Joe Nocera had a good piece discussing the plight of factory workers in the United States subjected to low cost competition from China and other developing countries. He argues that the government has done too little to help the workers and the communities that have suffered from such competition. However his prescription, that workers should get more skills, is somewhat misleading.
While it is always better to have a more skilled workforce, one of the main reasons that more skilled workers have done better in the era of globalization is that they have been largely protected from the same sort of competition faced by less-educated workers. While trade agreements were explicitly designed to put manufacturing workers in direct competition with the low-paid workers in the developing world, there has been no similar effort to subject our doctors, dentists, lawyers and other highly paid professionals to the same sort of competition.
Trade agreements could have focused on reducing barriers that make it difficult for qualified professionals from the developing world to work in the United States. For example, we could have fully transparent sets of standards to become a doctor or lawyer in the United States, with tests administered in other countries (by U.S. certified test givers). Anyone from Mexico, India, or China who passed these tests would have the same ability to work in the United States as someone who grew up in Kansas.
The potential benefits to consumers and the economy would run into the hundreds of billions of dollars annually. And this would have the effect of shifting income downward rather than upward. (Yes folks, we can design a mechanism to reimburse developing countries for the professionals they educated who come here, which would ensure they gain as well.)
Trade agreements did not put professionals into competition because they are a powerful enough lobby to block such actions. However it is important to be clear in our understanding. It was not "globalization" that redistributed income upward. It was a pattern of trade that was intended to put downward pressure on the wages of the bulk of the population while protecting those at the top.
Just a few quick points - doctors and lawyers (especially doctors) are not members of the middle class in the normal usage of the term. About 25 percent of doctors are in the one percent and the vast majority are in the top two percent. If the rest of us are going to get more, they must be among the group that gets less.
Second, lower wages for manufacturing workers have translated into lower prices. Part of it has gone to profits, but shirts and cars are cheaper than they would be if we didn't have low-paid labor doing much of the work.
Finally, there is no way that a lower valued dollar is going to bring us to developing country living standards as fans of arithmetic everywhere can verify. Imports are equal to roughly 20 percent of our GDP. Suppose a 30 percent drop in the dollar leads to a 20 percent rise in import prices (both very large changes). This implies that we can buy 4 percent less than we did previously. That still leaves us far ahead of Mexico and China. And for debt-phobia fans, we are saving this amount today by borrowing.
That's what a Reuters story on the NYT website said Japanese leaders are troubled by. The piece told readers:
"Policymakers are also pledging to draft a vision of how to keep Japan's ageing population from shrinking into oblivion, holding the line at 100 million in 2060, a 20 percent drop from now."
And what bad thing happens if Japan continues to become a less crowded island through the rest of the century and beyond, more room at the beach and less pollution?
Austin Frakt had an interesting piece in the Upshot section of the NYT reporting research finding that show substantial reduction in health care premiums when there is more competition in the market. The implication is that prices could fall substantially in the exchanges where there are a small numbers of insurers and especially in states like New Hampshire or West Virginia where there is only a single insurer in the market.
At the end of the piece Frakt notes that more insurers appear to be entering the exchanges in 2015 than in their first year of operation. He also suggests some policies that the federal government could pursue to encourage more competition. In addition to the policies Frakt listed, in principle the federal government could also allow Medicare and/or Medicaid to offer plans for purchase in the market in areas with less than a specified number of insurers. This should ensure people the option to have a reasonably priced plan.
At the start of the piece Frakt refers to President Obama's pledge that his health care plan would lower family premiums by as much as $2,500 a year. It is worth noting that per person health care costs in the United States in 2014 are around 15 percent less than had been projected in 2008. This would be a savings in the neighborhood of more than $2,000 a year for a typical family plan. Clearly not all of these savings can be attributed to the Affordable Care Act, but people are paying considerably less for health care in 2014 than had been expected in 2008.
