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The U.S. economy is not the world’s largest

August 24, 2019 1 comment

from Dean Baker

I know that reality often has little place in our political debates, but is there any way we can the New York Times and other news outlets to stop saying that the U.S. economy is the world’s largest? It happens not to be true.

According to the I.M.F., using purchasing power parity measures, which most economists view as the best measure, China passed the United States in 2015 and is now more than 25 percent larger. Maybe reporters and editors get a kick out of saying that the U.S. is the world’s largest economy, but since it happens not to be true, it would be good if they stopped saying it.

China did not trick the US — Trade negotiators served corporate interests

August 23, 2019 1 comment

from Dean Baker

The New York Times ran an article last week with a headline saying that the 2020 Democratic presidential contenders faced a serious problem: “how to be tougher on trade than Trump.” Serious readers might have struggled with the idea of getting “tough on trade.” After all, trade is a tool, like a screwdriver. Is it possible to get tough on a screwdriver?

While the Times’s headline may be especially egregious, it is characteristic of trade coverage which takes an almost entirely Trumpian view of the topic. The media portray the issue of some countries, most obviously China, benefiting at the expense of the United States. Nothing could be more completely at odds with reality.

China has a huge trade surplus with the United States, about $420 billion (2.1 percent of GDP) as of 2018. However, this doesn’t mean that China is winning at the expense of the United States and because of “stupid” trade negotiators, as Trump puts it.

The U.S. trade deficit with China was not an accident. Both Republican and Democratic administrations signed trade deals that made it easy to manufacture goods in China and other countries, and then export them back to the United States. Read more…

Good news: The stock market is plunging

August 17, 2019 7 comments

from Dean Baker

The stock market enjoys a mythological place not only among mainstream media types, but also among many progressives. For some reason this measure of expected future corporate profits is taken as a measure of economic well-being.

The fact that the media obsesses over the stock market hardly needs to be mentioned. If there is one item about the economy that we can be sure will be repeated every day, it is the movement in the Dow or the S&P 500. And, needless to say, an upward movement is good news and a downward movement is bad news.

But the view that the stock market is telling us something about the well-being of the economy goes far beyond just ill-informed media types. In the lead up to the 2016 election, Justin Wolfers, a University of Michigan economics professor, and a fellow at the Peterson Institute for International Economics, had several New York Times pieces arguing that the wise investors in the stock market recognized that Trump would be bad news for the country. He pointed to sharp declines in the market in response to events making a Trump win more likely.

The Wolfers hypothesis suffered a serious setback in the weeks and months immediately following the election. Read more…

Progressive policies may hurt the stock market. that’s not a bad thing.

August 15, 2019 7 comments

from Dean Baker

Last week, we saw the media terrified over a plunge in the stock market following an escalation of Donald Trump’s trade war with China. There are good reasons to be concerned about Trump’s ill-defined trade war and reality TV tactics, but the plunge in the stock market is not one of them.

While the idea that the stock market is a measure of the health of the economy permeates news reporting and popular understanding, it has no basis in economics. The stock market is a measure of the expectations of future profits of companies that are listed in the exchange. It is only coincidental when it provides information about the health of the economy. It is important that the public understand this distinction as the 2020 election draws closer.

The basic logic here is simple. The price of Microsoft, Boeing or Pfizer stock is not going to rise because workers are getting pay increases or they can take longer vacations. The price of these companies’ stocks will rise if investors believe that events will cause their profits to be higher. That’s the end of the story.

This is why the Trump tax cut was good news for the stock market. Investors were not passing judgment on whether lower corporate tax rates would mean more rapid economic growth. They were betting that if companies paid less money in taxes, there would be more money left for shareholders. Read more…

Yet another New York Times column gets the story on automation and inequality completely wrong

August 13, 2019 16 comments

from Dean Baker

I am a big fan of expanding the welfare state but I am also a big fan of reality-based analysis. For this reason, it’s hard not to be upset over yet another column telling us that the robots are taking all the jobs and that this will lead to massive inequality.

