As the Trump administration’s ineptitude is rapidly increasing the likelihood of a recession, we have to plan for a stimulus to counteract the worse effects. Many people (including me) have mentioned the possibility of a cut in the Social Security payroll tax as being a major component of a stimulus package. The idea is that the cut would be simple, progressive, and could get into people’s pockets quickly. We have a model for this, the Obama administration put in place a 2.0 percentage point reduction in the Social Security payroll tax in 2011 in order to provide a boost to the recovery.
When Obama put this cut into place, the Social Security trust fund was reimbursed for the lost revenue, and the payroll tax returned to its prior level in 2013. While that worked out fine, there is a potential problem in going this route.
The payroll tax has been the main designated funding source for Social Security since its creation in 1937. Under the law, it is operated as a separate program and it can only pay benefits if it has money available from its designated revenue sources.
It is no secret that the Republican party is extremely hostile to Social Security. Prominent Republicans have often proposed cuts to the program and President George W. Bush wanted to privatize it.
A temporary cut to the Social Security tax raises the possibility of Republican game-playing, which could worsen the program’s finances and create a situation that eventually forces cuts. While last time the Republicans in Congress did not interfere with the tax returning its prior level and left the trust fund unharmed, we certainly should not assume that the current crew of Republicans would act in good faith.
For this reason, it would be best to have a tax cut that was not directly tied to the Social Security payroll tax. The Make Work Pay tax credit that was part of President Obama’s initial stimulus is a great model. This tax cut effectively refunded 6.2 percent of workers’ pay, up to $400. This meant that anyone earning over $6,500 a year got the full amount of the tax credit. It phased out for incomes over $100,000. That made the tax cut considerably more progressive than a payroll tax cut and it was not tied to Social Security in any way whatsoever.
This sort of tax cut would be a great model for a tax cut to offset some of the economic impacts of the coronavirus. Of course, we would want to do much more.
We recognize that close to a quarter of the workforce does not have paid sick leave. We don’t want people to go to work when they are sick. We should have a generous tax credit to employers (e.g. $800) to extend at least seven paid sick days a year to workers who do not already have it. We also need to pay for testing and treatment of coronavirus to ensure that people who are uninsured or who have bad insurance will come in for testing.
We also have to remember that when schools are closed, many lower-income children are missing out on lunches and breakfasts. We need more money for food stamps and other forms of assistance for low-income families.
And, we need to put more public money into developing a vaccine. Also, we have to move into the 21st century in our thinking about this research. It should be fully open. We want our researchers not only sharing their findings with each other so that all can benefit from new results, but also with researchers in Europe, China, and elsewhere. Science advances most quickly when it is open.
And, when we do get a vaccine, it should be in the public domain so that it can be sold as a cheap generic from Day One. We shouldn’t have to worry about whether a vaccine will be affordable, it will be cheap if the government doesn’t grant a patent monopoly. The problem with high drug prices is not that we need the government to make drugs affordable, we need to stop the government from granting patent monopolies that make drugs expensive.
Anyhow, the full story of an effective stimulus would be longer, but this is a good start.
As the Trump administration’s ineptitude is rapidly increasing the likelihood of a recession, we have to plan for a stimulus to counteract the worse effects. Many people (including me) have mentioned the possibility of a cut in the Social Security payroll tax as being a major component of a stimulus package. The idea is that the cut would be simple, progressive, and could get into people’s pockets quickly. We have a model for this, the Obama administration put in place a 2.0 percentage point reduction in the Social Security payroll tax in 2011 in order to provide a boost to the recovery.
When Obama put this cut into place, the Social Security trust fund was reimbursed for the lost revenue, and the payroll tax returned to its prior level in 2013. While that worked out fine, there is a potential problem in going this route.
The payroll tax has been the main designated funding source for Social Security since its creation in 1937. Under the law, it is operated as a separate program and it can only pay benefits if it has money available from its designated revenue sources.
It is no secret that the Republican party is extremely hostile to Social Security. Prominent Republicans have often proposed cuts to the program and President George W. Bush wanted to privatize it.
A temporary cut to the Social Security tax raises the possibility of Republican game-playing, which could worsen the program’s finances and create a situation that eventually forces cuts. While last time the Republicans in Congress did not interfere with the tax returning its prior level and left the trust fund unharmed, we certainly should not assume that the current crew of Republicans would act in good faith.
For this reason, it would be best to have a tax cut that was not directly tied to the Social Security payroll tax. The Make Work Pay tax credit that was part of President Obama’s initial stimulus is a great model. This tax cut effectively refunded 6.2 percent of workers’ pay, up to $400. This meant that anyone earning over $6,500 a year got the full amount of the tax credit. It phased out for incomes over $100,000. That made the tax cut considerably more progressive than a payroll tax cut and it was not tied to Social Security in any way whatsoever.
This sort of tax cut would be a great model for a tax cut to offset some of the economic impacts of the coronavirus. Of course, we would want to do much more.
We recognize that close to a quarter of the workforce does not have paid sick leave. We don’t want people to go to work when they are sick. We should have a generous tax credit to employers (e.g. $800) to extend at least seven paid sick days a year to workers who do not already have it. We also need to pay for testing and treatment of coronavirus to ensure that people who are uninsured or who have bad insurance will come in for testing.
We also have to remember that when schools are closed, many lower-income children are missing out on lunches and breakfasts. We need more money for food stamps and other forms of assistance for low-income families.
And, we need to put more public money into developing a vaccine. Also, we have to move into the 21st century in our thinking about this research. It should be fully open. We want our researchers not only sharing their findings with each other so that all can benefit from new results, but also with researchers in Europe, China, and elsewhere. Science advances most quickly when it is open.
And, when we do get a vaccine, it should be in the public domain so that it can be sold as a cheap generic from Day One. We shouldn’t have to worry about whether a vaccine will be affordable, it will be cheap if the government doesn’t grant a patent monopoly. The problem with high drug prices is not that we need the government to make drugs affordable, we need to stop the government from granting patent monopolies that make drugs expensive.
Anyhow, the full story of an effective stimulus would be longer, but this is a good start.
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I suppose it’s not an absolute certainty, but with Donald Trump in charge of stopping the spread of the disease, the bankruptcy of the health insurance industry would seem to be pretty much a foregone conclusion. After all, if large numbers of people contract the disease, which is hard to imagine will not be the case, the industry will face a huge bill paying for their care.
Anyhow, folks should be giving some thought to what sort of conditions we would impose on a bailout. I’ll start the bidding with a hard cap of $1 million on total compensation for the CEO or any other employee of the company. And this should be written so it’s 100 percent airtight. That cap includes all options, bonuses, deferred pay, health care benefits and anything else that can be deemed as compensation.
And I would also take away any “we didn’t understand” defenses for corporate boards. Give the bastards a mandatory five year jail sentence if they sign a contract that breaks the cap. That should help them to think clearly.
For anyone who thinks this is too low, the president of the United States works for $400k. (Okay, Trump gets about 100 times that amount by billing the government for staff and secret service stays at his resorts, but $400k is what a normal president gets.)
Anyhow, this pay cap is my opening bid, but we should have our conditions prepared in advance for when the free market lovers in the health industry come running to the government to save them from bankruptcy.
I suppose it’s not an absolute certainty, but with Donald Trump in charge of stopping the spread of the disease, the bankruptcy of the health insurance industry would seem to be pretty much a foregone conclusion. After all, if large numbers of people contract the disease, which is hard to imagine will not be the case, the industry will face a huge bill paying for their care.
Anyhow, folks should be giving some thought to what sort of conditions we would impose on a bailout. I’ll start the bidding with a hard cap of $1 million on total compensation for the CEO or any other employee of the company. And this should be written so it’s 100 percent airtight. That cap includes all options, bonuses, deferred pay, health care benefits and anything else that can be deemed as compensation.
And I would also take away any “we didn’t understand” defenses for corporate boards. Give the bastards a mandatory five year jail sentence if they sign a contract that breaks the cap. That should help them to think clearly.
For anyone who thinks this is too low, the president of the United States works for $400k. (Okay, Trump gets about 100 times that amount by billing the government for staff and secret service stays at his resorts, but $400k is what a normal president gets.)