Folks who are not DC insiders might think it would take courage to stand up to the rich people who have done so well (and caused so much harm) over the last three decades. Or, we might think it would take courage to standup to nonsense about budget deficits to point out that we need larger deficits now to create the demand necessary to bring the economy back to full employment. (Yes, we all love the private sector, but the private sector doesn't create jobs for love.) Taking those positions might seem to require courage, but in DC insider circles real courage is demanding that we cut Social Security and Medicare; and that is independent of any of the facts.
Hence we see Dana Milbank telling us that new CBO projections, showing that deficits will be lower over the next decade than in the prior set of projections,"threw cold water on my tranquility." He went on to say the new report was "downright bone-chilling" and that the "top-line conclusions were grim enough, if not catastrophic." It's scary to think what his reaction would have been if the new projections showed a worsening picture.
But his real horror story is that the debt to GDP ratio will be over 77 percent in a decade. Wow, and this means what? Milbank was on vacation so he probably missed the collapse of the housing bubble and the worst downturn since the Great Depression. That really was (and is) bone-chilling and catastrophic, but apparently not the sort of thing that worries DC insider types.
Just for purposes of comparison, just about every country in the euro zone has debt to GDP ratios well above 77 percent and many are borrowing at lower interest rates than the United States. Japan has a debt to GDP ratio more than three times as high and borrows long-term at less than a one percent interest rate. So, these debt numbers might make good scare stories for the DC insider crowd, but they have nothing to do with real world economics.
There are of course things we should be worried about, like continued slow growth and high unemployment, but the best remedy for that would be a higher budget deficit or a lower valued dollar that would reduce the trade deficit. We should also worry about the fact that we pay twice as much for our health care per person than people in other wealthy countries with nothing to show for it in terms of outcomes. If we fixed health care that would also take care of the budget deficit, shifting the projected deficits to surpluses.
But fixing health care would mean taking money away from drug companies, doctors, medical equipment suppliers and insurers. The Post doesn't pay people to push taking away money from those interest groups,, just seniors.
The exchange I had with Jared Bernstein and subsequent comments by others have led to me do more thinking on the corporate income tax. First, just to respond to various notes and comments, I was not all upset that Jared and I disagreed. Jared is an old friend and a very good economist. I value his views, which is why I write books with him. I learned from his comments and I appreciate his concern for losing revenue even if it doesn't over-ride my my reasons for thinking that eliminating the corporate income tax (CIT) is a good idea.
I think the most useful way to think of the CIT is an optional levy placed on corporate income. We tell corporations that they have to pay 35 percent of their income in taxes to the government. It's optional in the sense that we allow them to cut this amount by two-thirds, if they instead pay one-third of this levy to Wall Street investment banks, accounting firms, and tax lawyers. (Using 2014 numbers nominal corporate tax liability would be roughly 6 percent of GDP or $1,050 billion, with actual tax collections around 2.0 percent of GDP or $350 billion.) This is roughly how the tax boils down, with the Government Accountability Office estimating that companies pay about 13.0 percent of their income in taxes to the government, compared to the 35 percent nominal tax rate. This means that 22 percentage points of the profits, that in principle are owed as taxes, are escaping taxation by the government.
In fairness, I don't know how much corporate America is actually paying to escape its taxes. (Someone have a good study to send me?) Essentially, I am just assuming that they spend half of their tax savings on avoidance costs.
These avoidance costs have real economic consequences. We are paying people lots of money to do activities that have zero value to the economy even though they are hugely valuable to their corporate employers. The people working on tax scams at the major accounting firms, or working out inversion mergers at Goldman Sachs, or creating new tax shelters at private equity companies could all be employed doing something productive. This is like giving companies a tax credit to pay people to dig holes and fill them up again. The difference is that these are highly educated people and they are getting paid really big bucks for the pointless hole-digging.
