Michael Fletcher had a short piece highlighting the huge gulf in the economic status of whites and African Americans. While the piece rightly points out that there are no simple remedies to eliminate the gap, one of the charts suggests a policy that can make a huge difference.
The chart shows the overall unemployment rate and the unemployment rate for whites and African Americans. The unemployment rate for African Americans is consistently twice as high as the unemployment rate for whites. This means that a drop in the unemployment rate for whites of one percentage point would likely be associated with a drop of two percentage points in the unemployment rate for African Americans.
For African American teens the ratio is typically six to one. This means that a Federal Reserve Board policy of letting the unemployment rate fall as low as possible is likely to have large payoffs for African Americans, especially for young people trying to get a step up in the labor market. This may not eliminate the gap in status between whites and African Americans, but a commitment to a full employment policy may go a substantial distance in that direction.
The Wall Street Journal was good enough to give us "our entitlement problem for the next generation in one CBO chart." The featured chart shows the projected discounted cost of Medicare benefits compared with the discounted value of the taxes paid in. It shows that the former is around three times the latter for the baby boom cohorts.
While this may look like the baby boomers are getting a real bonanza on their health care the real story is that the doctors and the drug companies are getting a real windfall at the expense of the rest of the country. Our health care providers earn roughly twice as much on average as their counterparts in other wealthy countries. There is little evidence they provide anything in the form of better service for this money, they just get much richer.
The doctors and other providers are able to largely limit domestic competition through their control of licensing and the setting of health care standards. They also obstruct any efforts to open up health care to international competition for example by allowing Medicare beneficiaries to buy into the health care systems of other countries (yes, this would have to be negotiated -- sort of like the TPP) or by increasing the number of foreign trained doctors who practice in the United States.
Anyhow, if we paid the same per person amount for health care as people in other wealthy countries, most of the gap between the cost of Medicare and Medicare taxes would disappear. Therefore we can more accurately say this is a picture of our health care cost problem in one graph. The power of the health care providers makes it very difficult politically to fix this problem, but it should at least be possible to talk about it.
I see that I have to disagree with Brad DeLong again. Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector.
First off, in this piece Brad seems to want to attribute the worldwide downturn to the collapse of the housing bubble in the U.S. This seems more than a bit bizarre, since countries like Spain and Ireland arguably had bigger bubbles and bigger collapses than the U.S.
The collapse in the U.S. may have happened first and triggered the collapse in other countries, but this would only be in the sense that the U.S. collapse might have alerted lenders to the possibility that house prices can fall. Presumably the bankers would have discovered this basic economic fact at some point regardless of what happened in the United States.
The NYT had a piece on efforts to encourage doctors to assess the price and relative effectiveness of drugs when writing prescriptions for cancer patients. It notes that drug companies charge $10,000-$30,000 a month for many of the new cancer drugs. It then comments on the suggestion that doctors should take these costs into account in deciding treatment:
"Evaluating the latter cost would put doctors in the role of being stewards of societal resources. That is somewhat of a controversial role for doctors, since it might conflict with their duty to the patient in front of them."
It is important to note that doctors are not exactly in the role of deciding whether resources would be allocated to developing these cancer drugs, since that decision would have already been made. The resources devoted to developing the drugs have already been used at the point where doctors are deciding whether to prescribe them. The doctors' decision only determines how much drug companies will profit as a result of committing these resources.
This is an important distinction. Obviously profits will affect the drug companies decisions on future research, but at the point where the drug exists, it costs society very little to make it available to every patient who would benefit. It is only due to patent monopolies that we get such a sharp divergence between the price facing the patient or insurer and the cost to society.
An NYT article on the prospects of a deal between Greece and its creditors left this item off its list of the risks from Greece leaving the euro. If Greece were to leave the euro, its exports, most importantly tourism, would be hyper-competitive. This would likely lead to a huge increase in its business as travelers from Europe and the United States opt to visit Greece rather than other tourist destinations.
This could lead to the same sort of rebound that Iceland saw after its initial collapse. This would be hugely embarrassing to the I.M.F., the European Commission, and the European Central Bank, which have forced Greece to endure a depression and demand policies that will likely leave it with depression levels of unemployment for at least another decade.