Anyhow, this pay cap is my opening bid, but we should have our conditions prepared in advance for when the free market lovers in the health industry come running to the government to save them from bankruptcy.
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Glenn Kessler, the Washington Post’s fact-checker, has a tough job. He tries to sort of what is true and what is false in the various claims made by public figures. I don’t always agree with his calls, but I know he tries to be fair in his approach.
Recognizing this fact, I think he made the wrong call in criticizing a Bernie Sanders campaign ad that went after Joe Biden for repeated efforts to cut Social Security. The gist of Kessler’s criticism is that Biden was never singling out Social Security for cuts, he was including the program in proposals that involved across the board cuts. He takes Sanders to task for not pointing this out.
This is an unfair call. First, on the basic point, the fact that you want to cut Social Security along with everything else does not mean that you are not proposing to cut Social Security. So, Sanders is 100 percent right on this point. Also, it is reasonable to assume that any Democrat is not going to single out Social Security as a program they want to cut, so the fact that Sanders did not give the full context hardly seems a major failing in a political ad.
Perhaps more importantly, there is a point as to whether Social Security would be singled out as a program to be protected, even when other programs are on the table. In this respect, it is important to note that Social Security is not actually part of the official budget. This is because it has a designated tax and revenue stream. It was designed to be separate from the official budget. In this respect, it is worth noting that, under the law, if the designated revenue stream is insufficient to pay full benefits, then they will not be paid.
There is also a powerful moral point here. Workers are effectively paying for their benefits through the Social Security tax. And, as many of us have pointed out, it is a very regressive tax. This tax can be justified in the context of a program with a very progressive payback structure, but no one would ever seriously propose financing the general budget with a regressive payroll tax.
In this context, reducing promised benefits can be seen as taking away something for which people have already worked. It would be comparable to telling a worker that we’re going to 10 percent out of their paycheck at the end of the pay period because we need that money for other things. This is especially pernicious when we are referring to cutting benefits for people who already retired since they will have little ability to work more to make up for lost benefits.
For these reasons, many Democrats have insisted that Social Security not be on the table in any effort to reduce budget deficits. Sanders has consistently been among this group. Biden has not been. That is an important distinction and it is totally appropriate for Sanders to be making it as part of his campaign.
Glenn Kessler, the Washington Post’s fact-checker, has a tough job. He tries to sort of what is true and what is false in the various claims made by public figures. I don’t always agree with his calls, but I know he tries to be fair in his approach.
Recognizing this fact, I think he made the wrong call in criticizing a Bernie Sanders campaign ad that went after Joe Biden for repeated efforts to cut Social Security. The gist of Kessler’s criticism is that Biden was never singling out Social Security for cuts, he was including the program in proposals that involved across the board cuts. He takes Sanders to task for not pointing this out.
This is an unfair call. First, on the basic point, the fact that you want to cut Social Security along with everything else does not mean that you are not proposing to cut Social Security. So, Sanders is 100 percent right on this point. Also, it is reasonable to assume that any Democrat is not going to single out Social Security as a program they want to cut, so the fact that Sanders did not give the full context hardly seems a major failing in a political ad.
Perhaps more importantly, there is a point as to whether Social Security would be singled out as a program to be protected, even when other programs are on the table. In this respect, it is important to note that Social Security is not actually part of the official budget. This is because it has a designated tax and revenue stream. It was designed to be separate from the official budget. In this respect, it is worth noting that, under the law, if the designated revenue stream is insufficient to pay full benefits, then they will not be paid.
There is also a powerful moral point here. Workers are effectively paying for their benefits through the Social Security tax. And, as many of us have pointed out, it is a very regressive tax. This tax can be justified in the context of a program with a very progressive payback structure, but no one would ever seriously propose financing the general budget with a regressive payroll tax.
In this context, reducing promised benefits can be seen as taking away something for which people have already worked. It would be comparable to telling a worker that we’re going to 10 percent out of their paycheck at the end of the pay period because we need that money for other things. This is especially pernicious when we are referring to cutting benefits for people who already retired since they will have little ability to work more to make up for lost benefits.
For these reasons, many Democrats have insisted that Social Security not be on the table in any effort to reduce budget deficits. Sanders has consistently been among this group. Biden has not been. That is an important distinction and it is totally appropriate for Sanders to be making it as part of his campaign.
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Many people have become very concerned about the economy because of the stock market’s plunge in the last two weeks. While the spread of the coronavirus gives us very good reason to worry about the state of the economy, the plunge in the stock market does not. In fact, those folks who are very concerned about wealth inequality can celebrate because the wealth of the top 1 percent has just dropped by around 10 percent, while the wealth of the bottom 50 percent has barely been touched. (I tend to focus on income inequality, in large part for this reason.)
Anyhow, the stock market does not generally provide us with very good insight into the future of the economy, except when it looks like more of the same. It’s sort of like hearing the weather forecaster tell you it’s sunny, as you step outside into the sunlight. You didn’t really need them for this purpose. When it comes to telling about the storm just around the corner, the stock market is a much worse predictor than weather forecasters.
We don’t have to look to ancient history to see this point. In October of 2007, the S&P 500 hit what was at the time a record high. That was less than two months before the beginning of the worst recession since the Great Depression. The stock market did not give us much warning on that one.
As I noted last week, the run-up in the stock market in the last few years had pushed price-to-earnings ratios to unusually high levels. I did not argue that this necessarily implied a market plunge, but I did point out that as a matter of logic, high price-to-earnings ratios virtually guarantee low returns in the future. For this reason, a sharp market downturn should not be a surprise, even if the specific cause is.
If the stock market is not a very good predictor of the economy’s future, it is also not generally a causal factor. There is a sort of fairy tale story that a high stock market is good for the economy because it means that companies can effectively borrow cheaply by issuing new shares. In this fairy tale, that means that they can more easily raise money for investment, which means more growth and higher productivity and wages.
The problem with this story is that companies rarely issue new shares of stock to finance investment. Most often large share issues are done to allow early investors to cash out some of their holdings. Companies will also issue shares to adjust their debt position. For example, if they issued bonds that pay a high interest rate, high share prices may give a company an opportunity to issue shares and use the money to retire some of its debt. However, it is rare that a company issues shares to directly finance investment.
The one major exception to this rule was during the stock bubble of the late 1990s. In that bubble, new companies, many of which did not even know how they could make a profit, were often able to raise hundreds of millions, or even billions, on initial public offerings. In that context, the plunge in the market from 2000 to 2002 did lead to a sharp reduction in investment, as this channel of financing largely disappeared. (The NASDAQ, where most of these new companies were listed, lost more than 80 percent of its value from peak to trough.)
The plunge in the market in 2000-2002 also had a major impact on consumption, as more than $10 trillion in stock wealth (roughly $20 trillion relative to today’s economy) was destroyed. Stock wealth was clearly driving consumption at the end of the 1990s boom, as savings rates fell to what were then record lows. (The housing bubble pushed the savings rate even lower.) It was not only the wealth itself that drove consumption but the expectations of future stock rises. It was common at the time for otherwise sane people to expect that the stock market would produce double-digit nominal returns for the indefinite future.
Anyhow, this sort of causation from a stock plunge to a recession is not plausible today. Investment is already weak and clearly not being driven by the stock market. And, savings rates are considerably higher than they were in the years of either the housing or the stock bubble. Losing 10 percent of the market’s wealth will surely have some negative impact on consumption, but almost certainly not enough to cause a recession.
In short, those who don’t have a lot of money in the stock market should view its ups and downs as you would any other spectator sport. It doesn’t have a lot to do with you. (Even those who do have lots of money in the market can be consoled by the fact that lower prices today mean higher future returns – not exactly a disaster story.)
While the drop in the market by itself may not be bad news, the prospect of the spread of the coronavirus certainly is. In addition to the very serious health risk it poses to tens of millions of potential victims, it also could have a very large economic impact.
There already has been much written about how the efforts to contain the disease in China have led to the shutdown of many factories, leading to shortages of important production inputs here. This can force factories to curtail production until alternative sources of supply can be found or Chinese suppliers are back up and running. But this is just the beginning of the sorts of economic disruptions that we may see if the coronavirus spreads quickly across the United States.
