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.

 

Addendum:

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
  Average 1990-2013
  Minus 2014
Consumption expenditures -2.3
Durable goods 0.7
Nondurable goods -0.1
Services -2.9
Nonresidential investment 0.0
Structures 0.0
Equipment 0.4
Intellectual property products -0.4
Residential 1.1
Change in inventories -0.1
Net exports 0.3
Exports -2.7
Imports -3.0
Government 1.1
Federal 0.5
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 fi nd that o ffshoring 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 off shoring 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. Off shoring 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

ECI-2014-2

                                                  Source: Bureau of Labor Statistics.

 

Addendum:

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?

 

Yes, what else is new? The immediate topic is Gene Steuerle's new book, Dead Men Ruling (reviewed here). The basic story, taken from the book, is that commitments made in the past, specifically Social Security, Medicare, Medicaid and interest on the debt, are taking up an ever larger share of the budget. This means that in the decades ahead people will have little say in how their tax dollars are spent, since they have already been committed by prior generations of "dead men."

There are several problems with this story. First, categories of spending are not the only way in which past generations obligate future generations. Military actions and tough on crime laws also impose large burdens on future taxpayers. For example, when the U.S. went to war in Iraq it not only committed itself to many decades of payments to veterans, included many who were wounded or disabled, but it also implied future commitments to the region. While the country may be able to back out of these commitments, politicians will often be reluctant to do so. 

In the same vein, tough on crime measures, such as three strikes laws, can mean that we will have to support a large prison population for decades into the future. (It can also mean that people spend their life in jail for petty offenses.) There is little obvious basis for highlighting the spending committed by social programs while ignoring spending committed by military actions and harsh criminal penalties.

A second problem with the logic here is it implicitly assumes that the revenue is available independent of the spending. This is almost certainly not true, especially in the case of Social Security. Under the law, Social Security taxes can only be used for Social Security spending. There is also reason to believe that people view Social Security taxes as different from other taxes. The National Academy for Social Insurance recently did a poll which found that a majority of people would be willing to pay higher taxes if it was necessary to avoid a benefit cut. The fact that taxes and spending are linked both in law and the public's mind means it is misleading to include Social Security revenue in the denominator of money available to spend. It isn't. (This would be explicit if we privatized Social Security.) This means that the amount of taxes that are actually up for grabs is much less than Lane-Steuerle say, and the portion committed by dead men for social insurance is considerably less.

This brings us to the other side of the ledger, Medicare and Medicaid. We spend more than twice as much per person for our health care as people in other wealthy countries. This should not be something we take for granted for all future time. After all, our political leaders are not that much more corrupt and incompetent than those in other countries.

If we paid the same amount for health care as people in other countries it would free up large amounts of revenue. However this would mean going after our doctors, the drug companies, and the medical equipment manufacturers, all of whom pocket close to twice as much as their counterparts in Europe and Canada. Of course this means going after powerful interest groups. That is not a popular position in Washington and certainly not at the Washington Post. (It should be noted that the Post gets large amounts of advertising revenue from drug companies.)

So the real question raised here is whether we look to cut benefits for seniors or whether we look to cut waste from the health care system. We know where Charles Lane and Post stand.

 

Addendum: I should also mention that patent monopolies also should be listed among the commitments made by dead men. In effect, a patent monopoly is a privately collected tax, where we allow patent holders to charge prices far above the free market price, but threatening competition with jail. Anyone looking at ways in which the government commits the resources of future generations should certainly count these obligations. For prescription drugs alone the excess price is around 2 percent of GDP (10 percent of the federal budget).

 

The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. The article begins:

"After suffering the sharpest contraction since the recession ended, the U.S. economy rebounded this spring, providing fresh evidence that the recovery is finally turning a corner.

"Government data released Wednesday shows the economy expanded at an annual rate of 4 percent during the second quarter. Consumers pulled out their wallets, businesses restocked their inventories and even the long-moribund housing market perked up.

