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China is the world’s largest economy: Get over it

September 16, 2022 4 comments

from Dean Baker

It is common for politicians and pundit types to speculate on when or whether China’s economy will pass the US economy as the world’s largest. The latest episode to cross my path was a column by David Wallace in the New York Times.

There is little reason for this sort of speculation. China is already the world’s largest economy, its economy is more than 20 percent larger than the US economy, according to the IMF. Furthermore, it is growing considerably more rapidly (assuming they don’t continue their zero COVID-19 policy forever), so it is projected to be more than a third larger than the US economy by the end of the decade.

Here’s the picture.

Source: International Monetary Fund.

Read more…

Weekend read – The big myth on inequality: it just happened

September 9, 2022 5 comments

from Dean Baker

The standard line in policy circles about the soaring inequality of the last four decades is that it is just an unfortunate outcome of technological change. As a result of technological developments, education is much more highly valued and physical labor has much less value. The drop in relative income for workers without college degrees is unfortunate and provides grounds for lots of hand wringing and bloviating in elite media outlets, but hey, what can you do?

Manufacturing plays a central role in this story since it has historically been the major source of high-paying jobs for workers without college degrees. Manufacturing jobs offered a pay premium of almost 17.0 percent in the 1980s. This had fallen sharply by the start of the last decade and had largely disappeared in more recent years.

This decline in the wage premium has coincided with a plunge in unionization rates in manufacturing. Approximately 20 percent of manufacturing workers were unionized at the start of the 1980s. In 2021 just 7.7 percent of manufacturing workers were in unions, only slightly higher than the average of 6.1 percent in the private sector. Read more…

How to decimate the corporate tax-avoidance industry

August 26, 2022 2 comments

from Dean Baker

The Inflation Reduction Act includes a remarkable innovation. Share buybacks will be taxed at a 1% rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, which can be easily manipulated, to taxing returns to shareholders.

It is time for a major and simple overhaul of the corporate income tax system. The main problem with the current system is that it is focused on the wrong target. Instead of taxing corporate profits, we should be taxing stock returns to investors.

The big issue here is that corporate profits are not a well-defined concept. A thousand issues arise in determining profit, all of which depend to a substantial extent on judgment calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

What’s Visible, What’s Not

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites. Read more…

Inflation: where are we now?

August 22, 2022 1 comment

from Dean Baker

With the United States data we have seen from the last few months, it’s fair to say that no one has a very good idea of where the economy is. At the most basic level, we have seen seven months of incredibly rapid job creation this year; the economy added 3.3 million jobs through July, along with two consecutive quarters of negative growth. We don’t have to join the Trumpers in calling this a recession, to be bothered by seeing two main economic indicators going in opposite directions.

I suspect most economists (I haven’t done a poll) would agree that the negative growth reported for the first two quarters was a statistical fluke. The GDP data are often revised by large amounts, so it would not be surprising if we see a very different picture after comprehensive revisions next year.

In this respect, it is worth noting Gross Domestic Income (GDI) grew at a 1.8 percent annual rate in the first quarter. In principle, GDI should be the same as GDP, since it is just measuring the income side of the GDP equation. While the two measures never measure up exactly, the size of the divergence in the first quarter was extraordinary. This is consistent with the view that GDP for the quarter may be revised upward. (We don’t have GDI data for the second quarter yet.)

Is Inflation Slowing?     

Read more…

The semiconductor bill and the Moderna billionaires

July 27, 2022 Leave a comment

from Dean Baker

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021. Read more…

Structuring the economy to give money to the rich is inflationary

July 19, 2022 1 comment

from Dean Baker

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class.

The big problem with Stryker’s argument is that it assumes that the working class will somehow benefit from having more manufacturing jobs. This would have been true 20-years-ago when noncollege educated workers in manufacturing enjoyed a substantial pay premium over workers employed in other sectors. It is no longer true today.

Due to our trade deals (especially Clinton’s), which cost millions of manufacturing jobs, the sector no longer offers any substantial pay premium over employment in other sectors. At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole.[1]

Much of the deterioration in the quality of manufacturing jobs is associated with the decline of unions in the sector. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole. Read more…

Governor Newsom does drugs, or at least insulin

July 15, 2022 Leave a comment

from Dean Baker

California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.

Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.

The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.

Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version. Read more…

People are not spending down their savings II

June 30, 2022 1 comment

from Dean Baker

Last month I wrote a piece where I managed to mangle a very simple point. While the reported saving rate had fallen in April, it was actually due to people paying more capital gains taxes, not the result of households spending down savings.

