November 2, 2018

November 2, 2018 (Jobs Byte)

It’s a bit less than a year since Congress passed the Trump tax cut, but we are far enough along that we can be fairly confident about its impact on the economy. There are three main lessons we can learn:

• The tax cut is to not leading to the promised investment boom;

• The additional demand generated by the tax cut is spurring growth and reducing the unemployment rate;

• The Federal Reserve Board’s interest rate hikes are slowing the economy in a way that is unnecessary given current inflation risks.

The Investment Boom: Just Like Jared Kushner’s Hidden Genius, No One Can See It

Taking these in turn, it is pretty clear at this point that we will not see the investment boom promised by proponents of the tax cut. This point really has to be front and center in any discussion of the benefits of the tax cut. By far, the largest chunk of the tax cut was the reduction in the corporate tax rate from 35 percent to 21 percent, along with various other measures lowering corporate taxes.

The immediate impact of a corporate tax cut is to give more money to the richest people in the country since stock ownership is highly skewed towards the top 10 percent of the income distribution and especially the top one percent.

Dean Baker
Truthout, October 29, 2018

The discussion of health care has been badly warped ever since the debate over the Affordable Care Act (ACA) in 2009. A central feature of the ACA was the requirement that everyone get insurance, or pay a penalty if they don’t. While many resented having the government force them to buy insurance, especially in a context where they had to buy it from a private insurance company (i.e. there was no public option), this was actually a central feature of the ACA.

The main point of the ACA was to make it possible for people with serious health issues to get coverage. Insurers are happy to cover healthy people. For the most part, covering a healthy person means insurers get a check every month for nothing. It’s good work, if you can get it.

People with health problems are a different story. They actually do cost the insurers money. This is why insurers either charged people with health problems very high premiums or didn’t allow them to buy insurance at all, in the years before we had the ACA.

The ACA prohibited discrimination based on pre-existing conditions. It only allowed insurers to vary premiums based on age, not health. But, as several states discovered, a ban on discrimination based on health will not work by itself. This means that the average cost of insurance will be much higher.

That makes it a bad deal for relatively healthy people, many of whom will then decide not to buy insurance. With fewer healthy people in the pool, the average cost per person rises. This leads to higher premiums, which leads to more relatively healthy people leaving the pool. You go through a few rounds of this process and you end up with an insurance pool with relatively few healthy people and very high premiums.

This is why the ACA came with a mandate for buying insurance. The point was to keep healthy people in the pool to ensure that health insurance would be affordable. Of course, even without discrimination based on health, insurance would still be very expensive. This was the reason for the subsidies.

Unfortunately, the subsidies were not very generous and they phased out at levels that left many middle-income families with very high insurance costs.  Still, many more people had access to insurance than before the ACA.

Matt O'Brien had a good piece on yesterday's GDP numbers noting that we are not seeing the investment boom promised by promoters of the tax cut. However, he argued that growth was likely to remain close to 3.0 percent based on the 3.1 percent growth rate reported in final sales to private domestic purchasers. In my GDP write-up, I was somewhat less optimistic about near-term growth prospects, pointing to the 1.4 percent growth rate in final sales.

The difference between these two measures is that the final demand measure pulls out inventory changes from GDP. The logic is that changes in the rate of inventory accumulation are erratic and no one thinks that the rate of inventory accumulation will expand infinitely relative to the economy nor the rate at which they are being run down will continually accelerate. For this reason, the final demand measure, which leaves out inventories, seems like a better measure of growth.

The final sales to domestic purchasers measure pulls out government spending and net exports, following a similar logic. Government spending is often erratic, jumping or falling in a given quarter, often due to the timing of purchases, especially with the military. Pulling it out can give a better measure of underlying growth. Net exports are also erratic, but we don't expect the trade deficit to either continually expand or shrink relative to the overall size of the economy. Therefore pulling out the quarterly changes can give us a better measure of the underlying growth rate.  

