Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

All the normal economic data tell us that people should feel pretty good about the economy right now. Unemployment has been below 4.0 percent for 21 consecutive months for the first time in more than half a century.

Tens of millions of people have left jobs they didn’t like to find better ones. As a result, workplace satisfaction is at the highest level it has been in the nearly forty years the Conference Board has done its survey.

The recent jump in mortgage rates has made it difficult for first-time home buyers, but homeownership rates are still well above pre-pandemic levels overall and for young people, Blacks and Hispanics, and people with below the median income.

The number of workers who can work from home, saving themselves thousands a year in commuting costs and hundreds of hours of time spent commuting, has increased by roughly 11 million.

Fifteen million households have been able to refinance their mortgages and save themselves thousands of dollars a year on interest payments.

And, real wages are above pre-pandemic levels, as wage growth has outpaced inflation. With inflation slowing, this pattern should continue. The biggest wage gains were for those at the bottom of the wage distribution.

All of these factors suggest that people should be feeling pretty good about the economy right now, but polls consistently show that people think the economy is doing terribly. Those of us who point to the data are told that we can’t argue with people’s lived experience, people feel what they feel.

That’s fair enough, except I want to know how people’s lived experience can tell them that their local economy is doing okay, it’s only the national economy that is in the tank?

A recent poll by Bloomberg found that 49 percent of respondents said their local economy is on the right track. Now that’s not great, but pretty damn close to half.

By contrast, only 26 percent said that the national economy was on the right track. This means that 23 percent of the people answering the poll thought things were going well where they lived, but were bad in the rest of the country.

My question then is, how this 23 percent could, based on their lived experience, determine that things were worse where they didn’t live than where they did live?

My working hypothesis is that they are likely reflecting the media’s endless trash-talking of the economy. The problem is not just Fox, which sees its purpose as advancing the Republican agenda, but also CNN, the NYT, the WaPo, and other major news outlets. Stories about inflation and prices not falling (they never do) fill their pages.

Stories about record-low unemployment are few and far between, and pieces on workplace satisfaction, the surge in mortgage refinancing and interest savings, and explosion in work-from-home are virtually none existent.

In my working hypothesis, when people tell us the national economy is bad, they are not reporting on their lived experience, they are repeating what they have heard directly or indirectly from the media. Everyone knows the economy is bad, they don’t want to look stupid so they give what they have been told is the correct answer.

I am open to other explanations for how 23 percent of the people think their local economy is on the right track, but the national economy is not.

All the normal economic data tell us that people should feel pretty good about the economy right now. Unemployment has been below 4.0 percent for 21 consecutive months for the first time in more than half a century.

Tens of millions of people have left jobs they didn’t like to find better ones. As a result, workplace satisfaction is at the highest level it has been in the nearly forty years the Conference Board has done its survey.

The recent jump in mortgage rates has made it difficult for first-time home buyers, but homeownership rates are still well above pre-pandemic levels overall and for young people, Blacks and Hispanics, and people with below the median income.

The number of workers who can work from home, saving themselves thousands a year in commuting costs and hundreds of hours of time spent commuting, has increased by roughly 11 million.

Fifteen million households have been able to refinance their mortgages and save themselves thousands of dollars a year on interest payments.

And, real wages are above pre-pandemic levels, as wage growth has outpaced inflation. With inflation slowing, this pattern should continue. The biggest wage gains were for those at the bottom of the wage distribution.

All of these factors suggest that people should be feeling pretty good about the economy right now, but polls consistently show that people think the economy is doing terribly. Those of us who point to the data are told that we can’t argue with people’s lived experience, people feel what they feel.

That’s fair enough, except I want to know how people’s lived experience can tell them that their local economy is doing okay, it’s only the national economy that is in the tank?

A recent poll by Bloomberg found that 49 percent of respondents said their local economy is on the right track. Now that’s not great, but pretty damn close to half.

By contrast, only 26 percent said that the national economy was on the right track. This means that 23 percent of the people answering the poll thought things were going well where they lived, but were bad in the rest of the country.

My question then is, how this 23 percent could, based on their lived experience, determine that things were worse where they didn’t live than where they did live?

My working hypothesis is that they are likely reflecting the media’s endless trash-talking of the economy. The problem is not just Fox, which sees its purpose as advancing the Republican agenda, but also CNN, the NYT, the WaPo, and other major news outlets. Stories about inflation and prices not falling (they never do) fill their pages.

Stories about record-low unemployment are few and far between, and pieces on workplace satisfaction, the surge in mortgage refinancing and interest savings, and explosion in work-from-home are virtually none existent.

In my working hypothesis, when people tell us the national economy is bad, they are not reporting on their lived experience, they are repeating what they have heard directly or indirectly from the media. Everyone knows the economy is bad, they don’t want to look stupid so they give what they have been told is the correct answer.

I am open to other explanations for how 23 percent of the people think their local economy is on the right track, but the national economy is not.

Like many self-imagined “free-traders,” the Washington Post editorial board cannot even conceive of free trade when it comes to prescription drugs. They demonstrated this fact yet again in discussing ways to deal with the high price of effective weight-loss drugs like Wegovy. These drugs carry price tags of more than $1,000 a month, making them costly for insurers, governments, or individuals who have to pick up the tab themselves.

The Post throws out a couple of ideas that could allow for a lower price, but never considers the fact that these drugs would be cheap without the government-granted patent monopolies that prevent generic manufacturers from entering the market. The monopolies are of course to provide an incentive to undertake the research, but there are other mechanisms for providing incentives, like paying people.

We did this when we wanted Moderna to develop a Covid vaccine, paying the company almost a billion dollars to develop and then test the vaccine. In the standard for our government, we then gave Moderna control over the vaccine, creating at least five Moderna billionaires. (Tell me again how conservatives want less government.) If we adopted the policy of only paying for research once, we would have both had the vaccine and low prices, since it likely could be manufactured and distributed for around $4 or $5 a shot.

In the case of Wegovy and other weight loss drugs, it’s likely the case that we would be talking about a cost of $20 or $30 a month in the absence of the patent monopoly. In this case, the monopoly is raising the price by a factor of 30 or 40, the equivalent of a tariff of 3,000 or 4,000 percent.

While the WaPo would usually go on the warpath over a tariff of 10 or 25 percent, it is apparently just fine with this much larger tariff that keeps drug prices high. Needless to say, we would not be debating how to cover the cost if Wegovy was selling for $30 for a month’s dosage.

We should also recognize this is real money. We will spend over $600 billion this year (almost $5,000 per family) on drugs that would likely cost less than $100 billion in a free market. This dwarfs the money at stake in tariffs on items like cars or steel, but it goes unmentioned at the Washington Post and in polite circles more generally.

In addition to lower prices, there is a second very important reason we should want free trade in prescription drugs. As the Post mentions, there are serious questions about the long-term side effects of Wegovy and other weight-loss drugs.

It would be good to have honest assessments of these side effects. While the researchers doing studies of these side effects may all be doing credible research, it is likely that there will be some ambiguities in the results. The billions of dollars on the table, in the form of prospective profits, puts a very big thumb on the scale towards minimizing negative side effects.

We would likely get a more honest scientific debate, and better outcomes for patients, if there wasn’t so much money on one side of this issue. For that reason also, we should want to see a free market for weight-loss drugs and drugs more generally.

Like many self-imagined “free-traders,” the Washington Post editorial board cannot even conceive of free trade when it comes to prescription drugs. They demonstrated this fact yet again in discussing ways to deal with the high price of effective weight-loss drugs like Wegovy. These drugs carry price tags of more than $1,000 a month, making them costly for insurers, governments, or individuals who have to pick up the tab themselves.

The Post throws out a couple of ideas that could allow for a lower price, but never considers the fact that these drugs would be cheap without the government-granted patent monopolies that prevent generic manufacturers from entering the market. The monopolies are of course to provide an incentive to undertake the research, but there are other mechanisms for providing incentives, like paying people.

We did this when we wanted Moderna to develop a Covid vaccine, paying the company almost a billion dollars to develop and then test the vaccine. In the standard for our government, we then gave Moderna control over the vaccine, creating at least five Moderna billionaires. (Tell me again how conservatives want less government.) If we adopted the policy of only paying for research once, we would have both had the vaccine and low prices, since it likely could be manufactured and distributed for around $4 or $5 a shot.

In the case of Wegovy and other weight loss drugs, it’s likely the case that we would be talking about a cost of $20 or $30 a month in the absence of the patent monopoly. In this case, the monopoly is raising the price by a factor of 30 or 40, the equivalent of a tariff of 3,000 or 4,000 percent.

While the WaPo would usually go on the warpath over a tariff of 10 or 25 percent, it is apparently just fine with this much larger tariff that keeps drug prices high. Needless to say, we would not be debating how to cover the cost if Wegovy was selling for $30 for a month’s dosage.

We should also recognize this is real money. We will spend over $600 billion this year (almost $5,000 per family) on drugs that would likely cost less than $100 billion in a free market. This dwarfs the money at stake in tariffs on items like cars or steel, but it goes unmentioned at the Washington Post and in polite circles more generally.

In addition to lower prices, there is a second very important reason we should want free trade in prescription drugs. As the Post mentions, there are serious questions about the long-term side effects of Wegovy and other weight-loss drugs.

It would be good to have honest assessments of these side effects. While the researchers doing studies of these side effects may all be doing credible research, it is likely that there will be some ambiguities in the results. The billions of dollars on the table, in the form of prospective profits, puts a very big thumb on the scale towards minimizing negative side effects.

We would likely get a more honest scientific debate, and better outcomes for patients, if there wasn’t so much money on one side of this issue. For that reason also, we should want to see a free market for weight-loss drugs and drugs more generally.

As a Thanksgiving present to readers, Washington Post columnist Catherine Rampell decided to tell us again how old-timers are robbing from our children with their generous Social Security and Medicare benefits. This is always a popular theme at the WaPo, especially around the holiday season.

The story is infuriating for four reasons:

  • Even by the calculations highlighted in the piece, Social Security is not a big subsidy to retirees,
  • Medicare appears to be a large subsidy only because our healthcare system is so inefficient,
  • What counts as a government payment, as opposed to a market outcome, is arbitrary, and
  • We pass on a whole society to our children, focusing on these programs to the neglect of the larger social and physical environment is close to absurd.

Social Security

The Social Security program has always been reasonably well-funded, even as slower growth and the upward redistribution of income over the last five decades have hurt the program’s finances. It is now projected to face a shortfall in a bit over a decade, but the gap between scheduled benefits and taxes is not exceptionally large, as calculated by Gene Steurele and Karen Smith, Rampell’s source.

Source: Steurele and Smith, 2023.

The chart below above shows Steurele and Smith’s calculations for lifetime Social Security benefits and taxes, for people turning 65 in 2025, for men and women at different earnings levels. There are a few points worth noting on these calculations.

First, they are highly stylized, assuming that a worker puts in 43 years from age 22 to age 65 always earning the same wage relative to the overall average. This means that their wage rises year by year in step with inflation and the increase in average wages. No one actually would follow this pattern.

They are likely to earn less early in their career and more later in their career. They also are likely to have some years of little or no earnings. This is especially the case for women who are likely to spend some time outside of the paid labor force caring for children or parents. These adjustments would generally lead to higher benefits relative to taxes.

The second point is that the calculations assume that everyone lives to age 65 at which point they start to collect benefits. Some people will die before they can collect benefits, so we are looking at the benefits for workers who survive to collect benefits. (Social Security also has survivors’ benefits that go to spouses and minor children of deceased workers, so their tax payments are not necessarily a complete loss.)

The third point is that Steurele and Smith have opted to use a 2.0 percent real (inflation-adjusted) interest rate to discount taxes and benefits. This is a standard rate to use in this sort of analysis, but one could argue for a higher or lower rate. A higher rate would make the program seem less generous, while a lower rate would raise benefits relative to taxes.

As can be seen, low earners are projected to receive more in benefits than they pay in taxes. An important qualification here is that there is a large and growing gap in life expectancies between low and higher earners. These calculations assume that everyone of the same gender has the same life expectancy regardless of their income. This means that the benefits will be somewhat overstated for low earners and understated for high earners.

Ignoring the life expectancy issue, the chart shows that projected benefits end up being less than taxes once we get to high earners ($105,800 in 2023). For men projected lifetime taxes exceed benefits by $106,000. For women the gap is smaller at $49,000, reflecting their longer life expectancy.

Moving to maximum earners, people who earn the income at which the payroll tax is capped ($160,200 in 2023), the gaps become larger. In the case of men, projected lifetime taxes exceed benefits by $319,000. For women, projected lifetime taxes are $249,000 more than benefits.

There are some simple takeaways we can get from the Steurele and Smith analysis. First, for low and middle-wage earners Social Security does indeed pay out more in benefits than workers pay in taxes. However, the gap is not very large. For average earners, who got $66,100 in 2023, (not shown to keep the size of the graph manageable), the gap is $3,000 for men and $46,000 for women.