The NYT had a piece on the upward revision of second quarter GDP data to a growth rate of 4.2 percent from 4.0 percent in the advance report. It would have been worth reminding readers that the jump was a reversal from a weather induced plunge of 2.1 percent in the first quarter. This leaves the economy growing at annual rate of just 1.1 percent for the first half of the year. Even if the growth rate is 3.0 percent for the second half that would still leave year-round growth at just 2.0 percent. This is below almost all estimates of the economy's potential which means that rather than making up ground lost during the recession, the economy is falling further below its potential level of output.
The piece also is a bit off in a couple of other areas. It noted the upward revision to investment and told readers:
"Since the economy emerged from the recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing."
Actually the revised 8.4 percent growth rate for investment is not especially impressive. There have been many previous quarters in the recovery where investment grew more rapidly. For example, in the second, third, and fourth quarters of 2011 investment grew at 8.8 percent, 19.4 percent, and 9.5 percent annual rates, respectively. As recenly as the fourth quarter of last year it grew at a 10.4 percent annual rate, so the most recent quarterly rate is not impressive, especially since it follows growth of just 1.6 percent in the first quarter.
One area where it paints an overly pessimistic picture is in reporting the split between wages and profits:
"Despite the faster overall growth rate, businesses still seem to be benefiting more from the economy’s upward trajectory than many individual consumers are.
"The revision on Thursday, for example, lowered the estimate of workers’ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said."
The comparison with the first quarter is misleading. The profit data are always erratic and the first quarter showed a surprisingly large drop in profits. If the comparison is made with the second quarter of 2013 nominal before-tax profits are actually down by 0.3 percent. By contrast, labor compensation is up by 4.4 percent. These data are too erratic to make much of this shift, but the numbers actually suggest some redistribution from capital to labor over the last year.
A Morning Edition report on French President Francois Hollande's decision to reshuffle his cabinet and eliminate members who complained about the cutbacks in government spending that are slowing growth and destroying jobs, treated him as a potential hero for trying to restructure France's labor market. This coverage directly contradicts economics, since there is no plausible story whereby the economic gains from whatever restructuring Mr. Hollande is able to engineer will be more than a small fraction of the losses it is incurring due to austerity being imposed by Germany on the whole euro zone. This austerity will have cost France several trillion dollars in lost output by the end of the decade.
The NYT noted that gas prices remain relatively low in spite of the fighting taking place in or near several major oil producers. In an article entitled "a new American oil bonanza, it told readers:
"The reason for the improved economics of road travel can be found 10,000 feet below the ground here, where the South Texas Eagle Ford shale is providing more than a million new barrels of oil supplies to the world market every day. United States refinery production in recent weeks reached record highs and left supply depots flush, cushioning the impact of all the instability surrounding traditional global oil fields."
The piece also includes a chart showing daily production at around 2.5 million barrels more than its pre-recession level. While this increased production has undoubtedly had an impact on world prices (it is world prices that matter -- oil is bought and sold in the global market), so has declines in demand. There has been a sharp drop in vehicle miles driven compared with projected travel.
Vehicle Miles Traveled: Total and Per Capita
Figure 1. VMT trends for the United States through 2013. Source: FHWA and Census Bureau.
If per person consumption had risen in line with the projected trend, it would be around 15 percent higher than it is today. Since U.S. oil consumption is around 19.0 million barrels a day (not all of it is for gasoline), this means that the reduction in driving below its trend path is saving us around 2.5 million barrels of oil a day, roughly the same amount as the increase in production.
In other words, this article could have been dedicated to the bonanza from conservation and told readers how all the happy people interviewed are enjoying lower gas prices because many people across the country (and the world) are now driving less than was projected based on prior trends. The piece then could have focused on mass transit or other factors that are leading people to drive less. (unfortunately, one of these would be the weak economy.)
In an article discussing the drop in the year over year inflation rate in the euro zone to 0.4 percent, the New York Times told readers that the inflation rate could fall further, turning into deflation, which it told readers:
"causes consumers to delay purchases and undercuts corporate profits and jobs."
