the unemployment rate was 7.9 percent for workers between the ages of 25 and 35. The data for June of this year shows the unemployment rate for this group was 3.4 percent. The economy had a recession from March of 1990 to 1991, but even prior to the recession, the unemployment rate for young workers was far higher than it is today.

 

 

The other obvious item to consider is wages. Here too it is hard to paint a picture where young workers are worse off today than they were three decades ago. According to the Economic Policy Institute, the median hourly wage in 2021 was $21.35. That is 19.6 percent higher than the median of $17.85 in 1992 (both numbers in 2021 dollars).

These facts don’t mean that many millennials are not struggling to make ends meet, to pay off student debt, or trying to buy a home, but the idea that their parents had it markedly better is just nonsense. Of course, both millennials and their parents would be much better off if we had not pursued so many policies (e.g. longer and stronger patent monopolies, protection for doctors and other highly paid professionals) to redistribute so much income upward. But apparently the NYT doesn’t have space to discuss this issue.

California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.

Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.

The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.

Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version.

Newsom is not the only one taking the lead in providing low-cost generic drugs. Mark Cuban has created a company that sells low-cost generic versions of a wide range of drugs. Part of the story here is that many people do not realize much lower cost generic versions are available of brand drugs that have gone off patent. Cuban’s company can help publicize this fact.

Another issue is that brand drug manufacturers can often intimidate generics from entering a market, even after its patents have expired. It is common for a company to hold dozens of patents for a drug. While only a small number may actually involve real innovations, the company can threaten to sue for patent violations for all the patents it holds.

There is an enormous asymmetry in this situation that hugely works to the benefit of the brand manufacturer. In addition to likely being a larger company, with deep pockets to fight legal battles, the brand company is fighting for the right to sell a drug at monopoly prices. The brand manufacturer is fighting to be able to enter a competitive market, sort of like selling pencils or paper clips. Given the enormous differences in potential payoffs for winning, many generics will simply give up on plans to enter a market if they anticipate a lengthy and expensive legal battle.

This is where someone like Newsom or Mark Cuban can play an important role. They both have deep pockets and the legal personnel to push a high stakes patent fight with major drug manufacturers. It is unlikely they will be chased out of a market, unless the drug companies have a clear case.

But, fighting the abuses in the generic market are the smaller part of the story. Roughly 80 percent of the $530 billion or so that we will spend on prescription drugs this year will be on brand drugs. This comes to more than $400 billion, roughly $3,000 per family each year. There would be enormous savings if these drugs were sold at generic prices.

Typically, the price of generics would be less than 10 percent of the patent protected price and often less than 5 percent. Drugs are almost invariably cheap to manufacture and distribute. It is patent monopolies that make them expensive.   

The industry will of course point to the fact that they spend substantial amounts on the research and development of new drugs. This is true, but we don’t have to rely on the industry for this funding. We already spend more than $50 billion annually on biomedical research, primarily through the National Institutes of Health.

Most of this funding goes to more basic research, but there is no reason that we could not increase the funding and dedicate the additional money to the development and clinical testing of new drugs. In this case, since we have paid for the research upfront, the drugs developed on the government’s dime can be sold as cheap generics from the day they are approved by the FDA.[1]

There are many reasons for preferring publicly funded open-research, rather than granting patent monopolies to compensate for spending after the fact. But, at the most basic level, it should be obvious that it does not make sense to charge patients, who are typically in poor health, thousands, tens of thousands, or even hundreds of thousands of dollars, to cover research that has already been done. This is an invitation to the nightmares that millions of families have had to endure in either paying for drugs themselves or getting an insurer to cover the cost.

It is hard to create the momentum for big changes in public policy, especially when the process involves confronting a huge powerful foe, like the pharmaceutical industry. The best route for getting to a generic drug market is to create facts on the ground, like the widespread availability of cheap insulin and other generics.

Building on this, the state of California, Mark Cuban, or some other billionaire, who cares about public health, could decide to finance the development of new drugs in specific areas. This would demonstrate that we don’t have to rely on patent monopolies to develop new drugs, and also that important new drugs can be cheap. We can argue all day about the relative effectiveness of patent-financed research as opposed to direct upfront funding, but if we have actually developed new drugs through the latter channel, there is nothing to argue over.

