It's great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business.
However the Post told readers:
"To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector."
Since the bill doesn't actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill, the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment.
Catherine Rampell used her column to give readers a short quiz on government spending. There are a couple of questions that could use a bit further examination.
The first question asks readers:
"An elderly person receives about how much in federal spending for every $1 received by a child?"
The correct answer is $7 according to Rampell. There are two problems with this question. First, the most important government program for the young is education, which is prmarily a state and local expense. So it is wrong to simply focus on federal spending as a measure of public priorities.
More importantly, the main reason for this ratio is that we have a retirement program (Social Security) and a senior health insurance program (Medicare) that are run through the government. These are benefits that people have paid for during their working lifetime.
In the logic of the Rampell quiz we could say that something like $100 in federal spending goes to the very rich (the top 0.1 percent) for every $1 received by a child. This would be based on the assumption that 10 percent of their $6.4 million annual income comes from interest on government bonds. Of course the rich paid to buy these bonds, but the elderly also paid for their Social Security and Medicare. If we're ignoring that fact in talking about benefits from Social Security and Medicare, then we should also ignore it when talking about interest on government bonds. (According to the Urban Institute, the discounted value of Social Security benefits received by current and future retirees is slightly less than the taxes they paid into the program.)
The possibility of a privatized Social Security system demonstrates the illogic of Rampell's quiz. Suppose we required that workers pay an amount equal to their current Social Security taxes into a private account which would then pay them a benefit comparable to their currently scheduled benefit. The situation of the elderly will not have been changed (ignoring the problems of a privatized system), but now we would not have the same inequality between federal payments to the elderly and the young.
There is also a serious problem with question 5 in which readers are supposed to answer there is a $127,000 difference, "between what you paid in Medicare taxes and what you can expect to receive in Medicare benefits." The problem with this description is that the gap is due to the fact that we pay health care providers about twice as much as they receive in other wealthy countries. In other words, people get back more in Medicare benefits than what they pay in Medicare taxes because are doctors are very rich (average earnings @ $250,000, net of malpractice insurance), drug companies are very rich, and medical supply companies are very rich. If we paid our providers the same as providers in Canada or West Europe then the value of benefits would be close to what people pay into Medicare in taxes. By the logic of question 5, every time we up what we pay doctors and drug companies, the elderly are better off.
The NYT had an interesting piece on the progress of high-speed rail under President Obama. As the headline tells it, we've spent $11 billion without all that much to show.
Just in case readers didn't know offhand, the federal government has spent roughly $550 billion on transportation over the last six years, so spending on high speed rail would be roughly 2.0 percent of total transportation spending. If you think this spending has been driving up your tax bill, this comes to roughly 0.05 percent of total federal spending over the last six years.While it would require a careful analysis to make a full assessment of whether the money devoted to high-speed rail has produced good results compared to alternative uses it would have been helpful to express this spending in a way that would be meaningful to most readers.
Involuntary part-time employment has fallen by 670,000 over the last year, however it's still up by almost 3 million from its pre-recession level. While there would seem to be a very simple and obvious explanation for this one -- weak demand in the economy -- you can't employ many people saying the obvious. Hence we see a lot of nonsense in the media on the topic.
The latest installment comes to us from McClatchy News Service. The story is that the problem is skills and employer sanctions in Obamacare.
"One reason is a gap in the kinds of skills needed to find work in an increasingly technological workplace. Many employers also remain uncertain about the economy and hesitant about deeper financial commitments.
"And hiring part-time instead full-time employees is one way that some businesses are getting around the costs of a mandate in the health care law that requires employers with 50 or more full-time workers to provide insurance coverage beginning in January."
Let's see, the problem is a gap in skills. So employers have those full-time jobs out there, the problem is that workers just don't have the skills needed to fill them.
