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Will degrowthing save the planet?

December 9, 2018 7 comments

from Dean Baker

[This is the third piece in an exchange with Jason Hickel on growth. Hickel’s response will be the last piece in the series.]

Jason Hickel responded to my earlier piece on degrowth arguing that in fact economic growth is inconsistent with a sustainable environment and that we have to get people to reject growth as an economic goal if we are going to limit the damage from climate change and excessive resource use more generally.

First, let me point out where we do agree. It is necessary to take drastic measures to reduce greenhouse gas emissions quickly. The world is falling far behind a path of emissions reductions (they are still rising) that will prevent excessive damage to the planet. Going beyond the issue of greenhouse gas emissions, we also have to take steps to reduce resource use more generally. The planet is rapidly losing habitat and species in ways that are irreversible.

I’m sure Hickel knows the data in these areas better than me, but I would not argue on the basic point. The question is whether degrowth needs to somehow fit into the picture. I will raise two points, one a question of logic and one a practical political issue.

On the logical point, I am at loss to understand why we would have a war on growth. Granted, we need to massively reduce our consumption of fossil fuels and over time other material inputs, but I am afraid I don’t see how that this precludes growth.  Read more…

Stability without growth: Keynes in an age of climate breakdown

December 7, 2018 7 comments

from Dean Baker

[This post is by Jason Hickel. He is responding to a post I did on the possibility of having growth in a sustainable economy. I will post a rejoinder later in the week. Jason will then get the last word in this exchange.]

What do Keynesian Democrats think about the movement for post-growth and de-growth economics? Dean Baker, a senior economist at the Center for Economic Policy Research in Washington, DC, has given us some insight into this question. In a recent blog post, republished by Counterpunch, he takes aim at two articles that I wrote for Foreign Policy in which I argue that it is not feasible to reduce our emissions and resource use in line with planetary boundaries while at the same time pursuing exponential GDP growth.

Baker agrees — thankfully — that we need to dramatically reduce emissions and resource use to prevent ecological collapse. But he thinks that this is entirely compatible with continued GDP growth.

Let’s imagine, he says, that a new government imposes massive taxes on greenhouse gas emissions and resource extraction while at the same time increasing spending on clean technologies, with subsidies for electric vehicles and mass transit systems. Baker believes that this will shift patterns of consumption toward goods that are less emissions and resource intensive. People will spend their money on movies and plays, for example, or on gyms and nice restaurants and new computer software. So GDP will continue growing forever while emissions and resource use declines.  Read more…

Restore higher tax rates for corporations that can’t contain CEO pay

December 1, 2018 3 comments

from Dean Baker

There is an argument that carries considerable currency on the right about the need to force the poor to do things that are actually good for them. This comes up frequently in the context of work requirements for people receiving benefits like Medicaid or food stamps (the Supplemental Nutrition Assistance Program).

The claim is that people will be made better off by working, since that will give them a foot into the labor market. They can eventually move up and earn enough so they no longer need these benefits. A major flaw in this argument is that the vast majority of non-disabled people who receive these benefits are already working.

While the idea of forcing people to help themselves doesn’t make much sense for these anti-poverty programs, they could make considerable sense for the governance of major US corporations. The problem is that shareholders seem to be unable to avoid paying out tens of millions of dollars to CEOs, even when these CEOs are not especially competent.

The problem is the structure of corporate governance. The people who most immediately determine the CEO’s pay are the corporation’s board of directors. These directors have incredibly cushy jobs. They typically get paid several hundred thousand dollars a year for perhaps 150 hours of workRead more…

Corporate debt will not be the basis for another financial crisis/great recession

November 17, 2018 13 comments

from Dean Baker

The folks who remain determinedly ignorant about the financial crisis and Great Recessioncontinue to look for another crisis where it isn’t. Much of the latest effort focuses on corporate debt. There are four big reasons why corporate debt does not pose anything like the same sort of problem that mortgage debt did during the housing bubble years.

First, many companies took on large amounts of debt for a simple reason, it was very cheap. The debt was not a necessity for them, but the opportunity to borrow for thirty or even fifty years at very low interest rates looked too good to pass up. As a result, many entirely healthy companies have large amounts of long-term debt on which they have very low interest payments. The ratio of corporate debt service payments to after-tax profits is at a relatively low (as in the opposite of high) level.