We can’t know if Governor Newsom’s plan to produce insulin is simply a one-off gesture designed to get publicity for an ambitious politician (not that this would be a bad thing) or whether it may be a step towards larger reform of our prescription drug system. In any case, it is a big and important step which should be applauded.   

[1] I outline a way to channel the funding in Rigged, chapter 5 [it’s free]. It is loosely modeled on the system of military contracting, using prime contractors, by the Defense Department. A big benefit of a system of publicly funded biomedical research over military research is that there is no need for secrecy. A requirement for fully open research should make impossible many of the abuses, that characterize military contracting.

California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.

Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.

The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.

Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version.

Newsom is not the only one taking the lead in providing low-cost generic drugs. Mark Cuban has created a company that sells low-cost generic versions of a wide range of drugs. Part of the story here is that many people do not realize much lower cost generic versions are available of brand drugs that have gone off patent. Cuban’s company can help publicize this fact.

Another issue is that brand drug manufacturers can often intimidate generics from entering a market, even after its patents have expired. It is common for a company to hold dozens of patents for a drug. While only a small number may actually involve real innovations, the company can threaten to sue for patent violations for all the patents it holds.

There is an enormous asymmetry in this situation that hugely works to the benefit of the brand manufacturer. In addition to likely being a larger company, with deep pockets to fight legal battles, the brand company is fighting for the right to sell a drug at monopoly prices. The brand manufacturer is fighting to be able to enter a competitive market, sort of like selling pencils or paper clips. Given the enormous differences in potential payoffs for winning, many generics will simply give up on plans to enter a market if they anticipate a lengthy and expensive legal battle.

This is where someone like Newsom or Mark Cuban can play an important role. They both have deep pockets and the legal personnel to push a high stakes patent fight with major drug manufacturers. It is unlikely they will be chased out of a market, unless the drug companies have a clear case.

But, fighting the abuses in the generic market are the smaller part of the story. Roughly 80 percent of the $530 billion or so that we will spend on prescription drugs this year will be on brand drugs. This comes to more than $400 billion, roughly $3,000 per family each year. There would be enormous savings if these drugs were sold at generic prices.

Typically, the price of generics would be less than 10 percent of the patent protected price and often less than 5 percent. Drugs are almost invariably cheap to manufacture and distribute. It is patent monopolies that make them expensive.   

The industry will of course point to the fact that they spend substantial amounts on the research and development of new drugs. This is true, but we don’t have to rely on the industry for this funding. We already spend more than $50 billion annually on biomedical research, primarily through the National Institutes of Health.

Most of this funding goes to more basic research, but there is no reason that we could not increase the funding and dedicate the additional money to the development and clinical testing of new drugs. In this case, since we have paid for the research upfront, the drugs developed on the government’s dime can be sold as cheap generics from the day they are approved by the FDA.[1]

There are many reasons for preferring publicly funded open-research, rather than granting patent monopolies to compensate for spending after the fact. But, at the most basic level, it should be obvious that it does not make sense to charge patients, who are typically in poor health, thousands, tens of thousands, or even hundreds of thousands of dollars, to cover research that has already been done. This is an invitation to the nightmares that millions of families have had to endure in either paying for drugs themselves or getting an insurer to cover the cost.

It is hard to create the momentum for big changes in public policy, especially when the process involves confronting a huge powerful foe, like the pharmaceutical industry. The best route for getting to a generic drug market is to create facts on the ground, like the widespread availability of cheap insulin and other generics.

Building on this, the state of California, Mark Cuban, or some other billionaire, who cares about public health, could decide to finance the development of new drugs in specific areas. This would demonstrate that we don’t have to rely on patent monopolies to develop new drugs, and also that important new drugs can be cheap. We can argue all day about the relative effectiveness of patent-financed research as opposed to direct upfront funding, but if we have actually developed new drugs through the latter channel, there is nothing to argue over.

We can’t know if Governor Newsom’s plan to produce insulin is simply a one-off gesture designed to get publicity for an ambitious politician (not that this would be a bad thing) or whether it may be a step towards larger reform of our prescription drug system. In any case, it is a big and important step which should be applauded.   