Let's assume this is true. Imagine you're one of those frustrated employers. You have all this demand for your service or product, but the dolts coming through your door just don't have the skills needed for your increasingly technological workplace. What might you do to solve this problem?
That's right, you could raise wages. This way you would pull away the workers who have these skills from your slow moving competitors.
There is a problem here. We don't have any major sector of the economy with rapidly rising wages. (Yes, North Dakota has rapidly rising wages and it employs about 0.3 percent of the workforce.) This indicates that we either don't have a skills gap or if we do it exists primarily among employers who don't understand how labor markets work.
A piece of data that doesn't fit well with the skills gap story is that the sector with the most rapid growth since the downturn has been the leisure and hospitality sector, which has added 1,120,000 jobs (total employment in all other sectors together is still below the pre-recession level). This sector is not generally considered to be at the center of the technological revolution. It also has an averagework week of 25.1 hours.
The Obamacare part of the story also doesn't fit the data. Employers would have thought that the employer sanctions applied for the first half of 2013 until the Obama administration announced a waiver in July of that year. During this period there was a modest increase in the share of the workforce working 25-29 hours, just under the 30 hour cutoff for the sanction. However this increase was totally at the expense of the share working less than 25 hours. The portion of the workforce putting in more than 30 hours a week actually increased.
In short, there is zero reason to believe that the increase in involuntary part-time employment has anything to do with either a skills gap or Obamacare. There is a simple explanation based on inadequate demand since we haven't filled the gap created by the collapse of the housing bubble. Unlike the more complicated explanations, this one fits the data.
There is a widely believed, but largely silly, view that rising inequality is the result of technology and globalization. NPR gave us an illustration of how silly this view is in a segment on plans in California to reduce the duration of medical school from four years to three years.
The ostensible motivation was to help address a shortage of primary care physicians. The reason why the piece is relevant to the larger issue of inequality is that it never once mentioned the possibility of bringing in more doctors from other countries. Doctors in the United States earn on average twice what their counterparts do in other wealthy countries. Since we have no notable differences in health outcomes, the implication would be that our doctors are of no better quality on average than those in Europe and Canada.
This would suggest that there is a vast pool of doctors who could benefit from coming to the United States and working for more money than they would receive in their home country. The pool of potential doctors is even larger if we include doctors from developing countries who could be required to train to U.S. standards. To ensure that developing countries benefit as well, we could repatriate tax revenue from expatriate doctors so they can train two or three doctors for everyone that comes here. (If you plan to complain that this policy hurts developing countries read the last sentence as many times as necessary to understand it.)
What is striking is that the issue of bringing in more doctors from other countries never got mentioned in this piece or in other new stories that raise the question of doctor shortages. Bringing in immigrant workers is raised all the time in other contexts such as alleged shortages of nurses, STEM workers, and farm workers.
The fact that immigration is not discussed in the context of a doctor shortage has nothing to do with inevitable processes of globalization or technology. It has to do with the power of doctors relative to other workers. Doctors are able to prevent their wages from being driven down by foreign competition; other workers have less power. It really is that simple.
Addendum: The above comment is not entirely fair to NPR. Planet Money once had a segment in which I discussed the possibility of bringing in more foreign doctors as a way of saving money on health care.
I see from comments that folks have noted the number of residency slots as the source of the limit on the supply of doctors. There are two points to be made on this. First, this rule is a textbook protectionist restriction. The requirement that people have to do a residency in the United States did not come down from the heavens, it was imposed as a way to restrict the number of doctors.
This gets us to the second point. The number of slots was cut back in 1997 at the insistence of the A.M.A. and other doctors' organizations because they said there were too many doctors and it was driving down their pay. So the pieces of the puzzle all fit together easily.
Students learn in introductory economic that Y = C+I+G +(X-m), which means that GDP is equal to the sum of consumption, investment, government spending and net exports. Those who remember their intro econ are not surprised to see that Italy has slid back into recession for the third time since the 2008 crisis.
