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David Ignatius Hides Upward Redistribution Policies as Market Outcomes Print
Thursday, 05 January 2012 06:26

People are inclined to give much more legitimacy to market outcomes than policy outcomes engineered by governments. That is why there is a whole industry devoted to convincing people that the upward redistribution of income over the last three decades, which has given the bulk of economic gains to the One Percent, is really just the result of the natural workings of the market.

David Ignatius is one of the people who works in this industry. His Post column today urges readers to contemplate the awful thought that, quoting Francis Fukuyama:

"What if the further development of technology and globalization undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?”

It is very useful to the One Percent to pretend that their wealth and the near stagnation in living standards for everyone else is just the result of "the further development of technology and globalization." However this has nothing to do with reality.

Globalization has hurt the living standards of the middle class because it was designed to have this effect. Trade agreements like NAFTA were quite explicitly designed to make it as easy as possible for General Electric and other manufacturers to set up operations in the developing world and export their output back to the United States. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world.

We could have designed these deals to put our doctors, lawyers, economists and other highly paid professionals in direct competition with their much lower paid counterparts in the developing world. We could have constructed trade deals that remove all the obstacles that make it difficult for students in China, India, and elsewhere and to train to U.S. standards and then practice their professions in the United States.

If globalization had followed this path it would have produced enormous benefits to both the middle class and the economy as a whole. We would be able to get health care, university education and many other services provided by highly paid professionals at much lower cost.

In the same vein it is not technology by itself that has made some people very rich. It is largely government-granted patent and copyright monopolies that have made people rich. These polices are becoming increasingly inefficient mechanisms for supporting innovation and creative work.

In the case of prescription drugs alone, patent monopolies raise costs by more than $250 billion (@1.7 percent of GDP) a year compared to a situation in which drugs were sold in a free market. This amount is roughly 5 times as much as the amount that is at stake with extending the Bush tax cuts to the richest 2 percent of taxpayers. There are more efficient mechanisms for financing drug research however this topic is largely excluded from public debate.

The great fortunes that have been made on Wall Street come in part from implicit too-big-to-fail insurance from the government, exemption from fraud laws, and being granted special tax treatment. Even the International Monetary Fund has noted that the financial sector in the U.S. and elsewhere faces a much lower tax burden than other sectors.

If a town has twenty gambling casinos and 19 of them pay heavy taxes, then we would expect the 20th casino to enjoy much higher profits. This is a significant part of the story of the high pay and big profits on Wall Street.

There is a much longer list of ways in which the government redistributes income upwards. It is cute how people like Fukuyama and Ignatius pretend that the upward redistribution was just the natural workings of the market and then wring their hands over the unfortunate implications, but this is kids' stuff. Serious people need not pay attention to such nonsense.

 
Harold Meyerson Commits the NYT Mistake on German Unemployment Print
Wednesday, 04 January 2012 05:39
Meyerson was trying to make the point that Germany is doing better than the U.S. in spite of its generous welfare state and lower level of inequality. But he used the official German unemployment rate to make his case, telling readers that Germany's unemployment rate was 6.5 percent in October. The OECD reports that Germany's harmonized unemployment rate, which uses the same methodology as the Bureau of Labor Statistics in the United States, was 5.5 percent in October. The OECD data makes his case even stronger. This is the same mistake made by the NYT today.
 
The New York Times Gets Germany's Unemployment Rate Wrong Print
Wednesday, 04 January 2012 05:22

The New York Times misled readers today by telling them that Germany's unemployment rate is 6.8 percent. This number is the official German measure of unemployment. It is not directly comparable to the U.S. measure of unemployment primarily because it counts people who are working part-time, but would like full-time jobs, as being unemployed.

There is no excuse for presenting this measure without clarifying the difference with the U.S. measure of unemployment. It is actually simple to get a measure that is comparable to the U.S. measure since the OECD publishes a harmonized unemployment rate series that uses a similar methodology to the Bureau of Labor Statistics. This measure shows that Germany's unemployment rate was 5.5 percent in October, more than a full percentage below the number reported by the NYT.

 
Why Does Charles Lane Contrast Pro-Growth Policies With Reducing Inequality? Print
Tuesday, 03 January 2012 08:07

Charles Lane used his Washington Post column today to imply that the presidential election will be a contrast between Mitt Romney pushing pro-growth policies and President Obama trumpeting reduced inequality. While Mitt Romney's campaign will undoubtedly describe the choice in this manner, what possible basis is there for someone not on Romney's payroll to frame the choice this way?

There is no clear trade-off between growth and inequality either internationally or in recent U.S. history. Many of the countries that are performing best at the moment, such Denmark, Sweden, and the Netherlands, rank near the top in equality of income distribution. Seriously troubled countries, like Greece, Portugal, and Spain have far more inequality.