For higher income earners taxes actually exceed benefits. In the case of maximum earners, these excess payments are actually fairly large, as noted $319,000 for men and $249,000 for women.

This raises an interesting issue, if we are looking to cut benefits to reduce the “subsidy” to the elderly provided by Social Security. We can cut back benefits by a substantial percentage for low earners to bring their lifetime benefits more closely in line with their lifetime taxes, but do we really want to reduce retirement benefits for people who had average earnings of $29,700?

We can make some cuts for more middle-income workers, but someone earning $66,100 during their working lifetime was not terribly comfortable, and there is not much subsidy here to start, especially with men. When we get to higher earners, taxes already exceed benefits. We can still make cuts to their benefits, but we would not be taking back a subsidy by this calculation, we would be increasing their net overpayment to the program.

It’s also worth noting who is a high earner in this story. The high earner had annual earnings of $105,800 in 2023. President Biden promised that he would not raise taxes on couples earning less than $400,000. That puts his cutoff of $200,000 at almost twice the high earner level, and the calculation of lifetime benefits and taxes turns negative at a considerably lower income than the stylized high earner.

These calculations show that if we just take Social Security in isolation and want to reduce the subsidy implied here we either have to cut benefits for people who are not living comfortably by most standards, or we have to cut benefits for people who are not currently receiving a subsidy. We may decide that the latter is good policy, but we should be clear that it is not taking back a subsidy.

There is an important qualification to this discussion. Married couples will generally do better in these calculations than single workers. This is because the spousal benefit allows the spouse to collect the greater of their own benefit or half of their spouse’s benefit. Also, a surviving spouse will receive the greater of their own or their deceased spouse’s benefit. For these reasons, lifetime benefits for couples will generally be higher relative to taxes than for single individuals.

The Medicare Subsidy and the Broken Healthcare System Story

The Steurele and Smith analysis shows much larger subsidies for the Medicare program, as shown below.

 

 

There are a few qualifications to these calculations that should be noted. First, the same caveats about earnings patterns that were noted with the Social Security calculations also apply to the projected value of Medicare taxes.

Second, the differences in life expectancies by income matter here also when assessing the size of the tax penalty or subsidy. The program is less generous for low earners than shown in this figure and more generous for high earners.

The third point is that, unlike with the designated Social Security tax, the Medicare tax is not capped. This means that people earning above the Social Security cap will be paying more taxes to support the program. For very high earners ($185,000 for men and $207,000 for women), projected taxes would exceed benefits. The size of the tax penalty increases further up the income scale.

Finally, high-income people also pay a designated Medicare tax on capital income, like dividends and capital gains. For these people, it is virtually guaranteed that their Medicare taxes exceed their projected benefits.

With these caveats, we see the same general story as with Social Security, where there is more of a subsidy for lower earners than higher earners. While the overall gaps are larger for Medicare, projected benefits exceed taxes by a larger amount, this changes less with income than in the case of Social Security.

This is due to the fact that, unlike Social Security, the payout is not designed to be progressive, with all retirees getting in principle the same benefit.[1] This is qualified by the fact that higher-income retirees can expect to receive benefits for a considerably longer period of time, making the benefit regressive.

I have added a third bar to this graph, labeled “Benefits-Canada.” This is a calculation of what the cost of benefits would be if we paid the same amount per person for our healthcare as Canada does. The Medicare program appears as a huge subsidy to beneficiaries primarily because we pay so much more for our health care than people in other wealthy countries.

According to the OECD, we pay 57 percent more per person than Germany, 107 percent more than France, and 99 percent more than Canada. This sort of massive gap can be shown with U.S. costs relative to every other wealthy country. We don’t get any obvious benefit in terms of better healthcare outcomes from this additional spending. Life expectancy in the United States is considerably shorter than in most other wealthy countries.

The “Benefits-Canada” bar allows us to assess the value of Medicare benefits if our healthcare costs were more in line with those in other countries. It multiplies the projected value of Medicare benefits by the ratio of per person health care costs in Canada to costs in the United States (50.3 percent).

As can be seen, if we calculate Medicare benefits assuming that we pay as much for our health care as people in Canada, most of the calculated subsidy goes away. Low earners still receive a substantial subsidy, $102,000 for men and $122,000 for women, but this quickly goes away higher up the income ladder.

If we assume Canadian health care costs, a high-earning male has a net Medicare tax penalty of $21,000, while a high-earning woman has a net tax penalty of just under $1,000. For those earning at the Social Security maximum, the net tax penalty for men is $111,000, and for women it’s $91,000.

The implication of this calculation is that the seemingly large subsidies that Medicare provides to retirees is not due to the generosity of benefits, it is due to the fact that we overpay for our healthcare. Medicare is not providing a large subsidy to retirees, it is providing a large subsidy for drug companies, medical equipment suppliers, insurers, and doctors. (In case you are wondering, people in the U.S. are not generally paid much more than people in other wealthy countries. Our manufacturing workers get considerably lower pay.)

We pay roughly twice as much in all of these categories as people in other wealthy countries. It is misleading to imply that these overpayments are generous to retirees. While all of these interest groups have powerful lobbies, which makes it politically difficult to bring their compensation in line with other wealthy countries, we should at least be honest about who is getting subsidized by the high cost of our Medicare program.

What Do Subsidies Mean, When the Government Structures the Market?

There is another aspect of these calculations that should have jumped out at people when I noted that the designated Medicare tax is not capped and also applies to capital income. The taxes that are designated for these programs are arbitrary. We can designate other taxes that people pay as being Social Security and Medicare taxes, and apparent subsidies will disappear.

In fact, the idea that we can make a clear distinction between income that people have somehow earned, and income that is given to them by the government, is in fact an illusion. The government structures the markets in ways that allow some people to get very wealthy and keep others on the edge of subsistence.

Those who make big bucks in the healthcare industry are just one example. While our trade policy was quite explicitly designed to open the door to cheap manufactured goods, we actually have increased the barriers that make it difficult for foreign-trained doctors to practice in the United States.

We have made patent and copyright monopolies longer and stronger. The government subsidizes bio-medical research and then gives private companies monopoly control over the product. In a recent example, we paid Moderna to develop a COVID vaccine and then gave them control over it, creating at least five Moderna billionaires.  

We have allowed our financial sector to become incredibly bloated, creating many millionaires and billionaires, even as we demand efficiency elsewhere. We give Elon Musk and Mark Zuckerberg Section 230 protection against defamation suits that their counterparts in print and broadcast media do not enjoy.

And, as was recently highlighted with the UAW strike, our CEOs make far more than the CEOS of comparably sized companies in other wealthy countries. The difference is as much as a factor of ten in the case of Japanese companies. This is not due to the natural workings of the market, this is the result of a corrupt corporate governance structure that allows the CEOs to have their friends set their pay.

Yes, I am again talking about my book (it’s free). It is absurd to obsess about tax and transfer policy while ignoring the ways in which the government structures the market to determine winners and losers. It is understandable that the right would like tax and transfer policy to be the focus of public debate, since the default is a market outcome that leaves most money with the rich.

However, it is beyond absurd that people who consider themselves progressive would accept this framing. We can structure the market differently to get more equitable market outcomes. This should be front and center in public debate. Unfortunately, the right wants to hide the fact that we can structure the market differently, and progressives are all too willing to go along.  

Future of the Planet

There is a final point on the sort of generational scorecard implied by these calculations of Social Security and Medicare benefits. We don’t just hand our children a tax bill, we hand them an entire economy, society, and planet.

If we experience anything resembling normal economic growth, average wages will be far higher twenty or thirty years from now than they are today. Will the typical worker see these wage gains? That will depend on distribution within generations, not between generations.

We also see costs from items like the military. When I was growing up in the 1960s we paid a much larger share of our GDP to support the Cold War. (Young men were also drafted.) We will again pay lots more money for the military if we have a new Cold War with China. The implied taxes don’t figure into the Social Security and Medicare calculations, but will be every bit as much of a drain on the income of people in the future as taxes for these programs.

And, we should always have global warming front and center. If we paid off the national debt and eliminated the programs to support retirees, but did nothing to restrain global warming, our children and grandchildren would not have much reason to thank us. First and foremost, we must give them a livable planet.

Phony Answers to a Phony Question

The whole subsidy to retiree story is a diversion from the many important issues facing the country. Even the core idea, that we don’t adequately support the young because we give too much to the elderly is wrong.

We saw this very clearly in the debate over the extension of the child tax credit. As with everything in Congress, much is determined by narrow political considerations. Republicans had no interest in giving President Biden and the Democrats a win, but the bill could have passed without Republican votes.

The deciding factor was the refusal of West Virginia Senator Joe Manchin to support the bill. Senator Manchin was very clear on his concerns. He didn’t argue that we were spending too much on retirees, he didn’t want low-income people to have the money.

This is in general the story as to why we don’t have adequate funding for early childhood education, children’s nutrition, day care and other programs that would benefit children. There is a substantial political bloc that does not want to fund these programs. And, they still would not want to fund these programs even if we didn’t pay a dime for Social Security and Medicare.

[1] This is not strictly true, since the premium payment that retirees make for Part B and Part D of the Medicare program depends on income in retirement.

As a Thanksgiving present to readers, Washington Post columnist Catherine Rampell decided to tell us again how old-timers are robbing from our children with their generous Social Security and Medicare benefits. This is always a popular theme at the WaPo, especially around the holiday season.

The story is infuriating for four reasons:

  • Even by the calculations highlighted in the piece, Social Security is not a big subsidy to retirees,
  • Medicare appears to be a large subsidy only because our healthcare system is so inefficient,
  • What counts as a government payment, as opposed to a market outcome, is arbitrary, and
  • We pass on a whole society to our children, focusing on these programs to the neglect of the larger social and physical environment is close to absurd.

Social Security

The Social Security program has always been reasonably well-funded, even as slower growth and the upward redistribution of income over the last five decades have hurt the program’s finances. It is now projected to face a shortfall in a bit over a decade, but the gap between scheduled benefits and taxes is not exceptionally large, as calculated by Gene Steurele and Karen Smith, Rampell’s source.

Source: Steurele and Smith, 2023.

The chart below above shows Steurele and Smith’s calculations for lifetime Social Security benefits and taxes, for people turning 65 in 2025, for men and women at different earnings levels. There are a few points worth noting on these calculations.

First, they are highly stylized, assuming that a worker puts in 43 years from age 22 to age 65 always earning the same wage relative to the overall average. This means that their wage rises year by year in step with inflation and the increase in average wages. No one actually would follow this pattern.

They are likely to earn less early in their career and more later in their career. They also are likely to have some years of little or no earnings. This is especially the case for women who are likely to spend some time outside of the paid labor force caring for children or parents. These adjustments would generally lead to higher benefits relative to taxes.

The second point is that the calculations assume that everyone lives to age 65 at which point they start to collect benefits. Some people will die before they can collect benefits, so we are looking at the benefits for workers who survive to collect benefits. (Social Security also has survivors’ benefits that go to spouses and minor children of deceased workers, so their tax payments are not necessarily a complete loss.)

The third point is that Steurele and Smith have opted to use a 2.0 percent real (inflation-adjusted) interest rate to discount taxes and benefits. This is a standard rate to use in this sort of analysis, but one could argue for a higher or lower rate. A higher rate would make the program seem less generous, while a lower rate would raise benefits relative to taxes.

As can be seen, low earners are projected to receive more in benefits than they pay in taxes. An important qualification here is that there is a large and growing gap in life expectancies between low and higher earners. These calculations assume that everyone of the same gender has the same life expectancy regardless of their income. This means that the benefits will be somewhat overstated for low earners and understated for high earners.

Ignoring the life expectancy issue, the chart shows that projected benefits end up being less than taxes once we get to high earners ($105,800 in 2023). For men projected lifetime taxes exceed benefits by $106,000. For women the gap is smaller at $49,000, reflecting their longer life expectancy.

Moving to maximum earners, people who earn the income at which the payroll tax is capped ($160,200 in 2023), the gaps become larger. In the case of men, projected lifetime taxes exceed benefits by $319,000. For women, projected lifetime taxes are $249,000 more than benefits.

There are some simple takeaways we can get from the Steurele and Smith analysis. First, for low and middle-wage earners Social Security does indeed pay out more in benefits than workers pay in taxes. However, the gap is not very large. For average earners, who got $66,100 in 2023, (not shown to keep the size of the graph manageable), the gap is $3,000 for men and $46,000 for women.

For higher income earners taxes actually exceed benefits. In the case of maximum earners, these excess payments are actually fairly large, as noted $319,000 for men and $249,000 for women.

This raises an interesting issue, if we are looking to cut benefits to reduce the “subsidy” to the elderly provided by Social Security. We can cut back benefits by a substantial percentage for low earners to bring their lifetime benefits more closely in line with their lifetime taxes, but do we really want to reduce retirement benefits for people who had average earnings of $29,700?