In a Huffington Post piece, Hayley Miller and Arthur Delaney examine the economic consequences of the sort of school closures that we have seen in Japan and elsewhere. A large percentage of the affected workers will be forced to stay home since they will be unable to make alternative child care arrangements. This could mean millions of workplaces are unable to maintain normal operations since they are understaffed. Look to longer wait times at everything from restaurants and barbershops to doctors’ offices and hospitals. The lines at the latter will also be affected by the increased demand from people who either are infected with the virus or are worried that they could be.
And, many people who miss days of work will also be missing days of pay, since they don’t have paid sick leave. That will mean less demand in the economy since these people will have less money to spend. And of course, another effect of the lack of paid sick leave is that many people will go to work sick, causing the virus to spread more widely.
If the coronavirus becomes very widespread, we could see enormous economic impacts. If people become very worried that they can catch the disease if they go out in public, this will mean many fewer people will go to restaurants, sports events, movie theaters, and concerts, or anyone else where they are likely to be in close proximity to large numbers of people. Many of these businesses are likely to shut down, at least until the major threat of the virus has passed.
Plane travel will also be drastically curtailed, as few people will want to be on a crowded plane, which could include several people with the virus. That will be a huge blow to the tourism industry, as people put off vacations, until the threat lessons.
There are few areas of the economy that would not be affected if the virus becomes as widespread as was the case in Wuhan China and possibly now in parts of Japan. It would be good if the United States had an effective public health team that could take the necessary steps to limit the spread of the virus. The Center for Disease Control (CDC) does have top-notch experts in this area.
However, it is not clear that they will be making the big decisions. Trump has placed Vice-President Pence in charge of the response to the epidemic. Pence is a person who does not believe in evolution or climate change. In other words, science is not his strong suit.
Furthermore, it is clear that Trump and Pence are more worried about the politics around Coronavirus than effective steps to stop its spread. They have demanded that all public statements about the disease must first be cleared with Pence. They have already acted to punish a whistleblower who called attention to the fact that passengers exposed to the virus on a cruise ship were greeted by people without protective gear and without medical training.
We may still get lucky, and the spread of the virus may be fairly limited in the United States. But with the containment effect being led by a bunch of vindictive clowns, people are quite right to be worried about the public’s health and prospects for the economy.
Many people have become very concerned about the economy because of the stock market’s plunge in the last two weeks. While the spread of the coronavirus gives us very good reason to worry about the state of the economy, the plunge in the stock market does not. In fact, those folks who are very concerned about wealth inequality can celebrate because the wealth of the top 1 percent has just dropped by around 10 percent, while the wealth of the bottom 50 percent has barely been touched. (I tend to focus on income inequality, in large part for this reason.)
Anyhow, the stock market does not generally provide us with very good insight into the future of the economy, except when it looks like more of the same. It’s sort of like hearing the weather forecaster tell you it’s sunny, as you step outside into the sunlight. You didn’t really need them for this purpose. When it comes to telling about the storm just around the corner, the stock market is a much worse predictor than weather forecasters.
We don’t have to look to ancient history to see this point. In October of 2007, the S&P 500 hit what was at the time a record high. That was less than two months before the beginning of the worst recession since the Great Depression. The stock market did not give us much warning on that one.
As I noted last week, the run-up in the stock market in the last few years had pushed price-to-earnings ratios to unusually high levels. I did not argue that this necessarily implied a market plunge, but I did point out that as a matter of logic, high price-to-earnings ratios virtually guarantee low returns in the future. For this reason, a sharp market downturn should not be a surprise, even if the specific cause is.
If the stock market is not a very good predictor of the economy’s future, it is also not generally a causal factor. There is a sort of fairy tale story that a high stock market is good for the economy because it means that companies can effectively borrow cheaply by issuing new shares. In this fairy tale, that means that they can more easily raise money for investment, which means more growth and higher productivity and wages.
The problem with this story is that companies rarely issue new shares of stock to finance investment. Most often large share issues are done to allow early investors to cash out some of their holdings. Companies will also issue shares to adjust their debt position. For example, if they issued bonds that pay a high interest rate, high share prices may give a company an opportunity to issue shares and use the money to retire some of its debt. However, it is rare that a company issues shares to directly finance investment.
The one major exception to this rule was during the stock bubble of the late 1990s. In that bubble, new companies, many of which did not even know how they could make a profit, were often able to raise hundreds of millions, or even billions, on initial public offerings. In that context, the plunge in the market from 2000 to 2002 did lead to a sharp reduction in investment, as this channel of financing largely disappeared. (The NASDAQ, where most of these new companies were listed, lost more than 80 percent of its value from peak to trough.)
The plunge in the market in 2000-2002 also had a major impact on consumption, as more than $10 trillion in stock wealth (roughly $20 trillion relative to today’s economy) was destroyed. Stock wealth was clearly driving consumption at the end of the 1990s boom, as savings rates fell to what were then record lows. (The housing bubble pushed the savings rate even lower.) It was not only the wealth itself that drove consumption but the expectations of future stock rises. It was common at the time for otherwise sane people to expect that the stock market would produce double-digit nominal returns for the indefinite future.
Anyhow, this sort of causation from a stock plunge to a recession is not plausible today. Investment is already weak and clearly not being driven by the stock market. And, savings rates are considerably higher than they were in the years of either the housing or the stock bubble. Losing 10 percent of the market’s wealth will surely have some negative impact on consumption, but almost certainly not enough to cause a recession.
In short, those who don’t have a lot of money in the stock market should view its ups and downs as you would any other spectator sport. It doesn’t have a lot to do with you. (Even those who do have lots of money in the market can be consoled by the fact that lower prices today mean higher future returns – not exactly a disaster story.)
While the drop in the market by itself may not be bad news, the prospect of the spread of the coronavirus certainly is. In addition to the very serious health risk it poses to tens of millions of potential victims, it also could have a very large economic impact.
There already has been much written about how the efforts to contain the disease in China have led to the shutdown of many factories, leading to shortages of important production inputs here. This can force factories to curtail production until alternative sources of supply can be found or Chinese suppliers are back up and running. But this is just the beginning of the sorts of economic disruptions that we may see if the coronavirus spreads quickly across the United States.
In a Huffington Post piece, Hayley Miller and Arthur Delaney examine the economic consequences of the sort of school closures that we have seen in Japan and elsewhere. A large percentage of the affected workers will be forced to stay home since they will be unable to make alternative child care arrangements. This could mean millions of workplaces are unable to maintain normal operations since they are understaffed. Look to longer wait times at everything from restaurants and barbershops to doctors’ offices and hospitals. The lines at the latter will also be affected by the increased demand from people who either are infected with the virus or are worried that they could be.
And, many people who miss days of work will also be missing days of pay, since they don’t have paid sick leave. That will mean less demand in the economy since these people will have less money to spend. And of course, another effect of the lack of paid sick leave is that many people will go to work sick, causing the virus to spread more widely.
If the coronavirus becomes very widespread, we could see enormous economic impacts. If people become very worried that they can catch the disease if they go out in public, this will mean many fewer people will go to restaurants, sports events, movie theaters, and concerts, or anyone else where they are likely to be in close proximity to large numbers of people. Many of these businesses are likely to shut down, at least until the major threat of the virus has passed.
Plane travel will also be drastically curtailed, as few people will want to be on a crowded plane, which could include several people with the virus. That will be a huge blow to the tourism industry, as people put off vacations, until the threat lessons.
There are few areas of the economy that would not be affected if the virus becomes as widespread as was the case in Wuhan China and possibly now in parts of Japan. It would be good if the United States had an effective public health team that could take the necessary steps to limit the spread of the virus. The Center for Disease Control (CDC) does have top-notch experts in this area.
However, it is not clear that they will be making the big decisions. Trump has placed Vice-President Pence in charge of the response to the epidemic. Pence is a person who does not believe in evolution or climate change. In other words, science is not his strong suit.
Furthermore, it is clear that Trump and Pence are more worried about the politics around Coronavirus than effective steps to stop its spread. They have demanded that all public statements about the disease must first be cleared with Pence. They have already acted to punish a whistleblower who called attention to the fact that passengers exposed to the virus on a cruise ship were greeted by people without protective gear and without medical training.
