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When politicians say “free trade,” they mean upward redistribution

February 12, 2019 4 comments

from Dean Baker

In Washington policy circles, being a supporter of free trade is pretty much comparable to saying you believe in evolution. All reasonable people say they accept the doctrine and agree that tariffs and other forms of protectionism are evil and dirty.

While there are good arguments for free trade as an economic policy, in the real world what passes for “free trade” is pretty much any policy that redistributes income upward, even if it is directly at odds with free trade. I have long harped on patent and copyright protection, both because I think that these government-granted monopolies are bad policy (at least in their current form), and because they are 180 degrees at odds with free trade.

The rationale for patents and copyrights is they provide incentives for innovation and creative work, but there is a rationale for every form of protectionism. This doesn’t change the fact that patent and copyright protection are still forms of protectionism. And, the imposition of stronger patent and copyright protections, which has been a central component of every trade deal for the last quarter-century, is a very costly form of protectionism.

Needless to say, the beneficiaries of this protectionism tend to be in the high end of income distribution. The list includes folks like Bill Gates, the pharmaceutical industry and the entertainment industry.  Read more…

Farhad Manjoo promotes billionaire ideology in proposal to get rid of billionaires

February 9, 2019 2 comments

from Dean Baker

New York Times columnist Farhad Manjoo tells us that he likes to “explore maximalist policy visions” in his columns. He falls well short of this goal in a piece calling for abolishing billionaires, which actually helps legitimate their existence.

The piece repeatedly tells us that their wealth is driven by technology, a point that first appears in the subhead which refers to “tech-driven inequality.” The problem with Manjoo’s piece is that the inequality is not in fact driven by technology, it is driven by our policy on technology, specifically patent and copyright monopolies. These forms of protection do not stem from the technology, they are policies created by a Congress which is disproportionately controlled by billionaires.

If the importance of these government granted monopolies is not clear, ask yourself how rich Bill Gates would be if any start-up computer manufacturer could produce millions of computers with Windows and other Microsoft software and not send the company a penny. The same story holds true with most other types of technology. The billionaires get rich from it, not because of the technology but because the government will arrest people who use it without the patent or copyright holder’s permission.

This point is central to the debate on the value of billionaires. If we could get the same or better technological progress without making some people ridiculously rich, then we certainly don’t need billionaires (I discuss alternatives in chapter 5 of my book Rigged [it’s free].) But in any discussion of the merits of billionaires, it is important to understand that they got their wealth because we wrote rules that allowed it. Their immense wealth was not a natural result of the development of technology.

It is unfortunate that this idea is apparently too radical for Manjoo.

Progressive taxes only go so far. Pre-tax income is the problem

February 5, 2019 8 comments

from Dean Baker

In recent weeks, there have been several bold calls for large increases in progressive taxation. First we had Representative Alexandria Ocasio-Cortez (D-NY), often referred to as AOC, proposing a top marginal tax rate on income over $10 million. This sent right-wing talking heads into a frenzy, leading many to show they don’t know the difference between a marginal tax rate and an average tax rate. (AOC’s 70 percent rate would only apply to an individual’s income above $10 million.)

More recently, we had Senator Elizabeth Warren propose a wealth tax that would apply to people with assets of more than $50 million. This tax could have Jeff Bezos sending more than $3 billion a year to the Treasury.

Given the enormous increase in inequality over the last four decades, and the reduction in the progressivity of the tax code, it is reasonable to put forward plans to make the system more progressive. But, the bigger source of the rise in inequality has been a growth in the inequality of before-tax income, not the reduction in high–end tax rates. This suggests that it may be best to look at the factors that have led to the rise in inequality in market incomes, rather than just using progressive taxes to take back some of the gains of the very rich.  Read more…

Yes, low unemployment does raise wages

January 28, 2019 Leave a comment

from Dean Baker

In the fall of 2013, Jared Bernstein and I wrote a book called Getting Back to Full Employment: A Better Bargain for Working People. The main point of the book was that low unemployment rates disproportionately benefited those who are most disadvantaged in the labor market. For this reason, we argued for using macroeconomic policy to get the unemployment rate as low as possible, until inflation became a clear problem.

At that time, the unemployment rate was still close to 7.0 percent. It was coming down from its Great Recession peak of 10.0 percent, but there were many economists, including some at the Federal Reserve Board, who argued that it should not be allowed to fall below a range between of 5.0–5.5 percent because lower rates of unemployment could trigger spiraling inflation. Our argument challenged that view.

We felt the evidence that unemployment rates this high should pose any sort of floor for macroeconomic policy were weak. Given the enormous gains from allowing the unemployment rate to fall further, we argued the Fed should take the small risk of accelerating inflation, and allow the unemployment to continue to decline.

Thankfully, Janet Yellen, who was then Fed chair, agreed with this position. (It helped that our friends with the Fed Up Coalition were also pushing hard in this direction.) Her replacement, Jerome Powell, seems to be following the same path, more or less.