The first part is more than a little annoying just because it is so completely and unambiguously at odds with reality. Productivity growth, which is the measure of the rate at which robots and other technologies are taking jobs, has been extremely slow in recent years. It has averaged just 1.3 percent annually since 2005. That compares to an annual rate of 3.0 percent from 1995 to 2005 and in the long Golden Age from 1947 to 1973.

In addition, all the official projections from places like the Congressional Budget Office and Social Security Administration assume that productivity growth will remain slow. That could prove wrong, but the people projecting a massive pick up of productivity growth are certainly against the tide here.

But the other part of the story is even more annoying. No, technology does not generate inequality. Our policy on technology generates inequality. We have rules (patent and copyright monopolies) that allow people to own technology.

Bill Gates is incredibly rich because the government will arrest anyone who mass produces copies of Microsoft software without his permission. If anyone could freely reproduce Windows and other software, without even sending a thank you note, Bill Gates would still be working for a living. Read more…

Why is Facebook, the world’s largest publisher, immune to publishing laws?

July 30, 2019 5 comments

from Dean Baker

Mark Zuckerberg may not think he needs a new job, but he does. It’s long past time Facebook be classified as a publisher, where it can be held responsible for the content that appears in posts on its system.

The issue here is the special exemption to liability that Facebook and other internet platforms get from Section 230 of the Communications Decency Act of 1996. This law was passed in the early days of the internet and was intended to set up rules for governing communications that paralleled the ones for print and broadcast media. At the time, Congress decided to include Section 230, which protects Facebook and other internet platforms from the same sort of responsibility for content that print or broadcast media face.

To see what is at issue, suppose that a Facebook post becomes widely circulated saying that Donald Trump has stolen $20 million from charity. Imagine in this particular case, it happens not to be true, and Trump can prove this fact.

Because of Section 230, Facebook bears no responsibility for spreading this false accusation. In fact, it is not even obligated to remove the false accusation from its platform, although it would likely choose to do so under the circumstances. If Trump could determine who had initiated the post, he could pursue legal action against them, but Section 230 would protect Facebook from any liability.

By contrast, suppose that a newspaper had printed the same accusation. Read more…

The “aging crisis” is actually just a labor crisis for the wealthy

July 24, 2019 8 comments

from Dean Baker

The New York Times told us last week that China is running out of people. That might seem an odd concern for a country with a population of more than 1.4 billion, but you can read it for yourself:

“Driving this regression in women’s status is a looming aging crisis, and the relaxing of the draconian ‘one-child’ birth restrictions that contributed to the graying population. The Communist Party now wants to try to stimulate a baby boom.”

What exactly is supposed to be China’s “aging crisis?” China has had a low birth rate for the last four decades, as the government consciously tried to slow the country’s population growth. As a result, it does have an aging population and a declining ratio of workers to retirees, but this raises the obvious question, “So what?”

We see endless news articles and columns implying that the prospect of a declining number of workers supporting a growing population of retirees is some sort of crisis. The people making such assertions really need some knowledge of demographics.

The United States and other wealthy countries have been seeing drops in the ratio of workers to retirees for many decades. In the U.S. case, we went from having 5.1 workers for every Social Security retiree in 1960 to just 2.8 workers for each retiree today. Read more…

Trump’s fixation on intellectual property rights serves the rich

July 15, 2019 8 comments

from Dean Baker

Between making threats of actual war with North Korea and Iran, Donald Trump has also gotten us into a trade war with China. Trump’s ostensible reason for this trade war — the large US trade deficit with China — actually did have some basis in reality, but in practice the trade war is straying into turf that is likely to offer few gains for US workers and could actually lead to sizable losses.

A major theme in Trump’s campaign was that China is a world-class currency manipulator that deliberately keeps down the value of its currency to give its products an advantage in international trade. The basic story is true; China did intervene heavily in currency markets to keep the value of its currency from rising against the dollar.

