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.

When I first saw Senator Warren refuse to acknowledge that Medicare for All will mean higher taxes, I admired her political skills, but as an economist, I was annoyed at her evasion of an obvious truth. However, on further thought, I realize that she is exactly right and is doing a public service with her simple insistence that costs for most people will go down.

It is true that many people hate taxes and find the idea that they would ever have to pay more for taxes for anything repugnant. But that group is far from a majority of the electorate. Most people approach their tax bill as any rational person would. They want to know what they are getting for their money.

This is why Warren is giving the right answer even though it is angering reporters and political pundits. She is talking about what actually matters to most voters; what will they get for their money?

The reporters are determined to make this a “she will raise your taxes story.” This is an absurd narrowing of the issue. There is no reason that Warren should cooperate with their silly game. She is determined to talk about the substance of the issue, whether or not the reporters want to hear it.

For a larger context, consider how the budget is reported. Reporters routinely highlight the budget deficit and the accumulated debt, as though this is the most important feature of the budget. It is at least implicit in nearly all reporting that the country would be better off with a lower budget deficit.

This is also indicated in their choice of sources. An incredibly high percentage of budget stories in leading news outlets (i.e. the New York Times, Washington Post, and National Public Radio) feature comments from Committee for a Responsible Federal Budget, an organization committed to lower deficits and debt.   

News stories on the budget almost never present the countervailing view, which is endorsed by a growing number of economists, that the budget deficit has generally been too small in the years following the Great Recession. The result has been that growth has been slower than it otherwise would have been, causing workers to be needlessly unemployed.

Furthermore, there is now considerable research on the concept of “hysteresis,” which means that there are lasting effects of a period of slow growth and high unemployment. The logic is that many of the people who go unemployed for long periods of time lose skills and may end up being permanently unemployed. In addition, less growth will typically mean less investment. This lost investment means the economy will be less productive in the future. Furthermore, there is even a generational impact, since we know the children of unemployed parent(s) are likely to have poorer educational prospects and therefore worse labor market prospects when they grow up.

Instead of the debt and deficit posing a generational burden on our children, as the conventional story has it, the opposite is true. The failure to run deficits that are large enough to push the economy to full employment leaves the country, and our children, poorer than they otherwise would be.

While certainly a large minority, if not an actual majority, of economists would hold this viewpoint, this sort of argument is virtually invisible from budget reporting. These stories will almost never feature even a single voice suggesting that an insufficiently large deficit is slowing growth and needlessly raising unemployment.

Reporters seem to feel that if they have reported the size of the deficit and gotten the requisite complaints from the licensed deficit hawks, they have done their job. Why should Senator Warren feel obligated to play this game?

But it gets worse. Budget reporters never report on the size of the future rents that result from government-granted patent and copyright monopolies. If you’re missing the connection, then you’ve been reading too much reporting and doing too little thinking about how the government creates liabilities for the future.

The government grants patent and copyright monopolies, as an alternative to direct spending, in order to achieve public goals. To take the most obvious one, the government grants patent monopolies to drug companies in order to give them an incentive to develop new drugs. This particular monopoly costs us close to $400 billion annually (1.8 percent of GDP) in higher drug prices, since we are forced to pay monopoly prices rather than the free market prices.  

Patent and copyright monopolies are important for supporting research and creative work in many other sectors. Medical equipment is expensive because the manufacturers hold patents on it. Software, which can typically be transferred over the web at zero cost, can be expensive because the developers hold copyright monopolies and sometimes patents as well. Movies, books, recorded music, and video games can all be sold at much higher prices because the government grants copyright monopolies on these items.

It is arguable whether these grants of monopoly are the most efficient mechanism for financing innovation and creative work. (I would say they are not, see Rigged, chapter 5 [it’s free].) However, it is not arguable that they impose a future cost on the public, that is the whole point. By my calculations, this additional cost can easily be more than $1 trillion a year, more than half of what the country will get from income taxes this year.

If the government were to spend another $50 billion a year on biomedical research, to replace the patent supported research currently taking place, it is a safe bet that budget reporters would note this addition to the deficit. We can count on the Committee for a Responsible Federal Budget being quoted to the effect that this comes to $500 billion over the 10-year budget horizon. And that is supposed to sound really bad to people.

However, we are committing the public to paying amounts that could be five or ten times larger, in the form of patent-protected drug prices. Budget reporters and reporters more generally ignore this fact. It is simply not their topic.

This is the context in which Senator Warren is exactly right to refuse to provide a direct answer to the tax question. Is there anyone who would be upset about seeing taxes go up by $50 billion a year, if it would mean saving $400 billion a year in payments on prescription drugs? The reporters and deficit hawks may only want us to pay attention to the taxes, but that is just a silly fraternity ritual. Any reasonable person would look at the full picture.

This is the perspective Senator Warren is demanding in her claim about Medicare for All. If lower and middle income people look at what they now pay in taxes, premiums, co-pays and deductibles they will find that it is more than what they will pay for health care under her Medicare for All plan. The amount they will pay in taxes directly may be higher, but so what?

Are we supposed to believe that a typical family would be upset if they paid another $5,000 a year in taxes but saved $10,000 from their health care bill? That seems unlikely.

This doesn’t mean that we can shift quickly to Medicare for All without serious problems. I have argued that we should phase in a Medicare for All system gradually and focus on getting payments to providers more in line with the rest of the world as we include more people in the program.  

It seems hard to imagine that a government that could not set up a website for the Affordable Care Act in three years, is going to flawlessly bring the whole health care system under a revised Medicare program in a comparable period of time. And, unlike the right, progressives pay a huge political price for mistakes, so it will be a very long time before we get a second chance to do it right.

But the idea that Medicare for All can’t work because it means higher taxes should be rejected for the nonsense it is. Ideologues will hate universal Medicare for whatever reason they can find, but people who get care about getting good affordable care for themselves, their families, and the country, care primarily about the point Senator Warren is repeatedly making: costs will go down.   

When I first saw Senator Warren refuse to acknowledge that Medicare for All will mean higher taxes, I admired her political skills, but as an economist, I was annoyed at her evasion of an obvious truth. However, on further thought, I realize that she is exactly right and is doing a public service with her simple insistence that costs for most people will go down.

It is true that many people hate taxes and find the idea that they would ever have to pay more for taxes for anything repugnant. But that group is far from a majority of the electorate. Most people approach their tax bill as any rational person would. They want to know what they are getting for their money.

This is why Warren is giving the right answer even though it is angering reporters and political pundits. She is talking about what actually matters to most voters; what will they get for their money?

The reporters are determined to make this a “she will raise your taxes story.” This is an absurd narrowing of the issue. There is no reason that Warren should cooperate with their silly game. She is determined to talk about the substance of the issue, whether or not the reporters want to hear it.

For a larger context, consider how the budget is reported. Reporters routinely highlight the budget deficit and the accumulated debt, as though this is the most important feature of the budget. It is at least implicit in nearly all reporting that the country would be better off with a lower budget deficit.

