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Marketplace radio did a piece last week that was essentially just giving the argument of the supporters of the new NAFTA. I will give a few thoughts on the other side.
First, the fact that NAFTA played a substantial role in reducing the power of unions and lowering wages of workers without college degrees doesn’t mean that we can reverse these effects by eliminating NAFTA.
The new NAFTA certainly does not eliminate the incentive to outsource jobs to Mexico to take advantage of lower-cost labor, but it does reduce it if we can count on its rules being enforced. However, this is not going to have more than a marginal effect on manufacturing employment and wages in the United States.
The jobs that are gone with few exceptions, are not coming back. There is also little reason to believe that manufacturing jobs that are saved through the new NAFTA will necessarily be high paying jobs. In 1994, when NAFTA went into effect, the average hourly wage for production and non-supervisory employees in manufacturing was 6.6 percent above the average for the private sector as a whole. In the most recent data, the average wage for manufacturing workers is 5.5 percent below. A fuller analysis that factors in health care and other benefits may still show a premium for manufacturing workers, but there is no doubt that it is much smaller than it was a quarter of a century ago.
Against the prospect of a small gain in manufacturing jobs, we have rules that lock in higher drug prices for the indefinite future. These rules could easily mean that patients in the United States and Canada and Mexico will pay tens of billions annually in higher drug prices. Just doing the math, we could easily be paying $2 or $3 million annually per manufacturing job saved. And, this is before even considering possible job loss in manufacturing due to the drain in purchasing power from higher drug prices.
In addition, the agreement locks in rules on the Internet that were designed to protect Facebook, Google, and other tech giants. I doubt anyone is satisfied that our current rules on Internet privacy and liability for spreading false information are adequate. How can it make sense to sign a treaty that could impair the ability of all three countries to adjust their rules? And, as with the rules on prescription drugs, the goal is to apply these rules to trade deals with other countries.
These are the main reasons I view the new NAFTA as a net negative. It makes a bad deal worse.
Marketplace radio did a piece last week that was essentially just giving the argument of the supporters of the new NAFTA. I will give a few thoughts on the other side.
First, the fact that NAFTA played a substantial role in reducing the power of unions and lowering wages of workers without college degrees doesn’t mean that we can reverse these effects by eliminating NAFTA.
The new NAFTA certainly does not eliminate the incentive to outsource jobs to Mexico to take advantage of lower-cost labor, but it does reduce it if we can count on its rules being enforced. However, this is not going to have more than a marginal effect on manufacturing employment and wages in the United States.
The jobs that are gone with few exceptions, are not coming back. There is also little reason to believe that manufacturing jobs that are saved through the new NAFTA will necessarily be high paying jobs. In 1994, when NAFTA went into effect, the average hourly wage for production and non-supervisory employees in manufacturing was 6.6 percent above the average for the private sector as a whole. In the most recent data, the average wage for manufacturing workers is 5.5 percent below. A fuller analysis that factors in health care and other benefits may still show a premium for manufacturing workers, but there is no doubt that it is much smaller than it was a quarter of a century ago.
Against the prospect of a small gain in manufacturing jobs, we have rules that lock in higher drug prices for the indefinite future. These rules could easily mean that patients in the United States and Canada and Mexico will pay tens of billions annually in higher drug prices. Just doing the math, we could easily be paying $2 or $3 million annually per manufacturing job saved. And, this is before even considering possible job loss in manufacturing due to the drain in purchasing power from higher drug prices.
In addition, the agreement locks in rules on the Internet that were designed to protect Facebook, Google, and other tech giants. I doubt anyone is satisfied that our current rules on Internet privacy and liability for spreading false information are adequate. How can it make sense to sign a treaty that could impair the ability of all three countries to adjust their rules? And, as with the rules on prescription drugs, the goal is to apply these rules to trade deals with other countries.
These are the main reasons I view the new NAFTA as a net negative. It makes a bad deal worse.
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The New York Times ran a piece on China’s devaluation of its currency, which warned that the move could hurt China because commodities like oil, which are priced in dollars, will become more expensive for companies in China. While it is true that the devaluation will make imported goods more expensive, the fact that some are priced in dollars is irrelevant.