Unfortunately simple economic logic does not find its way into the NYT article on the weakness of Italy's economy and much of the rest of the euro zone. The basic story is straightforward. Since 2010 the European Union has been demanding that countries in the euro zone reduce their budget deficits. This means cutting government spending and/or raising taxes. Lower government spending directly reduces demand in the economy. Raising taxes indirectly reduces demand by reducing disposable income, and thereby reducing consumption. (There is a supply-side effect from the change in incentives, but this is in almost all cases much smaller.)
In short, the European Union has been requiring that many of the countries in the Euro zone reduce demand in their economy. There is no obvious mechanism to replace this lost demand. If Italy, Spain, and other countries flirting with recessions had freely floating exchange rates it would be possible that the decline in the value of their currencies would lead to an increase in net exports (a lower valued currency would make their exports cheaper and imports more expensive), but since they are in the euro zone this route is not possible, except insofar as the euro falls against other currencies.
The high unemployment caused by the European Union's polices can have a modest stimulatory effect insofar as they push down wages in these countries. This can improve their competitive position relative to Germany and other countries with stronger economies, but this process is likely to be very slow, especially with inflation running at a very low rate in Germany.
In short, there is no plausible story whereby the countries of southern Europe can expect to replace the demand lost from the deficit reduction demanded by the European Union. The article should have at some point mentioned that the recession in Italy is pretty much exactly what most economists would expect from the European Union's austerity policies, just as physicists expect that when we drop a hammer it falls.
Yes, that is what he said according to the Washington Post. The context was a business summit involving U.S. and African business people and African heads of state. Immelt was complaining that the reauthorization of the Export-Import Bank is being seriously debated Washington.
The Bank makes or guarantees around $35 billion in loans, with the vast majority of the money going to large companies like GE, which Immelt heads. The Bank effectively is allowing these companies to get loans at below market interest rates, adding billions of dollars to their profits each year.
According to the piece Immelt complained:
"There’s a lot of things to be critical about big businesses, and there’s a lot of things that don’t work in government, but exporting is not one of them and the Ex-Im Bank is not one of them, ... And the fact that we have to sit here and argue for it I think is just wrong.”
It is also worth noting that article misled readers by saying:
"some Republicans and conservative groups say the bank should be allowed to die, claiming that it doles out corporate welfare and engages in crony capitalism."
There are also many people who are neither Republicans nor conservatives who do not think it is an important role of government to make people like Jeffrey Immelt even richer.
That one should be obvious, but for some reason almost no one ever says it. This is why it is very nice to see Eduardo Porter's piece making the point in the NYT today.
The basic point is probably too simple for economists to understand, but if we have 20 percent fewer people in 2050 than in a baseline scenario, then they all can emit 20 percent more greenhouse gas (GHG) emissions in that year and have the same amount of total emissions. Alternatively, if we have the same amount of per capita emissions, we will have 20 percent less total emissions.Restraining population growth is not going to solve the problem. We have to sharply reduce the amount of GHG emissions per person, but reaching whatever targets we set will be much easier with a smaller population.
It is remarkable how frequently news stories decry evidence of slowing population growth or shrinking populations as implying some sort of catastrophe. This is nonsense. It simply implies a tighter labor market with a rising ratio of capital to labor. In this scenario, workers switch from low productivity jobs (e.g. restaurant work, house cleaning, and retail clerks) to higher productivity jobs. This is a problem for the people who want to hire cheap labor, but will likely be seen as good news by almost everyone else.
In an article on corporate inversions (relocating their official headquarters to another country) the Washington Post told readers:
"the potential costs to the U.S. treasury are enormous. One measure, by the congressional Joint Committee on Taxation (JCT), suggests that the nation stands to lose nearly $20 billion in tax revenue over the next decade. Former JCT director Edward Kleinbard said he thinks the potential loss is much higher."
