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David Brooks Doesn't Want People to Focus on the 1 Percent Print
Tuesday, 31 January 2012 05:46

Even though the data on income show the top 1 percent of the population pulling away from everyone else, New York Times columnist David Brooks tells us that focusing on the 1 percent is a "distraction." He bases this assertion on, well absolutely nothing.

Brooks goes to tell readers that:

"the truth is, members of the upper tribe have made themselves phenomenally productive."

This is striking for two reasons. Since his upper tribe is the whole top 20 percent, much of this group that has become phenomenally productive has seen little benefit from their productivity. Wages for the second decile have risen over the last three decades, but not by very much.

The other part of the story is that this group has made itself phenomenally productive largely through its control of the political process. For example, it has used the political process to get an implicit government guarantee for too big to fail banks that can pay its top executives phenomenal amounts of money. It maintains protectionist barriers for doctors, lawyers and other highly educated professionals that allow their pay to soar relative to workers who must compete in the international economy. And it has garnered ever stronger patent protection that has shifted income from ordinary workers to those able to earn patent rents.

It was control over the political process that has allowed the 1 percent to profit at everyone else's expense. Their productivity, whether phenomenal or not, was secondary.

ABC and the Independent Are Terrified by the Prospect of Japan Getting Less Crowded Print
Tuesday, 31 January 2012 05:23

Japan is a densely populated country. As a result, housing is extremely expensive in its major cities. Its subway system is so crowded that Tokyo has people who push people into the subway cars to ensure that no space is wasted.

Given this situation, it was striking to see that the Independent report on Japan's "demographic crisis" and ABC News tell us about Japan's "dire picture." Their concern is that Japan's population is projected to shrink by about a third over the next 50 years.

While these news outlets might be terrified by the prospect that the Japanese will pay less for housing, it is not clear why the Japanese should have such concerns. The implication is that the increase in the ratio of retirees to workers will impose a devastating burden on the working population.

Those who know arithmetic don't share such concerns. Productivity growth in Japan has averaged almost 2.0 percent annually over the last two decades. At this rate, output per worker hour will be nearly 170 percent higher in 50 years.

This means that if retirees consume 80 percent as much as active workers, and the ratio of workers to retirees fall from 2.5 today to 1.8 in 50 years, then consumption per worker and per retiree can increase by 120 percent over this period, assuming no reduction in hours worked.

In fact, this would understate the actual gain in living standards since there will be fewer children to support and there will also be gains in living standards associated with less crowding. (Tokyo won't need to pay workers to push people into subway cars.)

In short, worrying about demographics might be a good way to create jobs in the current economic environment, it need not be a concern for serious people.


[Thanks to Keane Bhatt and Victor Silberman.]

Brazil’s Per Capita Income Did Not Grow by 200 Percent Over the Past Decade Print
Tuesday, 31 January 2012 05:05

By Mark Weisbrot

An article in Saturday’s New York Timesclaimed that Brazil had “tripled its per capita income over the past decade.”  In fact, Brazil’s real per capita income (per capita GDP) has grown by about 30 percent from 2001-2011.  

The article notes that “some of that increase has to do with its [Brazil’s ] overvalued currency”, but (1) even this cannot account for the vast difference between 200 percent and 30 percent, and (2) even if it all of this “growth” were due to currency appreciation, the measure used would still be wrong.  Brazilians earn and spend about 90 percent of their income in domestic currency;  the correct measure of their income growth is therefore in their own currency, adjusted for inflation. That has grown about 30 percent per capita over the decade.

Brazil would look like quite a different country today if it had really tripled its per capita income over the past ten years.

The article also presents a somewhat misleading impression of Brazil as compared with Argentina, which is common in the media, where Brazil “now flexes its economic muscle,” and “Argentina is the dean of the club of nations utterly obsessed with their decline” (an Argentine scholar quoted in the article).  Although the article notes that Argentina had a “robust recovery after defaulting on its debts,” the reader is left with the impression that Brazil has been an economic success story as compared with Argentina.

The chart below shows real per capita income in Argentina compared with Brazil (on a purchasing power parity basis).  It can be seen that, even though Brazil has greatly increased its growth rate since 2004, Argentina has pulled ahead so rapidly since in recent years that the gap has widened enormously.  Income per person is now about 40 percent higher in Argentina than in Brazil. Since income is much more unequally distributed in Brazil than Argentina, this income gap means an even wider gap for the poor and the majority of the population.