[1] I outline a way to channel the funding in Rigged, chapter 5 [it’s free]. It is loosely modeled on the system of military contracting, using prime contractors, by the Defense Department. A big benefit of a system of publicly funded biomedical research over military research is that there is no need for secrecy. A requirement for fully open research should make impossible many of the abuses, that characterize military contracting.

It doesn’t seem all that similar to the 1970s to me. After all, we have not seen (last two quarters excepted) a sharp slowdown in productivity growth after a quarter century surge. We don’t have powerful unions getting wage gains that match inflation. And, we don’t see the plunging dollar that the inflation hawks predicted. (The dollar has been soaring for those paying attention to which way is up.

Oh wait, this NYT article calling for a Volcker-type recession was from February 2008. That was when the collapse of the housing bubble was throwing the economy into the worst recession since the Great Depression. We had a full decade of lower than targeted inflation. I guess this just shows that, in some circles, it’s always a good time to call for a Volcker-type recession.

For those too young to remember, Paul Volcker was made chair of the Federal Reserve Board by Jimmy Carter in the fall of 1979. Carter was responding to pressure to “do something” about inflation. When Volcker took the helm, he quickly slammed on the brakes on the economy. A set of interest rate hikes, along with limits on credit card debt (a former power of the Fed) gave us a short, but steep, recession in the spring of 1980, probably dooming Carter’s re-election prospects.

Volcker did ease up as he worried about causing a financial crisis, but he got back to work in 1981, sending interest rates at one point to 20 percent. This was a huge jolt to the economy, giving us what was then the worst recession since the Great Depression. The unemployment rate peaked at just under 11.0 percent. 

This did get inflation under control, but the mechanism for reducing inflation was forcing ordinary workers to take big cuts in pay. The median hourly real wage was more than 3.0 percent lower in 1984 than it had been in 1978, in spite of productivity being more than 8.0 percent higher.

Needless to say, most of the fans of Volcker-style recessions were not then, and are not now, in the group facing unemployment or being forced to accept large cuts in pay. This should make us very wary when we see the NYT and many others again calling for a Volcker style  recession to combat inflation that does not look at all like the 1970s wage-price spiral.

It doesn’t seem all that similar to the 1970s to me. After all, we have not seen (last two quarters excepted) a sharp slowdown in productivity growth after a quarter century surge. We don’t have powerful unions getting wage gains that match inflation. And, we don’t see the plunging dollar that the inflation hawks predicted. (The dollar has been soaring for those paying attention to which way is up.

Oh wait, this NYT article calling for a Volcker-type recession was from February 2008. That was when the collapse of the housing bubble was throwing the economy into the worst recession since the Great Depression. We had a full decade of lower than targeted inflation. I guess this just shows that, in some circles, it’s always a good time to call for a Volcker-type recession.

For those too young to remember, Paul Volcker was made chair of the Federal Reserve Board by Jimmy Carter in the fall of 1979. Carter was responding to pressure to “do something” about inflation. When Volcker took the helm, he quickly slammed on the brakes on the economy. A set of interest rate hikes, along with limits on credit card debt (a former power of the Fed) gave us a short, but steep, recession in the spring of 1980, probably dooming Carter’s re-election prospects.

Volcker did ease up as he worried about causing a financial crisis, but he got back to work in 1981, sending interest rates at one point to 20 percent. This was a huge jolt to the economy, giving us what was then the worst recession since the Great Depression. The unemployment rate peaked at just under 11.0 percent. 

This did get inflation under control, but the mechanism for reducing inflation was forcing ordinary workers to take big cuts in pay. The median hourly real wage was more than 3.0 percent lower in 1984 than it had been in 1978, in spite of productivity being more than 8.0 percent higher.

Needless to say, most of the fans of Volcker-style recessions were not then, and are not now, in the group facing unemployment or being forced to accept large cuts in pay. This should make us very wary when we see the NYT and many others again calling for a Volcker style  recession to combat inflation that does not look at all like the 1970s wage-price spiral.

Maybe we can in Washington, but not in the real world. The bad inflation story of the 1970s was that higher inflation caused workers to demand larger pay increases, which then lead to still more rapid inflation, which meant even larger wage increases, repeat.

That’s a simple story, inflation and wage growth feed off each other, leading to ever higher inflation. Even if the initial rate of inflation was not a problem, after a few rounds of this wage-price cycle, we are looking a pretty bad inflation story.