We may still get lucky, and the spread of the virus may be fairly limited in the United States. But with the containment effect being led by a bunch of vindictive clowns, people are quite right to be worried about the public’s health and prospects for the economy.
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This was in an early morning tweet. Trump actually said that, when it comes to interest rates, “we should be paying less,” but that also means that we should be receiving less. In fact, our interest rates would be expected to be higher than in places like the eurozone, since our inflation rate is also roughly 1.0 percentage point higher.
But Trump is right that the Fed should lower interest rates, but it probably makes little difference whether it does so now or waits until its meeting later this month. Long-term rates, which are what has the most impact on the economy, have already tumbled to record lows. It’s likely that Trump’s whining has made Fed Chair Jerome Powell less likely to act early since he does not want to appear to be responding to Trump’s complaints.
This was in an early morning tweet. Trump actually said that, when it comes to interest rates, “we should be paying less,” but that also means that we should be receiving less. In fact, our interest rates would be expected to be higher than in places like the eurozone, since our inflation rate is also roughly 1.0 percentage point higher.
But Trump is right that the Fed should lower interest rates, but it probably makes little difference whether it does so now or waits until its meeting later this month. Long-term rates, which are what has the most impact on the economy, have already tumbled to record lows. It’s likely that Trump’s whining has made Fed Chair Jerome Powell less likely to act early since he does not want to appear to be responding to Trump’s complaints.
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Yes, I’m talking about its news section, not its opinion pages, where populists are always bashed. Today, the Post gave us a major piece telling us how Bernie Sanders and Donald Trump are two sides of the same populist coin. While the piece is confused in many ways, the one point it makes very clear is that the Washington Post really dislikes Bernie Sanders.
The piece is determined to tell people the problem is just one of perceptions:
“Each is powered by a disdain for elites they perceive as having flourished while other Americans suffered, a rejection of the establishment and the figures who have controlled it, and a contempt for the institutions that over the decades have blunted, as they see it, the success of efforts like theirs.”
Okay, let’s do a fact check. Elites have in fact flourished over the last four decades. The share of national income going to the richest one percent has gone from 10 percent to 20 percent. The next four percent (the 95th to the 99th percentiles of the income distribution) have also seen a large increase in their share of national income. As a result of this sharp upward redistribution of income, families at the middle and bottom of the income distribution have seen few gains over the last four decades. That is reality, not just a problem of perceptions.
The establishment figures that the Post is unhappy the populists are rejecting are folks like former Fed Chair Alan Greenspan, who could not see the $8 trillion housing bubble ($16 trillion relative to today’s economy), the collapse of which sank the U.S. economy. They also reject people like Larry Summers who also dismissed people who tried to warn of the bubble and pushed a trade opening to China that cost millions of manufacturing workers their jobs. Those are facts, not problems of perception.
In terms of institutions acting to blunt populism, Greenspan, Summers, and others who got it completely wrong can count on far more visibility in major media outlets than the people who got these issues right. Again, that is fact, not an issue of perception.
The piece also gives us this head-scratcher:
“Meanwhile, left-wing populism and self-described democratic socialists are gaining power throughout Europe and the Americas, at times replacing an older guard of liberals who embraced globalization.”
It’s not clear which “self-described democratic socialists” it sees gaining power throughout Europe and the Americas, but parties that call themselves “social democrats” have long been in governments in places like Germany, France, Sweden, Denmark, and elsewhere in Europe. There are left-wing populist parties that position themselves to the left of the social democratic traditional parties, but only in Greece have they taken power, although some have been the minority party in coalitions elsewhere.
As far as globalization, the article should have said that the older guard of liberals “claimed” to embrace globalization. Virtually none of them has sought to liberalize barriers that prevent foreign doctors and other workers in highly paid professionals from working in the United States and driving down the pay of U.S. professionals. These older guard liberals only seem interested in globalization when it is structured to reduce the pay of less-educated workers.
The “globalization” favored by the old guard also involves using trade deals to increase protectionist barriers in the form of longer and stronger patent and copyright monopolies. These protectionist barriers, which are equivalent to tariffs of many thousand percents, have the effect of redistributing income upward.
More recently, the old guard liberals have taken to using trade deals to lock in the protection enjoyed by Facebook and other intermediaries from the same liability that traditional media outlets face if they pass along false and libelous material. This policy is easy to understand if the goal is to make Mark Zuckerberg and people like him even richer, but it has nothing obvious to do with globalization.
Anyhow, this piece is a great example of the Post’s willingness to use its news section to press its case against populism. It also shows why populists would distrust a news outlet like the Washington Post.
Yes, I’m talking about its news section, not its opinion pages, where populists are always bashed. Today, the Post gave us a major piece telling us how Bernie Sanders and Donald Trump are two sides of the same populist coin. While the piece is confused in many ways, the one point it makes very clear is that the Washington Post really dislikes Bernie Sanders.
The piece is determined to tell people the problem is just one of perceptions:
“Each is powered by a disdain for elites they perceive as having flourished while other Americans suffered, a rejection of the establishment and the figures who have controlled it, and a contempt for the institutions that over the decades have blunted, as they see it, the success of efforts like theirs.”
Okay, let’s do a fact check. Elites have in fact flourished over the last four decades. The share of national income going to the richest one percent has gone from 10 percent to 20 percent. The next four percent (the 95th to the 99th percentiles of the income distribution) have also seen a large increase in their share of national income. As a result of this sharp upward redistribution of income, families at the middle and bottom of the income distribution have seen few gains over the last four decades. That is reality, not just a problem of perceptions.
The establishment figures that the Post is unhappy the populists are rejecting are folks like former Fed Chair Alan Greenspan, who could not see the $8 trillion housing bubble ($16 trillion relative to today’s economy), the collapse of which sank the U.S. economy. They also reject people like Larry Summers who also dismissed people who tried to warn of the bubble and pushed a trade opening to China that cost millions of manufacturing workers their jobs. Those are facts, not problems of perception.
In terms of institutions acting to blunt populism, Greenspan, Summers, and others who got it completely wrong can count on far more visibility in major media outlets than the people who got these issues right. Again, that is fact, not an issue of perception.
The piece also gives us this head-scratcher:
“Meanwhile, left-wing populism and self-described democratic socialists are gaining power throughout Europe and the Americas, at times replacing an older guard of liberals who embraced globalization.”
It’s not clear which “self-described democratic socialists” it sees gaining power throughout Europe and the Americas, but parties that call themselves “social democrats” have long been in governments in places like Germany, France, Sweden, Denmark, and elsewhere in Europe. There are left-wing populist parties that position themselves to the left of the social democratic traditional parties, but only in Greece have they taken power, although some have been the minority party in coalitions elsewhere.
As far as globalization, the article should have said that the older guard of liberals “claimed” to embrace globalization. Virtually none of them has sought to liberalize barriers that prevent foreign doctors and other workers in highly paid professionals from working in the United States and driving down the pay of U.S. professionals. These older guard liberals only seem interested in globalization when it is structured to reduce the pay of less-educated workers.
The “globalization” favored by the old guard also involves using trade deals to increase protectionist barriers in the form of longer and stronger patent and copyright monopolies. These protectionist barriers, which are equivalent to tariffs of many thousand percents, have the effect of redistributing income upward.
More recently, the old guard liberals have taken to using trade deals to lock in the protection enjoyed by Facebook and other intermediaries from the same liability that traditional media outlets face if they pass along false and libelous material. This policy is easy to understand if the goal is to make Mark Zuckerberg and people like him even richer, but it has nothing obvious to do with globalization.
Anyhow, this piece is a great example of the Post’s willingness to use its news section to press its case against populism. It also shows why populists would distrust a news outlet like the Washington Post.
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In spite of completely missing the crash of the stock bubble in 2000-2002 and the housing bubble in 2007-2010, people tend to think that the big actors in the stock market have great insight into the economy’s prospects. While I won’t claim to have a crystal ball that predicts the future of the economy (I had warned of both of those crashes), I did learn arithmetic in third grade.
