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Article Artículo

In a Tight Labor Market, the Profit Share of Income Is Falling

Last month’s GDP report also included revisions to previously reported profit data for the last three years. The earlier reports showed a slight increase in the profit share in 2018; the revised data showed that the profit share of corporate income had fallen by 0.4 percentage points from the prior year. This is important both because it means that workers are now clearly getting their share of the gains from growth and also because of what it tells us about the structure of the economy.

On the first point, we have seen four decades during which the wages of the typical worker have not kept pace with productivity growth.[1] While productivity growth has not been great over much of this period, it was slow from 1979 to 1995 and again in the years since 2005, the median wage has generally lagged annual productivity growth over most of this period.[2] 

The one exception was the years of low unemployment from 1996 to 2001, when the wages of the typical worker rose in line with productivity growth. With unemployment again falling to relatively low levels in the last four years, many of us expected that wages would again be keeping pace with productivity growth.

The earlier data on profits suggested that this might not be the case. It showed a small increase in the profit share of corporate income, suggesting that corporations were able to increase their share of income at the expense of labor, even with an unemployment rate below 4.0 percent. 

The revised data indicate this is not the case. The low unemployment rate is creating an environment in which workers have enough bargaining power to get their share of productivity growth and even gain back some of the income share lost in the Great Recession. In the last few years, wage growth has exceeded the rate of inflation by roughly one percentage point annually. This is not spectacular wage growth, but it is in line with, if not slightly above the rate of productivity growth.[3]

CEPR / August 10, 2019

Article Artículo

Thoughts on China’s Currency

There is a conventional wisdom on China’s currency that gets repeated almost everywhere and never seems to be challenged in the media. The basic story is that in the bad old days China ‘manipulated” its currency, but that stopped years ago. At present, its currency controls are actually keeping the value of its currency up, not down. As much as I hate to differ with the conventional wisdom, there are a few issues here that deserve closer examination.

First, it’s great see that everyone now agrees that China managed its currency in the last decade. (I prefer the term “manage” to “manipulate,” since the latter implies something sneaky and hidden. There was nothing sneaky about China’s undervalued currency. It had an official exchange rate that it bought trillions of dollars of foreign reserves to maintain.) Unfortunately, almost none of these people acknowledged China’s actions at the time, when the under-valuation of China’s currency was costing the United States millions of manufacturing jobs. Oh well, it wasn’t like the Wall Street bankers were losing their jobs.

The second point is that there is a common assertion that only the buying, not the holding, of reserves affects currency prices. It is easy to show that China is not currently buying large amounts of reserves. In fact, it has been selling some in recent years to keep its currency from falling.

Okay, let’s take a step back. The Federal Reserve Board bought more than $3 trillion in assets to try to boost the economy following the Great Recession. This was done to directly reduce long-term interest rates by increasing the demand for bonds. While it stopped buying assets several years ago, it still holds more than $3 trillion in assets.

Virtually all economists agree that by holding these assets, the Fed is keeping down long-term interest rates. If this additional $3 trillion in assets were on the market, then long-term interest rates would be higher. (The size of the impact is debated, but not the direction.)

If the holding (not buying) of assets has an impact on interest rates, why does China’s holding of more than $3 trillion in foreign reserves not have an impact on the price of the dollar and other reserve currencies relative to the RMB? (It would actually be well over $4 trillion if we add in the trillion plus dollars held in China’s sovereign wealth fund.)

CEPR / August 09, 2019

Article Artículo

Newsflash: Trump and DeVos Do Not Want to Get Government Out of For-Profit College Industry

It is far too common for progressives to accept the right’s framing of economic issues. In the standard story, the right portrays itself as the champion of free markets. The image is of the rugged individualist who struggles against the current to come out ahead. They want to be able to make their way in business without the help or hindrance of the government.