Many folks want to tell this story about the economy today. However, there is a big problem, the data won’t cooperate. Wage growth is not accelerating, it’s slowing.

Some folks seem to miss this fact because they look at year over year data, comparing the average hourly wage in June of 2022 with the average hourly wage in June of 2021. This comparison gives us a 5.1 percent annual increase, a pace that almost certainly implies a rate of inflation above 3.0 percent.

However, the year-over-year increase is telling us largely what wages did in the past, not what they are doing now. If we want to look more narrowly at what wages are doing at the moment, we can look at the most recent monthly data.

That shows a 0.3 percent rise in the average hourly wage from May to June, which translates into a 3.8 percent annual rate. That is only modestly above the 3.4 percent rate we saw in 2019, when the inflation rate was comfortably below the Fed’s 2.0 percent target.

However, the monthly data are erratic and subject to large revisions, so we can be misled by taking a single month’s data. My preferred measure is to look over a three-month period, using averages for three months.

This means comparing the rate of growth using the average hourly wage for the most recent three months (April, May, and June) compared with the prior three months (January, February, and March). This means looking back somewhat, but it also limits the impact of random error in the wage data.

If we use this calculation, we get an annualized inflation rate for the most recent period of 4.3 percent. More importantly, we see a clear downward trend from a peak of more than 6.0 percent hit at the start of the year. Here’s a picture. (The label shows the middle month of the ending comparison period.)

 

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

 

 

As can be seen, wage growth has been on a downward path since the start of the year. It is very hard to see how we can have a wage-price spiral if the rate of wage growth is actually slowing. If that is the Fed’s concern in its plans for aggressive rate hikes, it looks like it can relax. Wage growth is already slowing rapidly, and may soon be at a pace that is consistent with the Fed’s inflation target, if it is not there already.

Maybe we can in Washington, but not in the real world. The bad inflation story of the 1970s was that higher inflation caused workers to demand larger pay increases, which then lead to still more rapid inflation, which meant even larger wage increases, repeat.

That’s a simple story, inflation and wage growth feed off each other, leading to ever higher inflation. Even if the initial rate of inflation was not a problem, after a few rounds of this wage-price cycle, we are looking a pretty bad inflation story.

Many folks want to tell this story about the economy today. However, there is a big problem, the data won’t cooperate. Wage growth is not accelerating, it’s slowing.

Some folks seem to miss this fact because they look at year over year data, comparing the average hourly wage in June of 2022 with the average hourly wage in June of 2021. This comparison gives us a 5.1 percent annual increase, a pace that almost certainly implies a rate of inflation above 3.0 percent.

However, the year-over-year increase is telling us largely what wages did in the past, not what they are doing now. If we want to look more narrowly at what wages are doing at the moment, we can look at the most recent monthly data.

That shows a 0.3 percent rise in the average hourly wage from May to June, which translates into a 3.8 percent annual rate. That is only modestly above the 3.4 percent rate we saw in 2019, when the inflation rate was comfortably below the Fed’s 2.0 percent target.

However, the monthly data are erratic and subject to large revisions, so we can be misled by taking a single month’s data. My preferred measure is to look over a three-month period, using averages for three months.

This means comparing the rate of growth using the average hourly wage for the most recent three months (April, May, and June) compared with the prior three months (January, February, and March). This means looking back somewhat, but it also limits the impact of random error in the wage data.

If we use this calculation, we get an annualized inflation rate for the most recent period of 4.3 percent. More importantly, we see a clear downward trend from a peak of more than 6.0 percent hit at the start of the year. Here’s a picture. (The label shows the middle month of the ending comparison period.)

 

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

 

 

As can be seen, wage growth has been on a downward path since the start of the year. It is very hard to see how we can have a wage-price spiral if the rate of wage growth is actually slowing. If that is the Fed’s concern in its plans for aggressive rate hikes, it looks like it can relax. Wage growth is already slowing rapidly, and may soon be at a pace that is consistent with the Fed’s inflation target, if it is not there already.

Last month I wrote a piece where I managed to mangle a very simple point. While the reported saving rate had fallen in April, it was actually due to people paying more capital gains taxes, not the result of households spending down savings.  