For those wondering how big a deal $20 billion over the next decade is, the Congressional Budget Office (CBO) projects total revenue over this period of $40.6 trillion, which means that the JCT estimate would imply a lose of revenue of 0.05 percent. To make another comparison, Medicare spending has been coming in far lower than projected in recent years. The most recent projections for net spending in 2015 is $524 billion. By comparison, in 2008 CBO projected that we would spend $609 billion in 2015, implying a saving of $85 billion in 2015 alone. Carrying through the differences in projected growth rates in the most recent projections with the growth rate projected in 2008, the savings from lower Medicare spending would exceed $1 trillion, making them more than 50 times "enormous."
This does not mean that the Congress and the president should not try to stop a practice that serves no economic purpose and will needlessly cost the government a substantial amount of revenue. It is also important to note that this gaming of the tax code imposes real costs on the economy. There are financial firms that will earn lots of money from this sort of financial engineering. The resources used by these firms (e.g. the labor of the accountants and lawyers engineering the switch) could instead be used productively. In effect. some people are getting very rich being paid to dig holes and fill them up again, in other words, doing work of no economic value.
This is a problem with all economic transactions that become profitable wholly or partly because of quirks in the tax code. For example, much of the wealth of private equity fund managers can be attributed to their exploitation of the deduction for interest payments. This deduction effectively subsidizes heavy corporate leverage, which is undesirable from an economic standpoint since it increases the risk of bankruptcy.
The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.
The Post's Wonkblog has a piece telling us that we should thank the recession for the slowdown in health care cost growth. I was one of those in the camp who thought the recession was responsible for the slowdown in health care growth in 2008-2010, however I think the explanation weakens as time goes on and costs continue to grow slowly.
The point is simple. Suppose that you have $10k slashed from your income in 2008 compared to its 2007 level. We might expect that you would spend less on health care and everything else in 2008. Suppose that your income in 2009 is again $10k below where you expected it would have been back in 2007. This happens again in 2010, 2011, 2012, 2013, and 2014. In other words, your income grows at more or less the same pace that you would have expected in each of these years, but the level in each year is 10k below what you had expected it would be in back in 2007.
In this story, which more or less captures the recovery, we might expect that the level of health care spending in these later years would be lower than had been projected in 2007, but the growth rate would be pretty much the same. The Post piece tells us that ain't so.
It cites two studies. Since one is behind a paywall, I will focus on the Brookings study which is freely available to the unwashed masses. This study finds a reasonably strong link between health care spending and GDP growth, however there is a long lag. The regressions for the growth of per capita health care spending use as independent variables current GDP growth and 5 lagged GDP terms using annual data. What is striking is that the strongest effect shows up on the fourth lagged term.
This is noteworthy in the current context because in 2013, the fourth lagged term gave us 2009 GDP growth, which was -2.8 percent. The fourth lagged term this year would give us 2010 GDP growth, which was 2.5 percent. The difference between these two implies a predicted rate of health care cost growth that is 1.6 percentage points higher in 2014 than in 2013. (This calculation uses the coefficients from column 1 of Table 1, the uptick in predicted cost growth would apply for all the regressions whose results are shown in the table, although the size would vary.)
The point is that if this study is the basis for expecting a sharp slowing of health care costs due to the weak economy, the period during which that would be true is over. Based on the study's findings we should be seeing substantially more rapid increases in health care costs in 2014 than we did last year. Thus far this doesn't appear to be the case, which may cause us to question the usefulness of this model for explaining recent patterns in health care cost growth.
Medgeek was good enough to send me the other study, a paper by David Dranove, Craig Garthwaite, and Christopher Ody, which I quickly read through. Looks to me like it provides good evidence that the recession was the major factor in reducing cost growth in 2008-2010. Their model shows that the recession would not lead to any further decline in cost growth in 2011 or later years (see Exhibit 3). In fact, the modest uptick in the employment to population ratio in subsequent years means that we should have been seeing somewhat above trend increases in health care costs in 2012-2014. So yes, there is good reason to believe that the recession was the major factor behind slower health care costs in the years 2008-2010. The continued slow growth over the last three and a half years requires another explanation.
Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud. It is the sort of thing that you can go to jail for, especially when it is done on a mass scale, as was the case in the financial crisis. Knowingly passing along fraudulent mortgages in mortgage backed securities is also fraud.
No important figure at any major bank was prosecuted for these activities by the Justice Department. As a result, virtually all of them benefited from their actions in the housing bubble years. They were better off as a result of having committed fraud than if they had obeyed the law. Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.
In spite of this reality, in an article on a Justice Department investigation of loan practice in the subprime auto loan market the NYT told readers:
"For the Justice Department, buffeted by criticism for not indicting a Wall Street executive, the mortgage investigations have helped polish the agency’s image as a tough enforcer as they have yielded a string of multibillion dollar penalties."
The article doesn't tell readers in whose mind the Justice Department's image has been polished. The recent settlements against banks can be seen as taking actions against a mob run company after the mob has sold it off, while all the mobsters continue to go free and live off the proceeds of their illegal dealings. That may seem tough to some people, but probably not anyone who has given the issue much attention.
Note: Typo corrected.
In the NYT Upshot section Neil Irwin had an interesting piece assessing which sectors are most responsible for the weakness of the economy. His culprits (in order) were residential invesment (housing), state and local government, durable goods consumption, business equipment investment, and federal spending. Irwin's methodology was to take the Congressional Budget Office's estimate of potential GDP (roughly 5 percent higher than the current level) and then assume that each component has the same share of this potential as its average of GDP over the two decades from 1993 to 2013. The difference between this hypothetical level of demand from a component and the actual level of demand from that component in the second quarter of 2014 is the basis for determining the shortfall.
I decided to do a similar exercise with a couple of minor differences. The table below shows the difference between each component's average share of GDP in the period from 1990-2013 (this was an accident -- misread Irwin's start point) and the average for the first two quarters of 2014. The two quarters are taken together because for many components a strong second quarter offset a weak first quarter. I have also lumped components together (e.g. the categories of consumption are all together). The categories in bold are the major components that together add to GDP.
|Percentage Point Change|
|Intellectual property products||-0.4|
|Change in inventories||-0.1|
|State and local||0.5|
Source: Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.5.
There are a few points that can be made from this table. First, the items that have fallen substantially as a share of GDP are government spending, which had roughly equal dropoffs at the federal and state and local levels, and residential construction. Net exports are also down as the import share had grown more than the export share. Non-residential investment is at its average level for the 1990-2013 period. The big gainer in shares is consumption, which had a 2.3 percentage points larger share of GDP in 2014 than its average in the prior period.
A New York Times article on New York City's pension funds implied that its assumed rate of return going forward is too high based on past returns over a highly selective period:
"But excessive optimism can lead to financial disaster, because regular shortfalls could ultimately leave the city unable to fulfill its required payouts. For years, the investment return expectation was set at 8 percent. In reality, the system’s returns have often fallen well short of that, earning just 2 percent on average from 1999 to 2009, for instance."
It should not have been surprising that returns would be well below 8 percent in a period that started in 1999 when the price to trend earnings ratio in the stock market was close to 30. The funds should have adjusted their return projections downward in line with the unprecedented run-up in the stock market.
On the other hand, the fact that it is possible to find a year where the market has slumped badly and thereby provided very low returns is completely irrelevant to the a pension fund that in principle can exist forever. It had no need to cash out large amounts of its holdings in 2009, nor is there a plausible scenario in which it would. Of course returns have been far above the 8 percent average in the years since 2009, as the piece notes.