"The strong report dovetails with recent improvements in the job market. The Labor Department is expected to announce Friday that more than 200,000 net new jobs were created in July, marking the sixth straight month it has hit that benchmark."

Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration. 

And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.

Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales added 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.

The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession. According to the Congressional Budget Office's estimates, the economy is still operating at a level of output that is almost $800 billion (@4.5 percent) less than potential GDP. It will not close this gap unless it grows more rapidly than its potential.

The comment about job growth being in line with GDP growth seems misplaced given that the economy added 190,000 jobs a month in the first quarter when the data showed the economy shrinking by 2.1 percent. The pace of job growth has been quite extraordinary given the weakness of the economy.

In his write-up of the new data on GDP, Wonkblog's Matt O'Brien noted that Gross Domestic Income grew considerably more rapidly (or more accurately, shrank less rapidly) than GDP in the first quarter. O'Brien sees this as evidence that the economy grew more rapidly than the GDP data indicate.

That is possible, but it is also possible that the GDI data are simply in error. In principle GDP and GDI should be the same. GDP measures everything that was produced based on the sales of goods and services. GDI measures all the incomes generated in the production process. As a practical matter, they never add to be exactly the same. The Bureau of Economic Analysis generally considers the GDP measures to be more accurate since its ability to measure the sales of goods and services is better than its ability to measure income.

However there are patterns to the divergences. When there are large run-ups in asset prices (i.e. stocks and housing), the GDI measure tends to show stronger growth than the GDP measure. There is a simple explanation as to why this would be the case. If a portion of the capital gain income from a run-up in asset prices ends up being recorded as ordinary income, then the larger the capital gains, the more income will be wrongly reported. (Capital gains or losses should not be counted in GDI.)

It is likely that this would be the case. While people pay lower taxes on long-term capital gains than ordinary income, they pay the same tax rate on short-term capital gains. This means that they have no reason to be careful to distinguish these capital gains from ordinary income on their tax returns. Since tax returns provide the ultimate basis for GDI data, insofar as income is misrepresented on these returns it will lead to a misreporting of GDI.

In fact, we find a consistent pattern where GDI grew more than GDP in both the stock and housing bubble and again in the last few years with the sharp run-up in stock prices. If the capital gains explanation is correct, it means that income in the national accounts is overstated. This means that the saving rates are substantially lower than the official data show. (Saving is defined as income minus consumption, if income is overstated by 2 percent, then the saving rate is overstated by 2 percentage points, which would be close to half in recent years.)

It  also means that we can take no special solace in GDI numbers that are stronger than GDP numbers. It's just a mistake.

A NYT article on the possibility of a default by Argentina seriously misrepresented the issues involved and the origins of the term "vulture" in reference to the funds involved in a lawsuit against Argentina. The article implies that the funds had been bondholders at the time of Argentina's default in 2001 who refused to accept the terms that were offered to bondholders following the default:

"Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, they are seeking $1.5 billion in repayment, including interest."

In fact, these funds bought up Argentine debt years after the default, paying a small fraction of its face value. Their intention was to use their political connections to get a favorable ruling from the courts, with the hope of being able to extract something close to the face value of the defaulted bonds from Argentina's government. This is exactly what "vulture funds" do. The term did not originate with Argentina, it dates back decades.

 

The NYT had an article reporting on the possibility that China will use anti-monopoly laws and other regulations to limit Microsoft's operations in the country. This raises an interesting issue. Presumably the Obama administration will step in to try to protect Microsoft's interests. Since the United States cannot just dictate policy to China, if it wins concessions on the treatment of Microsoft then it presumably will make less progress in other areas like getting China to raise the value of its currency against the dollar.

If negotiating over Microsoft leads to the dollar having a higher value than would otherwise be the case, it would mean that we have a larger trade deficit. This raises the question of how many steel workers and auto workers will lose their jobs to protect Bill Gates' profits?