The issue here is straightforward. Saving is defined as the portion of disposable income that is not consumed. Savings can fall either because either consumption has increased, or disposable income has fallen.

We are not seeing especially rapid consumption growth in 2022 (real consumption actually fell in May), rather we are seeing weak growth in disposable income, which is defined as personal income, minus tax payments. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

The May data show taxes being paid at an annual rate of $3,123.4 billion (NIPA Table 2.1, Line 26). This is up by 41.6 percent, from the $2,205.1 billion paid in taxes in 2019.

This big jump in tax payments cannot be explained by an increase in tax rates. There have been no major increases in taxes since 2019. Rather, the jump in taxes almost certainly reflects large capital gains tax payments that people are making on stock they have sold in the last year. The huge runup in the stock market means that many people would have substantial amounts of taxable gains. Read more…

Neoliberals do not like a free market, but they want you to think they do

June 26, 2022 2 comments

from Dean Baker   

It was very frustrating to read Noam Scheiber’s profile of Jaz Brisack, the person who led the first successful union organizing drive at a Starbucks. Brisack does sound like a very impressive person and it is good to see her getting the attention her efforts warrant. However, Scheiber ruins the story by repeatedly telling readers that the neoliberals, who have dominated political debate in recent decades, want a free market. Nothing could be further from the truth.

I will start the indictment with their support of intellectual property. Government-granted patent and copyright monopolies transfer many hundred billion dollars annually from the rest of us to the top 10 percent, and especially the top one percent. Bill Gates would still be working for a living if the government didn’t threaten to arrest anyone who made copies of Microsoft software without his permission.

Then we have “free trade.” The neoliberals made it a top priority to make it as easy as possible to bring in cheap manufactured goods from developing countries. This cost millions of manufacturing jobs, and put downward pressure on the pay of noncollege educated workers more generally.

Read more…

Socialism ain’t what it used to be

June 23, 2022 10 comments

from Dean Baker

I was very disappointed with Ezra Klein’s NYT interview with Bhaskar Sunkara, in large part because I have a high opinion of Sunkara, the founder of Jacobin and now the president of The Nation. My main disappointment stems from his non-answer to one of the main questions raised by Klein.

Klein asked why the Democrats, and other liberal/left parties around the world, rely largely on more educated people for their support, while more working-class types have turned to the right. Socialists had historically envisioned socialism as the agenda of the working class, not college-educated professionals.

Sunkara gave an answer that put the blame on the decline in unions, which is undoubtedly a big part of the story. But the answer clearly goes beyond this.

Liberal/left parties around the world in recent decades, have not only often supported policies that weakened unions, but they have also supported policies that directly redistribute money from the traditional working class to people with more education, you know, the ones carrying the flame of socialism.

My favorite example here is Read more…

Getting rents down, converting vacant office space to residential

from Dean Baker

There is good reason for believing that the prices of many items that drove inflation higher in the last year have stopped rising and are may even be going in the opposite direction. Used cars are the best example. The CPI index for used vehicles rose 40.5 percent from January 2021 to January 2022. In the three months from January to April, the CPI index has fallen by 4.5 percent.

More generally, the supply shortages that drove prices higher in 2021 seem to be replaced by gluts, with major retailers like Amazon and Target complaining about stockpiles of unsold goods. With the stimulus measures from the pandemic fading into the past, and people no longer fearing to travel or go to restaurants, it is likely that we will be seeing serious downward pressure on the prices of many goods.

While inflation may be easing on the goods side, there are questions about prices in the service sector, most importantly rent. Rent accounts for more than 31.0 percent of the overall CPI, and almost 40 percent of the core index.

Rental inflation had been running at close to a 3.5 percent annual rate before the pandemic. It slowed in 2021, but is now running at almost a 5.0 percent annual rate. Read more…

The impediment to productivity growth: Waste that makes some people rich

May 25, 2022 6 comments

from Dean Baker

The New York Times ran a piece discussing why innovations in cloud computing and artificial technology have not led to more rapid increases in productivity. It raises a number of possibilities, but leaves out an obvious one, increasing waste associated with rent-seeking. We clearly see an increase in waste associated with rent-seeking, the only question is whether it is large enough to have a notable effect on productivity growth.

The piece actually touches on, without commenting on it, one of the major sources of waste. It discusses the practices of a major health insurer.

Health insurance does not directly contribute to GDP. Health care (actually health) is what we care about. Health insurers determines who has access to health care. In principle we want as few people employed in the health insurance industry as possible, we want people to be able to get health care, not to have insurers block their path.