We can make some cuts for more middle-income workers, but someone earning $66,100 during their working lifetime was not terribly comfortable, and there is not much subsidy here to start, especially with men. When we get to higher earners, taxes already exceed benefits. We can still make cuts to their benefits, but we would not be taking back a subsidy by this calculation, we would be increasing their net overpayment to the program.

It’s also worth noting who is a high earner in this story. The high earner had annual earnings of $105,800 in 2023. President Biden promised that he would not raise taxes on couples earning less than $400,000. That puts his cutoff of $200,000 at almost twice the high earner level, and the calculation of lifetime benefits and taxes turns negative at a considerably lower income than the stylized high earner.

These calculations show that if we just take Social Security in isolation and want to reduce the subsidy implied here we either have to cut benefits for people who are not living comfortably by most standards, or we have to cut benefits for people who are not currently receiving a subsidy. We may decide that the latter is good policy, but we should be clear that it is not taking back a subsidy.

There is an important qualification to this discussion. Married couples will generally do better in these calculations than single workers. This is because the spousal benefit allows the spouse to collect the greater of their own benefit or half of their spouse’s benefit. Also, a surviving spouse will receive the greater of their own or their deceased spouse’s benefit. For these reasons, lifetime benefits for couples will generally be higher relative to taxes than for single individuals.

The Medicare Subsidy and the Broken Healthcare System Story

The Steurele and Smith analysis shows much larger subsidies for the Medicare program, as shown below.

 

 

There are a few qualifications to these calculations that should be noted. First, the same caveats about earnings patterns that were noted with the Social Security calculations also apply to the projected value of Medicare taxes.

Second, the differences in life expectancies by income matter here also when assessing the size of the tax penalty or subsidy. The program is less generous for low earners than shown in this figure and more generous for high earners.

The third point is that, unlike with the designated Social Security tax, the Medicare tax is not capped. This means that people earning above the Social Security cap will be paying more taxes to support the program. For very high earners ($185,000 for men and $207,000 for women), projected taxes would exceed benefits. The size of the tax penalty increases further up the income scale.

Finally, high-income people also pay a designated Medicare tax on capital income, like dividends and capital gains. For these people, it is virtually guaranteed that their Medicare taxes exceed their projected benefits.

With these caveats, we see the same general story as with Social Security, where there is more of a subsidy for lower earners than higher earners. While the overall gaps are larger for Medicare, projected benefits exceed taxes by a larger amount, this changes less with income than in the case of Social Security.

This is due to the fact that, unlike Social Security, the payout is not designed to be progressive, with all retirees getting in principle the same benefit.[1] This is qualified by the fact that higher-income retirees can expect to receive benefits for a considerably longer period of time, making the benefit regressive.

I have added a third bar to this graph, labeled “Benefits-Canada.” This is a calculation of what the cost of benefits would be if we paid the same amount per person for our healthcare as Canada does. The Medicare program appears as a huge subsidy to beneficiaries primarily because we pay so much more for our health care than people in other wealthy countries.

According to the OECD, we pay 57 percent more per person than Germany, 107 percent more than France, and 99 percent more than Canada. This sort of massive gap can be shown with U.S. costs relative to every other wealthy country. We don’t get any obvious benefit in terms of better healthcare outcomes from this additional spending. Life expectancy in the United States is considerably shorter than in most other wealthy countries.

The “Benefits-Canada” bar allows us to assess the value of Medicare benefits if our healthcare costs were more in line with those in other countries. It multiplies the projected value of Medicare benefits by the ratio of per person health care costs in Canada to costs in the United States (50.3 percent).

As can be seen, if we calculate Medicare benefits assuming that we pay as much for our health care as people in Canada, most of the calculated subsidy goes away. Low earners still receive a substantial subsidy, $102,000 for men and $122,000 for women, but this quickly goes away higher up the income ladder.

If we assume Canadian health care costs, a high-earning male has a net Medicare tax penalty of $21,000, while a high-earning woman has a net tax penalty of just under $1,000. For those earning at the Social Security maximum, the net tax penalty for men is $111,000, and for women it’s $91,000.

The implication of this calculation is that the seemingly large subsidies that Medicare provides to retirees is not due to the generosity of benefits, it is due to the fact that we overpay for our healthcare. Medicare is not providing a large subsidy to retirees, it is providing a large subsidy for drug companies, medical equipment suppliers, insurers, and doctors. (In case you are wondering, people in the U.S. are not generally paid much more than people in other wealthy countries. Our manufacturing workers get considerably lower pay.)

We pay roughly twice as much in all of these categories as people in other wealthy countries. It is misleading to imply that these overpayments are generous to retirees. While all of these interest groups have powerful lobbies, which makes it politically difficult to bring their compensation in line with other wealthy countries, we should at least be honest about who is getting subsidized by the high cost of our Medicare program.

What Do Subsidies Mean, When the Government Structures the Market?

There is another aspect of these calculations that should have jumped out at people when I noted that the designated Medicare tax is not capped and also applies to capital income. The taxes that are designated for these programs are arbitrary. We can designate other taxes that people pay as being Social Security and Medicare taxes, and apparent subsidies will disappear.

In fact, the idea that we can make a clear distinction between income that people have somehow earned, and income that is given to them by the government, is in fact an illusion. The government structures the markets in ways that allow some people to get very wealthy and keep others on the edge of subsistence.

Those who make big bucks in the healthcare industry are just one example. While our trade policy was quite explicitly designed to open the door to cheap manufactured goods, we actually have increased the barriers that make it difficult for foreign-trained doctors to practice in the United States.

We have made patent and copyright monopolies longer and stronger. The government subsidizes bio-medical research and then gives private companies monopoly control over the product. In a recent example, we paid Moderna to develop a COVID vaccine and then gave them control over it, creating at least five Moderna billionaires.  

We have allowed our financial sector to become incredibly bloated, creating many millionaires and billionaires, even as we demand efficiency elsewhere. We give Elon Musk and Mark Zuckerberg Section 230 protection against defamation suits that their counterparts in print and broadcast media do not enjoy.

And, as was recently highlighted with the UAW strike, our CEOs make far more than the CEOS of comparably sized companies in other wealthy countries. The difference is as much as a factor of ten in the case of Japanese companies. This is not due to the natural workings of the market, this is the result of a corrupt corporate governance structure that allows the CEOs to have their friends set their pay.

Yes, I am again talking about my book (it’s free). It is absurd to obsess about tax and transfer policy while ignoring the ways in which the government structures the market to determine winners and losers. It is understandable that the right would like tax and transfer policy to be the focus of public debate, since the default is a market outcome that leaves most money with the rich.

However, it is beyond absurd that people who consider themselves progressive would accept this framing. We can structure the market differently to get more equitable market outcomes. This should be front and center in public debate. Unfortunately, the right wants to hide the fact that we can structure the market differently, and progressives are all too willing to go along.  

Future of the Planet

There is a final point on the sort of generational scorecard implied by these calculations of Social Security and Medicare benefits. We don’t just hand our children a tax bill, we hand them an entire economy, society, and planet.

If we experience anything resembling normal economic growth, average wages will be far higher twenty or thirty years from now than they are today. Will the typical worker see these wage gains? That will depend on distribution within generations, not between generations.

We also see costs from items like the military. When I was growing up in the 1960s we paid a much larger share of our GDP to support the Cold War. (Young men were also drafted.) We will again pay lots more money for the military if we have a new Cold War with China. The implied taxes don’t figure into the Social Security and Medicare calculations, but will be every bit as much of a drain on the income of people in the future as taxes for these programs.

And, we should always have global warming front and center. If we paid off the national debt and eliminated the programs to support retirees, but did nothing to restrain global warming, our children and grandchildren would not have much reason to thank us. First and foremost, we must give them a livable planet.

Phony Answers to a Phony Question

The whole subsidy to retiree story is a diversion from the many important issues facing the country. Even the core idea, that we don’t adequately support the young because we give too much to the elderly is wrong.

We saw this very clearly in the debate over the extension of the child tax credit. As with everything in Congress, much is determined by narrow political considerations. Republicans had no interest in giving President Biden and the Democrats a win, but the bill could have passed without Republican votes.

The deciding factor was the refusal of West Virginia Senator Joe Manchin to support the bill. Senator Manchin was very clear on his concerns. He didn’t argue that we were spending too much on retirees, he didn’t want low-income people to have the money.

This is in general the story as to why we don’t have adequate funding for early childhood education, children’s nutrition, day care and other programs that would benefit children. There is a substantial political bloc that does not want to fund these programs. And, they still would not want to fund these programs even if we didn’t pay a dime for Social Security and Medicare.

[1] This is not strictly true, since the premium payment that retirees make for Part B and Part D of the Medicare program depends on income in retirement.

Eduardo Porter had an interesting column in the Washington Post last week in which he argued that trade will be important in slowing climate change. The basic point is that we could do a lot to reduce emissions by encouraging people to buy items where they are produced with the least emissions. The point is well-taken even if Porter’s preferred mechanism, a carbon tax, is a political impossibility for the foreseeable future.

However, what is striking in Porter’s piece, and others making similar arguments, is the refusal to talk about trade in intellectual products, which is arguably a far more important issue in addressing climate change. If that claim sounds strange, it’s probably because of the taboo on even raising the issue in polite discussions.

The basic point is that the United States and other countries are developing a wide range of technologies in areas like wind and solar energy, electric cars, and energy storage, which will be essential for reducing greenhouse gas emissions. If we want these technologies to be as widely adopted as quickly as possible, we should want them to be freely available to everyone at the point they are developed.

In fact, our laws on intellectual property are explicitly designed to prevent technology from being freely available. Patent monopolies prevent anyone from using technologies without the permission of the patent holder.

These monopolies are an extreme form of protection. While modern tariffs rarely exceed 25 or 30 percent, a patent monopoly can make the price of a protected item two or three times its free market price, the equivalent of a tariff of 200 or 300 percent. If we want people to quickly switch to wind or solar power we should want wind turbines and solar panels selling at prices as close to their production cost as possible, not patent monopoly protected prices.

There is the obvious point that we need to provide people with an incentive to innovate in these areas, and the patent monopoly does that. This is true, but there are other ways to provide incentives, most notably we can just pay them upfront for the research.

This is what we did with Moderna when it contracted with Operation Warp Speed to develop a Covid vaccine. The government paid Moderna almost a billion dollars to develop and test the vaccine. Since it was paid upfront, the risk was entirely on the government’s hands. If it turned out that it didn’t work, the government would have been out a billion and Moderna would have still made a decent profit on its work.

Thankfully, the vaccine did work so the government’s money was well spent. Incredibly, we also gave Moderna control over the vaccine, enabling it to make tens of billions of dollars on government-funded research and creating at least five Moderna billionaires.

We can take the first half of the Moderna model and apply it to climate change technologies. We can pay money for the research and then let the resulting innovations sell in a free market. Ideally, we would arrange for other countries to also fund research, making its output freely available as well.

Going this route would also have the advantage that we could require that all funded research be fully open, with results posted on the web as quickly as practical. This would allow researchers everywhere to benefit quickly from the latest findings of other researchers anywhere in the world. They could then build on successes and avoid dead ends.

Unfortunately, the Washington Post and other leading media outlets won’t even allow this sort of discussion of free trade. Needless to say, patent monopolies contribute enormously to inequality in the distribution of income, and those who own and control major media outlets would rather not have questions about patent protection and other forms of intellectual property raised in polite company.

That was the story with the pandemic. The obvious route to have taken at the start of the pandemic, if saving lives was the issue, was to have complete sharing of technology among all countries. We could sort out later who should be compensated and how much.

At the end of the day, some companies or individuals may walk away thinking they didn’t get what they deserved, but so what? We could have spread vaccines, tests, and treatments far more quickly, likely saving millions of lives.  

Anyhow, the moral of this story is that as much as trade will be important to dealing with climate change, in polite circles we can only talk about some types of trade. If we start raising questions about the protections that provide the basis for the income of many of the rich, then discussions of trade are not on the agenda.  

Eduardo Porter had an interesting column in the Washington Post last week in which he argued that trade will be important in slowing climate change. The basic point is that we could do a lot to reduce emissions by encouraging people to buy items where they are produced with the least emissions. The point is well-taken even if Porter’s preferred mechanism, a carbon tax, is a political impossibility for the foreseeable future.

However, what is striking in Porter’s piece, and others making similar arguments, is the refusal to talk about trade in intellectual products, which is arguably a far more important issue in addressing climate change. If that claim sounds strange, it’s probably because of the taboo on even raising the issue in polite discussions.

The basic point is that the United States and other countries are developing a wide range of technologies in areas like wind and solar energy, electric cars, and energy storage, which will be essential for reducing greenhouse gas emissions. If we want these technologies to be as widely adopted as quickly as possible, we should want them to be freely available to everyone at the point they are developed.