Given this reality, it is entirely reasonable for pensions to use the expected rate of return on their pension assets as the discount rate for future liabilities. This would lead to the smoothest flow of funding. The alternative risk-free rate which is advocated by this article (it uses it in the main chart) would effectively have pensions pre-fund their obligations so that future payments would be much lower relative to revenue. This would be equivalent to building up a large account so that the police or fire department could be paid out of the interest. No policy experts would advocate such an approach.
The piece also misleadingly blames pensions for cutbacks in city programs;
"Already, the growing sums consumed by the pension funds have forced officials to scrimp on certain programs or abandon them, said Marc La Vorgna, a press secretary during Mr. Bloomberg’s administration. One casualty was the Advantage program, which helped homeless people move out of shelters and into apartments. It was eliminated in the Bloomberg administration."
It is equally accurate to say that these programs were only possible (assuming no other revenue or spending cuts) because the city wasn't meeting its obligations to the pension funds. In other words, rather than paying for possibly worthwhile programs, the city was taking the money from its workers' pay in the form of their pensions. It seems more than a bit misguided to blame the pensions for putting an end to this practice.
The points the article makes on the needless cost of investment advisers and questionable returns from private equity investments are well-taken.
I see that Gary Hufbauer and Cathleen Cimino have responded to my earlier post criticizing their colleague Adam Posen's Financial Times column touting the wonders of trade. They cover a lot of ground in their response, but I will just address two main points:
1) The pattern of trade that we have put in place over the last three decades has been a major factor reducing the wages of most of the work force (the 70 percent that lack college degrees).
2) The large trade deficit that we have at present is costing the country millions of jobs. If we eliminated the deficit, the direct and indirect effect would lead to roughly 6 million additional jobs, enough to bring the economy back to full employment.
On the first point, Hufbauer and Cimino (HC) focus largely on the impact of NAFTA. Certainly the impact of NAFTA would be considerably less than trade more generally since Mexico only accounts for about 8 percent of our imports and only about 60 percent as much as we import from China. In my column I was referring to the impact of trade more generally on wages, following Posen's piece which was a diatribe about progressives and trade.
While HC are dismissive of the idea that trade can have much negative impact on wages, it is not necessary to look far to find evidence of this effect. Lindsey Oldenski's, whose work is cited by both Posen and by HC, recently wrote a paper which has the following in the abstract:
"I find that offshoring by U.S. firms has contributed to relative gains for the
most highly skilled works and relative losses for middle skilled workers. An increase
in offshoring in an industry is associated with an increase in the wage gap between
workers at the 75th percentile and workers with median earnings in that industry,
and with a decrease in the gap between workers earning the median wages and those
at the 25th percentile. This pattern can be explained by the tasks performed by
workers. Offshoring is associated with a decrease in wages for occupations that rely
heavily on routine tasks and an increase in wages if the occupation is nonroutine and
communication task intensive."
I referred to work by David Autor, which also finds a substantial negative impact of trade on the wages of less educated workers as well as a recent analysis by Paul Krugman that suggested the expansion of imports from China likely has a large negative impact on the wages of less-educated workers. At this point, the fact that trade has had a negative impact on the wages of a large segment of the U.S. workforce really should not be controversial. The question is the size.
The NYT tells us the good news on the cost of giving people Sovaldi for treating Hepatitis C. First, the annual costs are likely to fall in the years ahead as the backlog of people with the disease are cured and the numbers needing treatment declines sharply. Second, new effective drugs will come on the market and compete with Sovaldi, driving the price down.
In a context where the government gives Savaldi a patent monopoly it is good to have multiple drugs that can provide competition. However from the standpoint of the efficiency of the drug development process this implies an enormous amount of waste.
Once an effective treatment for Hepatitis C has been developed, there is little medical benefit in having a second or third effective treatment. The resources to develop these alternatives to Sovaldi could have been much better utilized researching treatments for diseases which do not presently have a cure. However the incentives provided by the massive patent rents being earned by Gilead Sciences (the patent holder for Sovaldi) give a huge incentive to other companies to carry through duplicative research. If anyone cared about efficiency in the health care system this point would be widely publicized.