Anyhow, we have now seen the unemployment rate fall below 4.0 percent, getting as low as 3.7 percent last fall, with impressive results.  Read more…

No one said rich people were very sharp: Davos tries to combat populism

January 22, 2019 7 comments

from Dean Baker

Let’s see, cattle ranchers are against vegetarianism, coal companies are against restricting CO2 emissions, and the Davos crew is trying to combat populism, according to The Washington Post. It is kind of amazing that the rich people at Davos would not understand how absurd this is.

Yeah, we get that rich people don’t like the idea of movements that would leave them much less rich, but is it helpful to their cause to tell us that they are devoting their rich people’s conference to combating them? The real incredible aspect of Davos is that so many political leaders and news organizations would go to a meeting that is quite explicitly about rich people trying to set an agenda for the world.

It is important to remember, the World Economic Forum is not some sort of international organization like the United Nations, the OECD, or even the International Monetary Fund. It is a for-profit organization that makes money by entertaining extremely rich people. The real outrage of the story is that top political leaders, academics, and new outlets feel obligated to entertain them.

The Green New Deal is happening in China

January 20, 2019 26 comments

from Dean Baker

One of the Trump administration’s talking points about global warming is that we’re reducing greenhouse gas emissions, while the countries that remain in the Paris accord are not. Well, the first part of this story is clearly not true, as data for 2018 show a large rise in emissions for the United States. The second part is also not very accurate, as most other countries are taking large steps to reduce emissions.

At the top of the list is China. The country has undertaken a massive push to convert to electric powered vehicles and clean energy sources.

China’s progress in this effort is truly extraordinary. In the case of electric cars, it has used a carrot-and-stick approach where it offers consumers large subsidies for buying electric cars while also requiring manufacturers to meet quotas for electric car production as a percent of their total fleet of cars. It has also invested in the necessary infrastructure, ensuring that there are a large number of charging stations widely dispersed across the country so that drivers don’t have to worry about being unable to recharge their cars.

The result has been a massive increase in the sale of electric cars. Electric car sales are projected to be 1.1 million this year, almost equal to sales in the rest of the world combined. The country expects sales to continue to rise rapidly, with annual sales hitting 11.5 million in 2030. By comparison, electric car sales are expected to be just 480,000 in the United States this year, less than half the number in China. Read more…

The next recession: what it could look like

January 19, 2019 15 comments

from Dean Baker

With the New Year and the US recovery soon to be record-breaking in duration, many are asking when the next recession is likely to come and what will cause it. While none of us has a crystal ball that gives a clear view of the future, there are a few things we can say.

First, and most importantly, the next recession will not look like the last recession. The last recession was caused by the collapse of a massive housing bubble that had been the driving force in the previous recovery. While economists like to pretend this was an unforeseeable event, that is not true.

There was an unprecedented run-up in nationwide house prices. It was clear that this was not being driven by the fundamentals of the housing market, as there was no remotely corresponding increase in rents, and vacancy rates were hitting record levels.

Furthermore, it was easy to see the housing bubble was driving the economy. Residential construction was hitting record shares of GDP, more than two full percentage points above its long-term average of 4.0 percent of GDP.

The wealth created by the bubble was also leading to a consumption boom, as people spent based on the new equity created by the run-up in the price of their home. This was also easy to see in the data, as the ratio of consumption-to-income hit record levels.  Read more…

The US is not that important to China

January 10, 2019 4 comments

from Dean Baker

It is common to see stories that have China’s economy reeling as a result of the Trump tariffs. While it does seem that China’s economy is experiencing difficulties, it is hard to tell a story where Trump’s tariffs are a major factor.

First, as I pointed out in the past, China’s trade surplus has actually risen in 2018 compared to 2017. In the first 10 months of 2018, (Census is not releasing new data because of the shutdown), China’s surplus on goods trade was up 11.5 percent from 2017. Perhaps the surplus would have risen even more without the tariffs, but it is a bit hard to believe that China’s economy is suffering too much because its surplus with the US only increased by 11.5 percent.

But the other point is that China’s exports to the US are just not that large a share of its economy. If we assume that exports for November and December would be roughly comparable to the prior two months, then the total for 2018 would be $550 billion, which comes to 4.2 percent of its $13 trillion economy.

However, as we are endlessly reminded by supporters of recent trade deals, much of the value in these exports is generated elsewhere. Read more…

Resolutions to improve debates on economic policy in 2019

January 1, 2019 2 comments

from Dean Baker

Okay, it’s that time of year when we are all supposed to commit ourselves to performing nearly impossible tasks over the next twelve months. I will play the game. Here is the list of areas where I will try to bring economics into economic policy debates in 2019.

1) Patent and copyright monopolies are government policies:

This one is pretty simple, but that doesn’t mean it is easy. It should be pretty obvious that these and other forms of intellectual property are government policies explicitly designed to promote innovation and creative work. We can (and have) make them stronger and longer, or alternatively make them shorter and weaker, or not have them at all. We can also substitute other mechanisms for financing innovation and creative work, including expanding those already exist. (Anyone hear of the National Institutes of Health?)