This is also indicated in their choice of sources. An incredibly high percentage of budget stories in leading news outlets (i.e. the New York Times, Washington Post, and National Public Radio) feature comments from Committee for a Responsible Federal Budget, an organization committed to lower deficits and debt.   

News stories on the budget almost never present the countervailing view, which is endorsed by a growing number of economists, that the budget deficit has generally been too small in the years following the Great Recession. The result has been that growth has been slower than it otherwise would have been, causing workers to be needlessly unemployed.

Furthermore, there is now considerable research on the concept of “hysteresis,” which means that there are lasting effects of a period of slow growth and high unemployment. The logic is that many of the people who go unemployed for long periods of time lose skills and may end up being permanently unemployed. In addition, less growth will typically mean less investment. This lost investment means the economy will be less productive in the future. Furthermore, there is even a generational impact, since we know the children of unemployed parent(s) are likely to have poorer educational prospects and therefore worse labor market prospects when they grow up.

Instead of the debt and deficit posing a generational burden on our children, as the conventional story has it, the opposite is true. The failure to run deficits that are large enough to push the economy to full employment leaves the country, and our children, poorer than they otherwise would be.

While certainly a large minority, if not an actual majority, of economists would hold this viewpoint, this sort of argument is virtually invisible from budget reporting. These stories will almost never feature even a single voice suggesting that an insufficiently large deficit is slowing growth and needlessly raising unemployment.

Reporters seem to feel that if they have reported the size of the deficit and gotten the requisite complaints from the licensed deficit hawks, they have done their job. Why should Senator Warren feel obligated to play this game?

But it gets worse. Budget reporters never report on the size of the future rents that result from government-granted patent and copyright monopolies. If you’re missing the connection, then you’ve been reading too much reporting and doing too little thinking about how the government creates liabilities for the future.

The government grants patent and copyright monopolies, as an alternative to direct spending, in order to achieve public goals. To take the most obvious one, the government grants patent monopolies to drug companies in order to give them an incentive to develop new drugs. This particular monopoly costs us close to $400 billion annually (1.8 percent of GDP) in higher drug prices, since we are forced to pay monopoly prices rather than the free market prices.  

Patent and copyright monopolies are important for supporting research and creative work in many other sectors. Medical equipment is expensive because the manufacturers hold patents on it. Software, which can typically be transferred over the web at zero cost, can be expensive because the developers hold copyright monopolies and sometimes patents as well. Movies, books, recorded music, and video games can all be sold at much higher prices because the government grants copyright monopolies on these items.

It is arguable whether these grants of monopoly are the most efficient mechanism for financing innovation and creative work. (I would say they are not, see Rigged, chapter 5 [it’s free].) However, it is not arguable that they impose a future cost on the public, that is the whole point. By my calculations, this additional cost can easily be more than $1 trillion a year, more than half of what the country will get from income taxes this year.

If the government were to spend another $50 billion a year on biomedical research, to replace the patent supported research currently taking place, it is a safe bet that budget reporters would note this addition to the deficit. We can count on the Committee for a Responsible Federal Budget being quoted to the effect that this comes to $500 billion over the 10-year budget horizon. And that is supposed to sound really bad to people.

However, we are committing the public to paying amounts that could be five or ten times larger, in the form of patent-protected drug prices. Budget reporters and reporters more generally ignore this fact. It is simply not their topic.

This is the context in which Senator Warren is exactly right to refuse to provide a direct answer to the tax question. Is there anyone who would be upset about seeing taxes go up by $50 billion a year, if it would mean saving $400 billion a year in payments on prescription drugs? The reporters and deficit hawks may only want us to pay attention to the taxes, but that is just a silly fraternity ritual. Any reasonable person would look at the full picture.

This is the perspective Senator Warren is demanding in her claim about Medicare for All. If lower and middle income people look at what they now pay in taxes, premiums, co-pays and deductibles they will find that it is more than what they will pay for health care under her Medicare for All plan. The amount they will pay in taxes directly may be higher, but so what?

Are we supposed to believe that a typical family would be upset if they paid another $5,000 a year in taxes but saved $10,000 from their health care bill? That seems unlikely.

This doesn’t mean that we can shift quickly to Medicare for All without serious problems. I have argued that we should phase in a Medicare for All system gradually and focus on getting payments to providers more in line with the rest of the world as we include more people in the program.  

It seems hard to imagine that a government that could not set up a website for the Affordable Care Act in three years, is going to flawlessly bring the whole health care system under a revised Medicare program in a comparable period of time. And, unlike the right, progressives pay a huge political price for mistakes, so it will be a very long time before we get a second chance to do it right.

But the idea that Medicare for All can’t work because it means higher taxes should be rejected for the nonsense it is. Ideologues will hate universal Medicare for whatever reason they can find, but people who get care about getting good affordable care for themselves, their families, and the country, care primarily about the point Senator Warren is repeatedly making: costs will go down.   

Capital Goods Orders are Down Again in September

The Commerce Department reported that orders for non-defense capital goods fell 2.8 percent in September after dropping 3.1 percent in August. The September figure is more than 10 percent below the September 2018 level. If we pull out aircrafts, which are highly volatile and being pushed down by Boeing’s 737-Max problems, orders were still down by 0.5 percent. Orders for the month are up just 0.2 percent from the year-ago level.

This would have been worth some attention (both the NYT and WaPo ran wire service stories), since the rationale for the corporate tax cut pushed through by the Republicans in 2017 was supposed to be that it would lead to an investment boom. While there was a modest rise in investment in the first half of 2018 (but certainly not a boom), investment has been extraordinarily weak for the last year. Clearly, the tax cut has not produced the projected benefits.

 

The Commerce Department reported that orders for non-defense capital goods fell 2.8 percent in September after dropping 3.1 percent in August. The September figure is more than 10 percent below the September 2018 level. If we pull out aircrafts, which are highly volatile and being pushed down by Boeing’s 737-Max problems, orders were still down by 0.5 percent. Orders for the month are up just 0.2 percent from the year-ago level.

This would have been worth some attention (both the NYT and WaPo ran wire service stories), since the rationale for the corporate tax cut pushed through by the Republicans in 2017 was supposed to be that it would lead to an investment boom. While there was a modest rise in investment in the first half of 2018 (but certainly not a boom), investment has been extraordinarily weak for the last year. Clearly, the tax cut has not produced the projected benefits.

 

The Washington Post had an article reviewing Donald Trump’s various efforts to secure trade and other agreements with foreign countries. It comments briefly on the trade pact Trump negotiated with South Korea.

While the piece noted that the deal made few major changes in U.S.-Korea trade relations, it would have been useful to report on the impact on the trade deficit with South Korea. In the first eight months of 2018, the U.S. trade deficit in goods with South Korea was $11.7 billion. In the same months of 2019 it has been $14.9 billion. The full impact of any trade deal will only be felt after many years and there are many factors that affect bilateral trade deficits, but for now, at least, there is little evidence that Trump’s trade deal has reduced the country’s trade deficit with South Korea.

The Washington Post had an article reviewing Donald Trump’s various efforts to secure trade and other agreements with foreign countries. It comments briefly on the trade pact Trump negotiated with South Korea.