Suppose oil was priced in yen. Other things equal, the decision to devalue against the dollar would also mean that the Chinese yuan is devalued against the yen. This would lead to the same increase in the price of oil as if oil were priced in dollars. The pricing in dollars is simply a convention, there is no special importance to it in international trade.
The piece also raises the prospect that the drop in the value of the yuan, “could spur wealthy Chinese to take their money out of the country.” While it could have this effect, it may also have the opposite effect. Once the yuan has dropped in value the question is whether it is likely to fall further. This drop may lead many investors to believe that a further decline is unlikely, just as if the stock market fell by 20 percent, investors may come to believe that further decline is unlikely and therefore may be anxious to buy into the market.
It is also important to put the drop of the yuan in some context. The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.
The New York Times ran a piece on China’s devaluation of its currency, which warned that the move could hurt China because commodities like oil, which are priced in dollars, will become more expensive for companies in China. While it is true that the devaluation will make imported goods more expensive, the fact that some are priced in dollars is irrelevant.
Suppose oil was priced in yen. Other things equal, the decision to devalue against the dollar would also mean that the Chinese yuan is devalued against the yen. This would lead to the same increase in the price of oil as if oil were priced in dollars. The pricing in dollars is simply a convention, there is no special importance to it in international trade.
The piece also raises the prospect that the drop in the value of the yuan, “could spur wealthy Chinese to take their money out of the country.” While it could have this effect, it may also have the opposite effect. Once the yuan has dropped in value the question is whether it is likely to fall further. This drop may lead many investors to believe that a further decline is unlikely, just as if the stock market fell by 20 percent, investors may come to believe that further decline is unlikely and therefore may be anxious to buy into the market.
It is also important to put the drop of the yuan in some context. The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.
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Readers must be wondering because it happens so frequently in contexts where it is clearly inappropriate. The latest example is in an article about the state of the race for the Democratic presidential nomination following the second round of debates.
The piece told readers:
“After a few candidates used the Detroit debate to demand that Mr. Biden account for Mr. Obama’s record on issues such as deportations and free trade, Mr. Biden was joined by some of the former president’s advisers, who chastised the critics for committing political malpractice.”
The word “free” in this context adds nothing and is in fact wrong. The Obama administration did virtually nothing to promote free trade in highly paid professional services, like physicians’ services, which would have reduced inequality. It only wanted to reduce barriers that protected less-educated workers, like barriers to trade in manufactured goods.
And, it actively worked to increase patent and copyright protections, which are the complete opposite of free trade. These protections also have the effect of increasing inequality.
Given the reality of trade policy under President Obama, it is difficult to understand why the New York Times felt the need to modify “trade” with the adjective “free.” Maybe it needs to get this editing program fixed.
Readers must be wondering because it happens so frequently in contexts where it is clearly inappropriate. The latest example is in an article about the state of the race for the Democratic presidential nomination following the second round of debates.
The piece told readers:
“After a few candidates used the Detroit debate to demand that Mr. Biden account for Mr. Obama’s record on issues such as deportations and free trade, Mr. Biden was joined by some of the former president’s advisers, who chastised the critics for committing political malpractice.”
The word “free” in this context adds nothing and is in fact wrong. The Obama administration did virtually nothing to promote free trade in highly paid professional services, like physicians’ services, which would have reduced inequality. It only wanted to reduce barriers that protected less-educated workers, like barriers to trade in manufactured goods.
And, it actively worked to increase patent and copyright protections, which are the complete opposite of free trade. These protections also have the effect of increasing inequality.
Given the reality of trade policy under President Obama, it is difficult to understand why the New York Times felt the need to modify “trade” with the adjective “free.” Maybe it needs to get this editing program fixed.
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I’m asking because in an otherwise very reasonable column on doctors’ pay, Washington Post columnist Catherine Rampell suggests that if Medicare for All cut doctors pay, that they might “otherwise go into even higher-paying careers, like finance.” In fact, almost all doctors are in the top two percent of the pay ladder for U.S. workers and many are in the top one percent. It is not plausible that the vast majority have higher-paying alternatives that they could otherwise pursue.
