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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…

Medicare for all is doable; most Americans want it

March 9, 2019 10 comments

Dean Baker

In Canada, everyone in the country is guaranteed access to health care by the government.

The same is true for France, the United Kingdom, Germany, Netherlands and every other country that we think of as comparable in terms of levels of wealth, democracy and economic development.

In spite of providing universal care, these countries also all spend much less on health care than the United States.

In Canada, per person spending is 60 percent what it is in the United States. In Germany spending per person is 56 percent and in the United Kingdom just 42 percent of what we spend.

And these countries all have comparable outcomes. People in other wealthy countries not only have longer life expectancies and lower infant mortality rates, they also have comparable outcomes when looking at more narrow health issues like treatment for cancer or heart disease.

The basic story is that we spend roughly twice as much per person as people in other wealthy countries and we have pretty much nothing to show for it in terms of better health. This is the context in which critics of Medicare for all are telling us it is not possible. Read more…

To reduce inequality, let’s downsize the financial sector

March 7, 2019 9 comments

from Dean Baker

Matt Bruenig — the president of the progressive, grassroots-funded People’s Policy Project think tank — put forward a creative set of policy proposals last month on child care and family policy under the title of the Family Fun Pack. It prompted a major discussion in progressive circles on child care policy, helped in part by Sen. Elizabeth Warren’s important proposal in this area that was released the next week.

In the hope of prompting the same sort of debate on policy directed toward the financial sector, I am putting forward the “Finance Fun Pack.” While the full list of policies to rein in finance would be far more extensive, this one has three main components:

  1. A modest tax on financial transactions;
  2. Complete transparency on the contract terms that public pension funds sign with private equity companies; and
  3. Complete transparency on the contract terms that university and other nonprofit endowments sign with hedge funds.

The goal of these policies is to have a smaller and more efficient financial sector. They are also likely to reduce the opportunity for earning huge fortunes in the sector. People looking to get fabulously rich will instead have to do something productive.

A modest tax on trades in stock, bonds and derivatives (like options, futures and credit default swaps) can raise a large amount of money while making the financial sector more efficient. According to the Congressional Budget Office, a tax of 0.1 percent on trades, as proposed in a new bill by Sen. Brian Schatz, would raise close to $100 billion a year or 0.5 percent of GDP.  Read more…

‘Socialism’ and other bad words from the Name-Caller-in-Chief

February 25, 2019 8 comments

from Dean Baker

We know the way Republicans win elections these days. They call their opponents offensive names.

This is probably a good political tactic. After all, when your party’s agenda is about redistributing as much money as possible to the very richest people in the country, you are not likely to win much support based on your policies. Therefore, we get name-calling.

The latest bad word in the Republicans’ schoolyard taunts is “socialism.” President Trump and his team have decided that they will run around calling Democrats “socialists.”

Their hope is to conjure up images of the stagnation and shortages in the Soviet Union. Or, for those who lack memories of the problems of Soviet bloc economies, they’ll use the economic chaos in Venezuela as a substitute.

Of course, the policies being put forward by the Democrats have nothing to do with the socialist bogeyman Trump is using to try to scare people. They are policies that have deep roots in U.S. history and are, in fact, overwhelmingly popular among voters in both parties.

For example, Alexandria Ocasio-Cortez, the new representative from Queens, New York, has proposed a marginal income tax rate of 70 percent on income in excess of $10 million. This is the same rate that was in effect under that well-known socialist Richard Nixon. Under Dwight Eisenhower, another prominent socialist, the top tax rate was 90 percent.  Read more…

End bloated salaries in the nonprofit sector

February 23, 2019 17 comments

from Dean Baker

An average family participating in the federal Temporary Assistance for Needy Families (TANF) program costs taxpayers $400 a month. We pay $126 a month to the typical beneficiary of food stamps—the Supplemental Nutrition Assistance Program (SNAP).

By contrast, Susan Desmond-Hellmann, the CEO of the Bill & Melinda Gates Foundation, costs us $44,200 a month. This figure may catch some readers by surprise, because they probably don’t think of themselves as paying the salaries of people who work at nonprofit organizations. But we do pay her that amount, and it is a problem.

The salary of the Gates Foundation’s CEO costs taxpayers money because we gave Bill Gates a large tax break that subsidizes his contribution to his eponymous foundation or any other philanthropy. If Gates was in the 40 percent tax bracket (a safe bet before the 2017 Tax Cuts and Jobs Act pushed by President Donald Trump), then the government effectively picked up the tab for 40 cents of every dollar that Gates decided to contribute to his foundation. Read more…

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 3 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…