That is true of deflation, but it is also true of very low inflation. The reported inflation rate is an average of the inflation rate seen in millions of different goods and services being sold at millions of different outlets. At any point in time roughly half of these inflation rates are more rapid than the average inflation rate and half are less. This means that the prices of a large number of goods and services are already falling. Insofar as this is a factor causing a delay in the purchase of goods, we would already be seeing it. A further drop in the overall rate of inflation to make it negative would change the picture little.
In terms of the impact on corporate profits and jobs, the issue here is the real interest rate, which is the nominal interest rate minus the inflation rate. Any drop in the inflation rate means a higher real interest rate and therefore provides a disincentive for investment. Whether the inflation rate crosses zero and turns negative really has no consequence in this story.
The point here is important. The euro zone is already suffering from an inflation rate that is way too low, causing real interest rates to be far higher than would be desired given the weakness of its economy. The problems of deflation are not something that it may have to worry about in the future. Those problems are here now. The situation worsens anytime the inflation rate falls further, but crossing zero and turning negative has no particular economic significance.
I should probably also mention that there is huge error in measurement. The Boskin Commission, to the widespread applause of most elite economists, said that our consumer price index overstated the annual inflation rate by 1.1 percentage point. After some changes in the index were made, they said it still overstated inflation by 0.8 percentage points. There is no reason to think the euro zone measure is more accurate than the U.S. measure, which means if people follow our elite economists then they should believe that the euro zone already is facing deflation.
I should probably also mention that the Boskin Commission's estimates were pushed as part of an effort at the time to cut the annual cost of living adjustment to Social Security benefits. For some reason no one seems to mention their work anymore, even though the Bureau of Labor Statistics has not addressed most the sources of bias they identified.
Note: Typo corrected, "inflation" changed to "deflation." Thanks kea.
It's always nice when a prominent economist and the NYT pick up on a line of work that we started at CEPR. That is why we are all happy to see David Leonhardt's piece on a new paper by Alan Krueger, the former head of President Obama's Council of Economic Advisers.
The gist of the piece is that Krueger has discovered that many people do not respond to the Current Population Survey (CPS), the main survey used to measure the unemployment rate. Krueger discovered that the unemployment rates are higher for people the first month that they are in the survey than in later months. (People are in the survey for four months, then out for eight months and then back for four months.) The implication is that people who are not responding may be more likely to be unemployed than people who are responding.
This fits well with analysis done by John Schmitt and me nine years ago. That work noted a sharp gap between the employment rates reported in the 2000 Census and the employment rates reported in the CPS for the overlapping months, with the CPS rates being much higher. (The Census has a response rate close to 99 percent, whereas the coverage rate for the CPS is under 90 percent overall. It is under 70 percent for young black men.) The analysis focused on employment rates because employment is much more well-defined than unemployment.
The analysis also noted that the gap was largest for the groups with the lowest coverage rates. In particular the gap was largest for young black men, with the CPS showing an employment rate that was 8.0 percentage points higher than the Census data for the same month. Our conclusion was that the people who respond to the survey are more likely to be employed than the people who don't respond. It's good to see that Krueger appears to have concurred in this finding nine years later.
Note: Link and president corrected.
The headline of the Washington Post piece on the new budget projections from the Congressional Budget Office (CBO) told readers, "CBO: Deficit falls to $506 billion in 2014, but debt continues to rise."
Both parts of this are wrong if the comparison is the most recent prior set of projections. The deficit projected for 2014 is actually somewhat higher in the most recent projections, $506 billion compared to $492 billion in the projections made in April. Both figures are below last year's deficit of $680 billion. Measured as a share of GDP the deficit fell from 4.1 percent in 2013 to 2.9 percent in the most recent projections for 2014.
However the debt numbers in the new projections are lower than the debt numbers in the prior set. CBO now projects that the debt will be 77.2 percent of GDP at the end of the projection period in 2024. It previous had projected a debt to GDP ratio of 78.1 percent.
The article got both of these points right.