There are some simple and important statements we can make about future stock returns, based on nothing more than arithmetic and the generally accepted projections for the economy’s performance. The basic story is that if we accept the projections for future profit growth from the Congressional Budget Office or other official forecasters, then we are almost certain to see a decade of extraordinarily low returns to stockholders.
Real returns will almost certainly be less than 5.0 percent annually. This compares to a long period average of close to 7.0 percent. And this assumes no plunge in the market over the decade. Of course, if the market does plunge, real returns will be considerably lower.
The reason that returns will almost certainly be low in the next decade is that stock prices are high. If we look at Robert Shiller’s calculations of the price of the S&P 500 relative to ten years of trailing earnings, it was at 31.5 for February to date. That compares to an average of 20.6 in the 1960s, 12.7 in the 1970s, and 11.5 in the 1980s. A high price to earnings ratio means that people buying or holding stock are paying a high price for each dollar of earnings.
To see what this means more concretely, we can take the most recent price to earnings figures from Shiller’s data. Taking February’s prices over December’s earnings, we get a ratio of 23.7. Taking a somewhat broader, but somewhat dated measure, the value of all corporate equities was $49.6 trillion at the end of the third quarter. After-tax corporate profits were $1,869 billion, giving a price to earnings ratio for the market as a whole of 26.5.[1]
The fact that these two figures are close should give us confidence that we are looking at the right numbers. It would not be surprising that the whole market would have a higher PE than the S&P 500. The index is by design composed of older well-established companies. Many smaller and newer companies may have high valuations based on growth prospects rather than current profits.
Anyhow, we can work from the slightly lower PE reported by Shiller for the S&P 500. The ratio of 23.7 implies an earnings-to-price ratio of 4.2 percent. This means that for each dollar a shareholder is paying for stock, they get 4.2 cents in earnings.
Companies pay out a portion of their earnings to shareholders as either dividends or share buybacks. (There are some differences between these mechanisms for tax purposes, but that really does not matter for this analysis.) Suppose that they pay 70 percent of their profits out to shareholders, which would be the high end of the recent range. This would mean that shareholders could get annual returns from direct payouts of 2.94 percent (0.7 * 4.2).
The other component of returns is capital gains. The actual course of the market over the next decade is anyone’s guess, but one thing we can say with absolute certainty is that if the price to earnings ratio remains constant, then share prices will rise at the same pace as corporate profits. And, we do have projections for the growth of corporate profits over the next decade.
The Congressional Budget Office projects that before-tax corporate profits will grow at an average annual rate of 4.15 percent over the decade from 2020 to 2030. It makes sense to use before-tax profits because we don’t know what will happen to the corporate tax rate over this period. The 2017 tax cut hugely reduced corporate taxes, however, it is possible that if Trump is re-elected he will seek to reduce corporate taxes even further. On the other hand, all the leading contenders for the Democratic presidential nomination have pledged to raise corporate taxes, in most cases by quite a bit. Without knowing the outcome of these political battles, it is probably safest to assume the tax rate remains where it is currently.
This gives us an average annual nominal capital gain of 4.15 percent. The average inflation rate projected for this period, as measured by the consumer price index, is 2.4 percent, which gives an average real capital gain of 1.75 percent. If we add that to the 2.94 percent return from dividends or buybacks, it comes to 4.69 percent. This is considerably below the 7.0 percent historic real return on stocks, that many investors bank on.
Of course, these are very crude calculations. No one knows that the price to earnings ratio will stay stable. Suppose it were to keep rising enough to give 7.0 percent real returns over the next decade. In that case, using the CBO profit projections, the price to earnings ratio for the S&P 500 would be over 30 by 2030. That is not obviously impossible, but the 70 percent dividend/buyback payout would get shareholders just 2.3 percent of the share price. That would mean to sustain a 7.0 percent real return, price to earnings ratios would have to rise even more rapidly in the following decade.
The situation would look even worse with the broader market. Starting with a price to earnings ratio of 26.5 to 1, the price to earnings ratio for the market as a whole would be over 35 by 2030. That would provide a dividend/buyback payout of just 2.0 percent.
It is possible that profits could grow more rapidly. For example, the Trump administration could be proven right and maybe we will see 3.0 percent real growth over the next decade, but there are not many people betting on that being the case. We could see a further shift to profit shares, although, with profit shares already at an unusually high level, that does not seem likely. There could be further cuts in corporate taxes, but with the effective corporate tax rate projected at less than 11.0 percent in 2020, that seems unlikely even if the Republicans remain in power. In short, it seems almost inevitable that real stock returns over the next decade will be considerably lower than their long period average of 7.0 percent.
However, the 4.7 percent real returns that would be consistent with a constant price-to-earnings ratio is not necessarily bad in the current interest rate environment. Historically, the real return on long-term Treasury bonds has been close to 3.0 percent. By contrast, the current interest rate on a 30-year Treasury bond is roughly 2.0 percent, putting it slightly under the inflation rate. A 4.7 percent real return on stocks does not look bad in a context where the long-term Treasury bonds are providing a zero or small negative real return.
But even if a 4.7 percent real return might be reasonable in the current interest rate environment, it is not clear that it is consistent with investors’ expectations. Many investors are undoubtedly looking at the far higher returns of the years since the Great Recession and expect double-digit returns to continue for at least the immediate future. They may be very disappointed if this turns out not to be the case.
The other part of this story that stockholders have to consider is that there are good reasons for thinking that future after-tax profits might be considerably lower than CBO has projected. On the before-tax side, there was a large shift in income shares from labor to capital in the immediate aftermath of the Great Recession. As the labor market has tightened, there has been some shift back towards labor. The CBO projections assume that this reversal does not continue. In fact, the projections assume that the profit share of national income actually increases slightly over the decade.
The other key factor in determining after-tax profits is the corporate tax rate. This is, of course, a political decision. While Republicans are unlikely to raise corporate income taxes to any substantial extent, they also are unlikely to lower them further. By contrast, there is widespread agreement among Democrats that corporations should pay more in taxes. Whatever the outcome of the 2020 elections, there is at least a reasonable prospect that corporate taxes will increase at some point over the next decade.
With the possibility of further shifts back from capital to labor and future increases in the corporate income tax, stockholders should view their investment as somewhat risky. If the labor share were to rise back to its pre-recession level, profits would drop by 10 percent, if price to earnings ratios were unchanged. That would wipe out more than two years of returns, as calculated above.
The same would be true if there was a 9.0 percentage point rise in the effective tax rate to 20.0 percent, roughly the level prior to the 2017 tax cut. That would also lead to a 10 percent drop in share prices, assuming a constant price to earnings ratio.
And, the interest rate on government bonds could rise. Most economists have been surprised that long-term interest rates have remained this low for as long as they have. The low rates could continue, but no one can rule out that they will rise back to their historic average of 3.0 percent real rates. If that were to be the case, a 4.7 percent real return in the stock market may not look very good.
In short, there are good reasons for thinking that the current valuations in the stock market are high. That doesn’t mean that prices will plummet any time soon, but it does seem unlikely that anything like the recent growth will continue far into the future.
[1] The value of corporate equities comes from the Federal Reserve Board’s Financial Accounts of the U.S. Economy, Table L. 223, Line 10. After-tax corporate profits are taken from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 1.12, Line 15.
In spite of completely missing the crash of the stock bubble in 2000-2002 and the housing bubble in 2007-2010, people tend to think that the big actors in the stock market have great insight into the economy’s prospects. While I won’t claim to have a crystal ball that predicts the future of the economy (I had warned of both of those crashes), I did learn arithmetic in third grade.
There are some simple and important statements we can make about future stock returns, based on nothing more than arithmetic and the generally accepted projections for the economy’s performance. The basic story is that if we accept the projections for future profit growth from the Congressional Budget Office or other official forecasters, then we are almost certain to see a decade of extraordinarily low returns to stockholders.
Real returns will almost certainly be less than 5.0 percent annually. This compares to a long period average of close to 7.0 percent. And this assumes no plunge in the market over the decade. Of course, if the market does plunge, real returns will be considerably lower.