While the piece noted that the deal made few major changes in U.S.-Korea trade relations, it would have been useful to report on the impact on the trade deficit with South Korea. In the first eight months of 2018, the U.S. trade deficit in goods with South Korea was $11.7 billion. In the same months of 2019 it has been $14.9 billion. The full impact of any trade deal will only be felt after many years and there are many factors that affect bilateral trade deficits, but for now, at least, there is little evidence that Trump’s trade deal has reduced the country’s trade deficit with South Korea.

Next week we will be celebrating the 20th anniversary of the founding of the Center for Economic and Policy Research (October 29th to be precise). I’m going to take this opportunity to point out how much economic debate has shifted over the last two decades, and also do a bit of boasting.

When Mark Weisbrot and I started CEPR at the end of 1999, it was the heyday of neoliberalism. Bill Clinton had won reelection in 1996, assuring us that the era of big government was over. Two big agenda items from his first term were the passage of NAFTA and welfare reform, which, as he put it, “ended welfare as we know it.” In international economics, the Washington Consensus reigned supreme, with privatization and austerity being pushed pretty much everywhere in the developing world.

Mark and I felt that the debate on economic policies had become overly narrow, and we thought that a small dynamic think tank, without major institutional constraints, could make a difference.

One of the first issues that we weighed in on was Social Security. At the time, the conventional wisdom, even among Democrats, was that Social Security was in crisis and that benefits had to be cut. Our book, Social Security: The Phony Crisis, came out just as CEPR was launching. Two decades later, not only have benefits not been cut, but the centrist position in the Democratic Party has shifted to benefits should be raised.

We also had pushed for full employment policies. In two books, Jared Bernstein and I argued that the benefits from low levels of unemployment to workers at the middle and bottom of the pay ladder were enormous. We also argued that economists had underestimated the economy’s ability to maintain low levels of unemployment without spiraling inflation. Today, as the unemployment rate sits at 3.5 percent, Jerome Powell, the chair of the Federal Reserve Board, has largely adopted our position.

Internationally, contrary to the widely held view at the time, we pointed out that the era of the Washington Consensus had actually been pretty bad for most of the developing world, with the major exceptions of China and India, neither of which were closely following the model.

When Argentina went to war with the International Monetary Fund (IMF) in 2001, we showed that the institution’s growth projections showed a serious political bias, coming in consistently higher than actual growth in the period in which Argentina was following IMF policies, and then coming in well below actual growth when it followed an unorthodox path. We also caught the World Bank telling a bogus story on NAFTA, concealing the fact that Mexico’s growth had actually been very weak in the first decade following the pact’s implementation.

A series of papers that John Schmitt and I did with David Howell and Andrew Glyn, helped to correct what had been the prevalent view at the OECD, and among labor economists more generally, that European countries had to dismantle their welfare state protections if they were to enjoy low unemployment rates like the United States. Today, most of the countries with strong labor market protections have better labor market outcome measures than the United States.  

Eileen Appelbaum, the current co-director, who joined CEPR a decade ago, has done pathbreaking work with Rosemary Batt on the private equity industry. She also has pointed out that private equity is at the center of the current battle over surprise medical bills. In addition, her work showing that paid sick days and paid family leave do not cost jobs is routinely cited in efforts to promote family-friendly workplace policies. 

There are many other areas where CEPR has helped change the terms of the debate. We were pushing financial transactions taxes from our inception when such a proposal appeared loopy. Now, most of the Democratic presidential contenders are on record supporting such a tax. We also pushed to have states adopt state-run retirement plans to offer a universal low-cost alternative to private 401(k)s. This policy has now been adopted by California, New York, and many other states. We also pushed to have publicly-funded research for prescription drugs so that new drugs could be sold as low cost generics, a position now embraced by the Labor Party in the United Kingdom and taken seriously in policy forums around the world.

We can point to much work in other areas, like destroying George W. Bush’s claims for his Social Security privatization plans and warning (unfortunately unsuccessfully) that the housing bubble would burst and give us a serious recession. Our work has also helped build the case for a higher minimum wage and stimulus packages following the Great Recession.

Of course, CEPR has had great partners in these accomplishments. A Washington think tank with a budget of just over $2 million is not going to accomplish big things on its own. At the top of this list would be the AFL-CIO and other unions. We have worked with a large number of community groups over the years, most notably the Fed Up Coalition, that successfully pressured the Federal Reserve on full employment and the Family Values at Work Coalition, which has been behind the drive for family friendly workplace policies. We have also worked closely with the state-level policy groups in the EARN network and the Economic Policy Institute, where I and many other CEPRites spent many years.

Mark and I may have had no idea what we were doing 20 years ago when we started CEPR, but we were right to think it could make a difference.

Next week we will be celebrating the 20th anniversary of the founding of the Center for Economic and Policy Research (October 29th to be precise). I’m going to take this opportunity to point out how much economic debate has shifted over the last two decades, and also do a bit of boasting.

When Mark Weisbrot and I started CEPR at the end of 1999, it was the heyday of neoliberalism. Bill Clinton had won reelection in 1996, assuring us that the era of big government was over. Two big agenda items from his first term were the passage of NAFTA and welfare reform, which, as he put it, “ended welfare as we know it.” In international economics, the Washington Consensus reigned supreme, with privatization and austerity being pushed pretty much everywhere in the developing world.

Mark and I felt that the debate on economic policies had become overly narrow, and we thought that a small dynamic think tank, without major institutional constraints, could make a difference.

One of the first issues that we weighed in on was Social Security. At the time, the conventional wisdom, even among Democrats, was that Social Security was in crisis and that benefits had to be cut. Our book, Social Security: The Phony Crisis, came out just as CEPR was launching. Two decades later, not only have benefits not been cut, but the centrist position in the Democratic Party has shifted to benefits should be raised.

We also had pushed for full employment policies. In two books, Jared Bernstein and I argued that the benefits from low levels of unemployment to workers at the middle and bottom of the pay ladder were enormous. We also argued that economists had underestimated the economy’s ability to maintain low levels of unemployment without spiraling inflation. Today, as the unemployment rate sits at 3.5 percent, Jerome Powell, the chair of the Federal Reserve Board, has largely adopted our position.

Internationally, contrary to the widely held view at the time, we pointed out that the era of the Washington Consensus had actually been pretty bad for most of the developing world, with the major exceptions of China and India, neither of which were closely following the model.

When Argentina went to war with the International Monetary Fund (IMF) in 2001, we showed that the institution’s growth projections showed a serious political bias, coming in consistently higher than actual growth in the period in which Argentina was following IMF policies, and then coming in well below actual growth when it followed an unorthodox path. We also caught the World Bank telling a bogus story on NAFTA, concealing the fact that Mexico’s growth had actually been very weak in the first decade following the pact’s implementation.

A series of papers that John Schmitt and I did with David Howell and Andrew Glyn, helped to correct what had been the prevalent view at the OECD, and among labor economists more generally, that European countries had to dismantle their welfare state protections if they were to enjoy low unemployment rates like the United States. Today, most of the countries with strong labor market protections have better labor market outcome measures than the United States.  