Neil Irwin had a good post on the latest Case-Shiller house price data. he argued that the flat, or even modestly declining house prices are good news. This means that prices are now more or less following a normal pattern where they move pretty much in step with the economy.
This is right, with one important qualification. The Case-Shiller tiered price indexes show some worrying numbers in some cities for the bottom third of the housing market. Prices for the bottom tier fell by 0.7 percent in San Francisco in June. In Atlanta, the index showed a drop of 1.3 percent and in Minneapolis the decline was 4.0 percent. This may just be a monthly blip, but there is a real risk that in some areas this could be the beginning of another plunge in low-end house prices.
House prices for the bottom tier have been on a real roller coaster ride for some time. They were inflated in the bubble years by subprime loans and then plummeted when this source of lending collapsed. Then they were propped up by one of the most hare-brained policies of all-time, the first-time homebuyers tax credit. Predictably, prices in the bottom tier plummeted again when the credit ended. (Typical of the honesty people came to expect from Timothy Geithner, his book had a chart (p 304) which showed the uptick in house prices caused by the credit, but ends before the subsequent fall.)
Price recovered again and began to rise rapidly through the first half of 2013. There was a real danger of a new bubble forming, but then Bernanke's famous taper talk took the wind out of the market. The concern now is that with investors leaving the market prices in the bottom tier in some cities will take another major hit. This is not likely to have much of an effect on the national economy but could be bad news for moderate income homeowners that bought in near a temporary peak.
I see that my friend Jared Bernstein has some more thoughtful (if mistaken) arguments on ending the corporate income tax. I recognize his concerns about giving more money to the people who have the most (hey, it’s the American Way), but I still think this is a policy that could be a big winner in the battle against the enemies of the people.
I will quickly address two issues Jared raised, the extent to which any of the savings will be passed on in wages and the ability to replace the revenue. However my main focus is the nature of the corporate tax avoidance industry. This is a pernicious drain of economic resources. It is also a major source of upward redistribution. I consider its elimination an enormous benefit – even if on net we give up some government revenue to do it.
First, I followed the Tax Policy Center in assuming that 20 percent of the benefits would go to workers in higher wages. Jared rightly pointed out that this will depend on workers bargaining power. However, it is worth noting that even in the worst of times workers have gotten some fraction of productivity gains. And if we look at the last year, the data show that average real hourly compensation increased almost as much as productivity growth (1.0 percent rise in real compensation versus a 1.2 percent increase in productivity). So the Tax Policy Center’s 20 percent pass back to wages hardly seems out of line.
The second question is how we would make up the lost revenue. The Congressional Budget Office (CBO) projects we will get $351 billion or 2.0 percent of GDP from the corporate income tax in 2014 (Table 4-1). This is the average for the next decade as well. Much of this can be gotten back from eliminating the special treatment of dividend and capital gains income. The major rationale for their special treatment was the argument that it amounted to double taxation since profits were already taxed at the corporate level. Since the corporate income tax will have been eliminated, there is no rationale for special treatment.
In 2012, the most recent year for which data is available, the Internal Revenue Service reported $260.4 billion in taxable dividend income and $2.217 trillion in capital gains distributions. If we assume an average increase of 10 percentage points in the tax rate on dividends and 5 percentage points in the effective tax rate on realized capital gains, this gets us $137 billion in tax revenue (26.0 billion from dividends and $111 billion from taxing capital gains). If we adjust this figure up by 10 percent to account for nominal growth from 2012 to 2014 we are up to $151 billion.
In addition, eliminating the corporate income tax will cause both sources of income to increase, which would imply a further increase in revenue. If half of profits are paid out in dividends (a bit less than the historic average) then we would see dividends increase by $175 billion (using the 2014 numbers), which at a 30 percent average tax rate gets us $53 billion in tax revenue.
The ending of the corporate income tax would increase after tax profits by around 25 percent, which presumably would lead to a corresponding increase in stock prices. That would lead to a one-time windfall for both stockholders and also the government in the form of capital gains tax revenue. However going forward stock prices should rise on average at the same pace but at base that is roughly 25 percent higher. In 2011 (sorry, most recent year I could find) the CBO projected capital gains income for 2014 of $103 billion. If we up that by 25 percent, it gets $26 billion.