Second, the crisis mongers apparently missed it, but stock prices are very high right now. This means that most companies have the opportunity to raise more money by selling stock if they feel the need. Of course, the stock market could always plunge by 50 percent, but this one doesn’t factor into most crisis mongers’ predictions. As long as the market stays high, or even if it falls 20 percent, most companies would be able to sell shares to raise capital if they were facing trouble meeting their debt service payments.  Read more…

US drug prices started to explode in the 1980s, contrary to what the NYT tells you

November 14, 2018 2 comments

from Dean Baker

Book4 22160 image002

Austin Frakt had an interesting Upshot piece in the NYT saying that drug spending in the US began to sharply diverge from other countries in the 1990s. This actually is not very clear, since the comparison group dating back to the 1980s is small. I am actually more struck by the explosion in spending in the 1980s, with it nearly doubling as a share of GDP over the course of the decade. Note that drug spending had not been increasing at all as a share of GDP over the prior two decades.  Read more…

Good news, the stock market is plunging: thoughts on wealth

November 9, 2018 5 comments

from Dean Baker

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

No one told Greg Mankiw about the Great Recession

October 8, 2018 1 comment

from Dean Baker

We all know how difficult it is for elite economists at places like Harvard to get information about the economy, so perhaps we should excuse him for this little mess up. Of course if he had heard of the Great Recession he would not be writing a piece in the New York Times telling us that trade deficits really don’t matter:

“Nations run trade deficits when their spending on consumption and investment, both private and public, exceeds the value of goods and services they produce. If you really want to reduce a trade deficit, the way to do it is to bring down spending relative to production, not to demonize trading partners around the world.”

If Mankiw had heard about the Great Recession he would have known that countries often face shortfalls in demand, meaning that we have unemployment because there is not enough demand (i.e. spending on consumption and investment). In this context, if we reduce domestic spending, as Mankiw advocates, it may reduce the trade deficit somewhat, but it will also lead to a further reduction in demand and loss of jobs.  Read more…

Trump’s tariffs on Chinese imports are actually a tax on the US middle class

October 1, 2018 3 comments

from Dean Baker

In his escalating trade war with China, Donald Trump is acting increasingly like Captain Queeg in the Caine Mutiny. He has imposed a 10 percent tariff on $200 billion in US imports from China, a rate he proposes to increase to 25 percent at the start of the next year. He also is threatening tariffs on the rest of our imports from China, an additional $300 billion in goods and services.

The straight arithmetic tells us that 10 percent of $200 billion is $20 billion on an annual basis. If this rises to 25 percent next year, the tariffs would be $50 billion. If we add in 10 percent tariffs on another $300 billion, that comes to $30 billion, bringing the total to $80 billion.

While Trump talks as though he thinks his tariffs are taxing China, they aren’t. Most immediately, they are a tax on US households. The full $80 billion would come to a bit less than $600 per household.

It is true that the tariffs will not be passed on dollar for dollar. Some companies will decide it’s better to see their profit market squeezed than pass on the full price increase. This means that Apple and Nike may not raise the price for the iPhone and running shoes by the full amount of the tariff.

In that case, a portion of the tax will be borne by US companies manufacturing items in China. This is fine, since corporate profits are near record highs as a share of GDP. But, this is still not taxing China.

There will be some spillovers where either Chinese companies importing items to the US end up with less money or Chinese suppliers selling to US companies are forced to accept less money, but there is little doubt that the bulk of the tariff will be borne by the US. Trump is effectively proposing one of the largest tax increases on the middle class in memory.  Read more…

Getting serious about debt and deficits: the deficit hawks did enormous harm to our kids

September 27, 2018 15 comments

from Dean Baker

Debt and Deficits, Again

With the possibility that the Democrats will retake Congress and press demands for increased spending in areas like health care, education, and child care, the deficit hawks (DH) are getting prepared to awaken from their dormant state. We can expect major news outlets to be filled with stories on how the United States is on its way to becoming the next Greece or Zimbabwe. For this reason, it is worth taking a few moments to reorient ourselves on the topic.

First, we need some basic context. The DH will inevitable point to the fact that deficits are at historically high levels for an economy that is near full employment. They will also point to a rapidly rising debt to GDP ratio. Both complaints are correct, the question is whether there is a reason for anyone to care.

Just to remind everyone, the classic story of deficits being bad is that they crowd out investment and net exports, which makes us poorer in the future than we would otherwise be. The reason is that less investment means less productivity growth, which means that people will have lower income five or ten years in the future than if we had smaller budget deficits. Lower net exports mean that foreigners are accumulated U.S. assets, which will give them a claim on our future income.