In fact, our laws on intellectual property are explicitly designed to prevent technology from being freely available. Patent monopolies prevent anyone from using technologies without the permission of the patent holder.

These monopolies are an extreme form of protection. While modern tariffs rarely exceed 25 or 30 percent, a patent monopoly can make the price of a protected item two or three times its free market price, the equivalent of a tariff of 200 or 300 percent. If we want people to quickly switch to wind or solar power we should want wind turbines and solar panels selling at prices as close to their production cost as possible, not patent monopoly protected prices.

There is the obvious point that we need to provide people with an incentive to innovate in these areas, and the patent monopoly does that. This is true, but there are other ways to provide incentives, most notably we can just pay them upfront for the research.

This is what we did with Moderna when it contracted with Operation Warp Speed to develop a Covid vaccine. The government paid Moderna almost a billion dollars to develop and test the vaccine. Since it was paid upfront, the risk was entirely on the government’s hands. If it turned out that it didn’t work, the government would have been out a billion and Moderna would have still made a decent profit on its work.

Thankfully, the vaccine did work so the government’s money was well spent. Incredibly, we also gave Moderna control over the vaccine, enabling it to make tens of billions of dollars on government-funded research and creating at least five Moderna billionaires.

We can take the first half of the Moderna model and apply it to climate change technologies. We can pay money for the research and then let the resulting innovations sell in a free market. Ideally, we would arrange for other countries to also fund research, making its output freely available as well.

Going this route would also have the advantage that we could require that all funded research be fully open, with results posted on the web as quickly as practical. This would allow researchers everywhere to benefit quickly from the latest findings of other researchers anywhere in the world. They could then build on successes and avoid dead ends.

Unfortunately, the Washington Post and other leading media outlets won’t even allow this sort of discussion of free trade. Needless to say, patent monopolies contribute enormously to inequality in the distribution of income, and those who own and control major media outlets would rather not have questions about patent protection and other forms of intellectual property raised in polite company.

That was the story with the pandemic. The obvious route to have taken at the start of the pandemic, if saving lives was the issue, was to have complete sharing of technology among all countries. We could sort out later who should be compensated and how much.

At the end of the day, some companies or individuals may walk away thinking they didn’t get what they deserved, but so what? We could have spread vaccines, tests, and treatments far more quickly, likely saving millions of lives.  

Anyhow, the moral of this story is that as much as trade will be important to dealing with climate change, in polite circles we can only talk about some types of trade. If we start raising questions about the protections that provide the basis for the income of many of the rich, then discussions of trade are not on the agenda.  

The Washington Post ran another “trash the Biden economy, let the facts be damned” piece today.  The theme is that the economy is really awful for new college grads. The paper finds us a few real-life examples of struggling recent grads to make its case.

The problem is that the data in the article actually tell the opposite story. While it tells us that the unemployment rate for recent college grads is higher than for the workforce as a whole, it actually is lower than it had been for most of the decade prior to the pandemic.

In fact, instead of being a bad time for recent college grads, the data shown in the graph in the article indicate that their employment prospects are relatively good today. Their unemployment rate was more than 30 percent higher a decade ago.

In fact, this is a point made by the economists featured in the article. The experience of recent grads only looks bad compared to the strong labor market for other workers, it is not a story of recent grads becoming impoverished.

This fact comes out in the other major data point in the piece, the share of young adults (ages 18 to 24) living at home. While it tells us that the share is higher than in 2019, the chart in the piece tells a different story.

For men in this age group, the share living at home is higher than lows hit in 2005-07, just before the Great Recession, but well below the average of the last two decades. There had been an upward trend in the share of women in this age group living at home, with a big pandemic jump. This pandemic jump has now been largely reversed. In other words, the story here is that fewer young women are living at home.

So, the Post really doesn’t have a case for new college grads struggling, but it apparently wants to tell a bad economy story and doesn’t intend to let reality stand in the way.

The Washington Post ran another “trash the Biden economy, let the facts be damned” piece today.  The theme is that the economy is really awful for new college grads. The paper finds us a few real-life examples of struggling recent grads to make its case.

The problem is that the data in the article actually tell the opposite story. While it tells us that the unemployment rate for recent college grads is higher than for the workforce as a whole, it actually is lower than it had been for most of the decade prior to the pandemic.

In fact, instead of being a bad time for recent college grads, the data shown in the graph in the article indicate that their employment prospects are relatively good today. Their unemployment rate was more than 30 percent higher a decade ago.

In fact, this is a point made by the economists featured in the article. The experience of recent grads only looks bad compared to the strong labor market for other workers, it is not a story of recent grads becoming impoverished.

This fact comes out in the other major data point in the piece, the share of young adults (ages 18 to 24) living at home. While it tells us that the share is higher than in 2019, the chart in the piece tells a different story.

For men in this age group, the share living at home is higher than lows hit in 2005-07, just before the Great Recession, but well below the average of the last two decades. There had been an upward trend in the share of women in this age group living at home, with a big pandemic jump. This pandemic jump has now been largely reversed. In other words, the story here is that fewer young women are living at home.

So, the Post really doesn’t have a case for new college grads struggling, but it apparently wants to tell a bad economy story and doesn’t intend to let reality stand in the way.

Can you imagine doing a 1300-word piece on how ordinary people are faring in the economy and never once mentioning unemployment? Apparently, the New York Times opinion page editors don’t think jobs matter to people, since they ran a column by Karen Petrou (the managing partner of Federal Financial Analytics) that didn’t mention unemployment once. The piece is titled “Why Voters Aren’t Buying Biden’s Boasts About Bidenomics” and uses a cornucopia of bad economics to argue the case against Biden.

It’s hard to know where to begin in addressing this piece, so it’s probably best to start where the piece starts.

“On Oct. 26, the Department of Commerce announced that gross domestic product had grown at an annual rate of 4.9 percent in the third quarter. This growth rate ran well above even optimistic forecasts, leading to what can only be called triumphalism from a White House dead-set on making “Bidenomics” a key to its 2024 presidential campaign. President Biden issued a self-congratulatory statement, the White House echoed it over and over — and Donald Trump’s relative popularity increased.”

Like every president, Biden has talked about economic growth. But he also talks about jobs and wages, sort of like all the time, as when he touted the big wage gains by UAW workers following their strike (which he supported). In fact, the very next week after the GDP report, Biden was very happy to boast about the 21st consecutive month of unemployment below 4.0 percent when the October jobs data were released.

Low unemployment is actually a very big deal for workers, not only because it means they have jobs, but it means that they can leave jobs they don’t like and find better ones. Workers have been doing this in large numbers since the unemployment rate fell to extraordinarily low levels in early 2022. As a result, according to the Conference Board, workplace satisfaction is at its highest level in the nearly forty years they have conducted the survey.

Biden also was happy to boast about wages that were outstripping inflation, a point that sort of squeaks through in the confusion in Petrou’s piece. The piece includes a graph of nominal wage growth and nominal price growth.

The graph shows wage growth modestly outstripping prices through most of Trump’s term, and then hugely outstripping prices in 2020. For Biden we get the opposite story, prices outpaced wages in 2021, then hugely outpaced wages in 2022, but inflation then dropped and wages are again outpacing inflation, with the biggest gains for those at the bottom (contrary to what Petrou told readers).  

The pattern here is not much of a mystery to people who follow the economy. Wages hugely outstripped prices in 2020 because tens of millions of low-paid workers in restaurants, hotels and other service industries lost their jobs. When you get rid of low-paid workers, the average wage rises, just as the average height in a room increases if we get the short people to leave.

We saw the opposite story in 2021 as low-paid workers got their jobs back. We also did have the problem of serious supply disruptions created by the pandemic and Russia’s invasion of Ukraine. As the supply problems have eased inflation has come back down.  

Inflation due to the pandemic was a worldwide phenomenon, not just something that hit the United States. In fact, we have dealt with the problem very well. The U.S. inflation rate is now the second lowest among major economies, only slightly higher than Japan’s.

It is fair to say that people don’t care that things are worse in Germany or Canada, they care about their own finances. But, Petrou is quite explicitly making an attack on Bidenomics as policy, not the fact that the economy has faced huge headwinds that would have caused serious problems regardless of what policies were pursued.  

Ignoring the importance of the pandemic and the Russian invasion would be like complaining about the shortage of housing in an area just devastated by a hurricane and not noting the hurricane. It is understandable that the average person might recognize the damage done by a hurricane more readily than the economic damage caused by the pandemic, but it would be reasonable to expect that a person writing for the New York Times would be familiar with the impact of the pandemic.   

Petrou highlights polls showing that most people think that the economy is doing badly and they are not buying Biden’s boasts. That is true, but a recent poll gives us important insights on this point.

The poll shows that roughly half the people think that the economy in their town or city is doing okay, but just 26 percent think the national economy is doing well. This huge gap between people’s assessment of their local economy and their assessment of the national economy cannot be explained by their personal experience. Rather this gap must be attributable to things that they are hearing about the economy from places like Fox News and the New York Times.

 

Can you imagine doing a 1300-word piece on how ordinary people are faring in the economy and never once mentioning unemployment? Apparently, the New York Times opinion page editors don’t think jobs matter to people, since they ran a column by Karen Petrou (the managing partner of Federal Financial Analytics) that didn’t mention unemployment once. The piece is titled “Why Voters Aren’t Buying Biden’s Boasts About Bidenomics” and uses a cornucopia of bad economics to argue the case against Biden.

It’s hard to know where to begin in addressing this piece, so it’s probably best to start where the piece starts.

“On Oct. 26, the Department of Commerce announced that gross domestic product had grown at an annual rate of 4.9 percent in the third quarter. This growth rate ran well above even optimistic forecasts, leading to what can only be called triumphalism from a White House dead-set on making “Bidenomics” a key to its 2024 presidential campaign. President Biden issued a self-congratulatory statement, the White House echoed it over and over — and Donald Trump’s relative popularity increased.”

Like every president, Biden has talked about economic growth. But he also talks about jobs and wages, sort of like all the time, as when he touted the big wage gains by UAW workers following their strike (which he supported). In fact, the very next week after the GDP report, Biden was very happy to boast about the 21st consecutive month of unemployment below 4.0 percent when the October jobs data were released.

Low unemployment is actually a very big deal for workers, not only because it means they have jobs, but it means that they can leave jobs they don’t like and find better ones. Workers have been doing this in large numbers since the unemployment rate fell to extraordinarily low levels in early 2022. As a result, according to the Conference Board, workplace satisfaction is at its highest level in the nearly forty years they have conducted the survey.

Biden also was happy to boast about wages that were outstripping inflation, a point that sort of squeaks through in the confusion in Petrou’s piece. The piece includes a graph of nominal wage growth and nominal price growth.

The graph shows wage growth modestly outstripping prices through most of Trump’s term, and then hugely outstripping prices in 2020. For Biden we get the opposite story, prices outpaced wages in 2021, then hugely outpaced wages in 2022, but inflation then dropped and wages are again outpacing inflation, with the biggest gains for those at the bottom (contrary to what Petrou told readers).  

The pattern here is not much of a mystery to people who follow the economy. Wages hugely outstripped prices in 2020 because tens of millions of low-paid workers in restaurants, hotels and other service industries lost their jobs. When you get rid of low-paid workers, the average wage rises, just as the average height in a room increases if we get the short people to leave.

We saw the opposite story in 2021 as low-paid workers got their jobs back. We also did have the problem of serious supply disruptions created by the pandemic and Russia’s invasion of Ukraine. As the supply problems have eased inflation has come back down.  

Inflation due to the pandemic was a worldwide phenomenon, not just something that hit the United States. In fact, we have dealt with the problem very well. The U.S. inflation rate is now the second lowest among major economies, only slightly higher than Japan’s.

It is fair to say that people don’t care that things are worse in Germany or Canada, they care about their own finances. But, Petrou is quite explicitly making an attack on Bidenomics as policy, not the fact that the economy has faced huge headwinds that would have caused serious problems regardless of what policies were pursued.  

Ignoring the importance of the pandemic and the Russian invasion would be like complaining about the shortage of housing in an area just devastated by a hurricane and not noting the hurricane. It is understandable that the average person might recognize the damage done by a hurricane more readily than the economic damage caused by the pandemic, but it would be reasonable to expect that a person writing for the New York Times would be familiar with the impact of the pandemic.   

Petrou highlights polls showing that most people think that the economy is doing badly and they are not buying Biden’s boasts. That is true, but a recent poll gives us important insights on this point.

The poll shows that roughly half the people think that the economy in their town or city is doing okay, but just 26 percent think the national economy is doing well. This huge gap between people’s assessment of their local economy and their assessment of the national economy cannot be explained by their personal experience. Rather this gap must be attributable to things that they are hearing about the economy from places like Fox News and the New York Times.

 

Local journalism serves an essential public service, providing people with information about the problems facing their communities and efforts to address them. It is also an essential check on corruption. Journalists have exposed a vast number of crimes in both the public and private sector.