Doctors do go through years of training, and many work long hours. (They also have large debts from medical school, which is an issue, but grossly exaggerated.) Many other workers also have years of training and work long hours and get much lower pay.
In addition, there are hundreds of thousands of very smart and ambitious people elsewhere in the world who would be happy to study to U.S. standards and work for much lower pay than our doctors receive. They are prevented from coming here by protectionist measures.
For some reason “free traders” rarely seem bothered by protectionist barriers that inflate the pay of high end workers. In this case, these barriers cost us close to $100 billion annually, compared to a scenario in which doctors in the U.S. received pay that was comparable to pay in other wealthy countries. This is far more than the cost of Trump’s tariffs, which have gotten economists quite excited.
I’m asking because in an otherwise very reasonable column on doctors’ pay, Washington Post columnist Catherine Rampell suggests that if Medicare for All cut doctors pay, that they might “otherwise go into even higher-paying careers, like finance.” In fact, almost all doctors are in the top two percent of the pay ladder for U.S. workers and many are in the top one percent. It is not plausible that the vast majority have higher-paying alternatives that they could otherwise pursue.
Doctors do go through years of training, and many work long hours. (They also have large debts from medical school, which is an issue, but grossly exaggerated.) Many other workers also have years of training and work long hours and get much lower pay.
In addition, there are hundreds of thousands of very smart and ambitious people elsewhere in the world who would be happy to study to U.S. standards and work for much lower pay than our doctors receive. They are prevented from coming here by protectionist measures.
For some reason “free traders” rarely seem bothered by protectionist barriers that inflate the pay of high end workers. In this case, these barriers cost us close to $100 billion annually, compared to a scenario in which doctors in the U.S. received pay that was comparable to pay in other wealthy countries. This is far more than the cost of Trump’s tariffs, which have gotten economists quite excited.
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No one expects serious budget reporting from the Washington Post, so we might as well have some fun with the ridiculous items it gives us under this pretext. It had a major article about the Senate approval of a bipartisan plan which it tells readers, “increases military and domestic spending by $320 billion over two years compared to existing law. It increases overall discretionary spending from $1.32 trillion in fiscal 2019 to $1.37 trillion in 2020 and $1.375 trillion in 2021.”
So the gist of the story, as told in the first sentence, was that the deal “boosts spending,” this is really only true relative to a baseline under which spending would be cut. The increases in law are actually slightly less than projected inflation over this period and considerably less than GDP growth, meaning that spending will decline as a share of GDP.
It would have been helpful to point this fact out to readers. The piece instead implies that this is an example of profligate spending.
To support this view, we get the quote from Florida Senator Rick Scott:
“I’m worried about the staggering debt we’re leaving for our children and grandchildren. … Too often in Washington, compromise means both sides get everything they want so that no one has to make a tough choice. I can’t support that.”
If Rick Scott were actually concerned about the burdens that the government is imposing on our children and grandchildren he should be looking at the costs of patent and copyright rents that result from these government-granted monopolies. These rents are running close to $400 billion a year in the case of prescription drugs alone. If we sum all the patent and copyright rents in the economy, it could exceed $1 trillion a year.
Granting patent and copyright monopolies is an alternative way for the government to pay for services as opposed to direct spending. Anyone who is seriously concerned about burdens created for our children would have to consider the cost of these monopolies. Otherwise, they are just looking to score cheap political points and richly deserve public ridicule.
No one expects serious budget reporting from the Washington Post, so we might as well have some fun with the ridiculous items it gives us under this pretext. It had a major article about the Senate approval of a bipartisan plan which it tells readers, “increases military and domestic spending by $320 billion over two years compared to existing law. It increases overall discretionary spending from $1.32 trillion in fiscal 2019 to $1.37 trillion in 2020 and $1.375 trillion in 2021.”
So the gist of the story, as told in the first sentence, was that the deal “boosts spending,” this is really only true relative to a baseline under which spending would be cut. The increases in law are actually slightly less than projected inflation over this period and considerably less than GDP growth, meaning that spending will decline as a share of GDP.
It would have been helpful to point this fact out to readers. The piece instead implies that this is an example of profligate spending.