Debt is bad because it means a larger portion of future income will go to people who own the debt. This means that the government has to use up a larger share of the money it raises in taxes to pay interest on the debt rather than for services like health care and education. Or, to put it in a more Keynesian context, there will be more demand coming from people who own the debt, which means the government would need higher taxes, to support the same level of spending, than would otherwise be the case.  Read more…

Cheap tricks with economic statistics: the democratic version

September 22, 2018 7 comments

from Dean Baker

We all know Donald Trump’s tendency to make up numbers to tell everyone what a great job he is doing as president. People are rightly appalled, both that Trump is not doing a great job, but also that he is lying to imply otherwise.

While Trump is clearly over the top in just inventing data to back his argument, Democrats are also often not very straightforward in assessing the data. We got a dose of that last week when there were complaints that the rate of income growth had slowed down in 2017 compared with 2016 and 2015.

Workers should be unhappy about the pace of income growth. They have much ground to make up following the losses of the Great Recession and the weak growth even prior to the downturn, but the main reason that income growth was slower in 2017 than in 2016 and 2015 is that oil, and energy prices more generally, rose in 2017 after falling the prior two years.

As a result of the reversal in oil prices, inflation was 2.1 percent in 2017, compared to 1.3 percent in 2016, and just 0.1 percent in 2015. This means that even though there was a very modest acceleration in nominal wage growth, and comparable gains in employment in all three years, the growth in income adjusted for inflation was far lower in 2017 than in the prior two years.

Workers have to pay for gas and heating oil, so the rise in energy prices does affect their living standards. In that sense, the weaker income growth in 2017 is very real, but this hardly represents some new failure of the political system. The speeding of income growth in 2015 and 2016, and its slowing in 2017, are just the story of fluctuating world oil prices, which any honest analyst should acknowledge.  Read more…

The best way to remove corruption in medicine: take the money out

September 20, 2018 1 comment

from Dean Baker

Former New England Journal of Medicine editor Marcia Angell had an op-ed in the NYT explaining how efforts to increase transparency had not ended the corrupting influence of money on medical research. Her piece describes various ways in which the researchers who get money from drug companies bend research to favor their benefactors.

While Dr. Angell suggests some reforms, there is an obvious one that is overlooked: take the money out. Drug companies have incentives to bend research findings because patent monopolies allow them to sell their drugs at prices that are several thousand percent above the free market price.

As every good economist knows, when the government puts in an artificial barrier that raises prices above the free market price it is creating an incentive for corruption. However, they are usually thinking about gaps like those created by Trump’s 10 or 25 percent tariffs that are supposed to punish our trading partners.

They usually don’t think about the corruption from patent monopolies that allow drug companies to sell drugs for tens of thousands of dollars that would sell for a few hundred dollars as a generic. But the same principle applies, with the incentives for corruption being proportionately larger.

The economist’s remedy would be the same in both cases: get rid of the artificial barrier. We could do this by paying for drug research upfront and make all findings fully public and place all patents in the public domain (discussed here and in Rigged Chapter 5). This would allow all new drugs to be sold at generic prices. There would then be no more incentive to make payoffs to doctors to help promote drugs.

The bank bailout of 2008 was unnecessary

September 19, 2018 4 comments

from Dean Baker

Last week marked 10 years since the harrowing descent into the financial crisis — when the huge investment bank Lehman Bros. went into bankruptcy, with the country’s largest insurer, AIG, about to follow. No one was sure which financial institution might be next to fall.

The banking system started to freeze up. Banks typically extend short-term credit to one another for a few hundredths of a percentage point more than the cost of borrowing from the federal government. This gap exploded to 4 or 5 percentage points after Lehman collapsed. Federal Reserve Chair Ben Bernanke — along with Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner — rushed to Congress to get $700 billion to bail out the banks. “If we don’t do this today we won’t have an economy on Monday,” is the line famously attributed to Bernanke.

The trio argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression.

Neither part of that story was true.

Still, news reports on the crisis raised the prospect of empty ATMs and checks uncashed. There were stories in major media outlets about the bank runs of 1929.   Read more…

Amazon and Apple: Wall Street’s trillion dollar babies

September 15, 2018 10 comments

from Dean Baker

Last month Amazon joined Apple, becoming the second company in the world to have a $1 trillion market capitalization. Amazon’s accomplishment didn’t cause quite as much celebration as Apple’s – it pays to be number one – nonetheless this was treated as a milestone that all of us should view as good news.