This outcome will be especially painful for political leaders in countries like Spain and Portugal, both because they have imposed comparable depressions on their own populations and also because they will be directly hit by the loss of tourism to Greece. From their perspective, a successful Grexit would be the worst possible outcome.
Robert Samuelson used his column today to note the sharp rise in CEO pay. He ends up leaving it an open question as to whether the increase in the pay gap between CEOs and average workers, from an average of 20 to 1 in the 1960s to 300 to 1 at present, reflects the fundamentals of the market. In assessing this question, it is worth considering the incentives for the boards of directors that set CEO pay.
If a CEO wants another $1 million, a director is likely to make herself unpopular among her peers, many of whom are likely to be personal friends of the CEO, if she refuses to go along. Furthermore, if the CEO were to leave because they did not get the pay raise, and the company performed poorly (possibly because of random events having nothing to do with the CEO), the director who opposed the pay increase would be likely to see their position threatened.
On the other hand, directors almost never have their positions threatened as a result of overpaying their CEO. It is very difficult for disgruntled shareholders to organize to remove a director.
In this context, it would not be surprising if CEO pay continued to rise. With such asymmetric incentives, there is not the same sort of downward pressure on CEO pay as there is for auto workers or retail workers. Therefore, it should not be surprising that if gap in pay continues to increase.
Those are the two takeaways for most readers from his column today. Most of the piece is a condemnation of Greece's leftist government for what Will considers its lack of realism and ineptitude. Then he points out:
"Since joining the euro zone in 2001, Greece has borrowed a sum 1.7 times its 2013 GDP. Its 25 percent unemployment (50 percent among young workers) results from a 25 percent shrinkage of GDP. It is a mendicant reduced to hoping to “extend and pretend” forever. But extending the bailout and pretending that creditors will someday be paid encourages other European socialists to contemplate shedding debts — other people’s money that is no longer fun. ....
"It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money."
But the problem with Will's logic is that the borrowing was almost all done by much more centrist Greek governments, not the leftist government office that took office in Janauary. Similarly, the economic collapse happened under these centrist governments which were following a program designed by the I.M.F., the European Central Bank, and the European Commission.
It is therefore difficult to understand how this is a "socialist smashup." All the big steps toward disaster were taken by governments that were very much capitalist. Furthermore, the borrowing came from capitalists who lent money expecting a profit. While the ability of these capitalist bankers to assess the creditworthiness of borrowers may not have been very good, they have proved quite effective in using their political power. As was the case in the United States, they were protected from the worst fallout from their bad lending decisions through government bailouts.
The story of Greece, like the Wall Street bailout in the United States, can certainly be described as a "crony capitalism smashup." It only fits the bill of a "socialist smashup" in Will's imagination.
The usually insightful Matt Yglesias takes a big swing and a miss in his effort to explain why it appears that so many vacancies are going unfilled. He notes the rise in vacancies and also the increased period of time that employers are taking to fill vacant positions.
He then asks the obvious question as to why employers don't raise wages if they aren't getting qualified applicants. Remarkably, he accepts the argument that there may be no point in offering hiring wages since workers with the necessary skills do not exist.
This is nonsense. There are people in the country who have almost any conceivable skill needed by an employer. These people may not currently be unemployed, but that just means an employer needs to offer more money to pull the people with the necessary skills away from their competitors.
For example, if the Washington football team wants a top-notch quarterback then Dan Snyder will have to put tens of millions of dollars on the table to get someone like Peyton Manning or Tom Brady to move over from their current team. That is the way labor markets work. This means that if a software designer in Silicon Valley needs top quality engineers then he or she will have to pay enough money to get them to leave Google, Facebook, or wherever else people with the necessary skills might be working.
We are still not seeing rapid wage increases in any major sector of the economy. This implies that either there are not real shortages, just whiny employers, or alternatively we have employers that are so ignorant of the workings of the labor market that they don't realize they can attract more skilled workers by offering higher wages.
It's got to be pretty much one or the other; take your pick.
The NYT decided to survey what people in the other crisis countries think about the situation in Greece. The general theme appears to be that we toughed it out, now Greece should too. It would have been useful to include a bit of data on where these countries stand now. Per capita income and employment are all well below their pre-crisis level in all four countries mentioned.