The reason that returns will almost certainly be low in the next decade is that stock prices are high. If we look at Robert Shiller’s calculations of the price of the S&P 500 relative to ten years of trailing earnings, it was at 31.5 for February to date. That compares to an average of 20.6 in the 1960s, 12.7 in the 1970s, and 11.5 in the 1980s. A high price to earnings ratio means that people buying or holding stock are paying a high price for each dollar of earnings.
To see what this means more concretely, we can take the most recent price to earnings figures from Shiller’s data. Taking February’s prices over December’s earnings, we get a ratio of 23.7. Taking a somewhat broader, but somewhat dated measure, the value of all corporate equities was $49.6 trillion at the end of the third quarter. After-tax corporate profits were $1,869 billion, giving a price to earnings ratio for the market as a whole of 26.5.[1]
The fact that these two figures are close should give us confidence that we are looking at the right numbers. It would not be surprising that the whole market would have a higher PE than the S&P 500. The index is by design composed of older well-established companies. Many smaller and newer companies may have high valuations based on growth prospects rather than current profits.
Anyhow, we can work from the slightly lower PE reported by Shiller for the S&P 500. The ratio of 23.7 implies an earnings-to-price ratio of 4.2 percent. This means that for each dollar a shareholder is paying for stock, they get 4.2 cents in earnings.
Companies pay out a portion of their earnings to shareholders as either dividends or share buybacks. (There are some differences between these mechanisms for tax purposes, but that really does not matter for this analysis.) Suppose that they pay 70 percent of their profits out to shareholders, which would be the high end of the recent range. This would mean that shareholders could get annual returns from direct payouts of 2.94 percent (0.7 * 4.2).
The other component of returns is capital gains. The actual course of the market over the next decade is anyone’s guess, but one thing we can say with absolute certainty is that if the price to earnings ratio remains constant, then share prices will rise at the same pace as corporate profits. And, we do have projections for the growth of corporate profits over the next decade.
The Congressional Budget Office projects that before-tax corporate profits will grow at an average annual rate of 4.15 percent over the decade from 2020 to 2030. It makes sense to use before-tax profits because we don’t know what will happen to the corporate tax rate over this period. The 2017 tax cut hugely reduced corporate taxes, however, it is possible that if Trump is re-elected he will seek to reduce corporate taxes even further. On the other hand, all the leading contenders for the Democratic presidential nomination have pledged to raise corporate taxes, in most cases by quite a bit. Without knowing the outcome of these political battles, it is probably safest to assume the tax rate remains where it is currently.
This gives us an average annual nominal capital gain of 4.15 percent. The average inflation rate projected for this period, as measured by the consumer price index, is 2.4 percent, which gives an average real capital gain of 1.75 percent. If we add that to the 2.94 percent return from dividends or buybacks, it comes to 4.69 percent. This is considerably below the 7.0 percent historic real return on stocks, that many investors bank on.
Of course, these are very crude calculations. No one knows that the price to earnings ratio will stay stable. Suppose it were to keep rising enough to give 7.0 percent real returns over the next decade. In that case, using the CBO profit projections, the price to earnings ratio for the S&P 500 would be over 30 by 2030. That is not obviously impossible, but the 70 percent dividend/buyback payout would get shareholders just 2.3 percent of the share price. That would mean to sustain a 7.0 percent real return, price to earnings ratios would have to rise even more rapidly in the following decade.
The situation would look even worse with the broader market. Starting with a price to earnings ratio of 26.5 to 1, the price to earnings ratio for the market as a whole would be over 35 by 2030. That would provide a dividend/buyback payout of just 2.0 percent.
It is possible that profits could grow more rapidly. For example, the Trump administration could be proven right and maybe we will see 3.0 percent real growth over the next decade, but there are not many people betting on that being the case. We could see a further shift to profit shares, although, with profit shares already at an unusually high level, that does not seem likely. There could be further cuts in corporate taxes, but with the effective corporate tax rate projected at less than 11.0 percent in 2020, that seems unlikely even if the Republicans remain in power. In short, it seems almost inevitable that real stock returns over the next decade will be considerably lower than their long period average of 7.0 percent.
However, the 4.7 percent real returns that would be consistent with a constant price-to-earnings ratio is not necessarily bad in the current interest rate environment. Historically, the real return on long-term Treasury bonds has been close to 3.0 percent. By contrast, the current interest rate on a 30-year Treasury bond is roughly 2.0 percent, putting it slightly under the inflation rate. A 4.7 percent real return on stocks does not look bad in a context where the long-term Treasury bonds are providing a zero or small negative real return.
But even if a 4.7 percent real return might be reasonable in the current interest rate environment, it is not clear that it is consistent with investors’ expectations. Many investors are undoubtedly looking at the far higher returns of the years since the Great Recession and expect double-digit returns to continue for at least the immediate future. They may be very disappointed if this turns out not to be the case.
The other part of this story that stockholders have to consider is that there are good reasons for thinking that future after-tax profits might be considerably lower than CBO has projected. On the before-tax side, there was a large shift in income shares from labor to capital in the immediate aftermath of the Great Recession. As the labor market has tightened, there has been some shift back towards labor. The CBO projections assume that this reversal does not continue. In fact, the projections assume that the profit share of national income actually increases slightly over the decade.
The other key factor in determining after-tax profits is the corporate tax rate. This is, of course, a political decision. While Republicans are unlikely to raise corporate income taxes to any substantial extent, they also are unlikely to lower them further. By contrast, there is widespread agreement among Democrats that corporations should pay more in taxes. Whatever the outcome of the 2020 elections, there is at least a reasonable prospect that corporate taxes will increase at some point over the next decade.
With the possibility of further shifts back from capital to labor and future increases in the corporate income tax, stockholders should view their investment as somewhat risky. If the labor share were to rise back to its pre-recession level, profits would drop by 10 percent, if price to earnings ratios were unchanged. That would wipe out more than two years of returns, as calculated above.
The same would be true if there was a 9.0 percentage point rise in the effective tax rate to 20.0 percent, roughly the level prior to the 2017 tax cut. That would also lead to a 10 percent drop in share prices, assuming a constant price to earnings ratio.
And, the interest rate on government bonds could rise. Most economists have been surprised that long-term interest rates have remained this low for as long as they have. The low rates could continue, but no one can rule out that they will rise back to their historic average of 3.0 percent real rates. If that were to be the case, a 4.7 percent real return in the stock market may not look very good.
In short, there are good reasons for thinking that the current valuations in the stock market are high. That doesn’t mean that prices will plummet any time soon, but it does seem unlikely that anything like the recent growth will continue far into the future.
[1] The value of corporate equities comes from the Federal Reserve Board’s Financial Accounts of the U.S. Economy, Table L. 223, Line 10. After-tax corporate profits are taken from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 1.12, Line 15.
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A New York Times article on the status of France’s president Emmanuel Macron gave him some free public relations work touting the decline in France’s unemployment rate to 8.1 percent. It tells readers:
“The intractable unemployment rate, slayer of his predecessors, appears finally to be bending to a French president’s touch, recently reaching its lowest rate in 12 years at 8.1 percent.”
This is a 1.4 percentage point drop from when Macron took office in May of 2017. In the same period, unemployment in Finland declined by 2.1 percentage points to 6.6 percent. In the Netherlands, the unemployment rate declined by 1.9 percentage points to 3.2 percent. Unemployment in Italy dropped by 1.6 percentage points to 9.8 percent. In short, this was a period of declining unemployment throughout western Europe and France’s performance was not especially strong.
Furthermore, France’s unemployment rate was already on a slow downward path at the time Macron took office. The unemployment rate had fallen 1.1 percentage points in the prior two years.
In short, it is very hard to look at the data and conclude that Macron’s policies had any major effect in reducing unemployment.
A New York Times article on the status of France’s president Emmanuel Macron gave him some free public relations work touting the decline in France’s unemployment rate to 8.1 percent. It tells readers:
“The intractable unemployment rate, slayer of his predecessors, appears finally to be bending to a French president’s touch, recently reaching its lowest rate in 12 years at 8.1 percent.”
This is a 1.4 percentage point drop from when Macron took office in May of 2017. In the same period, unemployment in Finland declined by 2.1 percentage points to 6.6 percent. In the Netherlands, the unemployment rate declined by 1.9 percentage points to 3.2 percent. Unemployment in Italy dropped by 1.6 percentage points to 9.8 percent. In short, this was a period of declining unemployment throughout western Europe and France’s performance was not especially strong.