However, we have over 900,000 people employed in health and life insurance companies. Much of what they do is made profitable by the fact that patent monopolies make many drugs and medical equipment expensive. In the absence of these monopolies, no insurer would look to block patients from getting the drugs or medical care recommended by their physician.

There are similar stories in many other sectors. The financial industry employs hundreds of thousands of people shuffling assets in ways that contribute nothing to GDP. The same is true with the lawyers and accountants devoting their efforts to help rich people and corporations avoid paying taxes.

Eliminating, or at least reducing, this waste would be a great way to increase productivity. Unfortunately, the people get rich and richer off this waste prevent it from being addressed politically, or even discussed in the New York Times.

There is no political constituency for free trade, it’s just a term used to justify screwing workers

April 29, 2022 2 comments

from Dean Baker

It is amazing how frequently policy types talk about “free trade” as though it is actually a policy anyone is interested in promoting. The reality is that what passes for free trade is a policy of removing barriers to allow low cost manufactured goods to enter the United States without restrictions. This puts downward pressure on the pay of manufacturing workers. Since manufacturing had historically been a source of high paying jobs for workers without college degrees (it is no longer), the loss of these jobs out downward pressure on the pay of non-college educated workers more generally.

A policy of genuine free trade would mean eliminating barriers that limit trade in physicians’ services as well as the services of highly paid professionals more generally. It would also mean weakening or eliminating patent and copyright monopolies, which can raise the price of protected items by many thousand percent above the free market price.

There is no political constituency for removing these protectionist barriers, as can be clearly seen by the fact that no major political figure is advocating this path. Instead, there is a strong political constituency, which includes many self-described liberals, for a trade policy designed to reduce the pay of non-college educated workers.

It is politically more salable to describe this policy as “free trade,” but it is a lie. Reporters should not describe it that way if they are trying to be objective.

Two routes to lower inflation

April 27, 2022 2 comments

from Dean Baker  

Inflation has stayed higher longer than I expected. I got that one wrong. I am happy to acknowledge my mistake, but I also want to know the reason why. This is not a question of finding excuses, I want to know why the economy is acting differently than I thought it would.

The most obvious reason is the supply chain disruptions that led to the original jump in prices have lasted longer and been more far-reaching than I expected. Part of this is due to the persistence of the pandemic, with the delta and omicron strains disrupting economies around the world.

The other major source of disruption is Russia’s invasion of Ukraine. This has blocked the supply of many items manufactured in Ukraine, but more importantly, the war reduces its ability to grow and sell wheat and other crops on world markets. There is also the risk of losing Russia’s oil and gas, which propelled oil prices to levels not seen in more than a decade.[1]

The idea that inflation would spike under such circumstances should not be surprising. As has been widely noted, the jump in inflation was worldwide, not just in the United States. The increase in the inflation rate was comparable in the European Union and the United Kingdom, so it obviously was not just a story of excessive stimulus in the United States. The break-even inflation rate on German 10-year government bonds are now essentially the same as in the United States, indicating that investors expect inflation in the two countries to be roughly the same over this period.

The logic here should not be hard to understand. The normal delivery of goods and services was disrupted by the pandemic. Since overall demand did not drop to anywhere near the same extent (due to various stimulus measures), we had shortages of many items, leading to sharp increases in prices.

Read more…

Corruption in drug patents: take away the money

April 18, 2022 3 comments

from Dean Baker

The New York Times had an editorial about the corruption of the patent system in recent decades. It noted that the patent office is clearly not following the legal standards for issuing a patent, including that the item being patented is a genuine innovation and that it works. Among other things, it pointed out that Theranos had been issued dozens of patents for a technique that clearly did not work.

As the editorial notes, the worst patent abuses occur with prescription drugs. Drug companies routinely garner dozens of dubious patents for their leading sellers, making it extremely expensive for potential generic competitors to enter the market.  The piece points out that the twelve drugs that get the most money from Medicare have an average of more than fifty patents each.

The piece suggests some useful reforms, but it misses the fundamental problem. When patents can be worth enormous sums of money, companies will find ways to abuse the system.

We need to understand the basic principle here. Patents are a government intervention in the free market, they impose a monopoly in a particular market. Read more…

Paul Krugman, China, mRNA vaccines, and right-wing populism

April 11, 2022 3 comments

from Dean Baker  

It is our policy on technology that drives inequality, it is not the technology.

I rarely disagree with Paul Krugman’s columns, but every now and then he does say something that I have to issue with. In a column last month, Krugman complained about the enormous costs associated with China’s zero COVID-19 policy. He tied it to its reliance on old-fashioned Chinese vaccines that used dead virus material, instead of using the mRNA vaccines developed by researchers in the United States and Europe.