This table compares the I.M.F.'s projections for per capita GDP and employment in 2015 with the 2007 level in each of the four countries. The last column shows the equivalent employment loss in the United States. For example, the employment loss in Ireland since the start of the crisis would be equivalent to losing 13.35 million jobs in the United States. The loss in Spain would be equivalent to losing 21.0 million jobs.
Gap from 2007 Level
Per capita GDP
This should give readers a better sense of the success to date of the austerity policies being promoted by the European Union and I.M.F.
The piece also wrongly asserts that Italy did not have austerity. This is not true. It went from having a structural budget deficit of 4.2 percent of GDP in 2009 to 0.3 percent in 2015. This would be equivalent to a reduction in the size of the annual deficit of roughly $700 billion in the U.S. economy. That is less of a reduction than in the other countries, but still a substantial amount of deficit reduction in a country experiencing a recession.
Note: The U.S. equivalent for the number of jobs lost in Ireland has been corrected in the text.
In a piece that attacks the AFL-CIO for opposing fast-track trade authority, Washington Post columnist Charles Lane told readers:
"President Obama, elected and reelected with significant majorities of the popular vote, believes that the American people would benefit if he gets authority from Congress to negotiate international trade agreements and then submit them to both houses for approval on an expedited basis."
It's interesting that Lane thinks he knows what President Obama believes. Most people only know what President Obama says. And sometimes politicians don't say what they actually think.
For example, it is possible that President Obama thinks that the Trans-Pacific Partnership (TPP) will be beneficial to the corporations who helped to negotiate the pact. He may also be expecting that these corporations will reward the Democrats with campaign contributions in 2016 if the TPP is approved. If this explained his actual motivations, it is unlikely that he would say so publicly, since it would not help to get fast-track or the TPP approved by Congress.
"Labor is waging this counter-majoritarian battle [against fast-track] in the name of 'working people,' who, it says, would otherwise face another wave of low-wage foreign competition like the ones purportedly unleashed by previous 'bad' trade deals.
"Labor leaders consider their moral authority axiomatic in this matter, even though they represent just 11.1 percent of the labor force."
The implication is that labor leaders should turn to people like Charles Lane to determine their stand on major issues since he believes they lack the moral authority to take a different position. It's an interesting position, but understandable from someone who can read the president's mind.
The NYT apparently is doing its part to try to push the Trans-Pacific Partnership (TPP). Today it ran a piece warning people in its headline "failure of Obama's Trans-Pacific trade deal could hurt U.S. influence in Asia." The piece presented the views of a variety of individuals who said the failure of the TPP would damage the standing of the United States in the region.
Remarkably the piece did not include the views of anyone who had a different opinion. This is remarkable because we know from the leaked chapters that there have been important objections to at least parts of the TPP from most of the countries in the deal. For example, all the countries disagreed with much of what the United States was pressing in the form of stronger and longer patent protection for prescription drugs. Australia objected so strongly to the investor state dispute settlement mechanism that they indicated that this provision would not apply to the country. (It's not clear that this is final.)
Surely the NYT could have found someone in these countries who thinks that negatives, like higher drug prices and an extra-judicial legal system that can over-ride laws passed at the national and sub-national level, over-ride any gains from the modest tariff reductions in the TPP. For some reason the NYT opted not to present the views of any opponents of the TPP, wrongly implying to its readers that everyone believes that the failure of the TPP would be a serious negative.
The piece also included the wonderful line:
"The White House and its Republican free-trade allies in Congress are searching for ways to revive a bill that would extend aid to workers displaced by global trade agreements."
The phrase "free-trade" is not accurate and does not belong in this piece.
The Washington chattering class is really upset that the Trans-Pacific Partnership (TPP) looks like it's going down. David Brooks pulls out all the stops today, using his NYT column to yell at "Tea Party" Democrats for not supporting the fast-track authority that would facilitate the passage of the TPP.
Unfortunately, Brooks was largely unarmed with facts when it came to the attack. To start, he tells readers;
"The North American Free Trade Agreement, for example, probably didn’t affect the American economy too much. But the Mexican economy has taken off. With more opportunities, Mexican workers feel less need to sneak into the U.S."
