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Are Investors Less Confused About Real and Nominal Interest Rates Than They Were 40 Years Ago? Print
Monday, 07 April 2014 12:38

Brad DeLong picks up on Paul Krugman's column and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don't, but that they think they do.  He says:

"The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy."

"But they think they would be…"

I'm not sure about Brad's story here. While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?

The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:

"a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons."

It is remarkable that more than three decades later we don't have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.

However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?

 

 
There is Evidence That Cities Can Combat Inequality Print
Monday, 07 April 2014 04:53

The NYT had a piece on efforts to address inequality at the local level which might have left readers with the impression that there is little that cities can do. The only economist quoted in the piece was Edward Glaeser, who was very dismissive of the idea that cities could do anything that would have much impact.

It would have been useful to include the views of University of Massachusetts economist Arin Dube or Berkeley economist Michael Reich, both of whom have done extensive work on state and local minimum wages. Reich recently co-authored a book on the impact of local measures in helping low-income workers.

 
The Generation War Goes on Parade Print
Monday, 07 April 2014 03:52

Paul Taylor, a vice president at Pew and the author of a new book on generational conflict, took his generation war story to Parade Magazine this weekend. This magazine, which is distributed to millions of people with their Sunday paper, included a piece by Taylor that warned:

"By the time every boomer is collecting Social Security and Medicare, those two programs are projected to eat up about half our entire federal budget—and both the Social Security trust fund and one of Medicare’s two trust funds will be broke. That’s because the ratio of taxpayers to retirees will have fallen to its lowest level ever, about 2 to 1. (When Social Security first went into effect, the ratio was more than 20 to 1.) But renegotiating the social contract between the generations will be a tall order, because these days, young and old in America don’t look alike, act alike, or vote alike."

This comment is fundamentally misleading. First, the ratio of taxpayers to retirees at the time Social Security started has nothing to do with the time of day. Amazon had only a few thousand customers in the first months it was operating. So what?

When Social Security was first created its actuaries knew full well that life expectancies would increase and that the ratio of workers to retirees would decline, and they adjusted the program accordingly. This was done primarily through a series of tax increases that were scheduled decades in advance. In addition, the commission chaired by Alan Greenspan in 1983 increased the age at which workers qualify for full benefits from 65 to 67. This increase is phased in over the period from 2002 to 2022. It is remarkable that Taylor seems unaware of these facts.

While the program is still projected to face a shortfall over its 75-year planning horizon, close to half of this shortfall is attributable to the upward redistribution of income over the last three decades. This upward redistribution has worsened the finances of the program in two ways.

First, it increased the portion of wage income that went to workers who earned more than the wage cap. In 1983, when the Greenspan commission set the cap at its current level (which is indexed to average wages), only 10 percent of wage income was above the cap and escaped taxation. Now it is close the 18 percent of wage income.

Read more...

 

 
Can You Say "Patent Monopolies?" Print
Sunday, 06 April 2014 07:37

It's hard to believe that patent protection was not mentioned in this useful NYT piece on the high cost of treating chronic diseases like diabetes. The prices of new drugs and devices are high because the government grants companies patent monopolies. It will arrest and imprison potential competitors.

As every intro econ textbook shows, the monopoly profits also provide enormous incentives for corruption. As a result companies routinely misrepresent the safety and effectiveness of their products and lobby politicians to get the government to pay for their products. We would be debating alternative mechanisms for financing drug research if the industry were not so powerful and the economic profession so corrupt.

 

Addendum:

Sorry folks, I should have been clearer. I meant that the issue of patent-supported research was never raised. There are some folks, like Joe Stiglitz, who is a Nobel prize winning economist, who have suggested alternatives to patent protection as a way to finance research into prescription drugs or medical equipment. So the idea that alternatives exist should not be viewed as crazy-talk. And, if you don't bring up alternative to patent-supported research in an article like this one -- which is a careful and thoughtful piece -- where is the issue going to be raised? 

 
If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data Print
Saturday, 05 April 2014 21:52

Tyler Cowen warns us that technology may be making it much harder for less educated workers to get jobs. He highlights a series of changes in the economy then tells readers:

"All of these developments mean a disadvantage for people who don’t like formal education, even if they are otherwise very talented. It’s no surprise that current unemployment has been concentrated among those with lower education levels."

Actually, the data show unemployment has been less concentrated among the less educated in this recovery than was the case twenty years ago. Over the first three months of 2014 the unemployment rate for people over age 25 with at least a college degree averaged 3.3 percent. This is slightly higher than the 3.1 percent average in the first quarter of 1992.

While the unemployment rate for college grads was higher in the most recent period than in 1992, it was lower for both people with just high school degrees and for people who did not graduate high school. For high school grads the unemployment rate averaged 6.4 percent in the most recent quarter, half a percentage point below the 6.9 percent average in the first quarter of 1992. For those without high school degrees the unemployment rate was 9.7 percent in the first quarter of 2014 more than a percentage point lower than the 11.0 percent average in the first quarter of 1992.

There are other measures that may support Cowen's case, but a simple comparison of unemployment rates by education levels shows the opposite.

 

Note: Typos corrected.

 

 
Glenn Hubbard Says We Have a Shortage of Workers Print
Saturday, 05 April 2014 06:40

Glenn Hubbard, the dean of Columbia Business School and former chief economist to President George W. Bush, argued that we have a shortage of workers in a Wall Street Journal column. Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up. (This explanation seems especially plausible since we know that employers generally will not even consider hiring a person who has been unemployed for a long period of time.)

The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment.

The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.