However, it would probably be more appropriate to say that China managed its currency rather than manipulated it. There was nothing hidden or sneaky about China’s intervention; it has an official exchange rate that it acts to maintain.

Read more…

Replace patent monopolies with direct public funding for drug research

July 2, 2019 3 comments

from Dean Baker

It is impressive to see many of the leading Democratic candidates put forward bold progressive proposals. Unfortunately, in the case of prescription drugs, their imagination has been notably weak. While there have been proposals for lowering drug prices, none of them have been willing to attack the fundamental problem: government makes prices high by granting patent monopolies.

This is a simple but incredibly important point that is often lost in the debate. We frequently hear comments about how progressives want the government to intervene in the free market to bring drug prices down through various mechanisms.

That story turns logic on its head. In almost all cases, drugs are cheap to manufacture. It is government-granted patent monopolies or some other form of exclusivity that makes drugs expensive. In a truly free market, drugs are cheap. The restrictions on prices being proposed are simply efforts to limit the extent to which drug companies can exploit the monopolies the government has given them. Read more…

Under Trump, manufacturing job growth slows to a trickle

June 25, 2019 4 comments

from Dean Baker

Donald Trump put manufacturing jobs at the center of his economic platform in 2016. He endlessly harped on the loss of relatively good-paying manufacturing jobs.

He blamed this job loss on “terrible” trade agreements and other countries “manipulating” the value of their currency to get an advantage in trade. He put China at the top of the list of bad actors, promising to declare them a currency manipulator on day one of his administration, which would directly lead to economic sanctions.

While Trump has engaged in considerable bluster in his trade negotiations, they have not led to much of a payoff for U.S. manufacturing workers to date. At the most basic level, instead of shrinking, the trade deficit has gotten larger under Trump.

In 2016, the last year of the Obama administration, the trade deficit was $502 billion. Through the first four months of 2019, the trade deficit was running at almost a $620 billion annual rate, more than $100 billion higher than the deficit Trump inherited.

For all his screaming about currency manipulation, the value of the dollar relative to other currencies has barely changed since Trump took office. Needless to say, Trump did not declare China a currency manipulator on day one of his administration or on any subsequent day. Read more…

Donald Trump’s capricious tariffs open the door to corruption

June 12, 2019 5 comments

from Dean Baker

Donald Trump has repeatedly proclaimed his love for tariffs, even dubbing himself “Tariff Man.” While Trump clearly does not understand how tariffs work, some of the discussion in the media has been off target as well. It’s worth trying to get the basic story straight.

First, it has been widely pointed out that Trump is wrong in thinking that China or other targeted countries are paying tariffs to the U.S. Treasury. To make it simple, a tariff is a tax on imports.

It can be thought of as being like a tax on cigarettes or alcohol. The buyer is the one who most immediately pays the tax on Chinese or other targeted imports. However, the tax will generally not be borne entirely by the consumer.

The seller  in this case, producers in the countries subject to the tax  will typically lower their price to maintain their market share. So, some of the burden of the tariff will be borne by China or other targeted countries. (An important exception is a financial transactions tax, where the financial industry will bear almost the entire burden of the tax.)

It is also important to point out that part of this burden is likely to come through fluctuations in currency prices, an issue that has been almost completely ignored in media reports on tariffs. The classic economics story is that if the U.S. puts a tariff on Chinese or other imports, the value of the dollar will rise relative to the Chinese yuan and other currencies.  Read more…

New York City moves forward with paid vacation measure

June 9, 2019 26 comments

from Dean Baker

Workers in the United States
now put in more time than workers in any other wealthy country, including Japan.

This week New York’s city council will begin to consider a measure put forward by Mayor Bill de Blasio that would guarantee workers in the city at least 10 days of paid time off per year. This proposal is an important step toward bringing the United States inline with the other rich countries in guaranteeing its workers some amount of paid vacation.