If the Mexican economy has taken off since NAFTA they managed to conceal this fact from the I.M.F. and other keepers of official statistics. Here is the path of per capita GDP in the United States and Mexico post-NAFTA.
Source: International Monetary Fund.
Developing countries like Mexico are supposed to have more rapid growth than rich countries like the United States. Instead the gap has increased by about five percentage points since NAFTA as growth in the U.S. has exceeded growth in Mexico since NAFTA took effect. (The chart shows growth in international dollars, not adjusted for inflation.)
Brooks also seems to be inventive in his assessment of patterns of immigration. According to the Migration Policy Institute the number of Mexican immigrants to the United States rose from 4.3 million in 1990 to 11.7 million by 2010.
Matt O'Brien treated us to a classic case of bad reasoning by economists. A survey of elite economists (you know, the type of people that couldn't see an $8 trillion housing bubble) found that the vast majority said that the official income data understated the increase in the standard of living for the middle class over the last 35 years.
The explanation for this view is that new goods like cell phones and the Internet have vastly improved our standard of living in ways that are not picked up in the data. O'Brien suggests a thought experiment that has been put forward by this elite group. Would you be willing to trade an income of $50,000 in 2015 for an inflation adjusted $100,000 income in 1980, knowing that you can only buy the goods and services available in 1980?
The implication is that most of us would say no, since it would mean giving up our cell phones, Ipads and Ipods, smartphone cameras, wifi, and all sorts of other neat things. This may well be true, but there are two reasons why the economists raising this point flunk cost of living 101.
The first point is a narrow one. These folks are upset that our price indexes don't have a way of picking up the benefits of new goods like television, refrigerators, and the polio vaccine. (Sorry, guess those are pretty old now. But the point is that important new goods are not new.) But good economists know that price indexes also don't pick up the cost of these new goods. To be specific, we can complain that the consumer price index doesn't pick up the gain from the wonders of a cell phone. That's true. But it also doesn't pick up the cost of buying the phone and paying for monthly service. (It picks up the change in these costs once they are included in the price basket, but not the initial cost.) With an important qualification that we will get to momentarily, we can assume the benefits are greater than the cost since people opt to buy cell phones, but that gap is much less than just counting the benefits alone, which it seems is how our elite economists view the issue.
The second point is that we adjust our society and living patterns around the technology we have. Ask someone who lived in the suburbs in the 1960s how they would feel living without a car. It would be pretty awful, but just 30 years earlier most middle class families did not have a car or think they needed one. To take a slightly more recent example, imagine living without air conditioning in the summer. Most middle class families did fifty years ago.
We have constructed a society that is built around cell phones and the Internet. Asking people to go without these items would be a real hardship because they have become integrated into their lives. Does this mean that we are better off in a society with these things than without? It probably does, but asking how our Internet/cell phone addict would do in a world without the Internet or cell phones is a silly question.
There is one more point worth mentioning. Our elite economist friends presumably don't want to believe that well-being is relative. This could be important because there is a much sharper gap between the living standards of the rich and famous in 2015 than in 1980. Some people may take this into account in their assessment of their well-being. In other words they may feel deprived to some extent because their living standards are so much lower relative to the rich than was the case in 1980. We know the elite economists don't want people to think like this, but some of the ignorant masses might anyhow. Maybe if they just took more economics...
Wow, it's the sharing economy, everything is new and different. Hey, they don't have to pay the fees that those stupid old taxi companies do, because you order them on the Internet.
Sorry to be a bit negative early on a Monday morning, but I was just reading in the Washington Post that Uber is arguing that it should not have to pay the same fees as traditional taxi companies to pick people up at airports. Uber says the fees are too high.
I have no strong opinion about the size of these fees, which are effectively a tax on taxi travel that is used to support the operation of the airport. However, there is no basis for Uber paying lower fees than their competitors in traditional taxi companies, even if it is cooler.
This is the sort of tripe that doesn't pass the laugh test as serious policy. There is much about the regulation of the taxi industry that is archaic and should be changed, but the goal should be a uniform system of regulation, not a system that leaves the traditional sector heavily encumbered by regulation and allows Uber to do whatever it wants.