In recent U.S. history, the economy performed best in the early post-war decades when income was much more equally distributed. The major economic point at issue between President Obama and Governor Romney is likely to be the fate of the Bush tax cuts for the richest 2 percent. When Reagan lowered taxes in the 80s we got the slowest decade of growth in the post-war era until we got the Bush tax cuts in the 00s.

It would be silly to claim that the relatively bad performance of the economy in 80s was due to the Reagan tax cuts or the awful performance in the 00s was due to the Bush tax cuts, but it would take a considerable stretch to argue that cutting taxes on the rich is in general associated with better growth. While lower tax rates do have a positive effect on incentives, a large body of research shows that the potential impact on growth is likely to be small.

In short, the choice in this election is between a candidate who wants to have lower taxes on the rich and either larger deficits or cuts to social programs and public investment and one who prefers higher taxes on the rich and fewer cuts to social programs and public investment. That is the way people not working for Governor Romney would describe the trade-offs. 

 
Impact of the Minimum Wage on Employment and Low-Income Families Print
Tuesday, 03 January 2012 05:57

Morning Edition had a piece on the minimum wage hikes that took effect in various states and cities at the start of the year. The piece included an interview with economist David Neumark who referred to research showing that a 10 percent hike in the minimum wage leads to a 1-2 percent drop in employment among minimum wage workers.

While there is research showing no job loss (as noted in the piece by David Cooper, an analyst at the Economic Policy Institute), it is worth noting what the 1-2 percent job loss number would actually mean. Minimum wage jobs tend to be high turnover. A reduction in employment of 1-2 percent would effectively mean that the typical minimum wage worker would spend somewhat more time between jobs rather than workers literally be throwing out of their jobs. In other words, it would mean that the typical minimum wage worker would get 10 percent more pay for each hour worked, but would work 1-2 percent fewer hours.

The piece also concluded by saying that a minimum wage hike would have little benefit for most low-income families because most workers with families are earning wages well above the minimum. It asserted that many of the workers helped by the increase will be teenagers in middle income families who work for spending money. In fact, an analysis by Heather Boushey and John Schmitt of the last national law raising the minimum wage found that 70 percent of the people who would benefit were over the age of 20.

 
Consumption Is Not Returning to Bubble Levels Print
Tuesday, 03 January 2012 05:04

The NYT did a piece on the prospects for consumer spending in 2012. It listed a number of reasons why spending would be "tepid." Actually, spending is not tepid, it is actually quite high relative to disposable income as noted by one of the sources in the article.

In the pre-bubble years, savings averaged more than 8.0 percent of disposable income. The saving rate fell sharply due to the wealth effects associated with the run up of stock prices in the 90s and house prices in the 00s. With this wealth now gone, it is reasonable to expect the savings rate to return to its former level, if not higher. 

With a savings rate near 4.0 percent, consumption is relatively strong. There is no obvious reason that it should pick up and many that it should fall back, most notably that the huge baby boom cohorts are approaching retirement with almost no savings.  

 
Indiana Governor Mitch Daniels Wants to Tax Workers Who Support Unions Print
Monday, 02 January 2012 22:04

The NYT reports that Indiana governor Mitch Daniels is pushing legislation that will require workers who support a union to pay extra money to support the cost of representing workers who don't want to pay for their representation. Under federal labor law, a union is required to represent all the workers in a bargaining unit, whether they opt to join the union or not. This means not only that all workers will receive the full pay and benefits negotiated by the union, but also that the union is required to represent workers who face any sort of disciplinary action.

Since the union is legally obligated to represent all workers in the bargaining unit, in most states workers are able to sign agreements with management that require all workers to pay for this representation. However, some states infringe on workers' freedom of contract and prohibit such agreements with management. These states require the workers who join a union to pay for the representation of workers who opt not to join.

This restriction on the freedom on contract, which passes under the euphemism "right to work" is being pushed by Indiana governor Mitch Daniels. According to the article, it is likely to be approved by Indiana's Republican legislature.

It would have been helpful if this piece had made a point of noting that this legislation requires workers who support a union to pay for the benefits received by the workers who opt not to join. It is also important to note that no one is ever required to join or pay for a union they don't like. As every libertarian knows, a person who doesn't like unions is completely free to work for an employer where workers are not represented by a union.

 
Robert Samuelson Oversells the Case for Economic Optimism Print
Monday, 02 January 2012 03:20

Last summer news reports were filled with ill-informed predictions of a double-dip recession. Now there seem to be many accounts that misrepresent recent economic data to make a case for substantially stronger growth.

Robert Samuelson makes some of the standard errors in outlining a case for optimism. (In fairness, the column also presents a case for pessimism.) For example, he touts the jump in housing starts reported for November, saying, "Housing construction was up 9.3 percent in November over October and 24.3 percent over November 2010."