Per Capita Income: Argentina and Brazil


Source: World Bank.

Arithmetic Lesson for Robert Samuelson Print
Monday, 30 January 2012 05:29

In a piece that supported imposing a Buffet-rule type tax on the wealthy, Robert Samuelson explained the growing income share of the 1 percent in part on the booming stock market. He told readers:

"From 1980 to 2000, stocks rose almost tenfold; from 2000 to 2007, the gain was about 40 percent."

While the first part is roughly correct, the S&P 500 rose by just 3.5 percent from 2000 to 2007. According to his source, it averaged 1427.22 in 2000. Its average close in 2007 was 1477.19.

It's good to see Samuelson get the story straight that a higher capital gains tax will not hurt growth. (The Buffet rule would effectively raise the capital gains tax rate.) But he could make his arguments better if he got his numbers right.

The House is on Fire and Fred Hiatt Is Worried About What Color to Paint the Kitchen Print
Monday, 30 January 2012 05:05

You have to love Fred Hiatt and the Washington Post's oped page. The country is suffering through the worst downturn in 80 years. Tens of millions of people are unemployed or underemployed. Millions are facing the prospect of losing their homes. And tens of millions of baby boomers are looking at a retirement where they will be entirely dependent on their Social Security and Medicare.

With this state of affairs, they naturally rise to the occasion by denouncing politicians for being insufficiently attentive to "needed Medicare and Social Security reform." Of course, people familiar with the Congressional Budget Office's projections for Social Security know that there is no need for Social Security reform. The projections show the program will be fully solvent for the next quarter century even if no changes are made. Even after it is first projected to face a shortfall in 2038 it would still be able to pay more than 80 percent of projected benefits. It is difficult to see why dealing with a projected distant and modest shortfall should be a priority given the economy's current situation.

As all policy wonks know, the problem with Medicare is the problem of U.S. health care costs which are more than twice as high per person as the average for other wealthy countries. Therefore the issue should be fixing the health care system. If the United States faced the same per person health care costs as other wealthy countries we would be looking at huge budget surpluses in the long-term, not deficits.

Towards the end of the piece we are told:

"If America doesn’t tackle its debt problem, everything else is at risk: economic growth, the safety net for the poor, investment in research and roads."

Yeah, things might get bad if we don't start taking the Post's concerns about Social Security and Medicare seriously. It would be great if the Post's oped staff could get access to government data on unemployment, housing equity and family wealth.  

The WSJ Didn't Hear About the Collapse of Japan's Bubbles Print
Sunday, 29 January 2012 22:05

It is apparently hard to get information about Japan's economy at the Wall Street Journal. That is what readers must think after seeing an article about Japan's debt that say:

"after decades of undisciplined spending, government debts are more than twice the size of the nation's annual economic output."

Of course there were not decades "decades of undisciplined spending." In fact Japan was running large surpluses through the 80s and into the 90s. If the WSJ had access to IMF data (it's free folks), they would know this. It only began running deficits in response to the downturn following the collapse of the bubble.

Arguably the deficits were too small, not too large, since they did not get the economy back to full employment and did not prevent prices from falling. If there was any "undisciplined spending," it was by the banks that pumped up the stock and housing bubbles in the 80s.

English Lessons for WSJ: "Deflation" Means Falling Prices Print
Sunday, 29 January 2012 21:55

It's unfortunate that people who actually do business deals might think that they are getting information from the Wall Street Journal. It had an article warning readers that:

"demand for loans hints at deflation."

There was actually not a single item in the article that suggested in any way whatsoever that prices would be falling. The piece did present some evidence of weakening loan demand, which would imply slower economic growth, but there was zero, nada, nothing to suggest that prices were about to start falling.

It is also worth noting that small rates of deflation are of no particular consequence. It would be better for the economy to have a higher rate of inflation right now in order to reduce the real interest rate and household debt burdens. However a decline in the inflation rate from 0.5 percent to -0.5 percent is of no more consequence than a decline from 1.5 percent to 0.5 percent.

WSJ reporters should know this.