It is of course ironic to be reading about this in a newspaper owned by Jeff Bezos, who became one of the richest people in the world through his ownership in a company that does not collect the same sales tax as its brick and mortar competitors. Its savings on sales tax collections almost certainly exceeds its cumulative profits since it came into existence.
That's what folks are asking after reading Peter Baker's "news analysis" that told readers the Trans-Pacific Partnership (TPP):
"was a way to leave behind a positive legacy abroad, one that could be measured, he hoped, by the number of lives improved rather than by the number of bodies left behind."
The discussion implies that the TPP is a way to pull together the countries of East Asia as allies. However, one of the main purposes of the TPP is to create stronger and longer patent and copyright protection. This will most importantly raise the cost of prescription drugs, but the prices of many other items will also rise due to increased protection.
We know that these increased protections were heavily contested by most of the other countries in the TPP due to the leaked chapters from Wikileaks which indicate where the countries disagree. It is difficult to see how making our trade partners in Asia pay more for drugs is a way to win their political allegiance. Ironically, insofar as higher drug prices keep patients from getting access to drugs, especially in developing countries, the TPP would be a policy whose impact could be measured by the number of bodies left behind.
I've been speaking and writing on financial transactions taxes for close to a quarter century. Most people don't find the concept that difficult to understand, but apparently Fred Hiatt does. In a column bemoaning the sidetracking of Obamanomics, Hiatt tells readers that Obama:
"has a targeted version of the left’s beloved financial transactions tax, too: a levy on the largest banks proportional to the riskiness of their liabilities."
Actually, the bank tax has nothing to do with a financial transactions tax. The bank tax is intended to compensate for the implicit subsidy given to large banks that markets view as too big to fail. Since investors assume that the government will bail the banks out if they get into trouble they are willing to lend to them at a substantially lower interest rate than would otherwise be the case. The tax is intended to offset this subsidy although the size of the tax proposed by Obama is an order of magnitude smaller than size of the implicit subsidy, which the I.M.F. recently estimated at $50 billion a year.
In contrast, a financial transactions tax is intended to reduce the excessive amount of trading in financial markets. While this trading uses economic resources, it contributes nothing to the productive economy. A recent analysis from the Bank of International Settlements found that countries with very large financial sectors, like the United States, experience slower growth. A financial transactions tax would go far toward reducing the amount of excessive trading in the financial sector.
The media seem to be getting better about referring to the Trans-Pacific Partnership as a "free-trade" agreement. Many articles now refer to it more neutrally as a "trade pact." The Washington Post sort of split the difference today in describing it as a "a sweeping free-trade and regulatory pact," but this still requires some further push back.
We know that the TPP will increase patent and copyright protections. These protections cover a large portion of the economy, most importantly prescription drugs, but also a wide variety of chemicals, tech products, and recorded movies, music, and video games.
We don't know how much trade barriers will be reduced by the TPP. (The deal is secret.) Since the United States already has trade deals with most of the countries in the TPP, it is unlikely that it will lead to a further reduction in the barriers with these countries. This means the TPP will likely only reduce the barriers with the remaining five countries which include Japan, with whom the barriers are already relatively low, and four countries with whom the U.S. has relatively little trade.
There is no basis for assuming that the reduction in barriers with this group of countries will have greater economic significant than the increase in patent and copyright protection. Therefore, the reporters who call the TPP a "free-trade" agreement are simply editorializing, expressing their support for the pact. They do not have any evidence to support this characterization.
Regular readers of the NYT opinion pages must really be wondering what is going on in China. Just a few days ago the paper ran a piece giving us the terrible news that robots are taking all the jobs. According to a column by Martin Ford, China is rapidly bringing robots into its factories, leading to massive displacement of manufacturing workers. Ford tells readers:
"Chinese factory jobs may thus be poised to evaporate at an even faster pace than has been the case in the United States and other developed countries."