Furthermore, France’s unemployment rate was already on a slow downward path at the time Macron took office. The unemployment rate had fallen 1.1 percentage points in the prior two years.
In short, it is very hard to look at the data and conclude that Macron’s policies had any major effect in reducing unemployment.
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I have often gone after the media on printing large numbers that are meaningless to almost all their readers. The point is that when you throw out numbers in the millions, billions, and trillions, very few readers have any idea what these numbers mean. It is possible to make them meaningful by simply adding some context, such as expressing them relative to the size of the economy or as a per person amount.
I actually got Margaret Sullivan, then the NYT Public Editor, to completely agree with me on this point. In her column, she also enlisted the enthusiastic agreement of then Washington editor David Leonhardt. But then nothing changed.
We see the fruits of this failure in a NYT article that compares the tax and spending plans of the leading Democratic contenders. It gives a a true orgy of really big numbers in the form of trillions of dollars of additional taxes and spending, providing readers with no context that would let them know how much impact these taxes are likely to have on the economy and/or their pocketbook.
We are told that:
“Even Mr. Bloomberg, a billionaire himself, would raise taxes on the rich and corporations by an estimated $5 trillion, which is about 50 percent more than Mr. Biden would.”
A bit later we get:
“Mr. Sanders’s policy agenda is by far the most expensive of the leading candidates, though estimates vary. The cost of his policy plans on just a handful of topics — health care, higher education, housing and climate change — could exceed $50 trillion over 10 years. By contrast, the federal government is currently projected to spend roughly $60 trillion over the next decade.” [Total federal spending is some context.]
….
“In addition to a Medicare for all program that would require an estimated $20.5 trillion in new federal spending over 10 years, Ms. Warren’s proposals include a sweeping set of new programs addressing areas like Social Security, climate change, higher education, K-12 schools and housing. Taken together, those proposals and her Medicare for all plan have an estimated 10-year price tag of more than $30 trillion.”
Since most readers probably don’t have a very good idea of how much money $30 trillion would be over the next decade, a useful starting point might be the projected size of the economy. The Congressional Budget Office puts GDP over this ten year period at roughly $280 trillion. That means $30 trillion in additional taxes and spending would be a bit less than 11 percent of projected GDP. Mr. Bloomberg’s projected $5 trillion in taxes would by roughly 1.8 percent of projected GDP.
To get a bit more context, the tax take projected for 2020 is 16.4 percent of GDP. By contrast in the late 1990s boom, tax revenue was over 19 percent of GDP, peaking at 20 percent in 2000. This means that Bloomberg’s proposed increase in taxes would still leave us with revenues that are far smaller as a share of GDP than what we paid in the late 1990s.
The proposals from Warren and Sanders would raise above the late 1990s level, but perhaps by less than the really big numbers in this piece might lead readers to believe. If we increased taxes by 11 percent of GDP it would raise them to a bit more than 27 percent of GDP, roughly 7 percentage points about the 2000 peak.
The Sanders proposals would imply an increase in taxes of roughly 18 percentage points of GDP, putting us at a bit over 34 percent of GDP. That is considerably more than the 2000 peak, but still much lower than in most other wealthy countries. (To get a full comparison we have to add in state and local taxes. This is difficult to do, since many of Sanders’ proposed federal expenditures [e.g. Medicare for All] would in part replace spending currently being undertaken by state and local governments.
These proposals can certainly be discussed in considerably more detail, but a piece like this could at least try to put the numbers in some context that would make them meaningful to readers, rather than just tossing around “trillions” like it is some sort of mantra. The reality is that the Biden-Bloomberg proposals are not terribly big deals in terms of the budget and what we have done historically. Clearly the Warren and Sanders proposals are more ambitious. Readers can decide whether they think the potential benefits are worth the cost, taking a few minutes to add a little context would give readers an idea of what is at stake.
I have often gone after the media on printing large numbers that are meaningless to almost all their readers. The point is that when you throw out numbers in the millions, billions, and trillions, very few readers have any idea what these numbers mean. It is possible to make them meaningful by simply adding some context, such as expressing them relative to the size of the economy or as a per person amount.
I actually got Margaret Sullivan, then the NYT Public Editor, to completely agree with me on this point. In her column, she also enlisted the enthusiastic agreement of then Washington editor David Leonhardt. But then nothing changed.
We see the fruits of this failure in a NYT article that compares the tax and spending plans of the leading Democratic contenders. It gives a a true orgy of really big numbers in the form of trillions of dollars of additional taxes and spending, providing readers with no context that would let them know how much impact these taxes are likely to have on the economy and/or their pocketbook.
We are told that:
“Even Mr. Bloomberg, a billionaire himself, would raise taxes on the rich and corporations by an estimated $5 trillion, which is about 50 percent more than Mr. Biden would.”
A bit later we get:
“Mr. Sanders’s policy agenda is by far the most expensive of the leading candidates, though estimates vary. The cost of his policy plans on just a handful of topics — health care, higher education, housing and climate change — could exceed $50 trillion over 10 years. By contrast, the federal government is currently projected to spend roughly $60 trillion over the next decade.” [Total federal spending is some context.]
….
“In addition to a Medicare for all program that would require an estimated $20.5 trillion in new federal spending over 10 years, Ms. Warren’s proposals include a sweeping set of new programs addressing areas like Social Security, climate change, higher education, K-12 schools and housing. Taken together, those proposals and her Medicare for all plan have an estimated 10-year price tag of more than $30 trillion.”
Since most readers probably don’t have a very good idea of how much money $30 trillion would be over the next decade, a useful starting point might be the projected size of the economy. The Congressional Budget Office puts GDP over this ten year period at roughly $280 trillion. That means $30 trillion in additional taxes and spending would be a bit less than 11 percent of projected GDP. Mr. Bloomberg’s projected $5 trillion in taxes would by roughly 1.8 percent of projected GDP.
To get a bit more context, the tax take projected for 2020 is 16.4 percent of GDP. By contrast in the late 1990s boom, tax revenue was over 19 percent of GDP, peaking at 20 percent in 2000. This means that Bloomberg’s proposed increase in taxes would still leave us with revenues that are far smaller as a share of GDP than what we paid in the late 1990s.
The proposals from Warren and Sanders would raise above the late 1990s level, but perhaps by less than the really big numbers in this piece might lead readers to believe. If we increased taxes by 11 percent of GDP it would raise them to a bit more than 27 percent of GDP, roughly 7 percentage points about the 2000 peak.
The Sanders proposals would imply an increase in taxes of roughly 18 percentage points of GDP, putting us at a bit over 34 percent of GDP. That is considerably more than the 2000 peak, but still much lower than in most other wealthy countries. (To get a full comparison we have to add in state and local taxes. This is difficult to do, since many of Sanders’ proposed federal expenditures [e.g. Medicare for All] would in part replace spending currently being undertaken by state and local governments.
These proposals can certainly be discussed in considerably more detail, but a piece like this could at least try to put the numbers in some context that would make them meaningful to readers, rather than just tossing around “trillions” like it is some sort of mantra. The reality is that the Biden-Bloomberg proposals are not terribly big deals in terms of the budget and what we have done historically. Clearly the Warren and Sanders proposals are more ambitious. Readers can decide whether they think the potential benefits are worth the cost, taking a few minutes to add a little context would give readers an idea of what is at stake.
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Serious people have long known the Washington Post as a pathetic propaganda organ when it comes to trade. After all, it was so shameless in its promotion of NAFTA that it ran an editorial back in 2007 claiming that NAFTA had been so great for Mexico that its GDP had quadrupled in the twenty years since 1987. The actual figure was 84.2 percent. (This has never been corrected.) It also has repeatedly run fantasy pieces about how NAFTA is creating a thriving middle class in Mexico, even though the period since NAFTA has been one of historically slow growth in Mexico.
For this reason, it was not surprising to see a piece by Fareed Zakaria touting the virtues of the trade deficit. While his point that the trade deficit has risen under Trump, contrary to his promise of a lower deficit, is correct, most of the rest of the piece is not.