In this story, liberals mess everything up by bringing in the government. They are so concerned that some people could get hurt that they bury businesses in bureaucracy and red tape, not only hurting profits but slowing growth and job creation, thereby hurting even the people they were trying to help. That is a worldview that is favorable to the right’s story – after all, who wants to stifle the economy?

I have written much to attack this worldview. My main point is that conservatives like the government just as much as liberals and progressives. The difference is that they want the government to act to redistribute income upward – and that they are smart enough to try to hide the role of government. That way they can say that their riches were just the result of talent and hard work. (This is the point of my book Rigged [it’s free].)

We got a great example of this turning of reality on its head in an otherwise excellent New York Times article on how it appears that Education Secretary Betsy DeVos intervened to ensure that a for profit college run by a political ally (Dream Center) could stay in business even after it was clear that it was about to go bankrupt. According to the piece, the Education Department’s actions allowed students enrolled in the school to continue to get government loans, even though there was little likelihood the school would survive long enough for them to graduate.

CEPR / August 02, 2019

Article Artículo

Missing Issues on the Economics of a Fed Rate Cut

A Washington Post piece on the issues surrounding a rate cut this week by the Federal Reserve Board missed many important points. First, and most importantly, it never once mentioned that inflation has been persistently below the Fed's 2.0 percent target. This matters both for the Fed's credibility and more importantly as a protection policy in the next downturn.

On the first point, the Fed has repeatedly stated that its 2.0 percent inflation target is an average, not a ceiling. That means that the inflation rate must occasionally rise above 2.0 percent in order for the average to be 2.0 percent. Inflation in the core personal consumption deflator, the rate targeted by the Fed, has not exceeded 2.0 percent since the Fed Chair Ben Bernanke adopted it as an official target in 2012. If Fed policy is not consistent with achieving the 2.0 percent inflation target, then markets will not believe the Fed is committed to this target.

The other side of this is that we know that there will be another recession at some point. Inflation almost always falls in a recession. If we go into a recession with a 1.5 percent inflation rate (the figure for the last twelve months) then we are likely to see inflation fall very close to zero in a downturn. This matters because the Fed would like to have a large negative real interest rate (the nominal rate minus the inflation rate) in a recession. If inflation is near zero, then even with a zero federal funds rate, the real interest rate is only slightly negative.

CEPR / July 29, 2019

Article Artículo

The Dangerously Irresponsible Arguments of the “Responsible” Budget Gang

Last week the Washington Post ran a column by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, one of the many pro-austerity organizations that received generous funding from the late Peter Peterson. The immediate target of the column was the standoff over the debt ceiling, but the usual complaints about debt and deficits were right up front in the first two paragraphs.

“At the same time, the federal debt as a share of the economy is the highest it has ever been other than just after World War II. ….”

“So our plan is to borrow a jaw-dropping roughly $900 billion in each of those years — much of it from foreign countries — without a strategy or even an acknowledgment of the choices being made because no one wants to be held accountable.”

This passes for wisdom at the Washington Post, but it is actually dangerously wrong-headed thinking that rich people (like the owner of the Washington Post) use their power to endlessly barrage the public with.

The basic story of the twelve years since the collapse of the housing bubble is that the U.S. economy has suffered from a lack of demand. We need actors in the economy to spend more money. The lack of spending over this period has cost us trillions of dollars in lost output.

This should not just be an abstraction. Millions of people who wanted jobs in the decade from 2008 to 2018 did not have them because the Washington Post and its clique of “responsible” budget types joined in calls for austerity. This meant millions of families took a whack to their income, throwing some into poverty, leading many to lose houses, and some to become homeless.

At this point, the evidence from the harm from austerity in the United States (it’s worse in Europe) is overwhelming, but just like the Pravda in the days of the Soviet Union, we never see the Washington Post, or most other major news outlets, acknowledge the horrible cost of unnecessary austerity. We just get more of the same, as though the paper is hoping its readers will simply ignore the damage done by austerity.

CEPR / July 25, 2019