To support this view, we get the quote from Florida Senator Rick Scott:
“I’m worried about the staggering debt we’re leaving for our children and grandchildren. … Too often in Washington, compromise means both sides get everything they want so that no one has to make a tough choice. I can’t support that.”
If Rick Scott were actually concerned about the burdens that the government is imposing on our children and grandchildren he should be looking at the costs of patent and copyright rents that result from these government-granted monopolies. These rents are running close to $400 billion a year in the case of prescription drugs alone. If we sum all the patent and copyright rents in the economy, it could exceed $1 trillion a year.
Granting patent and copyright monopolies is an alternative way for the government to pay for services as opposed to direct spending. Anyone who is seriously concerned about burdens created for our children would have to consider the cost of these monopolies. Otherwise, they are just looking to score cheap political points and richly deserve public ridicule.
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I was eagerly (okay, maybe not the right word) awaiting the data revisions that accompanied the 2nd quarter GDP report that came out yesterday. One of the items that often gets substantially revised is profits. I was surprised that initial reports showed the profit share increasing slightly in 2018 from 2017. That surprised me both because I had expected a tight labor market to allow workers to reclaim some of the share they lost to capital in the weak labor market following the Great Recession and because wage growth appeared to be somewhat outpacing productivity growth.
The revised data show a different picture. They show that the profit share fell by 0.4 percentage points in 2018, which means a total drop of 3.2 percentage points from their 2014 peak. If this pace of decline continues, then by 2022 the profit share will be pretty much back to its normal level.
This is good news for workers and also matters hugely for how we think about the economy. There have been many who argue that the shift from wages to profits, which began early in the last decade (I would argue the total is distorted by phony profits earned by the financial industry in the bubble years), is due to increasing monopoly power. This is the story of huge firms like Google, Apple, and Facebook dominating markets. On the other side, many of us think that the bigger story is weaker worker bargaining power due to declining unionization, weaker labor protections, and high unemployment.
If the first group is right, the key to restoring the labor share is breaking up the monopolies. If the second group is right, then the key is to restore workers’ bargaining power, most immediately by maintaining a tight labor market. (Higher unionization rates would be great, as are increasing employment protections, but these are a bigger lift than keeping the Fed from raising interest rates excessively.)
The latest data make it look like the weak labor market gang is correct. Of course, there are still good reasons for breaking up monopolies. Also, data will be revised again next year, so the picture may look different in July of 2020.
Btw, as best I can tell, the revised profit data got zero attention in reporting on the GDP release.
I was eagerly (okay, maybe not the right word) awaiting the data revisions that accompanied the 2nd quarter GDP report that came out yesterday. One of the items that often gets substantially revised is profits. I was surprised that initial reports showed the profit share increasing slightly in 2018 from 2017. That surprised me both because I had expected a tight labor market to allow workers to reclaim some of the share they lost to capital in the weak labor market following the Great Recession and because wage growth appeared to be somewhat outpacing productivity growth.
The revised data show a different picture. They show that the profit share fell by 0.4 percentage points in 2018, which means a total drop of 3.2 percentage points from their 2014 peak. If this pace of decline continues, then by 2022 the profit share will be pretty much back to its normal level.
This is good news for workers and also matters hugely for how we think about the economy. There have been many who argue that the shift from wages to profits, which began early in the last decade (I would argue the total is distorted by phony profits earned by the financial industry in the bubble years), is due to increasing monopoly power. This is the story of huge firms like Google, Apple, and Facebook dominating markets. On the other side, many of us think that the bigger story is weaker worker bargaining power due to declining unionization, weaker labor protections, and high unemployment.
If the first group is right, the key to restoring the labor share is breaking up the monopolies. If the second group is right, then the key is to restore workers’ bargaining power, most immediately by maintaining a tight labor market. (Higher unionization rates would be great, as are increasing employment protections, but these are a bigger lift than keeping the Fed from raising interest rates excessively.)
The latest data make it look like the weak labor market gang is correct. Of course, there are still good reasons for breaking up monopolies. Also, data will be revised again next year, so the picture may look different in July of 2020.
Btw, as best I can tell, the revised profit data got zero attention in reporting on the GDP release.
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