This brings the total from additional capital income to $79 billion. Adding that to $151 billion from raising the tax rate, get us to $230 billion. Suppose we raise the top marginal rate by three percentage points. CBO projected that the ending of the Bush tax cut for high end individuals would raise $109 billion in 2014 (Table 3), so a three percentage point hike should get around half that, or $55 billion. That gets us to $285 billion, still a bit short of the $351 billion in lost corporate tax revenue, but it is within spitting distance.
My friend Jared Bernstein had a piece in the NYT warning against plans to eliminate the corporate income tax. He argues that the corporate income is paid primarily by owners of capital, who in turn are primarily wealthy people. Therefore, if we eliminate the corporate income tax we will be giving a big tax break to the wealthy.
This is largely true. Eliminating the corporate income tax without some major increases in the personal tax rates for high income people would be a big gift to the wealthy. And as much as we would all like to help our favorite billionaires, they are probably not the ones most in need of a hand at the moment.
But the story on elimination may be a bit brighter than Jared implies. First, it is important to remember that not all of the corporate income tax comes out of corporate profits. Due to feedback effects (less investment), some portion will come out of wages. The model used by the Tax Policy Center of the Urban Institute and Brookings Institution put the split at 80 percent profits and 20 percent wages. This means that if we lose $100 billion in corporate income taxes we are effectively losing $80 billion in revenue from rich people.
But even this is somewhat of an overstatement. If companies had $80 billion in additional after-tax profits, then they would pay roughly half of this out in dividends, or $40 billion. If we assume for simplicity that all of this is paid to high end individuals, then we will tax back 20 percent of this amount or $8 billion. (Dividends are taxed at roughly half of the rate of normal income. This would presumably change if we eliminated the corporate income tax.) This means the net loss of revenue from rich people is $72 billion.
Now let's consider the tax evasion industry that is created by the corporate income tax. The corporate income tax use to raise close to 4.0 percent of GDP. In recent years it has been less than 2.0 percent even though corporate profits are at a record high as a share of income. Part of the drop is explained by a drop in the top tax rate from 50 percent to 35 percent. However most of this decline is explained by more effective forms of tax avoidance or evasion. (Avoidance is legal.)
The question is, how much will a company pay to avoid paying $100 in income taxes? The answer is up to $99.99. There are a lot of companies that are paying lots of money to avoid paying corporate income taxes. It is likely that a very substantial portion of that lost 2.0 percentage points of GDP in corporate income taxes ($350 billion a year in today's economy) is instead being paid to the income tax avoidance industry (a.k.a. the financial sector).
To take one important example, much of the bread and butter of the private equity industry is bringing creative tax schemes to smaller businesses that lacked the expertise to do it themselves. To personalize this some, think of Mitt Romney. Much of the story of his wealth was the corporate income tax. By devising clever schemes that allowed businesses his firm took over to escape the tax, he was able to resell these businesses at an enormous profit. In this way, the corporate income tax is not just a way of taking money from rich people, it is also a way to give money to rich people by creating enormous profit opportunities in altogether unproductive areas of the economy.
And Mitt Romney's wealth has direct ramifications for the rest of us. Suppose Mitt Romney spends a big chunk of his wealth building a big new house. In the context of a depressed economy, any spending is good for growth and jobs, so his consumption is a net plus just like anyone else's consumption. However as we start to get to the point where the inflation hawks are bringing enough pressure to bear on the Fed to force it to raise interest rates and slow the economy, Romney's construction project will effectively be crowding out other spending. The Fed will be raising rates sooner than it otherwise would have because of the riches Romney accumulated from designing ways to avoid the corporate income tax.