Without effective journalism, it is a sure bet there would be far more corruption than is currently the case. We may not know about it, because no one would be reporting on it, but we would be paying for it in higher prices, lower quality and less safe products, and less safe working conditions and lower pay.

As it stands, local journalism is not profitable without government support. The problem is that the information reporters uncover can be transferred at essentially zero cost. This was always the case, but it became especially true in the Internet Age, where information can be passed along instantly over the web. (Government-granted copyright monopolies are one form of public subsidy, but this has diminished value when information can be quickly circulated over the web.)

While the public might benefit hugely from knowing that a politician is stealing their tax dollars, the market does not require them to pay the reporters who discover the theft. If no one pays the reporters who do the investigating, then we don’t get the investigations, and the theft continues unchecked.

Addressing the Funding Shortfall

There are at least two ongoing efforts to support local journalism through a system of individual vouchers. One of them is still in nascent form in Seattle and the other is a bill introduced in Washington, DC  by City Councilmember Janeese Lewis George. These proposals stem from work that has been done over recent decades on ways to support journalism as newspapers close and the survivors lay off journalists.

The proposals are still works in progress, but the basic idea is that a sum of money would be put aside for individuals to allocate to support the journalistic work of their choice. In the DC proposal, which is now available on the web, the work that is supported through this mechanism would be freely available to the public without paywalls. There are differences in how the mechanism works and what journalism qualifies for funding, but the basic principle is straightforward.

The logic of an individual voucher system is that it lets individuals decide which news outlets are worth their support. Rather than having the government determine which news outlets and journalists should be supported, this leaves the choice to individuals.

The closest analogy to this sort of system is the tax deduction for charitable contributions. Under this system, to qualify for tax-deductible contributions, an organization has to register with the I.R.S. and state what it does that qualifies for tax-exempt status. The I.R.S. simply verifies that the organization does what it claims. It makes no effort to determine whether the organization is a good museum, think tank, or church. It only determines that it is a museum, think tank, or church. It is up to the individuals donating the money to determine which ones merit their contributions.

The government would play a comparable role with local journalism vouchers. It would set rules as to what qualifies as local journalism and would ensure that news outlets meet these criteria. It is up to individuals to determine which outlets merit their vouchers.

Criticism of the Local Journalism Voucher Model

While this approach is just now gaining some public traction, there have already been some serious criticisms raised. Specifically, Brier Dudley, the Seattle Times Free Press editor, has raised a number of objections to the proposal being crafted in Seattle.

He has a serious perspective on this issue, and his points are worth addressing. He argues that vouchers have serious problems. He suggests as an alternative, the Journalism Competition and Preservation Act, a bill that has been introduced in Congress, which would allow smaller news outlets to collectively negotiate with Google, Meta, and other Internet platforms for a portion of their ad revenue.

The first and most important point in Dudley’s criticism is the potential problem of low participation. Dudley points out that participation rates for Seattle’s democracy voucher program is very low. This program is to some extent a model for the news voucher program. Under the democracy voucher program, voters in Seattle get public money in the form of vouchers that they can contribute to support the campaigns of candidates for local office. This program has been very expensive to administer and only around 10 percent of the vouchers have been used.

Dudley also points out that there have been some questionable uses of these vouchers, with one candidate apparently spending more money in winning democracy vouchers than in winning votes. This is a very serious concern.

There is a way around this problem, which the DC bill uses. The amount of the voucher is not fixed in advance, rather the total funding is fixed and the amount of the voucher adjusts to the number that are used. The entire system is on-line so this minimizes any costs associated with distributing and collecting physical vouchers.

This means, for example, if $10 million is designated for the program (a bit less than the $11 million actual sum in DC) and 100,000 people use the voucher, then each one is worth $100. If only 10,000 people decide to use the voucher, then each one is worth $1,000.

This approach has two important effects. First, it ensures that a substantial sum will be distributed to support local journalism from the program’s inception. Low participation will not translate into an underfunded program. This also means that news outlets will understand that there is money available to them, if they choose to seek it out.

The second is that the problem of low participation is likely to be self-correcting. If only 10,000 people participate, and each voucher ends up being worth $1,000, it is likely to get people angry. Their route to correct the problem is to use the vouchers themselves.

This parallels a story that Alan Greenspan tells in his autobiography. As Chair of the Federal Reserve Board, Greenspan sat on the board of the Resolution Trust Corporation (RTC), the agency set up to sell off the assets of the Savings and Loans that went bankrupt in the 1980s.

In the RTC’s first major auction, assets sold at ridiculously low prices. There were stories of perfectly fine middle-class homes selling for $5,000, which was absurdly low even then. These stories created a mini-scandal. However, they led to many more people taking part in later auctions, which led to much more reasonable prices.

According to Greenspan in his autobiography, the low prices and mini-scandal was by design. He knew that reports of great bargains would increase interest in the auctions. (I don’t believe him, I think they just failed to publicize the auctions adequately.)

Anyhow, there is a valid point here that the DC design of the news voucher system takes into account. If people see that they will have a large chunk of money to give to whatever news outlets they value, they will take advantage of the opportunity to use the money. If the first round has low participation, it is likely that the high value of each voucher will lead many more people to participate in subsequent rounds. 

Dudley is of course right that any sort of subsidy system does pose a risk of abuse. The most immediate check is that people ideally have some knowledge of the news outlet to whom they are contributing, and won’t give their money to an outlet that doesn’t perform useful work. But there are no guarantees.

We know that there are many cases where charities abuse their I.R.S. tax-exempt status, which effectively is a taxpayer subsidy of 40 cents on each dollar given. There are instances where the top people running charities line their pockets and actually use very little of their donations for the ostensible purpose of the organization. In spite of these abuses, there are relatively few voices calling for the elimination of the deduction for charitable contributions. (It is worth noting that Mr. Dudley’s employer, the Seattle Times, has opted to take advantage of this subsidy by setting up a non-profit to support investigative journalism.)

The Journalism Competition and Preservation Act as an Alternative

The main thrust of the Journalism Competition and Preservation Act (JCPA) is to effectively provide an anti-trust exception, so that smaller news outlets can collectively negotiate with the Internet giants. While this would likely be good policy (the Internet giants do have huge market power), it is not likely to be sufficient to reverse the loss of funding to local news outlets in recent decades.  

Extrapolating from the experience in Australia, where negotiations have yielded roughly $50 million in annual revenue, a comparable law in the U.S. would yield in the neighborhood of $600 to $800 million annually. That would clearly be a substantial help, but would not nearly make up for the drop in revenue to newspapers over the last three decades.

There are also two areas where the voucher approach has a huge advantage over the JCPA. First, the voucher approach would not just look to preserve the current structure in the news business. It is consciously intended to open the door to new voices and perspectives. This is a huge issue, since public trust in the media has fallen through the floor in recent decades.

It is understandable that the prospect of new competition might make some of the existing news outlets unhappy, but if we want news media that are truly responsive to the public’s needs, we should be trying to structure it in a way that opens as many doors as possible. The voucher system does this, whereas the JCPA simply gets more funding for existing outlets.

The other important advantage of the voucher system is that it will produce material that is available to the public at no cost. We want people to have as much access to information as possible. While it might be good for people to buy subscriptions to their local paper, most people don’t. Even if there are ways around paywalls and people can still share information, ideally we should want information to be spread as cheaply as possible.

Economists usually want items to sell at their marginal cost. This means the price should be what it cost to produce one more loaf of bread, one more shirt, or one more paper clip. The marginal cost of transferring a news article is zero. The voucher system allows for it to sell at that price, the current system does not. This makes it as cheap as possible to have a well-informed public since anyone with access to the web could have full access to all the material supported by the voucher system.

Local or National Measures

Dudley also argues that the problem of supporting local journalism is far better addressed at the national level, since it is a national problem. Also, the national government’s finances are far more robust than those of any city. Even in a downturn, the federal government is not restricted in its spending.

This point is well-taken, but it ignores the current political environment. We have one house of Congress controlled by a party that seems to think shutting down the government is an end in itself. Even the JCPA is likely an undoable lift with a Republican Party that seems unwilling to do anything that might impinge on corporate profits.

A major part of the rationale for creating voucher systems at the local level is to show that they are workable. If Seattle and Washington, DC take the lead in setting up these systems, and they prove popular, other cities are sure to follow. And, if there is a track record of success, it is likely there will be a push to have a public journalism voucher system implemented nationally.

There are many examples of policies advancing along these lines, notably unemployment insurance and the minimum wage. Congress is quite reasonably reluctant to take big steps in uncharted water, but when a system has been demonstrated to be effective at the state or local level, there is less risk in adopting it nationally. Congress also then has the benefit of seeing the plusses and minuses of a system that is actually in practice, rather than drawing it up from scratch.

In short, adopting a system like the journalism vouchers at the local level is not an alternative to doing it at the national level. It is a necessary step in that direction.  

 

Local Journalism Vouchers – Big Potential Gains, Little Downside Risk

The proposals being crafted in Seattle and Washington, DC draw on several decades of analysis and debate among academics and journalists. They surely are not perfect, but they offer a clear route for addressing a real problem.

Even if they are adopted and there ends up being less to show than their advocates (including me) expect, we will not walk away empty-handed. Some number of news outlets and serious reporters will be supported with this funding. There will be investigations that would not have otherwise been undertaken and news stories that would not have been written and read. Perhaps most importantly, the system will have supported a number of journalists for its duration, helping them to develop skills, which they can then use in other contexts, even if the voucher system does not survive.

For these reasons, there seems very little downside risk in trying the local journalism voucher route. And, there are enormous potential benefits.

Local journalism serves an essential public service, providing people with information about the problems facing their communities and efforts to address them. It is also an essential check on corruption. Journalists have exposed a vast number of crimes in both the public and private sector.

Without effective journalism, it is a sure bet there would be far more corruption than is currently the case. We may not know about it, because no one would be reporting on it, but we would be paying for it in higher prices, lower quality and less safe products, and less safe working conditions and lower pay.

As it stands, local journalism is not profitable without government support. The problem is that the information reporters uncover can be transferred at essentially zero cost. This was always the case, but it became especially true in the Internet Age, where information can be passed along instantly over the web. (Government-granted copyright monopolies are one form of public subsidy, but this has diminished value when information can be quickly circulated over the web.)

While the public might benefit hugely from knowing that a politician is stealing their tax dollars, the market does not require them to pay the reporters who discover the theft. If no one pays the reporters who do the investigating, then we don’t get the investigations, and the theft continues unchecked.

Addressing the Funding Shortfall

There are at least two ongoing efforts to support local journalism through a system of individual vouchers. One of them is still in nascent form in Seattle and the other is a bill introduced in Washington, DC  by City Councilmember Janeese Lewis George. These proposals stem from work that has been done over recent decades on ways to support journalism as newspapers close and the survivors lay off journalists.

The proposals are still works in progress, but the basic idea is that a sum of money would be put aside for individuals to allocate to support the journalistic work of their choice. In the DC proposal, which is now available on the web, the work that is supported through this mechanism would be freely available to the public without paywalls. There are differences in how the mechanism works and what journalism qualifies for funding, but the basic principle is straightforward.

The logic of an individual voucher system is that it lets individuals decide which news outlets are worth their support. Rather than having the government determine which news outlets and journalists should be supported, this leaves the choice to individuals.

The closest analogy to this sort of system is the tax deduction for charitable contributions. Under this system, to qualify for tax-deductible contributions, an organization has to register with the I.R.S. and state what it does that qualifies for tax-exempt status. The I.R.S. simply verifies that the organization does what it claims. It makes no effort to determine whether the organization is a good museum, think tank, or church. It only determines that it is a museum, think tank, or church. It is up to the individuals donating the money to determine which ones merit their contributions.

The government would play a comparable role with local journalism vouchers. It would set rules as to what qualifies as local journalism and would ensure that news outlets meet these criteria. It is up to individuals to determine which outlets merit their vouchers.

Criticism of the Local Journalism Voucher Model

While this approach is just now gaining some public traction, there have already been some serious criticisms raised. Specifically, Brier Dudley, the Seattle Times Free Press editor, has raised a number of objections to the proposal being crafted in Seattle.

He has a serious perspective on this issue, and his points are worth addressing. He argues that vouchers have serious problems. He suggests as an alternative, the Journalism Competition and Preservation Act, a bill that has been introduced in Congress, which would allow smaller news outlets to collectively negotiate with Google, Meta, and other Internet platforms for a portion of their ad revenue.

The first and most important point in Dudley’s criticism is the potential problem of low participation. Dudley points out that participation rates for Seattle’s democracy voucher program is very low. This program is to some extent a model for the news voucher program. Under the democracy voucher program, voters in Seattle get public money in the form of vouchers that they can contribute to support the campaigns of candidates for local office. This program has been very expensive to administer and only around 10 percent of the vouchers have been used.