Actually, the celebratory coverage of both events demonstrated the incredibly ill-informed nature of much economic reporting in the United States. A big run-up in share prices is good news for the people who own lots of stock in the company; it is not especially good news for anyone else.

In principle, the value of a stock is supposed to represent the expected future earnings of the company. I said “supposed” because stock prices fluctuate wildly in response to all sorts of things that are not obviously connected to future earnings, but in the textbook definition, it is the discounted value of future earnings that determine stock prices. To be clear, this is not the socialist textbook, this is the capitalist textbook that is taught in business schools.

What does it mean that Amazon and Apple have market valuations of more $1 trillion? Presumably, it means that investors are now more optimistic about the companies’ future profit potential. It’s difficult to see why the rest of us should celebrate this outcome.

Apple obviously makes products that consumers value, and in that sense, it is contributing to the economy and generating wealth. But, suppose instead of one huge company we had 10 little (or littler) Apples that sold iPhones, computers, and the other items that comprise Apple’s product line? Would we be any poorer as a society in that case, even if the market cap of our leading tech company was just $100 billion?  Read more…

The housing bubble and financial crisis was easy to see coming

September 13, 2018 3 comments

from Dean Baker

Ten years ago we saw the culmination of a period of ungodly economic mismanagement with the collapse of Lehman Brothers and a full-fledged financial crisis. The folks who led us into this disaster rushed to do triage and tend to the most important problem: saving the bankrupt banks.

They also had to cover their tracks. They insisted that the financial crisis was some sort of fluke event — a lot of bad things went wrong simultaneously — and who could have predicted or prevented that? They had a lot of assistance in this coverup because almost all the people who did and wrote about economics at the time also missed the housing bubble and the harm that its inevitable collapse would cause.

The coverup continues to the present, largely because the same people who messed up in the years leading up to the crash are still in positions of authority. They are still the ones writing and talking about economics in major news outlets. So we can expect a lot of “who could have known?” drivel in the weeks ahead.

CEPR will be putting out a paper soon showing once again how the bubble was easy to recognize as was the fact that its collapse would be a disaster. Today I will just share one chart that shows much of the story.

The bubble led to an unprecedented run-up in house prices (with no accompanying rise in real rents), which in turn led to residential construction hitting 6.5 percent of GDP, more than two full percentage points above the long-term average. (But hey, who could have noticed that?)  Read more…

Bernanke, Geithner, and Paulson still don’t have a clue about the housing bubble

September 12, 2018 4 comments

from Dean Baker

NYT readers were no doubt disturbed to see a column in which former Fed Reserve Board chair Ben Bernanke, Obama Treasury Secretary Timothy Geithner, and Bush Treasury Secretary Henry Paulson patted themselves on the back for their performance in the financial crisis. First, as they acknowledge in the piece, all three completely failed to see the crisis coming.

During the years when house prices were getting way out of line with both their long-term trend and rents, Bernanke was a Fed governor, then head of the Council of Economic Advisers, and then Fed chair. He openly dismissed the idea that the run-up in house prices could pose any threat to the economy. Henry Paulson was at Goldman Sachs until he became Treasury Secretary in the middle of 2006. As the bank’s CEO, he was personally profiting from the bubble as the bank played a central role in securitizing mortgage-backed securities. Timothy Geithner was president of the New York Fed, where he was paid over $400,000 a year to make sure that the Wall Street banks were not taking on excessive risk.

It is bad enough that these three didn’t see the crisis coming, but they still seem utterly clueless. They tell readers:  Read more…

The housing bubble and financial crisis was easy to see coming

September 10, 2018 3 comments

from Dean Baker

Ten years ago we saw the culmination of a period of ungodly economic mismanagement with the collapse of Lehman Brothers and a full-fledged financial crisis. The folks who led us into this disaster rushed to do triage and tend to the most important problem: saving the bankrupt banks.

They also had to cover their tracks. They insisted that the financial crisis was some sort of fluke event — a lot of bad things went wrong simultaneously — and who could have predicted or prevented that? They had a lot of assistance in this coverup because almost all the people who did and wrote about economics at the time also missed the housing bubble and the harm that its inevitable collapse would cause.

The coverup continues to the present, largely because the same people who messed up in the years leading up to the crash are still in positions of authority. They are still the ones writing and talking about economics in major news outlets. So we can expect a lot of “who could have known?” drivel in the weeks ahead.