If the problem is really on the supply side then we should be seeing a surge in vacancies. In fact, the vacancy rate is still more than 10 percent below the pre-recession level and more than 20 percent below the 2000 level. We should also see an increase in the length of the average workweek. While this is more or less back to its pre-recession level (slightly above in manufacturing), it certainly is not unusually high. And we should be seeing rapid wage growth as firms compete for workers. Wages are now just moderately outpacing inflation.

In short, we have no reason to believe that the problem with the labor force is on the supply side. There remains an incredibly simple story that the housing bubble that was driving demand collapsed. With no source of demand to replace the housing and consumption driven by the bubble we are destined to slog through a prolonged period of slow growth and high unemployment. That one seems straightforward but it is apparently too simple for economists to understand.

 

 

 
CBO Estimates of Affordable Care Act Enrollment Print
Friday, 04 April 2014 05:24

Glenn Kessler provides a useful clarification of CBO projections for enrollment in the exchanges under the Affordable Care Act, pointing out that the numbers refer to enrollment years. This means that a person who signs up for coverage beginning on April 1 will only count as three quarters of an enrolled person since they will only be covered for three quarters of a year. 

However it is important to note that many more people will be signing up through 2014. While open season, in which anyone would enroll, ended on April 1, people who experience "life events" will be able to enroll at any time. "Life event" refers to anything that qualitatively changes your insurance or financial status. The most frequent life event is leaving a job, which happens to roughly 4 million people a month. Divorces, child birth, and deaths in the family are also life events.

This means that tens of millions of people will become eligible to enroll over the course of the year. Most will not be signing up with the exchanges (they will have other insurance options, such as a new job with insurance), but a substantial fraction will enroll through the exchanges. This will raise total enrollment above the level calculated based on the March enrollment numbers. 

 
Would Anyone at the NYT Notice a Loss of 400,000 Jobs? Print
Friday, 04 April 2014 05:13

Just asking, since it seems that the paper missed an unexpected $3 billion rise in the trade deficit in February. This is a big deal for the economy.

On annual basis the February numbers would imply an increase in the deficit of $36 billion, or more than 0.2 percent of GDP. Assuming a multiplier of 1.5, this would reduce GDP by more 0.3 percent, implying a loss of over 400,000 jobs.

Fans of national income accounting know that a trade deficit implies a reduction in demand, it is money that is being spent elsewhere, not in the United States. When the deficit rises, it leads to a fall in output and fewer jobs unless it is offset by larger budget deficits or by increased consumption and investment in the private sector. Since we are not likely to see either, the rise in the trade deficit, if sustained in future months, will mean lower output and fewer jobs. 

(FWIW, the Post noticed.)

 
As Chicago Cuts Pensions, Are Bondholders Also Taking Losses? Print
Friday, 04 April 2014 04:36

The NYT reported that Chicago Mayor Rahm Emanuel is negotiating reductions in pension benefits with the city's workers, including some cuts to retirees. It would have been worth mentioning if the city is also engaged in negotiations with its bondholders to arrange a partial default. Pensions are legal obligations of the city, which enjoy a comparable or higher status than the city's bonds. (In its bankruptcy settlement, Detroit's workers will almost certainly see a higher share of their pension obligations met than its bondholders.)

If Chicago is really unable to meet its pension commitments to retirees, who are now being asked to give back the benefits for which they worked, it would also be reasonable to ask investors to also take some loss. After all, this is what is supposed to happen in a market economy when investors use bad judgement and fail to recognize the risks associated with a loan.

 
David Ignatius Is Wrong: Trade Agreements are Not About Free Trade Print
Friday, 04 April 2014 04:16

David Ignatius' column in the Washington Post touting the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP) is badly mistaken in connecting these deals with free trade. The agreements have very little to do with free trade, rather they are about imposing a business-friendly regulatory structure that would almost certainly not be approved through the normal democratic process in the countries that are parties to the deal.

The reality is that formal trade barriers between the countries in these pacts are already very low. This means the potential gains from further reducing the barriers are quite limited. While Ignatius wants readers to be impressed that one forecast projects the TPP would add $223 billion to world GDP by 2025, this is less than one quarter of one percent of projected GDP in that year. That makes it roughly equal to how much the economy grows in a month. Furthermore, this projection takes no account of aspects of the TTP that would almost certainly slow growth, such as the increase in drug prices that would result from stronger patent related protections.

Ignatius also tells readers that the forecast shows the deal will "boost U.S. exports by $124 billion. That means jobs, here and abroad." This is not true. Many of the exports that will likely result from this sort of deal take the form of exporting components of products to be assembled outside of the country to take advantage of lower cost labor elsewhere. For example, engines and other car parts that may previously have been assembled in Ohio will instead be exported to Mexico to be assembled there into a car. The car will then be brought back to the United States as an import.

In this case the exports created no new jobs, since all of the products exported were already being produced in the United States. This is why economists always talk about net exports (exports minus imports) when discussing the job impact of trade. Currently the United States imports roughly $500 billion a year (@ 3 percent of GDP) more than it exports. Assuming a multiplier of 1.5, this trade deficit implies a loss of more than 6 million jobs.

In addition to increasing protection for prescription drugs, the deal is also likely to lead to longer copyright protection, more government control over the Internet and could sharply restrict environmental and safety standards in many areas. In addition, these agreements will create a legal structure, investor-state dispute settlement, that over-rides domestic legal systems. There is an arguable case for such extra-judicial entities in countries without well-established judicial systems. It is far more difficult to argue for the need such a system in the European Union, Canada, and the United States, where businesses can generally count on their interests being treated fairly in the courts.   

 

 
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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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