Dudley also points out that there have been some questionable uses of these vouchers, with one candidate apparently spending more money in winning democracy vouchers than in winning votes. This is a very serious concern.

There is a way around this problem, which the DC bill uses. The amount of the voucher is not fixed in advance, rather the total funding is fixed and the amount of the voucher adjusts to the number that are used. The entire system is on-line so this minimizes any costs associated with distributing and collecting physical vouchers.

This means, for example, if $10 million is designated for the program (a bit less than the $11 million actual sum in DC) and 100,000 people use the voucher, then each one is worth $100. If only 10,000 people decide to use the voucher, then each one is worth $1,000.

This approach has two important effects. First, it ensures that a substantial sum will be distributed to support local journalism from the program’s inception. Low participation will not translate into an underfunded program. This also means that news outlets will understand that there is money available to them, if they choose to seek it out.

The second is that the problem of low participation is likely to be self-correcting. If only 10,000 people participate, and each voucher ends up being worth $1,000, it is likely to get people angry. Their route to correct the problem is to use the vouchers themselves.

This parallels a story that Alan Greenspan tells in his autobiography. As Chair of the Federal Reserve Board, Greenspan sat on the board of the Resolution Trust Corporation (RTC), the agency set up to sell off the assets of the Savings and Loans that went bankrupt in the 1980s.

In the RTC’s first major auction, assets sold at ridiculously low prices. There were stories of perfectly fine middle-class homes selling for $5,000, which was absurdly low even then. These stories created a mini-scandal. However, they led to many more people taking part in later auctions, which led to much more reasonable prices.

According to Greenspan in his autobiography, the low prices and mini-scandal was by design. He knew that reports of great bargains would increase interest in the auctions. (I don’t believe him, I think they just failed to publicize the auctions adequately.)

Anyhow, there is a valid point here that the DC design of the news voucher system takes into account. If people see that they will have a large chunk of money to give to whatever news outlets they value, they will take advantage of the opportunity to use the money. If the first round has low participation, it is likely that the high value of each voucher will lead many more people to participate in subsequent rounds. 

Dudley is of course right that any sort of subsidy system does pose a risk of abuse. The most immediate check is that people ideally have some knowledge of the news outlet to whom they are contributing, and won’t give their money to an outlet that doesn’t perform useful work. But there are no guarantees.

We know that there are many cases where charities abuse their I.R.S. tax-exempt status, which effectively is a taxpayer subsidy of 40 cents on each dollar given. There are instances where the top people running charities line their pockets and actually use very little of their donations for the ostensible purpose of the organization. In spite of these abuses, there are relatively few voices calling for the elimination of the deduction for charitable contributions. (It is worth noting that Mr. Dudley’s employer, the Seattle Times, has opted to take advantage of this subsidy by setting up a non-profit to support investigative journalism.)

The Journalism Competition and Preservation Act as an Alternative

The main thrust of the Journalism Competition and Preservation Act (JCPA) is to effectively provide an anti-trust exception, so that smaller news outlets can collectively negotiate with the Internet giants. While this would likely be good policy (the Internet giants do have huge market power), it is not likely to be sufficient to reverse the loss of funding to local news outlets in recent decades.  

Extrapolating from the experience in Australia, where negotiations have yielded roughly $50 million in annual revenue, a comparable law in the U.S. would yield in the neighborhood of $600 to $800 million annually. That would clearly be a substantial help, but would not nearly make up for the drop in revenue to newspapers over the last three decades.

There are also two areas where the voucher approach has a huge advantage over the JCPA. First, the voucher approach would not just look to preserve the current structure in the news business. It is consciously intended to open the door to new voices and perspectives. This is a huge issue, since public trust in the media has fallen through the floor in recent decades.

It is understandable that the prospect of new competition might make some of the existing news outlets unhappy, but if we want news media that are truly responsive to the public’s needs, we should be trying to structure it in a way that opens as many doors as possible. The voucher system does this, whereas the JCPA simply gets more funding for existing outlets.

The other important advantage of the voucher system is that it will produce material that is available to the public at no cost. We want people to have as much access to information as possible. While it might be good for people to buy subscriptions to their local paper, most people don’t. Even if there are ways around paywalls and people can still share information, ideally we should want information to be spread as cheaply as possible.

Economists usually want items to sell at their marginal cost. This means the price should be what it cost to produce one more loaf of bread, one more shirt, or one more paper clip. The marginal cost of transferring a news article is zero. The voucher system allows for it to sell at that price, the current system does not. This makes it as cheap as possible to have a well-informed public since anyone with access to the web could have full access to all the material supported by the voucher system.

Local or National Measures

Dudley also argues that the problem of supporting local journalism is far better addressed at the national level, since it is a national problem. Also, the national government’s finances are far more robust than those of any city. Even in a downturn, the federal government is not restricted in its spending.

This point is well-taken, but it ignores the current political environment. We have one house of Congress controlled by a party that seems to think shutting down the government is an end in itself. Even the JCPA is likely an undoable lift with a Republican Party that seems unwilling to do anything that might impinge on corporate profits.

A major part of the rationale for creating voucher systems at the local level is to show that they are workable. If Seattle and Washington, DC take the lead in setting up these systems, and they prove popular, other cities are sure to follow. And, if there is a track record of success, it is likely there will be a push to have a public journalism voucher system implemented nationally.

There are many examples of policies advancing along these lines, notably unemployment insurance and the minimum wage. Congress is quite reasonably reluctant to take big steps in uncharted water, but when a system has been demonstrated to be effective at the state or local level, there is less risk in adopting it nationally. Congress also then has the benefit of seeing the plusses and minuses of a system that is actually in practice, rather than drawing it up from scratch.

In short, adopting a system like the journalism vouchers at the local level is not an alternative to doing it at the national level. It is a necessary step in that direction.  

 

Local Journalism Vouchers – Big Potential Gains, Little Downside Risk

The proposals being crafted in Seattle and Washington, DC draw on several decades of analysis and debate among academics and journalists. They surely are not perfect, but they offer a clear route for addressing a real problem.

Even if they are adopted and there ends up being less to show than their advocates (including me) expect, we will not walk away empty-handed. Some number of news outlets and serious reporters will be supported with this funding. There will be investigations that would not have otherwise been undertaken and news stories that would not have been written and read. Perhaps most importantly, the system will have supported a number of journalists for its duration, helping them to develop skills, which they can then use in other contexts, even if the voucher system does not survive.

For these reasons, there seems very little downside risk in trying the local journalism voucher route. And, there are enormous potential benefits.

Should We be Worried About the Deficit Now?

The shrieks of the deficit hawks have been growing louder with the fiscal 2023 deficit crossing 6.0 percent of GDP, and the projected future deficits being no lower. With interest rates now close to or above GDP growth, we regularly hear about the story of a looming debt spiral, where high debt leads to high interest payments, which add to annual deficits, making the debt even larger.  

To try to think clearly about the deficit and debt, it is worth pulling them apart and dealing with them as separate issues. This avoids many common sources of confusion.

Is the Deficit Too Large? Is Inflation Out of Control?

Back in the old days we used to argue about whether we needed to balance the budget. With a deficit of more than 6.0 percent of GDP, that question seems pretty much moot. If we wanted to balance the budget with tax increases, we would need to increase revenue by almost a third. If we tried to do this on the spending side, we would need cuts in non-interest spending of almost 29 percent. Neither of those seems close to politically realistic. And splitting the difference, tax increases of 15 percent, spending cuts of 14.5 percent, doesn’t look remotely plausible either.

So, we can forget about balanced budgets (thankfully), but the question is then how large a deficit is too large? There actually is a relatively simple answer to this one. A deficit that leads to inflation is a deficit that is too large.

This is the story that the Modern Monetary Theory crew keeps telling us, and it is right. If too much borrowing drives up interest rates, the Fed can counteract upward pressure on rates by buying bonds and/or targeting lower rates. The potential problem from the Fed maintaining low rates in a high deficit situation is that it can lead to too much demand in the economy, causing inflation.

We did see a surge in inflation in 2021 and 2022. Part of that story was too much demand, due to the generous pandemic support from the federal government, however the real story was the supply problems associated with the pandemic. Whatever excess demand problem we had went away when the programs ended, and supply recovered after the ending of the pandemic.

In any case, that history is behind us, the question is whether there is good reason to believe that we are seeing excess demand now. There are still important questions about the future course of inflation, but it has fallen quite rapidly over the last year and is virtually certain to fall further.[1]

Wage growth has also slowed to a pace that is close to its growth rate before the pandemic, when inflation was at the Fed’s 2.0 percent target. Other measures of the labor market, like quit rates and unemployment insurance claims, are at levels that are consistent with a strong labor market, but well below/above the levels seen when the labor market was very tight in the spring of 2022.

In short, it is certainly not clear that deficit-driven demand is so strong that it is causing inflation. Of course, the Fed has raised interest rates by more than 5.0 percentage points from their pandemic low, so arguably we are seeing a classic crowding-out story where demand would be causing inflation, if not for high-interest rates slowing demand.

This story can’t be completely dismissed, but it is hard to tell if we have a frame of reference beyond the recovery from the Great Recession. Interest rates are above their pre-pandemic level, but compared to the slightly more distant past, they still look pretty low.

The 10-year Treasury bond rate is currently roughly 4.6 percent. That is well below the rates we saw from 1998 to 2000 when the government was running budget surpluses. And, inflation is at least modestly higher today than it was in those years, meaning that the real interest rate (the nominal rate minus the inflation rate) is actually somewhat lower now with our deficits of 6.0 percent of GDP than in the balanced budget days at the end of the Clinton presidency.

 

It is also hard to tell the other part of this story, that investment has been crowded out by high-interest rates. Non-residential investment as a share of GDP is well above its average over the last two decades. The residential investment share of GDP is also well above its average for the decade prior to the pandemic, although down by a percentage point from its pandemic peak. This drop is primarily due to the end of the refinancing boom, since most of the expenses in refinancing mortgages count as residential investment in the national accounts.  

High mortgage rates have discouraged home buying. Sales of existing homes are down by more than a third from peaks hit in the pandemic, and more than 20 percent compared to pre-pandemic rates. But part of this story is not simply high long-term rates. There is an unusually large gap between the 30-year mortgage rate and 10-year Treasury rate.

It is currently around 3.0 percentage points, giving us 30-year mortgage rates around 7.6 percent with a 10-year Treasury rate of 4.6 percent. More typically, the gap would be around 1.75 percentage points, which would translate into a 30-year mortgage rate of 6.35 percentage points. That is still considerably higher than the rates seen before the pandemic, which were generally under 5.0 percent, but not nearly as bad as what we are seeing now. (If anyone has thoughts on why we see this extraordinary spread between mortgage rates and Treasury rates, I’m happy to be informed.)

Anyhow, it would certainly be desirable to see somewhat lower interest rates. If inflation remains under control, we will likely see the Fed begin to lower the federal funds rate next year and long-term rates will follow. And, this would be the case even without any deficit reduction.

In short, it might be desirable to see somewhat lower interest rates, but the current rates are not especially high by historical standards. Furthermore, it is not clear that large budget deficits are the main culprit, as opposed to the interest rate policy of the Fed.

Should Exploding Debt Bother Us?

If current deficits are not a big deal, should the prospect of an exploding debt spiral worry us? In this story, the debt continually builds primarily as a result of higher interest payments, which in turn lead to still higher interest payments, until interest ends up taking up a ridiculously large share of the budget.

There are a few points to be made about this story. First, this is a gradual process. Even in the story where we have a deficit of 6.0 percent of GDP, the debt-to-GDP ratio rises slowly. If we have 2.0 percent growth and 2.5 percent inflation, then nominal GDP is increasing by 4.5 percent. With a debt that is roughly 100 percent of GDP, the debt-to-GDP ratio would only increase by around 1.5 percentage points. Even with relatively large deficits, we don’t have to worry about the debt-to-GDP ratio suddenly exploding.

Some of the deficit hawks raise the prospect of a crisis of confidence, where investors suddenly become unwilling to hold U.S. debt and interest rates go through the roof and the dollar goes through the floor. There are certainly examples of countries where this has happened, but not in situations where they had an otherwise healthy economy, as is the case with the United States.

Furthermore, there is no evidence that we are on the edge of anything like this. Interest rates have risen, but that was primarily because they were pushed up by the Fed. And, as noted earlier, they are still relatively low by historical standards. And the dollar is actually higher against most other currencies than it was before the pandemic.

It is also worth noting that the U.S. debt to GDP ratio is not exceptionally high by international standards. The ratio of debt to GDP in France and the United Kingdom is very comparable to the U.S. and in Italy and Japan it is far higher. In fact, using gross debt, a measure that includes debt to public pension funds, Japan has a debt-to-GDP ratio of 260 percent. The current interest rate on long-term Japanese bonds is less than 1.0 percent.

Thinking About the Future

Even if interest is a bearable burden and the dollar is not on the edge of collapse, there are still many who see the debt as imposing a major burden on future generations. This is really a case of missing the forest for the trees.

