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Article Artículo

Washington Post Columnist Gets the Story Wrong In Saying the Fed's Model is Wrong

Zachary Karabell, the head of global strategies at Envestnet, got the story badly wrong in a Post Outlook section piece arguing that the Fed's model of inflation is wrong. The piece highlights the relatively rapid growth in the last two quarters and argues that this should be leading to inflation. That is not what the Fed's model would predict.

In the Fed's model, the change in the rate of inflation is tied to the level of unemployment. While the unemployment rate is at a level where the model predicts rising inflation, the rate of GDP growth is largely besides the point. The economy has had much more rapid GDP growth at earlier points in the recovery. For example, growth averaged 4.9 percent in the third and fourth quarters of 2014. It averaged 2.9 percent in the second and third quarters of 2015.

The question is primarily one of how rapidly productivity can grow. The labor market is getting tighter, although with the employment-to-population (EPOP) ratio of prime-age (ages 25 to 54) still below pre-recession levels and well below 2000 levels, it is likely that we still have some ways to go before reaching full employment. Once that point is reached, the economy will only be able to grow at the rate of labor force growth determined by demographics (around 0.5–0.7 percent) plus the rate of productivity growth.

Productivity growth had been averaging less than 0.7 percent annually from 2012 to 2017, and most projections had assumed slow growth would continue. However, it grew at more than a 3.0 percent annual rate in the third quarter and seems on track to again grow at a rate above 2.0 percent in the fourth quarter. If we can sustain a faster rate of productivity growth, the economy will be able to sustain a faster rate of GDP growth even when the labor market is fully employed.

CEPR / December 17, 2017

Article Artículo

Republicans Are Not Cutting Taxes on Pass-Through Corporations, They Are Cutting Taxes on Income from Pass-Through Corporations

This is a frequent mistake in reporting on the tax proposal, as in this Post article telling us:

"Under the Trump plan, pass-through businesses get a substantial reduction in taxes."

This is wrong since pass-through corporations already don't pay any taxes, so their taxes can't be reduced unless we have a negative income tax for them. The tax cut applies to income from pass-through corporations.

This distinction matters for two reasons. First, it means that taxpayers with the same income will pay different tax rates depending on its source. Under the plan passed by the Senate, anyone can get a 23 percent reduction in their tax bill if they arrange for their income to come through a pass-through corporation.

While this tax break is not likely to do much to promote economic growth, it will be rocket fuel for the tax shelter industry. There will be a flood of pass-through corporations created as higher-earning workers, like doctors and lawyers, arrange to have their income paid to them from their pass-through corporations rather than as normal wage income. (Yes, this is supposed to be illegal, but the Republicans have spent two decades gutting the IRS's enforcement capabilities. If you think the IRS, given its current resources, will be able to prevent widespread evasion, please contact me so I can sell you some digital currency.)

CEPR / December 15, 2017

Article Artículo

The Atlantic Tries to Push Generational Warfare to Divert Attention from the Rich Taking Everything

Fox News and Atlantic Magazine have zero shame. The latter has a major article telling readers that Social Security is "the grandparents stealing from the grandchildren."

The piece is a cornucopia of misstatements about Social Security and Medicare, most importantly implying that today seniors get some big windfall from the programs and that it somehow comes at the expense of our grandchildren. Both parts of this claim are seriously wrong.

In the case of Social Security, most people retiring in the near future will actually get back from the program roughly the same amount that they paid in, using standard interest rates. Low- and-moderate income people will get back somewhat more, whereas "high earners" (defined as people earning around $75,000 a year) will get back less.

The average value of Medicare benefits will exceed tax payments, but this is due to the high cost of medical care in the United States. While we don't have better health care outcomes in the United States than in Germany, Canada, or other wealthy countries, we do pay around twice as much per person as these other countries. The difference is the greater price of drugs and medical equipment, the cost of insurance, and the pay of doctors. A serious article would look at how these big actors in the health care industry are stealing from our grandchildren, but not the Atlantic.