The "hard to get good help" crowd continue to dominate reporting at the Washington Post. An article on Japan's efforts to facilitate women returning to jobs after childbirth told readers:
"Japan is sitting on a demographic time bomb: With its low birth rate, the population is on track to shrink 30 percent by 2060, at the same time 40 percent of its citizens will hit old age."
There is no time bomb. Japan, like most countries, has seen an increasing ratio of retirees to workers. This has been going on for a century. This increase has been associated with rising living standards because of increases in productivity. By all projections, productivity in Japan will be vastly higher in 2060 than it is today, which means that both workers and retirees will be able to enjoy higher living standards even though there will be a lower ratio of workers to retirees.
As labor markets tighten in Japan, workers will go from less productive to more productive jobs. This will mean that people who want workers for menial jobs such as cleaning their house or tending their garden will have to pay more money. This is bad news for them, but it does not amount to a time bomb for the country.
Zachary Goldfarb has an interesting analysis of trends in before and after-tax income inequality in the Obama years. However he is mistaken in attributing the rise in before-tax inequality to the market rather than deliberate policy choices.
For example, the big banks still exist today because the government had a policy of saving them from the market. They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome. (The financial sector also profits by being exempted from taxes that apply to other industries.)
Globalization has increased inequality because of the way the government structured trade. It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.
In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies. The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy. Patent monopolies transfer hundreds of billions of dollars a year to patent holders, who are overwhelming high-income households.
Finally, by running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people. We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.
In short, there are a whole list of easily identifiable policies that have fostered the large upward redistribution we have seen in the last three decades. It is not just the market.
A New York Times article on new economic data from the euro zone noted a 0.1 percentage point rise in the unemployment rate in France. It told readers that this rise (which is almost certainly not statistically significant):
"is likely to bolster concerns that France is stuck in an economic rut and politically incapable of making changes to labor rules or putting in place other overhauls needed to improve economic performance."
There is no one quoted making this claim, it is simply an assertion of the article. In this context, it is worth noting a piece in the NYT Upshot section by Justin Wolfers, which was also highlighted in Paul Krugman's column today. Wolfers noted the nearly unanimous view among the economists surveyed by the University of Chicago's Initiative in Global Markets that President Obama's stimulus created jobs and that it was more than worth its cost.
In the economics profession there is not much dispute that additional government spending in a depressed economy will lead to more jobs and growth. However, this view appears to have no place in the NYT's reporting on Europe's economy, instead we get unattributed assertions about bolstering concerns.
The NYT gave us a prime example of frat boy budget reporting today, presenting readers with really big numbers which mean almost nothing to any of them. The article referred to the Senate passage of bills providing funding for veterans health care and transportation. It told readers:
"Prompted by the long waiting lists at veterans’ health centers and the bureaucratic efforts to hide them, the $17 billion bill aims to clean up the scandal-scarred Department of Veterans Affairs by granting the agency’s secretary broad new authority to fire and demote senior executives.
"It would also authorize the leasing or construction of 27 new health facilities; and set aside $5 billion to hire doctors, nurses and other health care providers, and $10 billion to pay for veterans’ care at private and public facilities not run by the department."
Anyone know how large a share of the budget $17 billion is? Will it bankrupt our kids? Are the $5 billion for hiring doctors and $10 billion for care at private facilities in addition to or part of the $17 billion? Is this for one year or multiple years?
(The cost is approximately 0.45 percent of annual spending. The spending on doctors and private care is part of the $17 billion. It seems to cover multiple years [reducing its share of spending], but a quick look at the summary doesn't make the time period clear.)
The article also told readers:
"The Senate bowed to the House, which had approved an $11 billion measure financed largely by a sleight of budgetary hand that avoids any tax increases. Under the maneuver, known as “pension smoothing,” corporations will be allowed to set aside less money for pensions, which will increase profits and raise business tax receipts."