If we assume that roughly half of the drop in corporate income tax is now income for the tax avoidance industry, then this means that we are giving them 1.0 percent of GDP to raise 1.15 percent of GDP (0.72*1.6 percent of GDP raised in corporate income taxes) in taxes from rich people.
In this fuller context, the corporate income tax is a much more questionable proposition. It seems very plausible that we could design a system that will raise as much money from the rich with an increase in personal tax rates, while at the same time destroying the tax avoidance industry.
That's right, you might have thought there was a debate on whether the neo-liberal policies pursued by Brazil and other Latin American countries promoted or retarded growth, but the NYT settled the issue. It refers to the policies put in place by Social Democratic Party from 1994-2002 and then tells readers:
"The measures vanquished galloping inflation, opening the way for the next decade’s growth."
This voice of authority should perhaps explain why it took seven years of moderate inflation before growth could pick up. Inflation fell back to 6.9 percent in 1997 (it had been over 1000 percent), the growth rate crossed 5.0 percent in 2004 and remained at a respectable pace until the world financial crisis led to a recession in 2009.
A Vox piece on soaring textbook prices told readers:
"And the college textbook market has changed, too. Publishers used to spread out the cost of a new edition over five years before publishing the next edition and starting the cycle over. Since the publishing industry began consolidating in the 1980s — five major publishers now control 80 percent of the market — competition has become keener, and the window before a new edition has narrowed from five years to three. That means higher prices so that publishers can recoup the costs and make a profit."
Let's see, competition has become keener as the industry got more concentrated, causing prices to rise? That doesn't sound like the textbook economics I learned.
This sounds more like a story where an industry grew more oligopolistic. Rather than competing on price, textbook makers compete on quality (or the appearance of quality -- to keep the analogy to the prescription drug industry used in the piece). There is an implicit agreement not to try to undercut each other on price, since the big five recognize they would all end up losers in that story.
This sounds like a case where a bit of anti-trust action might do lots of good. Alternatively, a small amount of public funding for open source textbook production may wipe out the bastards altogether.
A New York Times article on the role that the debate over the Export-Import Bank is playing in the North Carolina senate race told readers that the bank:
"says it makes a profit and supported more than 200,000 jobs with $37.4 billion in transactions last year."
It would have been worth including the views of someone other than the bank who could have put these claims in context. If companies did not have access to the Bank's loans at below market interest rates, most of these sales would still take place. The companies would just have lower profit margins. As a result, the number of jobs that would be lost is a fraction of the number cited here.
Furthermore, in standard models it would be expected that with fewer exports subsidized by the bank, the dollar would fall in value, which would make other exports more profitable. The net effect on jobs and GDP would be close to zero and quite possibly positive. It would be possible to construct the exact same story about any industry that is subsidized by the government with loans offered at below market interest rates.
Robert Samuelson discusses a new analysis from Princeton University economists Alan Blinder and Mark Watson that finds the economy has generally grown more rapidly under Democratic presidents than Republican presidents. Samuelson notes that Blinder and Watson can explain much of the difference on factors like the OPEC price shocks, wars, and trends in productivity, but there is still a portion that remains unexplained.
Samuelson then comments:
"Actually, the explanation is staring them in the face.
"The parties have philosophical differences that affect the economy. To simplify slightly: Democrats focus more on jobs; Republicans more on inflation."
Clearly there are differences in attitudes towards the willingness to promote jobs as opposed to concerns about inflation. However, the party breakdowns are perhaps not as clear as Samuelson suggests. After all, it was Richard Nixon who imposed price controls in 1971 as an alternative to contractionary fiscal and monetary policy that would have slowed growth and eliminated jobs. And Jimmy Carter was the person who appointed legendary inflation hawk Paul Volcker as head of the Federal Reserve Board. More recently, it was Republican Alan Greenspan (originally appointed by Ronald Reagan, although reappointed by Bush I, Clinton, and Bush II) who argued with Clinton appointees Janet Yellen and Lawrence Meyers that there was no reason to raise interest rates in 1995-1997 and that the economy could be allowed to continue to grow and create jobs.