As a new report from Adewale Maye at the Center for Economic Research shows, the United States is very much an outlier from its peer countries in not guaranteeing its workers any paid vacation days or holidays. Countries in the European Union all guarantee workers at least four weeks of paid vacation (it’s a condition of EU membership). Many provide five weeks, in addition to an average of 10 paid holidays. Read more…

We wrecked the planet but if the young just read the Washington Post, they will only blame us for the national debt!

May 24, 2019 27 comments

from Dean Baker

You have to love Robert Samuelson. He writes a column noting that baby boomers are leaving the workforce, and some are dying off, leaving the country to our children and grandchildren. He concludes the piece with a comment on the national debt.

“To boot, there’s also a massive federal debt. Good luck.”

Given the enormous damage that we have done to the environment, our children and grandchildren would be enormously forgiving if all they blamed us for is the national debt. Of course, since we (baby boomers) will all be dead at some point, we will also be passing on the bonds that constitute the national debt to our children and grandchildren. Read more…

Trump’s trade war with China is waged to make the rich richer

May 21, 2019 8 comments

from Dean Baker

Donald Trump seems determined to double down and keep pressing forward on his trade war with China. He promises more and higher tariffs, apparently not realizing that U.S. consumers are the ones paying these taxes — not China’s government or corporations.

While tariffs clearly impose a cost on people in the United States, this cost could be justified as a weapon to change a trading partner’s harmful practices. During his campaign, Trump pledged to wage a trade war with China over its currency policy. He said he would declare China a “currency manipulator” on day one of his administration, putting pressure on China to raise the value of its currency against the dollar.

The value of China’s currency matters, since it determines the relative price of goods and services produced in China and the United States. Ordinarily, the currency of a rapidly growing country with a large trade surplus like China would be expected to rise against the currency of a country with a large trade deficit like the United States. However, China’s government intervened in currency markets to keep its currency from rising, thereby keeping down the price of China’s goods and services.

This was ostensibly the behavior that Trump was determined to change in his China trade war. But now that we are in the war, the currency issue has largely disappeared from the conversation. According to the published accounts, the big issue is over China’s respect for the intellectual property claims (i.e., patent and copyrights) of U.S. corporations. Read more…

The US labor market is deteriorating for black men

May 14, 2019 2 comments

from Dean Baker

The April jobs report was, for the most part, pretty good news. The overall unemployment rate fell to 3.6 percent, a level not seen in almost 50 years. The survey of businesses showed the economy generated more than 260,000 new jobs in the month — a very strong pace of job growth.

While not great, the average hourly wage grew 3.2 percent. That is more than a percentage point above the 2 percent inflation rate, meaning that wages are at least rising faster than prices, and workers are getting their share of the gains from productivity growth. This was not true earlier in the recovery when the labor market was weaker.

But the situation for Black Americans, and especially Black men, is disturbing. While the data are erratic, we now have enough of it to indicate that the employment prospects of Black men may actually be deteriorating even as the overall labor market continues to improve. Read more…

Trump Fed nominee Stephen Moore predicts big downward redistribution of wealth if Trump defeated

April 29, 2019 11 comments

from Dean Baker

Moore said it would take the form of “the biggest sell-off in the stock market in American history.” Since stock is overwhelmingly held by the wealthy, if the market plunges, it means that wealthy will have relatively less wealth.

It is important to remember that the stock market in principle represents the value of future after-tax corporate profits. This means that any measure that should increase after-tax profits, such as the Republicans’ corporate tax cut, should lead to a rise in the stock market. By contrast, measures that reduce corporate profits, like reining in abusive insurers or taxing fossil fuel companies for the damage they cause to the environment, will lead a fall in the stock market.

While this would mean that rich people would have less money, it has little to do with the health of the economy.