The other part of the story is the implication that somehow the Social Security and Medicare received by seniors is limiting our ability to ensure a decent standard of living for our children and grandchildren. This is lunatic land. As the Republicans are showing right now, we are not near any limits in our ability to run larger deficits. We could always impose higher taxes on the rich who have been the big gainers from economic growth over the last four decades, due to their rigging of the economy.

We could also reverse some of the rigging. For example, ending patent monopolies on prescription drugs and allowing them to be bought at free market prices would save us close to $370 billion a year, roughly half of which would take the form of savings to the government. Expansionary fiscal and monetary policy that allows the unemployment rate to fall to lower levels also disproportionately benefits those at the bottom of the income ladder, benefiting our children and grandchildren by giving their parents jobs and the bargaining power to get pay increases at those jobs.

CEPR / December 13, 2017

Article Artículo

Honduras

Latin America and the Caribbean

World

Senior Honduras Election Official: "The Trend Reversed Following a System Failure."

This interview with Marco Ramiro Lobo, a non-voting member of the Honduran electoral authority (TSE by its Spanish acronym) was published on December 3rd by El Faro. In the days since, the TSE has conducted a partial review of actas in an attempt to satisfy concerns raised by international observers and the political opposition, and has agreed to recount the 5000 actas discussed in the interview. However, both the second and third-place finishers continue to reject the results provided by the TSE, which they say has lost all credibility. Both parties filed legal challenges to the results requesting a full vote-by-vote recount and the annulment of the elections, respectively. More than two weeks since the election, many questions remain about how things went so wrong.

He’s an alternate member but, after the president of the Supreme Electoral Tribunal (TSE in Spanish) of Honduras, he is the most visible of the tribunal’s four magistrates. He doesn’t have a vote, but he has a voice and he has made certain that he is heard. Marco Ramiro Lobo was appointed by the Honduran congress three years ago, and today he appears to be the magistrate most opposed to the decisions of the tribunal’s president, David Matamoros. He’s demanding an in-depth investigation of two system failures by the TSE’s vote-tallying technology. He admits that the TSE bears the primary responsibility for the political and social crisis gripping Honduras a week after its presidential election.

The tribunal consists of a magistrate, President David Matamoros, from the National Party, a representative from the Liberal Party, Erick Rodríguez, a member of the tiny Democratic Christian Party, Saúl Bonilla, and Lobo, a member of the small Party of Democratic Unification (UD). The Honduran congress refused to name a representative from the Free Party or the Party for Innovation and Unity (PINU), which make up the Opposition Alliance headed by Salvador Nasralla and Mel Zelaya, who are currently denouncing the reported results as fraudulent.

Jake Johnston and Jacob Wilson / December 12, 2017

Article Artículo

Is It Hard to Get Good Help?

As the labor market has tightened, many of us have looked to trends in wage growth to see evidence that we could be hitting full employment. While the tighter labor market has led to gains for those at the middle and bottom of the wage distribution, it has not led to a general acceleration in wage growth. The year-over-year increase in the average hourly wage was just 2.5 percent for November, roughly the same as it has been for the last two years.

In spite of the weak wage growth, news outlets continually tell us that employers are unable to find workers with the necessary skills. The argument is that more people would be hired if only the unemployed workers had the skills required by employers.

This story doesn't fit with the weak wage growth story since there are always workers with the necessary skills — they just might work for competitors or in another city. The way employers attract these workers is by offering a higher wage. If we don't see wages rising, then this story doesn't really make sense. (Employers would always like to find workers who will accept below-market wages; so what?)

Nonetheless, we often see people citing the Bureau of Labor Statistics data on job openings and hires to argue the case that companies can't find workers with the needed skills. There has been a fall in the ratio of monthly hires to job openings over the last decade. This is taken as evidence that employers have positions that are going unfilled because they can't find skilled workers. A closer look at the data indicates otherwise.

CEPR / December 12, 2017