CEPR will be putting out a paper soon showing once again how the bubble was easy to recognize as was the fact that its collapse would be a disaster. Today I will just share one chart that shows much of the story.

The bubble led to an unprecedented run-up in house prices (with no accompanying rise in real rents), which in turn led to residential construction hitting 6.5 percent of GDP, more than two full percentage points above the long-term average. (But hey, who could have noticed that?)  Read more…

Unions in the 21st century: A potent weapon against inequality

September 5, 2018 3 comments

from Dean Baker and Jared Bernstein

The topic of economic inequality can appear complex, with many nuanced causes and outcomes. But while the two of us actively engage in that debate, we also strongly believe that there is one overarching factor that must not be, but often is, overlooked: worker bargaining power. On Labor Day, this problem of the long-term decline in workers’ ability to bargain for a fair share of the growth they have helped generate deserves a closer look.

There is, of course, a direct link between less worker clout and the decline in union coverage. In addition to directly empowering workers at the workplace, unions have played a central role in the drive for a wide variety of policy measures to ensure that everyone benefits from prosperity, which is the opposite outcome of rising inequality. This list includes Social Security, Medicare, paid family leave, civil rights legislation, fairer tax policy and higher minimum wages.

This view has been further buttressed by recent research using new data showing a strong connection between union strength and a more equal distribution of income (see figure), a link that makes the sharp decline in union membership over the past four decades particularly disturbing.

bernstein baker labor day 2018Source: Piketty et al., UnionStats Read more…

Bad news for Donald Trump, China is already bigger than the United States

August 26, 2018 5 comments

from Dean Baker

As we know, Donald Trump is not very good with numbers. He gave more evidence of this fact when he told a campaign rally in West Virginia:

“When I came, we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time …That’s not going to happen anymore.”

Actually, China’s economy is already considerably bigger than the US economy. Using the purchasing power parity measure, which is recommended by most economists and the CIA World Factbook, China’s economy is already more than 25 percent larger than the US economy. It is also worth noting that there are no growth projections from any remotely reputable source that show the US economy growing more rapidly than China’s economy.

The United States is not on the brink of a financial crisis

August 21, 2018 6 comments

from Dean Baker

Prior to the collapse of the housing bubble and the resulting financial crisis, major news outlets had little interest in pieces warning about the bubble and the risks it posed to the economy. These days there seems to be a large demand for such pieces. Unfortunately, in choosing these pieces, news outlets seem little better informed today than they were in the years before the housing bubble collapse.

To take a recent example, the New York Times published a piece by William D. Cohan, a well-known author of books and articles on the financial industry. Cohan argues that the Federal Reserve Board has kept interest rates at unusually low levels in recent years.

He maintains that while low interest rates have helped boost economic growth in the short-term, it makes the economy vulnerable to financial crises in the longer term. If interest rates go up, then many debtors will be unable to pay their debts and we will again be facing a 2008-type financial crisis.

At the most basic level, Cohan’s argument is extraordinarily misleading. He notes the current valuation of the $41 trillion bond market is considerably larger than the $30 trillion stock market and therefore deserves considerably more attention than it receives.  Read more…

Where Donald Trump and the elites agree on protectionism: patents and copyrights

August 3, 2018 86 comments

from Dean Baker

Policy wonks and pundits have been nearly unanimous in their condemnations of Donald Trump’s trade war and his primary weapon of tariffs. Tariffs are a tax increase on US consumers, raising the price of imports and the domestically produced goods with which they compete.

Retaliation by other countries will reduce US exports, costing jobs in other sectors. This is not likely to lead to good outcomes, especially when the basis for Trump’s complaints is vague, constantly shifting and often at odds with reality.

The one exception is with patents and copyrights. There is widespread agreement with Trump that China, our largest competitor, is stealing “our” intellectual property. They agree that Trump should be prepared to take steps to stop this theft and crackdown on China’s practices.

The so-called theft takes two forms. On the one hand, the complaint is that China does not adequately protect patents and copyrights internally. As a result, massive amounts of software, recorded music and video material, and other copyright protected items are sold without authorization.

The other form of theft is through requirements that companies looking to set up operations in China partner with Chinese firms and thereby share their technology. For example, Boeing is required to partner with Chinese manufacturers in its operations there, which then gives the Chinese manufacturers the ability to be competitors in future years.  Read more…