Eileen Appelbaum, the current co-director, who joined CEPR a decade ago, has done pathbreaking work with Rosemary Batt on the private equity industry. She also has pointed out that private equity is at the center of the current battle over surprise medical bills. In addition, her work showing that paid sick days and paid family leave do not cost jobs is routinely cited in efforts to promote family-friendly workplace policies. 

There are many other areas where CEPR has helped change the terms of the debate. We were pushing financial transactions taxes from our inception when such a proposal appeared loopy. Now, most of the Democratic presidential contenders are on record supporting such a tax. We also pushed to have states adopt state-run retirement plans to offer a universal low-cost alternative to private 401(k)s. This policy has now been adopted by California, New York, and many other states. We also pushed to have publicly-funded research for prescription drugs so that new drugs could be sold as low cost generics, a position now embraced by the Labor Party in the United Kingdom and taken seriously in policy forums around the world.

We can point to much work in other areas, like destroying George W. Bush’s claims for his Social Security privatization plans and warning (unfortunately unsuccessfully) that the housing bubble would burst and give us a serious recession. Our work has also helped build the case for a higher minimum wage and stimulus packages following the Great Recession.

Of course, CEPR has had great partners in these accomplishments. A Washington think tank with a budget of just over $2 million is not going to accomplish big things on its own. At the top of this list would be the AFL-CIO and other unions. We have worked with a large number of community groups over the years, most notably the Fed Up Coalition, that successfully pressured the Federal Reserve on full employment and the Family Values at Work Coalition, which has been behind the drive for family friendly workplace policies. We have also worked closely with the state-level policy groups in the EARN network and the Economic Policy Institute, where I and many other CEPRites spent many years.

Mark and I may have had no idea what we were doing 20 years ago when we started CEPR, but we were right to think it could make a difference.

That is undoubtedly what readers are asking after seeing the headline, “Facebook’s Mark Zuckerberg struggles to balance truth and free speech.” The headline is for the recording of a remarkably uncritical interview of Zuckerberg.

In the interview, Zuckerberg presents himself as struggling to deal with the trade-off between banning ads that are untrue and allowing free speech. If a reporter had been conducting the interview, they would have pointed out that every newspaper in the country faces the same problem and, unlike Zuckerberg, seem capable of dealing with it.

They will not print ads that they know to be untrue and, if they are shown evidence that an ad is untruthful after it runs, they typically will run a correction. It would have been useful to point this out to readers.

That is undoubtedly what readers are asking after seeing the headline, “Facebook’s Mark Zuckerberg struggles to balance truth and free speech.” The headline is for the recording of a remarkably uncritical interview of Zuckerberg.

In the interview, Zuckerberg presents himself as struggling to deal with the trade-off between banning ads that are untrue and allowing free speech. If a reporter had been conducting the interview, they would have pointed out that every newspaper in the country faces the same problem and, unlike Zuckerberg, seem capable of dealing with it.

They will not print ads that they know to be untrue and, if they are shown evidence that an ad is untruthful after it runs, they typically will run a correction. It would have been useful to point this out to readers.

Trump Declares Victory in China Trade War

(This post originally appeared on my Patreon page.)

Back in the late 1960s, when it was clear that the United States was losing in Vietnam, Vermont Senator George Aiken came up with the plan to declare victory and leave. It seems that Donald Trump has stolen the senator’s playbook. 

While we don’t know much of the details of Trump’s partial deal with China, it seems almost certain that he has not won most of his demands. According to press accounts, China will commit to buy a large amount of U.S. agricultural products. This is a highly visible, but largely pointless victory for Trump.

All the major agricultural commodities, such as wheat, corn, soybeans, and beef, sell on massive world markets. If China commits to buying some amount from U.S. producers, for the most part, it will come at the expense of producers from other countries. It will not be an increase in world demand. This means that the displaced producers will be dumping their now surplus commodities on world markets, leaving the market price received by U.S. farmers little changed. 

Anyhow, it was hardly a surprise to some of us that Trump would go the declare victory and leave route. My colleague at the Center for Economic and Policy Research, Mark Weisbrot, made exactly this prediction a couple of weeks ago, as did I, a few days earlier

This outcome was easy to see. Trump could not care less about U.S.-China trade policy. He does care about not looking weak and he very much wants to be re-elected. The obvious answer is to say that he won. It doesn’t matter that he may have gotten almost nothing of what he demanded. His followers will believe him and when the media raise questions after seeing the deal, we all know the Trump response: FAKE NEWS.

Just as was the case with the U.S. in Vietnam, the trade war was not going well for Trump. Rather than going down, our overall trade deficit has been rising. This also has been the case with the countries that Trump designated as foes in his trade war.

In 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019. This is clearly going the wrong way.

There are many factors behind the rise in the trade deficit. Growth in the US has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise predates Trump. But we know that Trump wouldn’t be interested in excuses, the bottom line is the trade deficit has gotten worse on his watch.

The story does not look any better if we look at his major nemeses. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion. This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to over $260.0 billion in the same months last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.

It is also worth remembering that it is difficult to calculate bilateral trade deficits with rigor. Suppose that iPhones, which had previously been assembled in China, are instead assembled in Thailand. If we imported the iPhone from China, the full value of the iPhone would have been recorded as an import from China, even though the assembly may have counted for less than 10 percent of the value added.

When the assembly shifts to Thailand, the reduction in our reported imports from China is equal to the full cost of the iPhones that we previously imported from China. The actual hit to China is just the small share of the value added that is attributable to assembly.

It’s also worth noting that contrary to Trump’s claims, China is not paying for the tariffs. There is a very simple way to measure the extent to which suppliers in China have been forced to absorb tariffs in lower prices. We can look at the change in the price of our imports from China.

The Bureau of Labor Statistics publishes data on import prices monthly. In the year from September 2018 to September 2019, in which tariffs on many items have been raised to 25 percent, the price of items imported from China fell just 1.8 percent. This means that virtually all of the tariff is being paid either by consumers in the United States or being absorbed by retailers or wholesalers here.

If Trump’s battle with China is not going well, he seems to be doing even worse with other trade combatants. The trade deficit in goods with Mexico was $63.3 billion in 2016. It hit $80.7 billion last year and is virtually certain to come in even higher in 2019. The trade deficit in goods with the European Union was $146.7 billion in 2016. It had risen to $168.7 billion last year and is on a path to come in $10-$15 billion higher in 2019. The deficit with Canada rose from $11 billion in 2016 to $19.1 billion last year. It is likely to be roughly $1 billion higher in 2019. 

In short, Trump is doing really awful in his trade war. It is as though after Pearl Harbor, Japan went on to seize Hawaii and was threatening California and the rest of the west coast. 

But apart from the theater surrounding the trade deal, the rest of us should be happy that Trump is waving the white flag in his trade war. His agenda would have actually been negative for the vast majority of America’s workers. 

While Trump does have a point in complaints about currency valuations, this issue has taken a back seat in his trade war, especially with China. Instead he has made demands about respecting the intellectual property of U.S. corporations front and center. This is an agenda that is detrimental to the interests of U.S. workers.