Anyhow, Samuelson's point is right. There are differences between the priorities that are placed on jobs and employment versus the risk of higher inflation. This is a fundamental policy decision. It is unfortunate that most of the public is unaware of the decisions the Fed makes on this trade-off. As a result the voices that tend to dominate the debate come from the financial sector, which pushes the Fed to focus on the risk of inflation. Unnecessarily high unemployment has little consequence for bank profits, even if it means millions of people needlessly out work and tens of millions lacking the bargaining power to demand higher wages.
Allan Lane correctly takes me to task for seeming to accept Samuelson claim that the differences between the parties are "philosophical." That was not the part I was agreeing with. There are differences with Democrats tending to be more responsive to concerns from unions and workers more generally about jobs. On the other hand, Republicans are more likely to be listening to their backers in the financial industry. So there are differences, but they don't necessarily come from philosophies.
Also, as noted above, the differences are not always clear cut. The Democrats also count on support from Wall Street.
The New York Times reported on lawsuits being filed by the City of Chicago and two California counties over the promotion of painkillers. The suit charges that the companies promoted OxyContin and other drugs for uses where they may not have been appropriate or necessary and deliberately downplayed risks of addiction and overdose.
It would have been worth noting that the reason the companies being sued had incentive to push their drugs was the high profit margins provided by patent monopolies. If these drugs had been sold in a free market in which the drug companies enjoyed the same profit margins as companies selling steel or bread, it never would have been profitable to spend tens of millions of dollars pushing their drugs for inappropriate uses.
However because patent monopolies allowed them to charge prices that were several thousand percent above the free market price, companies could make substantial profits by getting people to use their drugs even in cases where they may not have been appropriate. It would have been worth noting this basic fact, just as an article reporting on shortages of a particular product should mention that the government imposes price controls on the product.
Correction: "Synthetic" was added to the headline in the interest of accuracy. Thanks to Fred Gardner for the correction.
The usually astute Matthew Yglesias falls off the track with his discussion of David Autor's latest paper on technology and wages. For background, Autor is the guru of the job polarization story: the idea that technology is destroying middle-paying jobs leaving only those at the top and bottom. He presented a new paper at the Fed's annual conference at Jackson Hole which reassesses his prior work.
Matt's take on this paper has Autor telling us that robots may not take our jobs, but they will cut our pay. That isn't the story as I see it. Technology always devalues some jobs while increasing the productivity and wages of other jobs (that's why average wages are higher today than they were 100 years ago). New technologies like robots will not be different in this respect.
What's new and newsworthy in the Autor paper is the acknowledgement that his occupation story really cannot explain trends in wage inequality. Here's a figure from Autor's paper that Matt uses in his post.
Note that there is no job polarization in the period 2000-2007 and only very modest high end job growth in the period 2007-2012. The main story in these periods is the growth in the share of low-end occupations. Yet we continued to see a sharp increase in high end wages relative to everyone else.
This is a problem not only for the post-2000 period, but for the whole period. If high-end wages increase relative to other wages when their occupation share is not rising in the period 2000-2012, why would we think that the mix of occupations explains wage trends in earlier periods? And of course the sharpest increase in shares is for occupations at the bottom end of the skills distribution, the workers who have seen the sharpest drop in relative wages in the years since 2000 as well as the longer period since 1979.
In other words, there is no link between changes in occupation shares and wage trends, a point that my friends and colleagues, Larry Mishel, John Schmitt, and Heidi Shierholz, have been making for several years. These points in Autor's new paper appeared in their paper, Don't Blame the Robots. (Autor was a discussant of an earlier version of this paper at the American Economic Association meetings in 2013, although it is not cited in his new paper.)
Anyhow, given the eagerness with which the punditry embraced Autor's hollowing out of the middle story, the fact that he has now moved away from it should be big news. This means that the economics profession does not have a way to blame the growth of wage inequality on technology. And if it wasn't technology that gave us inequality, then we might start thinking about policy.