The increase in starts reported in November was almost entirely attributable to a jump in starts reported for multi-family units. Multi-family starts are highly erratic and frequently have large month-to-month rises and falls. Starts of single-family homes were actually 1.5 percent below their November, 2010 level.

The piece also refers to a jump in pending home sales reported for November. This is a measure of contracts signed. The National Association of Realtors reports that many more contracts are now falling through than in the past, so this rise in contracts does not likely mean a corresponding rise in sales. (In this vein, purchase mortgage applications are running even with or below their year ago level.)

The column also notes that recent construction levels have been well below the number needed to keep even with household growth. This is correct, but we are still far from making up for the overbuilding of the bubble years as indicated by the fact that the vacancy rate remains at near record levels.

(There have been some questions raised about the accuracy of the Census Department's data, claiming that it overstates the number of housing units in the country. Those raising the issue fail to note that measures of housing starts do not include housing units that were created by conversion of commercial or industrial property, such as an old warehouse being turned into condos. The rehabilitation of dilapidated units would also not be included in housing start numbers. There were many cases of both ways of adding to the housing stock during the bubble years. Also, it is important to note that the Census data is giving the percentage of units that are vacant. The critics of this measure must show how the Census methodology would lead it to overstate the share of units that are vacant.)

Finally, the piece notes that household debt levels have fallen since the beginning of the recession, implying that there could be a consumption boom as families are now better positioned to make major purchases. While debt is down, so is wealth. Households have lost close to $8 trillion in housing wealth and another $4 trillion in stock wealth. This would be expected to lead to a sharp drop in consumption through the wealth effect.

At present the saving rate is close to 4.0 percent. This is considerably above the near zero rate at the peak of the bubble, but well below the 8.0 percent average of the pre-bubble years. It seems more likely that, given this massive loss of wealth, the savings rate would be more likely to rise than fall, especially with tens of millions of baby boomers approaching retirement with the prospect of having almost nothing other than their Social Security to support them.

 

Addendum:

I see several comments that refer to the 2010 Census data and imply that it shows fewer vacancies than the quarterly survey numbers that I have been using. I am not sure what 2010 Census data these comments are referring to, but the ones I see show a higher vacancy rate than the quarterly data.

Table 1 of the 2010 Census publication on housing characteristics reports a total of 131,705,000 housing units. This is somewhat higher than the 130,517,000 units reported in the quarterly survey for the second quarter of 2010, the period in which most data collection took place. This implies that the survey had been understating the number of housing units, not overstating as some previous comments had claimed.

The 2010 Census data showed that 116,716,000 of these units were occupied for an occupancy rate of 88.6 percent. This is somewhat lower than the 88.9 percent occupancy rate shown in the quarterly survey data (Table 3, combining full and part-year occupancy). In short, if the 2010 Census is showing us that the quarterly data is understating occupancy and overstating vacancies, I'm not finding it in this publication. 

 
Trumping Incomplete Models on Financial Speculation Taxes Print
Monday, 02 January 2012 03:00

An NYT article on changes in governance rules in the European Union (EU) referred to the United Kingdom's opposition to a financial speculation tax supported by other members of the EU. The article noted that the UK cited a study done by the European Commission that found such a tax could lower GDP by 1.76 percent.

It is worth noting that this projected drop in GDP was derived from a model was intended as a work in progress, not a well developed forecasting technique. This model did not incorporate potentially beneficial effects of a tax such as diverting resources from the financial sector to more productive sectors of the economy.

The model also has several implausible implications. For example, it implies that much of the productivity growth in the last three decades was attributable to the decline in transactions costs in financial markets. This is not a factor in standard growth models, nor do any official projections assume a slowdown in productivity growth based on the fact that it will be impossible for transactions costs to decline as much in the future as they did in the past (because they are so close to zero already). The model also implies that the UK could raise its GDP by almost 10 percent if it eliminated the 0.5 percent tax that it imposes on stock trades.

 
Non-Payment of Credit Default Swaps on Greek Debt Print
Monday, 02 January 2012 02:48

Gretchen Morgenson noted the fact that credit default swaps (CDS) on Greek debt are not being paid off despite the fact that many investors are only getting 50 cents for each dollar of debt. This issue is a bit more complicated than presented in the column.

Major European banks essentially had their arms twisted to "voluntarily" accept a partial write-down on Greek debt. The ruling on the swaps hinged on the fact that no one who held Greek debt did not actually get a payment that they were expecting. The argument was that when the Greek government failed to make a payment, then they should move to collect on their credit default swaps.

This outcome suggests that CDS may not provide as much protection as their purchasers had expected. It also suggests that CDS may not be a good way to speculate on the prospect that a government will face a debt crisis.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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