Most importantly, he implies that there is no reason for anyone to be bothered by the trade deficit. As the trade deficit exploded in the years from 2000 to 2007 (before the Great Recession), the economy lost 3.4 million manufacturing jobs. That was 20 percent of total manufacturing employment. We also lost 40 percent of unionized manufacturing jobs. Anyone who gives a damn about the well-being of the country’s middle class should have been very worried about the trade deficit in these years. (There are some people who blame this massive job loss on technology. These people are known as “liars.” )
The impact of the trade deficit matters less on middle class living standards today than it did two decades ago, primarily because the effect of trade has substantially eroded manufacturing’s status as a source of relatively high-paying jobs for workers without college degrees. Manufacturing jobs actually pay slightly less than the private sector average, although if we factor in benefits and adjust for age and education, there likely is still a modest premium.
The trade deficit also matters from the standpoint of aggregate demand. Our current deficit of roughly 3.0 percent of GDP ($616.8 billion in 2019) means that we are generating demand in Europe, China, and elsewhere with our spending, not the United States. This is a large part of the story of “secular stagnation,” where we don’t have enough demand in the U.S. economy to push it to levels of output high enough to sustain full employment.
We can offset the demand lost as a result of the trade deficit with larger budget deficits, but then people, like the Washington Post editors, start hyperventilating about large budget deficits. If we did not face political obstacles to large budget deficits, secular stagnation would not be a problem, but we do.
The problems with Zakaria’s logic go much further. He implies that the fact that we have a surplus in trade in services is somehow helped by the fact that we have a deficit in goods:
“In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, ‘the trade deficit should be something to brag about rather than denounce.'”
Actually, there is no logical connection between the two. If we had a stronger manufacturing sector, we would also see more demand from manufacturing for services, like computer technologies, innovations in biology and chemistry, and logistics. By implying that there is some sort of trade-off between having a strong service sector and a strong manufacturing sector, Zakaria is pushing a non sequitur.
It is also worth noting that our surplus on services was just $249.2 billion last year (1.2 percent of GDP). This surplus mattered much less to the service sector (80 percent of GDP) than the $867 billion trade deficit in goods (4.3 percent of GDP) mattered to the manufacturing sector (around 12 percent of GDP).
While Zakaria would have us believe that our service jobs are high-paying and high tech, the largest category of service exports is travel. This sector produced $214.1 billion in exports last year, more than a quarter of all service exports. These are largely jobs in hotels and restaurants, not generally thought of as high-paying high productivity employment.
One of the other major items in services was “charges for the use of intellectual property.” This earned the country $129.1 billion last year or roughly 0.6 percent of GDP. The irony of Zakaria, who is ostensibly a committed free trader, touting this export is that it is 100 percent protectionism. The U.S. gets money for the “use of intellectual property” because we give companies patent and copyright monopolies and require other countries to respect them. These monopolies raise the price of items like prescription drugs, medical equipment, and software by many thousand percent above their free market price.
Anyone who is upset by tariffs of 10 percent or 25 percent on items like imported cars or steel, should be apoplectic over what are effective government created barriers that are tens or even hundreds of times larger. Apparently Zakaria is just fine with these barriers, perhaps because he and his friends at the Washington Post are in the class of people that benefit from them, as opposed to tariffs on cars or steel.
Another major item in our service exports is financial services, which came to $113.9 billion last year (0.5 percent of GDP). This is largely money going to the folks on Wall Street. As with intellectual property, this is a major source of inequality in the U.S. economy. Again Zakaria might be happy about this (I know, we can count on hand-wringing columns decrying inequality), but there is little reason for most of us to applaud the financial industry getting even richer.
Anyhow, in the Jeff Bezos owned Washington Post, Zakaria’s column passes for a serious analysis of trade. That’s America in 2020.
Serious people have long known the Washington Post as a pathetic propaganda organ when it comes to trade. After all, it was so shameless in its promotion of NAFTA that it ran an editorial back in 2007 claiming that NAFTA had been so great for Mexico that its GDP had quadrupled in the twenty years since 1987. The actual figure was 84.2 percent. (This has never been corrected.) It also has repeatedly run fantasy pieces about how NAFTA is creating a thriving middle class in Mexico, even though the period since NAFTA has been one of historically slow growth in Mexico.
For this reason, it was not surprising to see a piece by Fareed Zakaria touting the virtues of the trade deficit. While his point that the trade deficit has risen under Trump, contrary to his promise of a lower deficit, is correct, most of the rest of the piece is not.
Most importantly, he implies that there is no reason for anyone to be bothered by the trade deficit. As the trade deficit exploded in the years from 2000 to 2007 (before the Great Recession), the economy lost 3.4 million manufacturing jobs. That was 20 percent of total manufacturing employment. We also lost 40 percent of unionized manufacturing jobs. Anyone who gives a damn about the well-being of the country’s middle class should have been very worried about the trade deficit in these years. (There are some people who blame this massive job loss on technology. These people are known as “liars.” )
The impact of the trade deficit matters less on middle class living standards today than it did two decades ago, primarily because the effect of trade has substantially eroded manufacturing’s status as a source of relatively high-paying jobs for workers without college degrees. Manufacturing jobs actually pay slightly less than the private sector average, although if we factor in benefits and adjust for age and education, there likely is still a modest premium.
The trade deficit also matters from the standpoint of aggregate demand. Our current deficit of roughly 3.0 percent of GDP ($616.8 billion in 2019) means that we are generating demand in Europe, China, and elsewhere with our spending, not the United States. This is a large part of the story of “secular stagnation,” where we don’t have enough demand in the U.S. economy to push it to levels of output high enough to sustain full employment.
We can offset the demand lost as a result of the trade deficit with larger budget deficits, but then people, like the Washington Post editors, start hyperventilating about large budget deficits. If we did not face political obstacles to large budget deficits, secular stagnation would not be a problem, but we do.
The problems with Zakaria’s logic go much further. He implies that the fact that we have a surplus in trade in services is somehow helped by the fact that we have a deficit in goods:
“In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, ‘the trade deficit should be something to brag about rather than denounce.'”
Actually, there is no logical connection between the two. If we had a stronger manufacturing sector, we would also see more demand from manufacturing for services, like computer technologies, innovations in biology and chemistry, and logistics. By implying that there is some sort of trade-off between having a strong service sector and a strong manufacturing sector, Zakaria is pushing a non sequitur.
It is also worth noting that our surplus on services was just $249.2 billion last year (1.2 percent of GDP). This surplus mattered much less to the service sector (80 percent of GDP) than the $867 billion trade deficit in goods (4.3 percent of GDP) mattered to the manufacturing sector (around 12 percent of GDP).
While Zakaria would have us believe that our service jobs are high-paying and high tech, the largest category of service exports is travel. This sector produced $214.1 billion in exports last year, more than a quarter of all service exports. These are largely jobs in hotels and restaurants, not generally thought of as high-paying high productivity employment.
One of the other major items in services was “charges for the use of intellectual property.” This earned the country $129.1 billion last year or roughly 0.6 percent of GDP. The irony of Zakaria, who is ostensibly a committed free trader, touting this export is that it is 100 percent protectionism. The U.S. gets money for the “use of intellectual property” because we give companies patent and copyright monopolies and require other countries to respect them. These monopolies raise the price of items like prescription drugs, medical equipment, and software by many thousand percent above their free market price.
Anyone who is upset by tariffs of 10 percent or 25 percent on items like imported cars or steel, should be apoplectic over what are effective government created barriers that are tens or even hundreds of times larger. Apparently Zakaria is just fine with these barriers, perhaps because he and his friends at the Washington Post are in the class of people that benefit from them, as opposed to tariffs on cars or steel.
Another major item in our service exports is financial services, which came to $113.9 billion last year (0.5 percent of GDP). This is largely money going to the folks on Wall Street. As with intellectual property, this is a major source of inequality in the U.S. economy. Again Zakaria might be happy about this (I know, we can count on hand-wringing columns decrying inequality), but there is little reason for most of us to applaud the financial industry getting even richer.
Anyhow, in the Jeff Bezos owned Washington Post, Zakaria’s column passes for a serious analysis of trade. That’s America in 2020.
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