There are good grounds for criticizing China’s zero COVID-19 policy. It may have been reasonable in the early days of the pandemic when we had neither vaccines nor effective treatment. However, the massive lockdowns required, which also literally threaten lives (people can’t get necessary medications and medical care), are hard to justify in the current situation.

But Krugman, and others (several people, who I respect, have picked up this line on Twitter), error in tying the zero COVID-19 policy to China’s rejection of mRNA vaccines. In fact, with the omicron variant currently hitting China, the dead virus vaccines are actually quite effective in preventing serious illness and death.

Read more…

Recession fears: real and imagined

April 3, 2022 2 comments

from Dean Baker

There is a story of a football coach who ran running plays near the end of a game, when he clearly should have been passing. Apparently, he had seen data showing that teams that win, on average, run on a certain number of plays. His team was below this number, so he decided that he had to have more runs if his team was going to win.

This is a classic case of confusing correlation with causation. (For those not familiar with football, when a team is ahead, it generally uses running plays to take lots of time off the clock. They run because they are winning, they don’t win because they run.) This distinction is important when considering various predictions for a recession in the current environment.

There are many features of an economy that we commonly see before a recession. For example, we typically see higher prices for oil, wheat, and other commodities before a recession. We also often see an inverted yield curve, where the interest rate on short-term Treasury debt (e.g., 90-day or 2-year notes) exceed the interest rate on 10-year Treasury bonds.

We are currently seeing a serious run-up in many commodity prices. It’s very plausible that we will see an inverted yield curve in the next year or so. The question is whether this means we should be expecting a recession in the near future? Read more…

We don’t need a Cold War with China

March 21, 2022 1 comment

from Dean Baker

There has been much press around President Biden’s demands that China not support Russia in its invasion of Ukraine. The implication of these demands is that the United States has the ability to punish China economically in a way that imposes more pain on China than on us. That may be true for now, but it’s not clear it will be true much longer, and it may not even prove to be true at present.

It is common to refer to China as the world’s second largest economy, after the United States. However, using a purchasing power parity measure, China’s GDP actually passed US GDP in 2016. The IMF projects that it will be more than one third larger by 2026, the last year of its projection period.

Source: IMF

The purchasing power parity measure, in contrast to the more commonly cited exchange rate measure, applies a common set of prices for all the goods and services produced in both economies. Read more…

As the Fed prepares to raise rates, the inflation hawks are running wild

March 16, 2022 Leave a comment

from Dean Baker

With bad news on oil prices, and a new wave of COVID-19 shutdowns in China, the inflation hawks are getting really excited. After all, higher oil prices and further supply disruptions are sure to add to the inflation the economy is already seeing. I guess they were right with their warnings.

Okay, let’s get back to Planet Earth. The large stimulus package that President Biden pushed through last year undoubtedly added to inflation in the economy, but it also quickly got the economy back to something close to full employment. If we had not had a big package, maybe the inflation rate would be a couple points lower, but the unemployment rate might be closer to 5.8 percent, rather than the 3.8 percent reported for February.

The point that many of us keep making is that most of the inflation we have seen over the last year was due to the reopening from the pandemic, not the stimulus package. A simple picture makes this point well. Inflation jumped pretty much everywhere across the OECD.

The rise in the United States was somewhat higher than average, but not hugely so. And countries like Spain and Belgium, which did not have huge stimulus packages, actually have higher rates of inflation.

So, what about the current issue with surging oil prices and new supply disruptions in China? Read more…

Reducing oil prices without ruining the environment: pay people not to drive

March 2, 2022 1 comment

from Dean Baker

From my Twitter feed it seems that Sarah Palin has been resurrected. All sorts of centrist-liberal types are yelling “drill baby, drill!” as a response to Russia’s invasion of Ukraine. They have been pushing for ignoring environmental regulations and even directly subsidizing fracking.

While that is no doubt music to the ears of the fossil fuel industry, this is going backwards about as quickly as we can in our effort to reduce greenhouse gas emissions. There is an alternative route, we can pay people not to drive. That one might seem a little silly, but it beats paying people to wreck the environment.

The way this could work is that ask people to submit a form to the IRS indicating how many miles they drove last year. We also have them submit a picture of their odometer reading as of today. They send in another photograph at the end of the year. Then they are entitled to a payment of 20 cents for each mile that they reduce their driving this year compared to last year. (We adjust the calendar so that it is for a 12-month period.)

If someone drove 15,000 miles last year and can reduce their driving to 10,000 miles this year, we would Read more…

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