Trade games are back: The USITC report on the new NAFTA

April 26, 2019 3 comments

from Dean Baker

U.S. trade policy is truly fascinating. Probably more than in any other area of public policy, trade agreements are structured by corporate interests behind closed doors. Then when a deal is produced, the establishment media and economists insist that we have to support the deal behind the important principle of “free trade.” The opponents are treated as knuckle-dragging Neanderthals who just can’t understand how the economy works.

We got another episode in this long-running show last week when the United States International Trade Commission (USITC) came out with its assessment of the United States, Mexico, Canada Agreement (USMCA), also known as the new NAFTA. It came as a surprise to virtually no one that the USITC study showed economic gains from the deal. The study projected that the deal would lead to an increase in GDP of 0.35 percent when its effects are fully felt. However, the real impressive part of the story is how it got this result. Read more…

Why is populism on the rise and what do populists want?

April 5, 2019 3 comments

from Dean Baker

In the United States, the pay of a typical worker has badly trailed productivity growth over the last four decades, allowing only marginal improvements in living standards over this period. At the same time, a small number of people have gotten incredibly rich in the finance and tech sectors and by being top executives in major U.S. corporations. There is a similar, if somewhat less stark, picture in most other wealthy countries.

The standard story for this rise in inequality is that this is just the inevitable course of globalization and technology. While many in the elite may feel bad for those left behind, and even propose policies to help them, the line is that the rise in inequality is something that happened, not the result of conscious policy.

That is a lie. And the persistence of this lie is one of the reasons that populist politics has so much resonance in Europe and the United States.  Read more…

As US economy weakens, economists struggle to predict next recession

April 2, 2019 3 comments

from Dean Baker

Many of the people who completely missed the worst recession since the Great Depression are trying to get out front and tell us about the next one on the way. The big item glowing in their crystal ball is an inversion of the yield curve. There has been an inversion of the yield curve before nearly every prior recession and we have never had an inversion of the yield curve without seeing a recession in the next two years.

Okay, if you have no idea what an inversion of the yield curve means, it probably means you’re a normal person with better things to do with your time. But for economists, and especially those who monitor financial markets closely, this can be a big deal.

An inverted yield curve refers to the relationship between shorter- and longer-term interest rates. Typically, the longer-term interest rate — say, the interest rate you would get on a 30-year bond — is higher than what you would get from lending short-term, like buying a three-month U.S. Treasury bill.

The logic is that if you are locking up your money for a longer period of time, you have to be compensated with a higher interest rate. Therefore, it is generally true that as you get to longer durations — say, a one year bond compared to three-month bond — the interest rate rises. This relationship between interest rates and the duration of the loan is what is known as the “yield curve.”

We get an inverted yield curve when this pattern of higher interest rates associated with longer-term lending does not hold, as is now the case. For example, on March 27, the interest rate on a three-month Treasury bill was 2.43 percent. The interest rate on a 10-year Treasury bond was just 2.38 percent, 0.05 percentage points lower. This means we have an inverted yield curve.

Read more…

The real college admissions scandal is structural inequality

March 25, 2019 7 comments

from Dean Baker

The indictments last week of a number of prominent people for paying bribes to get their children into elite colleges was perhaps more amusing than shocking. The fact that rich people are often able to buy their kids into schools is hardly a secret. After all, who believes that Donald Trump would have been accepted at the University of Pennsylvania, or his son-in-law Jared Kushner would have been attending Harvard, had it not been for their wealthy fathers?

We also know about all the ways in which people who are affluent, but not super-rich, give their children a huge advantage in the college admissions process. These kids go to the best schools, either public or private, that prepare students to get into and attend an elite college. They also can count on help from tutors if they have difficulty in their classes and to improve their scores on standardized tests.

In addition, the children of the affluent can count on being able to learn and master a musical instrument, which can make an applicant more attractive to an elite school. They may become expert at a less popular sport, like fencing or horseback riding, which can also make them appear well-rounded on a college application. Read more…