The $11 billion comes to 0.3 percent of annual spending. This spending also covers multiple years, although the time period is certainly not clear from this article.
Anyhow, this should be really good one for the fraternity of budget reporting. It provides virtually no information to readers but apparently meets the quality standards of the NYT.
In a New York Times column, Boston University economist Larry Kotlikoff told readers why we should not use infinite horizon budget accounting. Kotlikoff showed how this accounting could be used to scare people to promote a political agenda, while providing no information whatsoever.
For example, after telling us how much money his 94-year-old mother is drawing from Social Security and a widow's benefit from his father's job he ominously reports:
"you’ll find that the program’s unfunded obligation is $24.9 trillion 'through the infinite horizon' (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government."
Are you scared? Hey $24.9 trillion a really big number. That's more than even Bill Gates will see in his lifetime. Does it mean our kids will be living in poverty?
Not exactly. Kotlikoff could have pulled a number from the same table in the Social Security trustees report to tell readers that the unfunded liability is equal to 1.4 percent of future income. If we just restrict our focus to the 75-year planning horizon (sorry folks, we don't get to make policy for people living 100 years from now), the shortfall is 1.0 percent of GDP.
That's not trivial, but it is considerably less than the combined cost of Iraq and Afghanistan wars at their peak. Furthermore, if we go out 40 years and assume that our children get their share of the economy's growth (as opposed to a situation in which it all goes to Bill Gates' kids), their before tax income will be more than 80 percent higher than it is today.
This means that even if they pay 2-3 percentage points more in Social Security taxes to cover the cost of their longer retirements (they will live longer than us), they will still have incomes that are more than 70 percent higher than we do today. Are you scared yet?
The release of new data from the Employment Cost Index (ECI) has the inflation hawks really excited. It showed that compensation rose by 0.7 percent in the months from March to June. This is a sharp uptick from the 0.3 percent rate in the months from December to March. This could be just what is needed to force the Fed to raise interest rates to slow the economy and keep people from getting jobs. That's pretty exciting stuff.
Before we start designating people to give up their jobs in the war against inflation, it's worth looking at the data a bit more closely. The 0.3 percent ECI growth reported for the winter months was actually unusually low. It had been rising at a 0.5 percent quarterly rate (2.0 percent annual rate) for the last four years. Fans of arithmetic can average together the 0.3 percent measure from the first quarter with the 0.7 percent measure from the second quarter and get (drum roll, please) ....... 0.5 percent.
In other words, the 0.7 percent rise in the ECI kept exactly on the growth track we have been for the last four years. It is not evidence of an uptick in the rate of wage growth (which would be good news).
Employment Cost Index
Source: Bureau of Labor Statistics.
Since there are people who see the rise in the second quarter ECI as a serious inflation threat, a few more data points may be helpful. The rise in the ECI for state and local employees was unchanged at 0.5 percent in both the first and second quarters. On the private side, the wage index went from a rise of 0.2 percent in the first quarter to 0.8 percent in the second quarter. The benefits index rose 0.3 percent in the first quarter, compared with 1.1 percent in the second quarter.
This leaves us with two possible explanations. The first is that the rate of increase in wages and benefits in the private sector slowed sharply in the first quarter and then accelerated even more sharply in the second quarter. Alternatively, the ECI under-reported wage and benefit growth in the first quarter. This means that if the trend growth was unchanged, we would find the sharp uptick in wage and benefit growth reported in the second quarter data.
When we look at a finer cut of the data it certainly seems consistent with the second story. For example, the increase in compensation for management, business, and financial occupations was 0.0 percent in the first quarter. It was 1.2 percent in the 2nd quarter. The increase in compensation for health care and social assistance industries was -0.3 percent in the first quarter. It was 0.6 percent in the second quarter. Does anyone believe that the world really looks like this?