At the most basic level, if Boeing and GE know that they can outsource operations to China, and don’t have to worry about being forced to transfer technology to Chinese partners, they will be more likely to outsource jobs than if they do have to worry about being forced to transfer technology. Making it more profitable for U.S. corporations to outsource jobs is not in the interest of U.S. workers.

More generally, longer and stronger patent monopolies have been a major factor in the upward redistribution of income over the last four decades. They mean higher prices for items like prescription drugs, medical equipment, and software, and more money for the people who design these items. Only an economist can stand by and watch the U.S. make patent and copyright protections ever stronger and then wonder why we have an upward redistribution of income. 

Perhaps even more importantly, the demand for stronger protections for the patents and copyrights of U.S. corporations is incredibly anachronistic in a world where China has an economy that is already 25 percent larger than the U.S. economy and is likely to be more than twice as large within a decade. With China spending roughly the same share of its GDP on research and development as the United States, it is virtually certain that it will have far more innovations that we want from them, than U.S. innovations they will want from us.

A forward thinking trade policy would look to pool research spending and make it open to all, especially in areas like prescription drugs and clean energy. We should want technology to advance as quickly as possible in these areas. And, once developed, we should want innovations to spread as widely as and quickly as possible.

Hopefully this will be the trade agenda of our next president, but Donald Trump’s trade agenda was going 180 degrees in the opposite direction. For this reason, his defeat by the Chinese in the trade war should be cause for celebration. This was Donald Trump’s trade war, not a trade war fought for to benefit the people of the United States. 

(This post originally appeared on my Patreon page.)

Back in the late 1960s, when it was clear that the United States was losing in Vietnam, Vermont Senator George Aiken came up with the plan to declare victory and leave. It seems that Donald Trump has stolen the senator’s playbook. 

While we don’t know much of the details of Trump’s partial deal with China, it seems almost certain that he has not won most of his demands. According to press accounts, China will commit to buy a large amount of U.S. agricultural products. This is a highly visible, but largely pointless victory for Trump.

All the major agricultural commodities, such as wheat, corn, soybeans, and beef, sell on massive world markets. If China commits to buying some amount from U.S. producers, for the most part, it will come at the expense of producers from other countries. It will not be an increase in world demand. This means that the displaced producers will be dumping their now surplus commodities on world markets, leaving the market price received by U.S. farmers little changed. 

Anyhow, it was hardly a surprise to some of us that Trump would go the declare victory and leave route. My colleague at the Center for Economic and Policy Research, Mark Weisbrot, made exactly this prediction a couple of weeks ago, as did I, a few days earlier

This outcome was easy to see. Trump could not care less about U.S.-China trade policy. He does care about not looking weak and he very much wants to be re-elected. The obvious answer is to say that he won. It doesn’t matter that he may have gotten almost nothing of what he demanded. His followers will believe him and when the media raise questions after seeing the deal, we all know the Trump response: FAKE NEWS.

Just as was the case with the U.S. in Vietnam, the trade war was not going well for Trump. Rather than going down, our overall trade deficit has been rising. This also has been the case with the countries that Trump designated as foes in his trade war.

In 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019. This is clearly going the wrong way.

There are many factors behind the rise in the trade deficit. Growth in the US has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise predates Trump. But we know that Trump wouldn’t be interested in excuses, the bottom line is the trade deficit has gotten worse on his watch.

The story does not look any better if we look at his major nemeses. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion. This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to over $260.0 billion in the same months last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.

It is also worth remembering that it is difficult to calculate bilateral trade deficits with rigor. Suppose that iPhones, which had previously been assembled in China, are instead assembled in Thailand. If we imported the iPhone from China, the full value of the iPhone would have been recorded as an import from China, even though the assembly may have counted for less than 10 percent of the value added.

When the assembly shifts to Thailand, the reduction in our reported imports from China is equal to the full cost of the iPhones that we previously imported from China. The actual hit to China is just the small share of the value added that is attributable to assembly.

It’s also worth noting that contrary to Trump’s claims, China is not paying for the tariffs. There is a very simple way to measure the extent to which suppliers in China have been forced to absorb tariffs in lower prices. We can look at the change in the price of our imports from China.

The Bureau of Labor Statistics publishes data on import prices monthly. In the year from September 2018 to September 2019, in which tariffs on many items have been raised to 25 percent, the price of items imported from China fell just 1.8 percent. This means that virtually all of the tariff is being paid either by consumers in the United States or being absorbed by retailers or wholesalers here.

If Trump’s battle with China is not going well, he seems to be doing even worse with other trade combatants. The trade deficit in goods with Mexico was $63.3 billion in 2016. It hit $80.7 billion last year and is virtually certain to come in even higher in 2019. The trade deficit in goods with the European Union was $146.7 billion in 2016. It had risen to $168.7 billion last year and is on a path to come in $10-$15 billion higher in 2019. The deficit with Canada rose from $11 billion in 2016 to $19.1 billion last year. It is likely to be roughly $1 billion higher in 2019. 

In short, Trump is doing really awful in his trade war. It is as though after Pearl Harbor, Japan went on to seize Hawaii and was threatening California and the rest of the west coast. 

But apart from the theater surrounding the trade deal, the rest of us should be happy that Trump is waving the white flag in his trade war. His agenda would have actually been negative for the vast majority of America’s workers. 

While Trump does have a point in complaints about currency valuations, this issue has taken a back seat in his trade war, especially with China. Instead he has made demands about respecting the intellectual property of U.S. corporations front and center. This is an agenda that is detrimental to the interests of U.S. workers.

At the most basic level, if Boeing and GE know that they can outsource operations to China, and don’t have to worry about being forced to transfer technology to Chinese partners, they will be more likely to outsource jobs than if they do have to worry about being forced to transfer technology. Making it more profitable for U.S. corporations to outsource jobs is not in the interest of U.S. workers.

More generally, longer and stronger patent monopolies have been a major factor in the upward redistribution of income over the last four decades. They mean higher prices for items like prescription drugs, medical equipment, and software, and more money for the people who design these items. Only an economist can stand by and watch the U.S. make patent and copyright protections ever stronger and then wonder why we have an upward redistribution of income. 

Perhaps even more importantly, the demand for stronger protections for the patents and copyrights of U.S. corporations is incredibly anachronistic in a world where China has an economy that is already 25 percent larger than the U.S. economy and is likely to be more than twice as large within a decade. With China spending roughly the same share of its GDP on research and development as the United States, it is virtually certain that it will have far more innovations that we want from them, than U.S. innovations they will want from us.

A forward thinking trade policy would look to pool research spending and make it open to all, especially in areas like prescription drugs and clean energy. We should want technology to advance as quickly as possible in these areas. And, once developed, we should want innovations to spread as widely as and quickly as possible.

Hopefully this will be the trade agenda of our next president, but Donald Trump’s trade agenda was going 180 degrees in the opposite direction. For this reason, his defeat by the Chinese in the trade war should be cause for celebration. This was Donald Trump’s trade war, not a trade war fought for to benefit the people of the United States. 