The Post Gives Another Defense of the One Percent: Mobility Print
Sunday, 29 January 2012 08:43

There is a big market in defending the One Percent these days and the Post is rising to the challenge. It presented a front page Outlook piece by James Q. Wilson that tells readers that inequality is not a really big deal because of the all the mobility in U.S. society. Furthermore, it tries to tell us we would be worse off with less inequality because inequality fell in Greece over the last three decades.

Wilson's main source for his claims about mobility is a study from the St. Louis Fed which in turn relies on data from a study from President Bush's Treasury Department. Wilson tells us that less than half of the people in the top one percent were still there 10 years later. This reflects the findings of the study. However 75 percent of the top one percent were still in the top 5 percent 10 years later and almost 83 percent were in the top ten percent.

Much of the mobility found in this study was likely simply the result of life-cycle effects. Earnings peak between ages 45 and 65. If we assume that people in these age groups are twice as likely to be in the top one percent as people who are younger or older, then we would expect 25 percent of the people in the top one percent to fall to a lower income category over a 10 year period simply because they have aged out of their peak earnings years.

Unlike most other studies of income mobility, the Treasury study did not restrict itself to prime earners (ages 25-55 at the start of the 10-year period). This would lead it to find greater mobility than other studies. Also, since this study is based on tax filing, some of the mobility may reflect the ability of individuals to game the tax system so that they show very low income in either the first or last year. If had restricted itself to the 25-55 age group it like would have found less mobility. [Thanks Stuart.]

Wilson's claim about Greece as an example of a country that has not seen an increase in inequality is the sort of argument by anecdote that people make when the data will not support their case. There were other countries, such as France, which have not seen an increase in inequality without obvious negative economic impacts. In fact, the rise in inequality across most European countries has been quite modest over the last three decades.

In addition, the most obvious factor that undermined Greece's economy seems to have been its decision to join the euro. This prevented it from allowing its currency to devalue in order to remain competitive. It is difficult to see how greater inequality would have improved its situation. Furthermore, since one of the country's main problems is a huge amount of tax evasion, data on income inequality is probably not very reliable.

It is also worth noting that this piece exclusively discusses the loser liberalism approach of taxing the income of the top 1 percent to redistribute income to the rest of the population. It does not address an agenda of reversing the policies that lead to the enormous upward redistribution of the last three decades. The Post appears to have a ban of any discussion of this approach.

Post Uses News Section to Push Its Editorial Line on Austerity, Again Print
Sunday, 29 January 2012 08:18

The Washington Post reminded readers why it is known as Fox on 15th Street when it referred to an agreement among European leaders that it said would "limit the perennial budget deficits that are the root of the crisis."

Both parts of this statement are demonstrably false. Of the five countries now facing an imminent debt crisis, only Greece and Portugal had consistent deficit problems prior to the economic collapse in 2008. Italy had a declining ratio of debt to GDP and Spain and Ireland were running budget surpluses.

The root of the crisis was a speculative bubble in the real estate markets in Spain, Ireland and much of the rest of Europe. With few exceptions, the people who profited from this bubble and the people in policy positions who let it go unchecked are still in the same positions as they were before the crisis. Like the Post, many of them are trying to shift blame to profligate government spending. 

Is Thomas Friedman More Incoherent Than Usual? Print
Sunday, 29 January 2012 00:01

In a column that repeats the usual Thomas Friedman line about all the barriers between countries coming down in the brave new world (while conveniently ignoring the barriers that protect highly paid professionals like doctors and lawyers, allowing them to earn far more than their counterparts elsewhere in the world), he approvingly quotes Michael Dell:

"'I always remind people that 96 percent of our potential new customers today live outside of America.' That’s the rest of the world. And if companies like Dell want to sell to them, he added, it needs to design and manufacture some parts of its products in their countries."

The statement Friedman attributes to Dell implies the exact opposite of his "world is flat" story. Dell is saying that he must design and manufacture a portion of the products he sells in the countries he sells them. This implies that there are political barriers to complete mobility, which would mean that Dell could manufacture and design his products wherever it is cheapest to do, regardless of where he sells them. 

Friedman's quote from Dell indicates  that protectionist restrictions are still an important reality in the world. Presumably the logical response would be to either try to reduce these barriers in other countries or to adjust our trade policies to ensure that they work best for the United States in a world that is clearly not flat. 

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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.