Incredibly, most policy debates, especially those on inequality, treat these monopolies as though they were just given to us by the gods. It is endlessly repeated that technology has allowed people like Bill Gates to get incredibly rich, while leaving less-educated workers behind. But that’s not true. It is our rules on patents and copyrights that have allowed people to get enormously wealthy from technological developments. With a different set of rules, Bill Gates would still be working for a living.  Read more…

Recession risks for the United States in 2019

December 21, 2018 14 comments

from Dean Baker

As we reach the end of the year, the economic recovery in the United States is approaching a new record for duration. In June, it will have its tenth birthday, passing the 1990s recovery as the longest one in US history. While recoveries do not die of old age, they do die. The length of this recovery has many looking for recession prospects on the horizon. At the moment, they are not clearly visible.

Before examining the risks, it is worth saying a bit about the good news. The length of the recovery has allowed the unemployment rate to fall to 3.7 percent, the lowest rate in almost 50 years.

It is important to remember that many people, including many in policymaking positions at the Federal Reserve Board, did not want the unemployment rate to fall this low. They argued that the inflation rate would begin to spiral upward if the unemployment rate fell below 5.0 percent.

We hit the 5.0 percent level in September of 2015. The world would look very different today if the inflation hawks had carried the day and the Fed raised interest rates enough to prevent the unemployment rate from dipping below this 5.0 percent mark.

If we flip the story and looked at employment rates, the employment rate for prime-age workers (ages 25 to 54) was 2.5 percentage points lower in September of 2015 than it is today. That translates into another 3.2 million people with jobs.  Read more…

Ivy Leagues are handing out millions in fees to hedge fund managers

December 19, 2018 3 comments

from Dean Baker

Many of the richest people in the country make their fortune in the financial sector. While it is surely the case that many of the high rollers in the financial sector are hard working and intelligent, these traits are not the key to getting really rich in the modern economy. As has always been the case, nothing can beat being well connected.

The latest tale of the well-connected rich is a study, by Markov Processes International, of the 10-year returns of the endowments of the eight Ivy League schools. The study found that all eight endowments had lower returns than a simple mix of 60 percent stock index funds and 40 percent bonds. In some cases the gap was substantial. Harvard set the mark with its annual returns lagging a simple 60-40 portfolio by more than 3 percentage points.

This dismal track record is a big deal because these endowments invest heavily in what is called “alternative investments,” primarily hedge funds and private equity funds. The people who run these funds often make tens of millions a year, in some cases hundreds of millions a year.

The rationale for these astronomical salaries is supposed to be their ability to produce outsized returns. The partners in these funds claim that they can earn far more for endowments and other investors than simple investment strategies, like buying index funds.  Read more…

Hickel response on degrowth

December 14, 2018 5 comments

from Dean Baker

[This is the last piece in an exchange with Jason Hickel on growth.My last piece is here.]

Baker says “I am at a loss to understand why we would have a war on growth.”  I don’t know why he is at a loss.  I explained the reasons for this in my previous post.  There are two I focus on.

(1) Because growing the GDP means growing energy demand, and this makes the task of switching to renewable energy significantly more difficult (nearly three times more difficult between now and 2050, which virtually rules out success).

(2) Because our preoccupation with growth makes it extremely difficult to get the regulations we need to avert ecological breakdown.  Politicians resist such measures precisely because of the risks they pose to growth

Baker has, unfortunately, not engaged with these arguments.

Next, Baker says that “if we spend enough in other areas, it is possible to offset sharp reductions in the sectors of the economy that are heavy users of fossil fuels.”  This argument is central to the standard vision of the Green New Deal (i.e., massive public investment in clean energy, which will generate millions of well-paid jobs and increase GDP growth).  Again, there are two problems with this.

(1) Even if we do manage to switch the entire energy system over to renewables, that might help us with emissions but it doesn’t help us with resource use.  If we keep growing GDP, resource use will keep going up – even if the economy is powered by clean energy.  And let’s not kid ourselves: to the extent that resource use is driving mass species extinction, this is an existential threat that we have to take seriously.  Read more…

Trade: It’s still about class, not country

December 13, 2018 3 comments

from Dean Baker

While Donald Trump keeps taking wild shots in his trade wars with China and other countries, the media have been cheering him on in at least one aspect of his campaign. All the elite types agree that “we” have an interest in clamping down on China’s alleged theft of our intellectual property. While some “we” might share that interest, most of the country does not.

Just to be clear on the agenda here, the alleged theft takes three forms. The first is what passes for actual theft. It is when a Chinese company, possibly with help from the Chinese government, literally takes technology from a US company. This can happen, for example, if they infiltrate its internal computer system.

While this is undeniably a bad practice, it is not unique to Chinese companies. In fact, many US companies also engage in such practices. Uber famously agreed to pay Waymo $245 million for stealing some of its software for self-driving cars. It would be hard to know if China’s companies are more guilty in this area than anyone else, but we can agree it is a bad practice that should be stopped.

The second area is forced technology transfers. This is when China requires that US companies, like Boeing or GE, take on a Chinese partner when they set up operations in China. This allows the Chinese companies to gain expertise in the technology used by US companies and then become potential competitors.  Read more…

Will degrowthing save the planet?

December 9, 2018 28 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 5 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

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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…