It made this assertion in two different articles last week, without attributing it to a source. The budget data from the I.M.F. do not seem to support this claim. (The numbers are all percent of GDP.)

While the deficits run in 2015 and 2016 were unsustainable, the deficit came down sharply in the next two years. The deficit run in 2018 and projected for 2019 could be sustained indefinitely. (Ecuador uses the dollar as its currency, so it must be able to borrow the money needed to finance its deficit in financial markets.)

Subject Descriptor

2015

2016

2017

2018

2019

General government net lending/borrowing

-6.119

-8.232

-4.533

-0.949

0.022

General government structural balance

-6.714

-6.783

-4.020

-1.676

-0.012

General government primary net lending/borrowing

-4.688

-6.670

-2.415

1.541

2.659

General government gross debt

    33.798

    43.166

    44.617

    46.132

    49.199

It made this assertion in two different articles last week, without attributing it to a source. The budget data from the I.M.F. do not seem to support this claim. (The numbers are all percent of GDP.)

While the deficits run in 2015 and 2016 were unsustainable, the deficit came down sharply in the next two years. The deficit run in 2018 and projected for 2019 could be sustained indefinitely. (Ecuador uses the dollar as its currency, so it must be able to borrow the money needed to finance its deficit in financial markets.)

Subject Descriptor

2015

2016

2017

2018

2019

General government net lending/borrowing

-6.119

-8.232

-4.533

-0.949

0.022

General government structural balance

-6.714

-6.783

-4.020

-1.676

-0.012

General government primary net lending/borrowing

-4.688

-6.670

-2.415

1.541

2.659

General government gross debt

    33.798

    43.166

    44.617

    46.132

    49.199

That seemed to be what Zuckerberg was saying in an interview with the Washington Post. Zuckerberg responding to complaints that Facebook was allowing people to lie in political ads:

“‘People worry, and I worry deeply, too, about an erosion of truth,’ Zuckerberg told The Washington Post ahead of a speech Thursday at Georgetown University. ‘At the same time, I don’t think people want to live in a world where you can only say things that tech companies decide are 100 percent true. And I think that those tensions are something we have to live with.'”

Zuckerberg apparently feels tech companies lack the competence to determine the truth of claims that people make in ads and elsewhere. Traditional publishers make this determination all the time. They refuse ads that they believe to be false and issue corrections for ads that they run and then later are presented with proof that the ads are false.

It may well be the case that Facebook is run by incompetents, but that is an argument for improving the quality of its staffing, not allowing it to be a medium for spreading lies.

That seemed to be what Zuckerberg was saying in an interview with the Washington Post. Zuckerberg responding to complaints that Facebook was allowing people to lie in political ads:

“‘People worry, and I worry deeply, too, about an erosion of truth,’ Zuckerberg told The Washington Post ahead of a speech Thursday at Georgetown University. ‘At the same time, I don’t think people want to live in a world where you can only say things that tech companies decide are 100 percent true. And I think that those tensions are something we have to live with.'”

Zuckerberg apparently feels tech companies lack the competence to determine the truth of claims that people make in ads and elsewhere. Traditional publishers make this determination all the time. They refuse ads that they believe to be false and issue corrections for ads that they run and then later are presented with proof that the ads are false.

It may well be the case that Facebook is run by incompetents, but that is an argument for improving the quality of its staffing, not allowing it to be a medium for spreading lies.

It is amazing how reporters and many economists feel the need to deceive the public about the reason for the loss of manufacturing jobs in the last decade. The number of manufacturing jobs was little changed from 1970 to 2000. From 2000 to the end of 2007 (before the Great Recession) we lost 3.4 million manufacturing jobs as the trade deficit exploded.

Fans of logic and arithmetic might think there is a connection there, the AP’s Fact Checker apparently does not. It tells readers:

“On trade

ELIZABETH WARREN: “The data show that we’ve had a lot of problems with losing jobs, but the principal reason has been bad trade policy. The principal reason has been a bunch of corporations, giant multinational corporations who’ve been calling the shots on trade.”

THE FACTS: Economists mostly blame those job losses on automation and robots, not trade deals.

So the Massachusetts senator is off.”

Here’s the picture as of a few years ago (sorry, I’m too lazy to update it).

baker buffie blue collar 2016 02 21 1

Apart from the huge falloff in the years from 2000 to 2007, which continued with the Great Recession, it is also interesting to note that manufacturing employment stabilized, and has risen modestly in the years since the Great Recession. So the economists AP relies on as sources much believe that robots and automation stopped displacing workers in manufacturing some time in 2010. Alternatively, we might note that the trade deficit has stabilized in the last nine years.

It is amazing how reporters and many economists feel the need to deceive the public about the reason for the loss of manufacturing jobs in the last decade. The number of manufacturing jobs was little changed from 1970 to 2000. From 2000 to the end of 2007 (before the Great Recession) we lost 3.4 million manufacturing jobs as the trade deficit exploded.

Fans of logic and arithmetic might think there is a connection there, the AP’s Fact Checker apparently does not. It tells readers:

“On trade

ELIZABETH WARREN: “The data show that we’ve had a lot of problems with losing jobs, but the principal reason has been bad trade policy. The principal reason has been a bunch of corporations, giant multinational corporations who’ve been calling the shots on trade.”

THE FACTS: Economists mostly blame those job losses on automation and robots, not trade deals.

So the Massachusetts senator is off.”

Here’s the picture as of a few years ago (sorry, I’m too lazy to update it).

baker buffie blue collar 2016 02 21 1

Apart from the huge falloff in the years from 2000 to 2007, which continued with the Great Recession, it is also interesting to note that manufacturing employment stabilized, and has risen modestly in the years since the Great Recession. So the economists AP relies on as sources much believe that robots and automation stopped displacing workers in manufacturing some time in 2010. Alternatively, we might note that the trade deficit has stabilized in the last nine years.

(This piece first appeared on my Patreon page.)

Last month, the Washington Post reported that Joe Biden is considering including a financial transactions tax (FTT) as part of his campaign for the Democratic nomination. For those of us who have long advocated such a tax, this is very good news.

On this issue, Bernie Sanders has taken the lead among presidential candidates, including an FTT as part of his plan for free college tuition free. Several other candidates also support an FTT, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.

It may be somewhat surprising, but Senator Warren is not among those supporting an FTT. This is certainly not due to a reluctance to challenge the interests of the wealthy. Warren has proposed a wide variety of measures that would directly challenge the interests of the rich and powerful.

The most ambitious item on this agenda is a wealth tax. Her tax would tax wealth above $50 million at the rate of 2.0 percent a year and wealth above $1 billion at the rate of 3.0 percent a year. (Sanders has an even larger wealth tax.) While there are good reasons for wanting to tax the very rich, an FTT is almost certainly a better economic policy and would have much better political prospects.  

We can see the economics of an FTT are superior when we consider the motivation for taxation by the federal government. As the proponents of Modern Monetary Theory remind us, the federal government doesn’t need revenue to spend, it prints money. The purpose of taxation by the federal government is to reduce consumption, so as to create the economic space for spending. The argument is that if the government spent a large amount of money, and didn’t have any taxes, it is likely to create too much demand in the economy, thereby generating inflation.