It is great fun watching the establishment get so upset over the possibility that Boeings' the Export-Import Bank may not be reauthorized to issue more loans. Just to remind everyone, the Export-Import Bank issues the overwhelming majority of its loans and guarantees to benefit a small number of huge corporations. It is a straightforward subsidy to these companies, giving them loans at below market interest rates. (Yes, they are almost all paid back. This means that our financial wizards have discovered arbitrage -- the government borrows at a lower rate than anyone else so it can show a profit any time it lends to anyone else by splitting the difference in borrowing costs.)

Anyhow, today's fun is a column in the NYT (major media outlets have an open door policy to anyone who wants to argue to preserve the subsidies) by William Brock, a former senator and trade representative under President Reagan. Brock tackles head on the argument made by folks like me that only a small portion of our exports are subsidized by the bank:

"Opponents of the bank say that it supports just 2 percent of all exports. Still, 2 percent amounts to $37.4 billion of American products made by American workers in American plants. That translates into tens of thousands of jobs from every state in the country."

Wow, that's pretty compelling. But wait, suppose we ended the subsidies to Boeing. Would it never sell another plane abroad?

Fans of economics everywhere know that the end of the Ex-IM subsidies simply means that it would stand to make less money on each plane. For the most part this would be a story of lower profits, but there would be some reduction in exports, probably in the range of 10 to 30 percent of the amount being subsidized. That translates into $3.7 to $11.2 billion in exports that we would lose without the Ex-Im Bank.

Is that a big deal? We can compare this to another export number that has been in the news recently. A new study showed that because of the sanctions against Iran, the United States has lost $175.4 billion in exports since 1995, with the estimated losses coming to $15 billion in 2012, the latest year covered by the study. So the jobs at stake with the Ex-Im Bank are about 75 percent of the number that could be gained if we ended the sanctions against Iran. In other words, if we think the ending of loans from the EX-Im Bank would be a hit to the economy, then we must think the sanctions to Iran are an even bigger hit.

Of course as a practical matter, if we really wanted to boost exports we would go the free market route and push down the value of the dollar against other currencies. That is how economies with a trade deficit, like the United States, are supposed to adjust towards balanced trade in a system of floating exchange rates. However we don't see this adjustment because other governments buy up large amounts of dollars in order to prop up its value and preserve their export markets in the United States.

We could negotiate for a lower valued dollar, but that would hurt the profits of companies like Walmart that have arranged low cost supply chains in the developing world. It would also hurt major manufacturers like Boeing and GE who now do much of their manufacturing overseas.

So, we don't read much in the papers about reducing the value of the dollar. Instead we get an endless drumbeat of news stories and columns about the urgency of preserving the Ex-Im Bank. The public may lack the political power to stop the re-authorization, but we can at least enjoy the show.

 

Note: It is of course net exports that add jobs, not just exports. (We don't create jobs if we import a car from Mexico and export it to Canada.) In both the case of the Ex-Im Bank and the Iran sanctions there also is a question of imports, which is going unaddressed.

 

It's hard to know what else it could possibly mean, but the Washington Post dutifully reported to readers:

"The aging population is shrinking here, with the 2011 census showing a loss of about 1.5 million people since the 1980s. As the decline accelerates, by 2030 the government predicts a hole as big as 2.3 million workers in the German labor force."

In a market economy, wages adjust to equilibrate supply and demand. If there are fewer workers in Germany it means that workers will leave less productive sectors, like retail trade, restaurants, and hotels, and instead move to sectors in which they can get a higher wage. Many of the firms in the less productive sectors will go out of business.

This sort of transition happens all the time. It is the reason that half of the U.S. population is not still working in agriculture. In the context of a market economy it is not clear what it can mean to have a hole in the labor force. This would just mean that low productivity jobs cease to exist. So what?

The Washington Post told readers that New Jersey's public pension faces a shortfall of $40 billion. Just in case some readers aren't familiar with the size of New Jersey's economy over the next 30 years (the relevant period for pension planning), it will have a discounted state product of more than $12 trillion. This means that the shortfall is roughly equal to 0.3 percent of future GDP. This is considerably larger than the shortfall faced by most states.

A NYT article reported on a study from Russell Sage reporting that median household wealth was 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.

This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)


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