While the decision to pull government expenditures out of the GDP figure makes little difference in the most recent quarter (they grew at a 3.3 percent rate, almost the same as the 3.5 percent overall growth rate), the decision on net exports does. The increase in the trade deficit subtracted 1.78 percentage points from growth in the quarter. That is the explanation for the difference between the 3.1 percent growth rate in final sales to domestic purchasers and the 1.4 percent rate of growth of final demand.

Rosemary Batt and Eileen AppelbaumThe American Prospect, October 26, 2018

October 26, 2018

October 26, 2018 (GDP Byte)

The wages of a typical worker have barely risen in four decades, many recent college grads are facing unbearable student loan burdens, housing costs are hugely outpacing inflation in many cities, making life especially hard for low- and moderate-income households. Naturally, the problem is the Social Security and Medicare received by baby boomers.

That's what Glenn Kramon, a former assistant managing editor at The New York Times, would have us believe according to his NYT column, seriously. He tells readers:

"My generation will say we paid into the system for decades and deserve our entitlements. But the one-earner baby boomer couple my age who have earned the average wage every year have paid less than $100,000 in Medicare taxes but are taking out benefits worth more than $400,000, after adjusting for inflation, according to C. Eugene Steuerle, a former Treasury official now at the Urban Institute.

"He also found that the couple will receive half a million dollars in Social Security after paying in little more than a quarter million."

Kramon even speculates that Medicare might have been responsible for Trump's victory in 2016.

"I even wonder whether increased Medicare spending is partly responsible for the election of Donald Trump, whose margin of victory came from voters in our generation. Without that spending, might enough of us have died sooner and tipped the balance in favor of Hillary Clinton?"

Before showing why this story is total nonsense, it is worth noting that the story that Social Security and Medicare are somehow responsible for all evil is a recurring theme at respectable news outlets like the NYT and National Public Radio. Just to give a few examples, we had this one last year in the Boston Globe on how the baby boomers are destroyed everything. (That's the title.) We had Abby Huntsman, whose main claim to fame is being born into a rich family, telling us on MSNBC how unfair these programs are to her generation. We have Thomas Friedman who periodically uses his NYT column for this purpose (e.g. here). And, we have Robert Samuelson who does it all the time with his Washington Post column.

Mark WeisbrotChicago Tribune, October 25, 2018

Hannah Archambault and Dean Baker, October 2018

Note: This post first appeared on my Patreon page.

Last week Roger Lowenstein had a piece in the Post about GE's hiring of a new CEO after the prior one served less than a year. According to Lowenstein, the new CEO's contract will give him incentives worth $300 million over the next four years if he does well by the shareholders. He will walk away with $75 million if he does poorly. This follows the hiring of an inept CEO who was dumped in less than a year and long-term CEO Jeffrey Immelt, who pocketed hundreds of millions of dollars during his tenure while giving shareholders returns averaging 1.0 percent annually, according to Lowenstein.

This raises the obvious question: What is GE's board is doing? I haven't looked at their forms, but I am quite certain these people get paid well over $100k a year and quite possibly over $200k for a job that requires perhaps 200 to 300 hours a year of work. That comes to an hourly pay rate in the $300 to $1,000 range. The primary responsibility of directors is picking top management and making sure that they don't rip off the shareholders.

How could you possibly fail worse in this job than GE's board? Yet, my guess is that there has been very little turnover in the board.

As a practical matter, it is difficult for shareholders, even large shareholders, to organize to remove board members. More than 99.0 percent of the incumbents who are nominated by the board for re-election win.

This is the classic problem of collective action. It is almost always much easier to simply exit as a shareholder and sell your stock than to organize and try to change the way the company operates. For this reason, CEOs are able to make out like bandits, getting pay in the tens of millions of dollars, even when they do poorly by shareholders.

It is common for progressives to condemn the outrageous pay of CEOs. However, they rarely move beyond condemnation to point out that the CEOs are ripping off their companies. This means first and foremost the shareholders.