Let’s say that because of our failure to get the deficit down, a decade from now the debt-to-GDP ratio is 20 percentage points higher than if we had been “fiscally responsible.” If the real interest rate on government debt is 2.0 percent, somewhat higher than it is today, that means we would be paying another 0.4 percent of GDP in interest compared to our fiscally responsible scenario.

That’s not entirely trivial, but it’s also had to tell the story that it is an enormous burden. Our current interest payments on the debt are roughly 2.7 percent of GDP. They were 3.3 percent of GDP in the early 1990s. That burden did not prevent the 1990s from being our most prosperous decade since the 1960s.

It is also worth mentioning that if AI proves to be anywhere near as important as its proselytizers insist, then the uptick in growth over the next decade could actually create a situation where the debt-to-GDP ratio stays flat or even falls.

More importantly, if we get an uptick in growth from AI and other technologies, it will swamp the impact of higher interest burdens. If AI led to just a 0.2 percentage point increase in annual productivity growth, it would imply a GDP that is 4.0 percentage points higher after two decades than in a world without this new technology. (Productivity growth averaged 4.3 percent the last two quarters, after averaging just 1.1 percent in the decade prior to the pandemic. It is important to recognize that productivity data are enormously erratic and subject to huge revisions.)

This sort of boost to output from AI is an order of magnitude larger than any plausible burden associated with a higher debt to GDP ratio. This is especially true when we remember that the bulk of interest payments are made to people in the United States. The interest payments do limit the extent to which we can spend in other areas, without higher taxes, but they are not a net burden on the economy.

It is also important to remember that direct spending is not the only way the government pays for things. It pays for innovation and creative work by issuing patent and copyright monopolies. These monopolies impose an enormous cost in the form of higher prices – effectively a tax paid by households in the future. In the case of drugs alone, this tax is likely in the neighborhood of $500 billion a year, or 2.0 percent of GDP.

Adding in the higher prices we pay as a result of these monopolies for medical equipment, computers, software and a wide variety of other items, it is likely the cost is over $1 trillion a year. The benefits we get from the innovation and creative work fostered by these government-granted monopolies may still make them good policy (there are alternative mechanisms), but to not acknowledge the costs attributable to patent and copyright monopolies when discussing the burden of the debt is simply dishonest.

It is also important to remember that government spending plays a direct role in supporting the economy. Due to efforts to contain the deficit following the Great Recession, the recovery was much slower than it could have been. It took us a full decade to get back to full employment.

This meant both that millions of people were not working, who could have had jobs if we had not been obsessed with austerity, and that tens of millions of workers got lower pay because they lacked bargaining power in a period of high unemployment. As we have seen in the tight labor markets of the pandemic recovery, tight labor markets disproportionately benefit those at the lower end of the wage distribution. The benefits of maintaining a high employment economy are hugely larger than any downsides associated with higher interest payments on the debt.

Finally, if we are keeping generational scorecards, the success of efforts to contain global warming will have far more impact on future generations than plausible increases in the interest burden of the debt. If twenty years from now, we have completely failed in limiting global warming, but we have cut the debt in half, our children will have no reason to be thanking us.

Deficits and Spending Going Forward

Saying that we don’t need to reduce the deficit doesn’t mean that we should not look to raise more revenue to support additional spending in key areas. There are some great ways to raise revenue that would actually make the economy more efficient. My two favorites are a tax on financial transactions (effectively a sales tax on stock, bond, and derivative trades) and shifting the basis of the corporate income tax to returns to shareholders, which would put the tax gaming industry out of business. We can also have higher taxes on rich people, the big gainers in the economy over the last half-century.

There are also areas where we desperately need to spend more money. The expanded child tax credit that Biden put in place with his recovery plan should be brought back. We also need to have additional funding for child care to make it affordable. And, we have a massive problem of homelessness.

This list could be extended at some length, but the point is that there is no urgency for reducing the deficit. We have many other problems that need to be addressed, which will require additional resources. This will mean making space in the economy by raising taxes, but the focus should be on addressing real problems in society, not reducing the deficit.

 

 

[1] We can be confident that inflation will fall further because the rental indexes, which account for 31 percent of the overall CPI and almost 40 percent of the core index, are virtually guaranteed to show lower rates of inflation in the months ahead. Private indexes measuring the rent of marketed units that change hands, show sharply lower inflation. The CPI rent indexes, which measure rents in all units, not just marketed units, lag these private indexes by six months to a year.  

 

The shrieks of the deficit hawks have been growing louder with the fiscal 2023 deficit crossing 6.0 percent of GDP, and the projected future deficits being no lower. With interest rates now close to or above GDP growth, we regularly hear about the story of a looming debt spiral, where high debt leads to high interest payments, which add to annual deficits, making the debt even larger.  

To try to think clearly about the deficit and debt, it is worth pulling them apart and dealing with them as separate issues. This avoids many common sources of confusion.

Is the Deficit Too Large? Is Inflation Out of Control?

Back in the old days we used to argue about whether we needed to balance the budget. With a deficit of more than 6.0 percent of GDP, that question seems pretty much moot. If we wanted to balance the budget with tax increases, we would need to increase revenue by almost a third. If we tried to do this on the spending side, we would need cuts in non-interest spending of almost 29 percent. Neither of those seems close to politically realistic. And splitting the difference, tax increases of 15 percent, spending cuts of 14.5 percent, doesn’t look remotely plausible either.

So, we can forget about balanced budgets (thankfully), but the question is then how large a deficit is too large? There actually is a relatively simple answer to this one. A deficit that leads to inflation is a deficit that is too large.

This is the story that the Modern Monetary Theory crew keeps telling us, and it is right. If too much borrowing drives up interest rates, the Fed can counteract upward pressure on rates by buying bonds and/or targeting lower rates. The potential problem from the Fed maintaining low rates in a high deficit situation is that it can lead to too much demand in the economy, causing inflation.

We did see a surge in inflation in 2021 and 2022. Part of that story was too much demand, due to the generous pandemic support from the federal government, however the real story was the supply problems associated with the pandemic. Whatever excess demand problem we had went away when the programs ended, and supply recovered after the ending of the pandemic.

In any case, that history is behind us, the question is whether there is good reason to believe that we are seeing excess demand now. There are still important questions about the future course of inflation, but it has fallen quite rapidly over the last year and is virtually certain to fall further.[1]

Wage growth has also slowed to a pace that is close to its growth rate before the pandemic, when inflation was at the Fed’s 2.0 percent target. Other measures of the labor market, like quit rates and unemployment insurance claims, are at levels that are consistent with a strong labor market, but well below/above the levels seen when the labor market was very tight in the spring of 2022.

In short, it is certainly not clear that deficit-driven demand is so strong that it is causing inflation. Of course, the Fed has raised interest rates by more than 5.0 percentage points from their pandemic low, so arguably we are seeing a classic crowding-out story where demand would be causing inflation, if not for high-interest rates slowing demand.

This story can’t be completely dismissed, but it is hard to tell if we have a frame of reference beyond the recovery from the Great Recession. Interest rates are above their pre-pandemic level, but compared to the slightly more distant past, they still look pretty low.

The 10-year Treasury bond rate is currently roughly 4.6 percent. That is well below the rates we saw from 1998 to 2000 when the government was running budget surpluses. And, inflation is at least modestly higher today than it was in those years, meaning that the real interest rate (the nominal rate minus the inflation rate) is actually somewhat lower now with our deficits of 6.0 percent of GDP than in the balanced budget days at the end of the Clinton presidency.

 

It is also hard to tell the other part of this story, that investment has been crowded out by high-interest rates. Non-residential investment as a share of GDP is well above its average over the last two decades. The residential investment share of GDP is also well above its average for the decade prior to the pandemic, although down by a percentage point from its pandemic peak. This drop is primarily due to the end of the refinancing boom, since most of the expenses in refinancing mortgages count as residential investment in the national accounts.  

High mortgage rates have discouraged home buying. Sales of existing homes are down by more than a third from peaks hit in the pandemic, and more than 20 percent compared to pre-pandemic rates. But part of this story is not simply high long-term rates. There is an unusually large gap between the 30-year mortgage rate and 10-year Treasury rate.

It is currently around 3.0 percentage points, giving us 30-year mortgage rates around 7.6 percent with a 10-year Treasury rate of 4.6 percent. More typically, the gap would be around 1.75 percentage points, which would translate into a 30-year mortgage rate of 6.35 percentage points. That is still considerably higher than the rates seen before the pandemic, which were generally under 5.0 percent, but not nearly as bad as what we are seeing now. (If anyone has thoughts on why we see this extraordinary spread between mortgage rates and Treasury rates, I’m happy to be informed.)

Anyhow, it would certainly be desirable to see somewhat lower interest rates. If inflation remains under control, we will likely see the Fed begin to lower the federal funds rate next year and long-term rates will follow. And, this would be the case even without any deficit reduction.

In short, it might be desirable to see somewhat lower interest rates, but the current rates are not especially high by historical standards. Furthermore, it is not clear that large budget deficits are the main culprit, as opposed to the interest rate policy of the Fed.

Should Exploding Debt Bother Us?

If current deficits are not a big deal, should the prospect of an exploding debt spiral worry us? In this story, the debt continually builds primarily as a result of higher interest payments, which in turn lead to still higher interest payments, until interest ends up taking up a ridiculously large share of the budget.

There are a few points to be made about this story. First, this is a gradual process. Even in the story where we have a deficit of 6.0 percent of GDP, the debt-to-GDP ratio rises slowly. If we have 2.0 percent growth and 2.5 percent inflation, then nominal GDP is increasing by 4.5 percent. With a debt that is roughly 100 percent of GDP, the debt-to-GDP ratio would only increase by around 1.5 percentage points. Even with relatively large deficits, we don’t have to worry about the debt-to-GDP ratio suddenly exploding.

Some of the deficit hawks raise the prospect of a crisis of confidence, where investors suddenly become unwilling to hold U.S. debt and interest rates go through the roof and the dollar goes through the floor. There are certainly examples of countries where this has happened, but not in situations where they had an otherwise healthy economy, as is the case with the United States.

Furthermore, there is no evidence that we are on the edge of anything like this. Interest rates have risen, but that was primarily because they were pushed up by the Fed. And, as noted earlier, they are still relatively low by historical standards. And the dollar is actually higher against most other currencies than it was before the pandemic.

It is also worth noting that the U.S. debt to GDP ratio is not exceptionally high by international standards. The ratio of debt to GDP in France and the United Kingdom is very comparable to the U.S. and in Italy and Japan it is far higher. In fact, using gross debt, a measure that includes debt to public pension funds, Japan has a debt-to-GDP ratio of 260 percent. The current interest rate on long-term Japanese bonds is less than 1.0 percent.

Thinking About the Future

Even if interest is a bearable burden and the dollar is not on the edge of collapse, there are still many who see the debt as imposing a major burden on future generations. This is really a case of missing the forest for the trees.

Let’s say that because of our failure to get the deficit down, a decade from now the debt-to-GDP ratio is 20 percentage points higher than if we had been “fiscally responsible.” If the real interest rate on government debt is 2.0 percent, somewhat higher than it is today, that means we would be paying another 0.4 percent of GDP in interest compared to our fiscally responsible scenario.

That’s not entirely trivial, but it’s also had to tell the story that it is an enormous burden. Our current interest payments on the debt are roughly 2.7 percent of GDP. They were 3.3 percent of GDP in the early 1990s. That burden did not prevent the 1990s from being our most prosperous decade since the 1960s.

It is also worth mentioning that if AI proves to be anywhere near as important as its proselytizers insist, then the uptick in growth over the next decade could actually create a situation where the debt-to-GDP ratio stays flat or even falls.

More importantly, if we get an uptick in growth from AI and other technologies, it will swamp the impact of higher interest burdens. If AI led to just a 0.2 percentage point increase in annual productivity growth, it would imply a GDP that is 4.0 percentage points higher after two decades than in a world without this new technology. (Productivity growth averaged 4.3 percent the last two quarters, after averaging just 1.1 percent in the decade prior to the pandemic. It is important to recognize that productivity data are enormously erratic and subject to huge revisions.)

This sort of boost to output from AI is an order of magnitude larger than any plausible burden associated with a higher debt to GDP ratio. This is especially true when we remember that the bulk of interest payments are made to people in the United States. The interest payments do limit the extent to which we can spend in other areas, without higher taxes, but they are not a net burden on the economy.

It is also important to remember that direct spending is not the only way the government pays for things. It pays for innovation and creative work by issuing patent and copyright monopolies. These monopolies impose an enormous cost in the form of higher prices – effectively a tax paid by households in the future. In the case of drugs alone, this tax is likely in the neighborhood of $500 billion a year, or 2.0 percent of GDP.