To see this point, imagine that the federal government was to spend another $1 trillion next year on Green New Deal policies (a bit more than 20 percent of current federal spending), such as clean energy and mass transit subsidies. If there were no increase in taxes, we would expect to see a huge surge in demand in the economy, likely leading to inflation. (Assume that the Federal Reserve Board simply prints more money so that interest rates are little changed.)

Now suppose we had another big Republican-style tax cut where we handed $1 trillion annually to the very richest people in the country. Also assume that we have no offsetting reduction in spending or increase in other taxes.

In this case, we almost certainly don’t have to worry about inflation. Jeff Bezos, Bill Gates, and other multi-billionaires already have pretty much all the money they can possibly spend. This government handout will fatten their stock portfolios but will have little effect on demand in the economy. And for that reason it is not likely to lead to inflation.

Now let’s flip this over and imagine that instead of handing money to our billionaires, we are taxing away their wealth at the rate of 3.0 percent annually. With Bezos, Gates, and the rest still earning money on their assets, their wealth is likely to be little affected. The impact on the consumption of the very wealthy is likely to be minimal, meaning that we have created little room for additional government spending.

In fact, it’s possible the effect on demand goes the other way. Most billionaires like their money. The wealth tax gives them a strong incentive to hire accountants, lawyers, and other people engaged in the tax avoidance/evasion industry. To take the simple arithmetic, if Jeff Bezos can find a way to hide $1 billion for twenty years, he will effectively be making $600 million. (I am ignoring interest.) That means that if he spends $500 million on clever accountants and tax lawyers, he is coming out ahead on the deal.

Bezos’ spending on accountants and tax lawyers is real spending that creates demand for goods and services, no matter how nefarious. For this reason, it is entirely possible that a wealth tax will end up increasing demand in the economy rather than reducing it.

By contrast, the way to avoid an FTT is to reduce trading. This means that we would see less demand for goods and services in the financial sector. Most estimates show that if we raise the cost of trading with an FTT, we will see a roughly proportionate decline in trading. For example, if a FTT raises the cost of trading a share of stock or an option by 40 percent, then the volume of trading will decline by roughly 40 percent.

In this scenario, people would be paying 40 percent more for each trade they made, but they would be carrying through 40 percent fewer trades. That would mean that the total amount of money they spent on trading would be little changed, even after we include what they pay in taxes. The financial industry would effectively be forced to eat the full amount of the tax, as the revenue it collected from trading would fall by roughly the size of the tax. This is exactly what we want a tax to do: free up resources in the economy to allow the government to spend on other priorities.

And, the financial industry is a sector of the economy that could badly use some downsizing. The size of the narrow financial sector (securities and commodities trading) has exploded over the last four decades, going from roughly 0.5 percent of GDP in the 1970s, to more than 2.0 percent of GDP today. An FTT would partially reverse this rise. By my calculations, it could raise an amount roughly equal to 0.6 percent of GDP, which comes to $1.6 trillion over the next decade, with the money largely corresponding to a shrinkage of the financial sector.[1]

It is hard to see an economic cost from this sort of reduction in trading volume. Since there has been an enormous explosion in trading volume over the last four decades, even a reduction in trading volume of 50 percent would only get us back to 1990s levels. And, we certainly had very robust financial markets in the 1990s. The purpose of the financial sector is to allocate capital to its best uses. It would be hard to convince those of us who lived through the housing bubble and the subsequent financial crisis that the increase in trading volume has allowed the financial industry to do a better job allocating capital than in prior decades.

The Politics of the Two Taxes

The politics of any tax increase will always be difficult. The rich can be expected to use their political power to scare people into believing the world will end if they are forced to pay more taxes. But the wealth tax has a unique problem.

Since the bulk of the money comes from a very small group of people, this small group of people has the option to announce that they will not pay the tax, by renouncing their citizenship. If that sounds strange to people, they have not been following the political behavior of the very rich in recent years. These people are not patriots committed to democracy or the United States.

Many of them contribute to and vote for Donald Trump, apparently believing that their savings on taxes are worth enough to overlook his racism, anti-Semitism, and disrespect for democracy and the rule of law. If anyone thinks that these people will happily pay a wealth tax that is likely to dwarf their income tax liabilities, they have not been paying attention to U.S. politics. 

It’s true that Warren’s wealth tax has a confiscatory exit tax for those who renounce their citizenship once the tax is in place. However, there is nothing to prevent billionaires from renouncing their citizenship before the tax is passed into law.

While is absurd to think that billionaires are geniuses by virtue of their great fortune, most almost certainly are not morons. If they don’t feel like paying the wealth tax they can simply renounce their citizenship as soon as it seems possible that Congress will act on a wealth tax. (Note, this does not mean they have to leave the country.) If it seemed plausible that Congress would pass a wealth tax does anyone doubt that a large percentage of the very rich would be prepared to renounce their citizenship?

And this threat alone would likely have a large impact on the prospects of wealth tax passing Congress. Suppose 1,000 very rich people, representing $10 trillion in wealth, sent a letter to Congress proclaiming their plan to renounce their citizenship if it moved ahead with President Warren’s wealth tax? My guess is that Congress would happily use this threat as an excuse not to pass a wealth tax, even if it otherwise was inclined to endorse such a measure. If Congress did move forward, and a substantial share of these billionaires carried through with their threat, the Warren administration would face a major embarrassment.

Of course an FTT will face ferocious opposition from the financial industry, but there is a big advantage here: every argument they make will be a lie. The financial sector will function just fine if trading volume was slashed by 50 percent. We know this, because we lived through periods with a much smaller financial sector.

And the claim that small investors will bear the cost in 401(k)s can also be shown to be a lie. The higher cost per trade will be offset by the reduction in trading volume.

And, as much as they will hate to admit to it, trading does not on average make investors money. On average the wins and loses balance out, so the ones who win from the high current level of trading are the people who get paid to do the trades. A president pushing a financial transaction tax should be able to get this point out to the general public.

In short, on both economic and political grounds, a FTT has far more to offer than a wealth tax. The enormous rise in inequality over the last four decades demands a serious response. But we have to make our moves carefully. A well-designed FTT fits the bill.

 

[1] My friend, Bob Pollin, along with colleagues at the University of Massachusetts, calculates a FTT could raise considerably more revenue. The primary difference is that he assumes that trading volume is considerably less elastic with respect to trading costs.

(This piece first appeared on my Patreon page.)

Last month, the Washington Post reported that Joe Biden is considering including a financial transactions tax (FTT) as part of his campaign for the Democratic nomination. For those of us who have long advocated such a tax, this is very good news.

On this issue, Bernie Sanders has taken the lead among presidential candidates, including an FTT as part of his plan for free college tuition free. Several other candidates also support an FTT, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.

It may be somewhat surprising, but Senator Warren is not among those supporting an FTT. This is certainly not due to a reluctance to challenge the interests of the wealthy. Warren has proposed a wide variety of measures that would directly challenge the interests of the rich and powerful.