This left us all wondering what China would do with all these workers displaced by robots. But today we discover that China is relaxing its one-child policy, not out of human rights considerations but because it doesn't have enough people:
"Something had to be done. China’s population has stabilized at around 1.4 billion, but people over 60 now make up more than 13 percent of the population, and the percentage of people 14 years of age and under shrunk at least 6 percent between 2000 and 2010, reaching a new low of 16.4 percent in 2013. The rapid decline of China’s fertility rate — which has plunged to 1.6 percent, way below the 2.1 percent replacement rate — could stunt the country’s future economic growth. The declining working-age population will no longer be able to support the increasingly older Chinese population."
Let's contemplate that last sentence for a moment: a declining working-age population won't be able to support a growing population of retirees. This is the sort of tripe that gets repeated endlessly by the folks who want to cut Social Security. Remember the robots? We don't need as many workers to support retirees today as we did 20 or 30 years ago because of productivity growth. That has always been true. The robots and other improvements in technology allow each worker to be more productive.
In fact, productivity growth has occurred at an incredibly rapid pace in China over the last three decades so there is no reason that retirees can't maintain the standard of living they had during their working years while still allowing future generations of workers to experience rapid increases in living standards. The people who can't understand this fact need to do some more homework in economics before they start writing op-ed columns on the topic.
The Wall Street Journal ran a piece headlined, "as minimum wages rise, small firms get squeezed." Most readers probably would expect a story of how small businesses are being hit by higher minimum wages. But the business that provides the framing for the story doesn't seem to fit the bill at all:
"Hannah Joseph dreams of bringing gourmet grilled hot dogs to food lovers coast to coast. But she now rules out owning any new restaurants beyond the two she and her husband currently operate in Indianapolis.
"The reason: high staffing costs, and growing competition for low-wage workers.
"'I don’t want to deal with more employees,' said Ms. Joseph, co-owner of King David Dogs, whose 10 or so staffers start at $7.50 an hour, 25 cents above the federal minimum."
As the piece notes, the minimum wage in Indiana is just the federal minimum of $7.25 an hour and has not been raised in six years. The restaurant apparently is not bound by the minimum, since it is already paying 25 cents an hour more than the minimum, presumably to attract and retain workers.
Insofar as Hannah Joseph is being forced to scale back her plans it seems likely that it is mostly the result of a poorly conceived business strategy. She apparently underestimated the cost of labor and presumably other expenses. That likely would have been the case even if no one was raising the minimum wage, unless the Fed threw the economy back into a recession with high interest rates.
The NYT has a fascinating piece on how a Chinese drug company appears to have developed a successful treatment for Ebola, the use of which is being threatened by U.S. researchers complaining about patent infringement. The basic story is that the Chinese company used information in a U.S. patent to help develop their drug, which appears to be an effective treatment for Ebola. The patent holders are now upset that the Chinese company is making their drug widely available to Ebola victims, in some cases to people who would otherwise be taking part in controlled clinical trials. (In a controlled trial, half of the people are given a placebo, which can be a serious issue when treating a disease with a high fatality rate.)
Anyhow, it is difficult to believe that progress would not advance more rapidly if researchers did not try to bottle up their findings with patent protection. This is the sort of protection that will be increased in the Trans-Pacific Partnership (TPP). The impact of this protectionism in raising drug prices and impeding scientific progress has not been considered in the widely cited analysis of the TPP's impact.
Economic reporting is far too focused on short-term fluctuations that often have little relationship to the underlying trend growth in the economy. Last fall this focus led to many celebrations of a turn around in the economy with many pronouncements that the United States was back on top in terms of growth.
The celebrations quickly turned to despair as bad winter weather led to a drop in GDP in the first quarter. There was much hand-wringing over why consumers were not spending their dividend from lower gas prices. (Somehow the hand-wringers never bothered to notice that consumption was at a near record high as a share of the GDP.)
This hand-wringing hit its peak earlier this month with this "letter to stingy American consumers" in the Wall Street Journal. In the letter the WSJ begged consumers to start spending again. Apparently they got the message retroactively. The Commerce Department reported today that retail sales jumped 1.2 percent in May, with April's data revised up from no change to an increase of 0.2 percent.
So it looks like consumers are again spending their cheap-gas dividend and the economy is safely back on its slow growth track. Needless to say, we will probably have another round of celebrations as people look at the strong growth in May and tout a new boom, forgetting that the cause is a bounceback from the winter weakness. At least it gives economists and economics reporters something to do.