Adding in the higher prices we pay as a result of these monopolies for medical equipment, computers, software and a wide variety of other items, it is likely the cost is over $1 trillion a year. The benefits we get from the innovation and creative work fostered by these government-granted monopolies may still make them good policy (there are alternative mechanisms), but to not acknowledge the costs attributable to patent and copyright monopolies when discussing the burden of the debt is simply dishonest.

It is also important to remember that government spending plays a direct role in supporting the economy. Due to efforts to contain the deficit following the Great Recession, the recovery was much slower than it could have been. It took us a full decade to get back to full employment.

This meant both that millions of people were not working, who could have had jobs if we had not been obsessed with austerity, and that tens of millions of workers got lower pay because they lacked bargaining power in a period of high unemployment. As we have seen in the tight labor markets of the pandemic recovery, tight labor markets disproportionately benefit those at the lower end of the wage distribution. The benefits of maintaining a high employment economy are hugely larger than any downsides associated with higher interest payments on the debt.

Finally, if we are keeping generational scorecards, the success of efforts to contain global warming will have far more impact on future generations than plausible increases in the interest burden of the debt. If twenty years from now, we have completely failed in limiting global warming, but we have cut the debt in half, our children will have no reason to be thanking us.

Deficits and Spending Going Forward

Saying that we don’t need to reduce the deficit doesn’t mean that we should not look to raise more revenue to support additional spending in key areas. There are some great ways to raise revenue that would actually make the economy more efficient. My two favorites are a tax on financial transactions (effectively a sales tax on stock, bond, and derivative trades) and shifting the basis of the corporate income tax to returns to shareholders, which would put the tax gaming industry out of business. We can also have higher taxes on rich people, the big gainers in the economy over the last half-century.

There are also areas where we desperately need to spend more money. The expanded child tax credit that Biden put in place with his recovery plan should be brought back. We also need to have additional funding for child care to make it affordable. And, we have a massive problem of homelessness.

This list could be extended at some length, but the point is that there is no urgency for reducing the deficit. We have many other problems that need to be addressed, which will require additional resources. This will mean making space in the economy by raising taxes, but the focus should be on addressing real problems in society, not reducing the deficit.

 

 

[1] We can be confident that inflation will fall further because the rental indexes, which account for 31 percent of the overall CPI and almost 40 percent of the core index, are virtually guaranteed to show lower rates of inflation in the months ahead. Private indexes measuring the rent of marketed units that change hands, show sharply lower inflation. The CPI rent indexes, which measure rents in all units, not just marketed units, lag these private indexes by six months to a year.  

 

Silliness on Deflation at Bloomberg

Do reporters get lessons on saying silly things when they discuss deflation? It seems that way from reading news articles that discuss the problem. Bloomberg gives us the latest example.

Before explaining why the discussion of deflation is silly, it’s worth first briefly discussing what deflation means. When we have deflation, it means that average prices in the economy are falling.[1]

The point about “average” is crucial. All prices don’t move at exactly the same rate. When we have a low rate of inflation, say 0.5 percent, it means that a substantial share of items (say 45 percent) have falling prices, but a somewhat larger share (say 55 percent) have rising prices.

If we switch to having 0.5 percent deflation, then these ratios might reverse. In that case, we might have 55 percent of items with falling prices and 45 percent with rising prices.

This simple point should make the point about the needless hysteria over deflation clear. If 55 percent of items have falling prices, rather than 45 percent, what’s the big deal?

There is a point about falling prices making investment less desirable. If a car company is looking to expand, but it expects the price of cars to fall by 1.0 percent a year, it will be less likely to invest at a given interest rate, than if it expects the price of cars to rise by 1.0 percent a year.

But zero has no special importance in this story. At a given interest rate, it will be more likely to invest if it expects car prices to rise 2.0 percent a year rather than 1.0 percent a year. The problem is that lower expected inflation discourages investment. If inflation turns negative its investment prospects worsen, but that is also true if the rate of inflation falls from 2.0 percent to 1.0 percent.  

In short, crossing zero has no special importance for an individual product or the economy as a whole. It is just a story where lower inflation is worse than higher (but still low) rates of inflation.

The other part of the story that gets high marks for silliness is the idea that deflation will cause consumers to delay purchases, thereby dampening consumption, that this Bloomberg piece raises. The reason this is silly is that the rates of deflation being discussed (less than 1.0 percent in absolute terms) are too trivial to have a noticeable impact on consumption.

To take a simple example, suppose prices are falling at a 0.5 percent annual rate. If someone is thinking of buying a $1,000 refrigerator, this means that if they put off the purchase by six months, they would save $2.50. Know anyone who would do this?

Deflation can be fast enough that this sort of delay could make sense, but we haven’t seen this story in any major economy for many decades. Certainly, the deflation rates of 0.0 to -1.0 percent that Japan and China have occasionally experienced don’t fit the bill.

The point here is that an inflation rate that is too low can be a problem. A negative rate of inflation (deflation) is a bigger problem than low positive rates, but there is nothing magical about crossing zero. It is absurd to panic about a small amount of deflation, with the idea that everything is fine with a low positive rate.

 

 

[1] Making things more complicated, these are quality-adjusted prices. The statistical agencies try to adjust prices for quality improvements or deterioration. Many buyers may be unaware of the ways in which quality is assumed to have improved and just see a price increase, when the quality-adjusted price stays the same or falls. This is true with many consumer goods like computers and televisions, where quality-adjusted prices have fallen sharply, even as there has been little change in the average price of the product.

Do reporters get lessons on saying silly things when they discuss deflation? It seems that way from reading news articles that discuss the problem. Bloomberg gives us the latest example.

Before explaining why the discussion of deflation is silly, it’s worth first briefly discussing what deflation means. When we have deflation, it means that average prices in the economy are falling.[1]

The point about “average” is crucial. All prices don’t move at exactly the same rate. When we have a low rate of inflation, say 0.5 percent, it means that a substantial share of items (say 45 percent) have falling prices, but a somewhat larger share (say 55 percent) have rising prices.

If we switch to having 0.5 percent deflation, then these ratios might reverse. In that case, we might have 55 percent of items with falling prices and 45 percent with rising prices.

This simple point should make the point about the needless hysteria over deflation clear. If 55 percent of items have falling prices, rather than 45 percent, what’s the big deal?

There is a point about falling prices making investment less desirable. If a car company is looking to expand, but it expects the price of cars to fall by 1.0 percent a year, it will be less likely to invest at a given interest rate, than if it expects the price of cars to rise by 1.0 percent a year.

But zero has no special importance in this story. At a given interest rate, it will be more likely to invest if it expects car prices to rise 2.0 percent a year rather than 1.0 percent a year. The problem is that lower expected inflation discourages investment. If inflation turns negative its investment prospects worsen, but that is also true if the rate of inflation falls from 2.0 percent to 1.0 percent.  

In short, crossing zero has no special importance for an individual product or the economy as a whole. It is just a story where lower inflation is worse than higher (but still low) rates of inflation.

The other part of the story that gets high marks for silliness is the idea that deflation will cause consumers to delay purchases, thereby dampening consumption, that this Bloomberg piece raises. The reason this is silly is that the rates of deflation being discussed (less than 1.0 percent in absolute terms) are too trivial to have a noticeable impact on consumption.

To take a simple example, suppose prices are falling at a 0.5 percent annual rate. If someone is thinking of buying a $1,000 refrigerator, this means that if they put off the purchase by six months, they would save $2.50. Know anyone who would do this?

Deflation can be fast enough that this sort of delay could make sense, but we haven’t seen this story in any major economy for many decades. Certainly, the deflation rates of 0.0 to -1.0 percent that Japan and China have occasionally experienced don’t fit the bill.

The point here is that an inflation rate that is too low can be a problem. A negative rate of inflation (deflation) is a bigger problem than low positive rates, but there is nothing magical about crossing zero. It is absurd to panic about a small amount of deflation, with the idea that everything is fine with a low positive rate.

 

 

[1] Making things more complicated, these are quality-adjusted prices. The statistical agencies try to adjust prices for quality improvements or deterioration. Many buyers may be unaware of the ways in which quality is assumed to have improved and just see a price increase, when the quality-adjusted price stays the same or falls. This is true with many consumer goods like computers and televisions, where quality-adjusted prices have fallen sharply, even as there has been little change in the average price of the product.

Michelle Cottle had a NYT column headlined “What Voters Want That Trump Seems to Have.” She needed to make up a few facts to push her case. For example, she tells us that people don’t like Biden because crime is high. But, crime rose sharply in 2020 when Donald Trump was in the White House, it has fallen since Biden took office.

If people are actually unhappy about crime then they should be voting for Biden, not Trump. If they prefer Trump on this issue it is because they are confused about the timing of recent patterns in crime, perhaps because people like Ms. Cottle have been misleading them.

There is a similar story with Cottle’s pronouncements on inflation. She told readers that in the last year of Trump’s term, just before the pandemic:

“Inflation was practically nonexistent.”

That’s actually not what our friends at the Bureau of Labor Statistics say. Year-over-year inflation was 2.5 percent as of January of 2020, just before the pandemic hit.

 

That isn’t exactly frightening, but hardly nonexistent. In fact, with lower rental inflation pretty much baked into the data (we know this from patterns in housing units that turn over), the inflation rate is likely to be lower than this by Election Day.

Cottle also has advice for those of us who try to connect how people feel about the economy to economic data.

“The degree to which Mr. Biden’s policies have helped or hurt does not much matter, especially on the economy. He owns it. And here’s the thing: You can’t argue with voters’ feelings. Even if you win the debate on points, you’re not going to convince people that they or the nation is actually doing swell. Trying, in fact, often just makes you look like a condescending, out-of-touch jerk.”

This is true, people feel how they feel. We can ask why they feel the way they do (I suspect endless trashing of the economy in often dishonest ways by the media has a lot to do with it), but we can’t tell them how they should feel.

So, we can point out that real wages for many workers, especially those at the bottom, have risen in spite of the massive hit from the pandemic. We can point out that homeownership rates for young people, Blacks, Hispanics, and moderate-income homeowners have all risen under Biden. But yeah, people still feel how they feel.

However, we may want to look more broadly when asserting how people feel. According to the Conference Board, people report a higher level of workplace satisfaction currently than at any point in the nearly forty years that they have done their survey.

I don’t think it takes a huge amount of economic training to believe that workplace satisfaction has something to do with the economy. The workplace is where workers spend close to half of their waking hours, so if workers say they are more satisfied now than ever before, that seems like a really good story about the economy

But, I guess that New York Times columnists get to be condescending, out-of-touch jerks when they want to make their case. If they insist that people think the economy is awful, we can’t let what people say get in the way.

 

Michelle Cottle had a NYT column headlined “What Voters Want That Trump Seems to Have.” She needed to make up a few facts to push her case. For example, she tells us that people don’t like Biden because crime is high. But, crime rose sharply in 2020 when Donald Trump was in the White House, it has fallen since Biden took office.

If people are actually unhappy about crime then they should be voting for Biden, not Trump. If they prefer Trump on this issue it is because they are confused about the timing of recent patterns in crime, perhaps because people like Ms. Cottle have been misleading them.

There is a similar story with Cottle’s pronouncements on inflation. She told readers that in the last year of Trump’s term, just before the pandemic:

“Inflation was practically nonexistent.”

That’s actually not what our friends at the Bureau of Labor Statistics say. Year-over-year inflation was 2.5 percent as of January of 2020, just before the pandemic hit.

 

That isn’t exactly frightening, but hardly nonexistent. In fact, with lower rental inflation pretty much baked into the data (we know this from patterns in housing units that turn over), the inflation rate is likely to be lower than this by Election Day.

Cottle also has advice for those of us who try to connect how people feel about the economy to economic data.

“The degree to which Mr. Biden’s policies have helped or hurt does not much matter, especially on the economy. He owns it. And here’s the thing: You can’t argue with voters’ feelings. Even if you win the debate on points, you’re not going to convince people that they or the nation is actually doing swell. Trying, in fact, often just makes you look like a condescending, out-of-touch jerk.”

This is true, people feel how they feel. We can ask why they feel the way they do (I suspect endless trashing of the economy in often dishonest ways by the media has a lot to do with it), but we can’t tell them how they should feel.

So, we can point out that real wages for many workers, especially those at the bottom, have risen in spite of the massive hit from the pandemic. We can point out that homeownership rates for young people, Blacks, Hispanics, and moderate-income homeowners have all risen under Biden. But yeah, people still feel how they feel.

However, we may want to look more broadly when asserting how people feel. According to the Conference Board, people report a higher level of workplace satisfaction currently than at any point in the nearly forty years that they have done their survey.

I don’t think it takes a huge amount of economic training to believe that workplace satisfaction has something to do with the economy. The workplace is where workers spend close to half of their waking hours, so if workers say they are more satisfied now than ever before, that seems like a really good story about the economy

But, I guess that New York Times columnists get to be condescending, out-of-touch jerks when they want to make their case. If they insist that people think the economy is awful, we can’t let what people say get in the way.

 

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