The most ambitious item on this agenda is a wealth tax. Her tax would tax wealth above $50 million at the rate of 2.0 percent a year and wealth above $1 billion at the rate of 3.0 percent a year. (Sanders has an even larger wealth tax.) While there are good reasons for wanting to tax the very rich, an FTT is almost certainly a better economic policy and would have much better political prospects.  

We can see the economics of an FTT are superior when we consider the motivation for taxation by the federal government. As the proponents of Modern Monetary Theory remind us, the federal government doesn’t need revenue to spend, it prints money. The purpose of taxation by the federal government is to reduce consumption, so as to create the economic space for spending. The argument is that if the government spent a large amount of money, and didn’t have any taxes, it is likely to create too much demand in the economy, thereby generating inflation.

To see this point, imagine that the federal government was to spend another $1 trillion next year on Green New Deal policies (a bit more than 20 percent of current federal spending), such as clean energy and mass transit subsidies. If there were no increase in taxes, we would expect to see a huge surge in demand in the economy, likely leading to inflation. (Assume that the Federal Reserve Board simply prints more money so that interest rates are little changed.)

Now suppose we had another big Republican-style tax cut where we handed $1 trillion annually to the very richest people in the country. Also assume that we have no offsetting reduction in spending or increase in other taxes.

In this case, we almost certainly don’t have to worry about inflation. Jeff Bezos, Bill Gates, and other multi-billionaires already have pretty much all the money they can possibly spend. This government handout will fatten their stock portfolios but will have little effect on demand in the economy. And for that reason it is not likely to lead to inflation.

Now let’s flip this over and imagine that instead of handing money to our billionaires, we are taxing away their wealth at the rate of 3.0 percent annually. With Bezos, Gates, and the rest still earning money on their assets, their wealth is likely to be little affected. The impact on the consumption of the very wealthy is likely to be minimal, meaning that we have created little room for additional government spending.

In fact, it’s possible the effect on demand goes the other way. Most billionaires like their money. The wealth tax gives them a strong incentive to hire accountants, lawyers, and other people engaged in the tax avoidance/evasion industry. To take the simple arithmetic, if Jeff Bezos can find a way to hide $1 billion for twenty years, he will effectively be making $600 million. (I am ignoring interest.) That means that if he spends $500 million on clever accountants and tax lawyers, he is coming out ahead on the deal.

Bezos’ spending on accountants and tax lawyers is real spending that creates demand for goods and services, no matter how nefarious. For this reason, it is entirely possible that a wealth tax will end up increasing demand in the economy rather than reducing it.

By contrast, the way to avoid an FTT is to reduce trading. This means that we would see less demand for goods and services in the financial sector. Most estimates show that if we raise the cost of trading with an FTT, we will see a roughly proportionate decline in trading. For example, if a FTT raises the cost of trading a share of stock or an option by 40 percent, then the volume of trading will decline by roughly 40 percent.

In this scenario, people would be paying 40 percent more for each trade they made, but they would be carrying through 40 percent fewer trades. That would mean that the total amount of money they spent on trading would be little changed, even after we include what they pay in taxes. The financial industry would effectively be forced to eat the full amount of the tax, as the revenue it collected from trading would fall by roughly the size of the tax. This is exactly what we want a tax to do: free up resources in the economy to allow the government to spend on other priorities.

And, the financial industry is a sector of the economy that could badly use some downsizing. The size of the narrow financial sector (securities and commodities trading) has exploded over the last four decades, going from roughly 0.5 percent of GDP in the 1970s, to more than 2.0 percent of GDP today. An FTT would partially reverse this rise. By my calculations, it could raise an amount roughly equal to 0.6 percent of GDP, which comes to $1.6 trillion over the next decade, with the money largely corresponding to a shrinkage of the financial sector.[1]

It is hard to see an economic cost from this sort of reduction in trading volume. Since there has been an enormous explosion in trading volume over the last four decades, even a reduction in trading volume of 50 percent would only get us back to 1990s levels. And, we certainly had very robust financial markets in the 1990s. The purpose of the financial sector is to allocate capital to its best uses. It would be hard to convince those of us who lived through the housing bubble and the subsequent financial crisis that the increase in trading volume has allowed the financial industry to do a better job allocating capital than in prior decades.

The Politics of the Two Taxes

The politics of any tax increase will always be difficult. The rich can be expected to use their political power to scare people into believing the world will end if they are forced to pay more taxes. But the wealth tax has a unique problem.

Since the bulk of the money comes from a very small group of people, this small group of people has the option to announce that they will not pay the tax, by renouncing their citizenship. If that sounds strange to people, they have not been following the political behavior of the very rich in recent years. These people are not patriots committed to democracy or the United States.

Many of them contribute to and vote for Donald Trump, apparently believing that their savings on taxes are worth enough to overlook his racism, anti-Semitism, and disrespect for democracy and the rule of law. If anyone thinks that these people will happily pay a wealth tax that is likely to dwarf their income tax liabilities, they have not been paying attention to U.S. politics. 

It’s true that Warren’s wealth tax has a confiscatory exit tax for those who renounce their citizenship once the tax is in place. However, there is nothing to prevent billionaires from renouncing their citizenship before the tax is passed into law.

While is absurd to think that billionaires are geniuses by virtue of their great fortune, most almost certainly are not morons. If they don’t feel like paying the wealth tax they can simply renounce their citizenship as soon as it seems possible that Congress will act on a wealth tax. (Note, this does not mean they have to leave the country.) If it seemed plausible that Congress would pass a wealth tax does anyone doubt that a large percentage of the very rich would be prepared to renounce their citizenship?

And this threat alone would likely have a large impact on the prospects of wealth tax passing Congress. Suppose 1,000 very rich people, representing $10 trillion in wealth, sent a letter to Congress proclaiming their plan to renounce their citizenship if it moved ahead with President Warren’s wealth tax? My guess is that Congress would happily use this threat as an excuse not to pass a wealth tax, even if it otherwise was inclined to endorse such a measure. If Congress did move forward, and a substantial share of these billionaires carried through with their threat, the Warren administration would face a major embarrassment.

Of course an FTT will face ferocious opposition from the financial industry, but there is a big advantage here: every argument they make will be a lie. The financial sector will function just fine if trading volume was slashed by 50 percent. We know this, because we lived through periods with a much smaller financial sector.

And the claim that small investors will bear the cost in 401(k)s can also be shown to be a lie. The higher cost per trade will be offset by the reduction in trading volume.

And, as much as they will hate to admit to it, trading does not on average make investors money. On average the wins and loses balance out, so the ones who win from the high current level of trading are the people who get paid to do the trades. A president pushing a financial transaction tax should be able to get this point out to the general public.

In short, on both economic and political grounds, a FTT has far more to offer than a wealth tax. The enormous rise in inequality over the last four decades demands a serious response. But we have to make our moves carefully. A well-designed FTT fits the bill.

 

[1] My friend, Bob Pollin, along with colleagues at the University of Massachusetts, calculates a FTT could raise considerably more revenue. The primary difference is that he assumes that trading volume is considerably less elastic with respect to trading costs.

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