The issue here is straightforward. Saving is defined as the portion of disposable income that is not consumed. Savings can fall either because either consumption has increased, or disposable income has fallen.

We are not seeing especially rapid consumption growth in 2022 (real consumption actually fell in May), rather we are seeing weak growth in disposable income, which is defined as personal income, minus tax payments. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

The May data show taxes being paid at an annual rate of $3,123.4 billion (NIPA Table 2.1, Line 26). This is up by 41.6 percent, from the $2,205.1 billion paid in taxes in 2019.

This big jump in tax payments cannot be explained by an increase in tax rates. There have been no major increases in taxes since 2019. Rather, the jump in taxes almost certainly reflects large capital gains tax payments that people are making on stock they have sold in the last year. The huge runup in the stock market means that many people would have substantial amounts of taxable gains.

Capital gains are not counted as income. This means, for example, if a person reported $100,000 in capital gains from selling stock, and then paid $20,000 in capital gains taxes (for high income people, the capital gains tax rate is 20 percent), we would report their savings as being down by $20,000.

To most people, this would not be a story of someone spending down their savings. After all, even when they have paid their taxes, they can bank $80,000. But in the National Income Accounts, this would appear as a drop in savings.

If we want to see what saving looks like excluding the change in tax payments, we can simply combine tax payments and reported savings, and that as a percentage of personal income. (This only is a useful calculation when there have been no major changes in the tax code.) Here is the picture for 2018 and 2019, and the first five months of 2022. (I’m leaving out 2020 and 2021 because the data are skewed by large pandemic-related transfer payments.)

It is hard to tell a story of people dipping into their savings here. The combined rate of tax payments and savings is actually somewhat higher in the first five months of 2022 than in 2018 or 2019. To be clear, these are aggregate data. There are millions of families who are undoubtedly spending down their savings and going into debt.

These calculations simply refer to the aggregate data published monthly by the Commerce Department, which had been the basis for many articles claiming people were spending down their savings. That data actually show that people are paying capital gains tax on the money they made in the stock market, not spending down savings.  

Last month I wrote a piece where I managed to mangle a very simple point. While the reported saving rate had fallen in April, it was actually due to people paying more capital gains taxes, not the result of households spending down savings.  

The issue here is straightforward. Saving is defined as the portion of disposable income that is not consumed. Savings can fall either because either consumption has increased, or disposable income has fallen.

We are not seeing especially rapid consumption growth in 2022 (real consumption actually fell in May), rather we are seeing weak growth in disposable income, which is defined as personal income, minus tax payments. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

The May data show taxes being paid at an annual rate of $3,123.4 billion (NIPA Table 2.1, Line 26). This is up by 41.6 percent, from the $2,205.1 billion paid in taxes in 2019.

This big jump in tax payments cannot be explained by an increase in tax rates. There have been no major increases in taxes since 2019. Rather, the jump in taxes almost certainly reflects large capital gains tax payments that people are making on stock they have sold in the last year. The huge runup in the stock market means that many people would have substantial amounts of taxable gains.

Capital gains are not counted as income. This means, for example, if a person reported $100,000 in capital gains from selling stock, and then paid $20,000 in capital gains taxes (for high income people, the capital gains tax rate is 20 percent), we would report their savings as being down by $20,000.

To most people, this would not be a story of someone spending down their savings. After all, even when they have paid their taxes, they can bank $80,000. But in the National Income Accounts, this would appear as a drop in savings.

If we want to see what saving looks like excluding the change in tax payments, we can simply combine tax payments and reported savings, and that as a percentage of personal income. (This only is a useful calculation when there have been no major changes in the tax code.) Here is the picture for 2018 and 2019, and the first five months of 2022. (I’m leaving out 2020 and 2021 because the data are skewed by large pandemic-related transfer payments.)

It is hard to tell a story of people dipping into their savings here. The combined rate of tax payments and savings is actually somewhat higher in the first five months of 2022 than in 2018 or 2019. To be clear, these are aggregate data. There are millions of families who are undoubtedly spending down their savings and going into debt.

These calculations simply refer to the aggregate data published monthly by the Commerce Department, which had been the basis for many articles claiming people were spending down their savings. That data actually show that people are paying capital gains tax on the money they made in the stock market, not spending down savings.  

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