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Former AIG director Martin Feldstein warns of stock and housing bubbles

January 15, 2018 2 comments

from Dean Baker

That’s one of the things we learn from reading Robert Samuelson’s Washington Post columntoday, although Samuelson identifies Feldstein only by his professorship at Harvard, not his moonlighting work on AIG’s board. (In addition to requiring a massive government bailout during Feldstein’s tenure as a director, AIG was also rocked by an accounting scandal that forced the resignation of its Maurice Greenberg, its longtime CEO.) I’m one of those old-fashioned types who think that track records should matter in assessing the accuracy of economists’ assessments, which is why it is appropriate to mention AIG here.

While it would have been enormously valuable if a person of Feldstein’s prominence had warned of the housing bubble back in 2003 or 2004, before it had grown so large as to pose a major threat to the economy, his warning now is off the mark according to some of us who did see the earlier bubbles. High stock prices and housing prices are justified by extraordinarily low interest rates we have been seeing in the last decade.

While this could change (interest rates could rise) it would not be nearly as harmful to the economy as the collapse of the housing bubble in 2007-2009 or the collapse of the stock bubble in 2000-2002. Unlike in those two earlier periods, the high asset prices in these markets are not driving the economy. Investment and housing construction are not especially strong, so there is no reason to think they would plummet even if prices in both markets were to fall 20 or 30 percent. Consumption is somewhat high, and could fall back 1-3 percentage points of GDP in response to the loss of wealth implied by these sorts of declines. That would slow growth, but need not lead to a recession.

Tesla, Amazon, and Bitcoin

January 9, 2018 12 comments

from Dean Baker

The soaring price of Bitcoin is a useful lesson about markets for people who seem to very quickly forget the last lesson. Bitcoin, a digital algorithm, backed by absolutely nothing, has been selling for more than $16,000.

Perhaps Bitcoin’s price will double or triple again. After all, who knows how badly people need digital currencies that are not really currencies? But more likely the market will run out of people who are willing to trade real money for nothing. At that point Bitcoin’s price will plunge and may approach its underlying value of zero.

In the meantime the price surge shows us that markets are capable of enormous amounts of irrationality. This is helpful for people who can’t remember the stock bubble at the end of the 1990s. Favored stocks, like AOL, often reached price to earnings ratios in the stratosphere, if they even had earnings. In AOL’s case, its market valuation topped out at more than $220 billion in December of 1999. When it was sold to Verizon sixteen years later the company was worth just over $4 billion. Many other high flyers of the bubble years, like Webvan and Pets.com, simply went out of business.

For those who consider 1999 and 2000 the distant past, we need only go back to 2006 and 2007 when subprime mortgage backed securities (MBS) all got top investment grade ratings from the bond rating agencies. These MBS were worth just a small fraction of their face value a couple of years later after the housing bubble burst. Nonetheless, “informed” investors placed trillions of dollars in MBS assuming them to be almost as safe as U.S. government bonds.  Read more…

Diverting class warfare into generational warfare: round LVIII

January 3, 2018 8 comments

from Dean Baker

With the Republicans having just passed a $1.5 trillion tax cut, the bulk of which goes to the richest one percent, it was inevitable that the generational warriors would come out of the woodwork and resume the attack on Social Security and Medicare. Generational warriors try to divert attention away from how our economy has redistributed income upwards over the last four decades, and convince a large portion of today’s workers that their real problems stem from their parents’ and grandparents’ overly generous retirement benefits.

The opening shot in this new round of generational warfare showed up earlier this month in The Atlantic Magazine. It told the classic story about how seniors are getting too much money back from Social Security and Medicare, the same thing we’ve been seeing for decades. (There is little expectation of originality if you’re in the business of promoting generational warfare.)

In fact, middle-income seniors will get somewhat less back from Social Security than they paid into the system. The cost of Medicare benefits does exceed their taxes, but this is because Americans pay twice as much for our doctors, drugs, medical equipment and other health care items than people in other wealthy countries.   Read more…

Bubbles: are they back?

December 19, 2017 19 comments

from Dean Baker

There has been much greater concern about the danger of asset bubbles ever since the collapse of the housing bubble sank the economy. While it is good that people in policy positions now recognize that bubbles can pose a real danger, it is unfortunate that there still seems very little understanding of the nature of the problem.

First, an economy-threatening bubble does not just sneak up on us. Often the discussion of bubbles implies that we need some complex measuring tools to uncover an economy-threatening bubble that’s lurking in some far corner of the data.

This is absurd on its face. If a bubble is large enough to threaten the economy, it is hard to miss. This was true of both the stock bubble in the 1990s and the housing bubble in the last decade.

At the peak of the stock bubble in 2000, the ratio of stock prices-to-trend corporate profits was more than twice its long-term average. This may have been justified if there was an expectation that profit growth was going to be much faster in the future, but almost no economic analysts projected this speed up.

Higher price-to-earnings ratios could also be justified if stockholders were prepared to accept lower returns on their stock than they had in the past. But there was no evidence this was the case. In fact, most stockholders seemed to expect that the double-digit returns of the recent past would continue.

Read more…

Why not make the rich compete?

December 15, 2017 11 comments

from Dean Baker

I’m glad to see the debate that Max Sawicky has touched off with his review of Steve Teles and Brink Lindsey’s new book, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase InequalityThe book, and the resulting debate, raises the question: can an attack on rent-seeking by the rich be the basis for a progressive agenda? This is a debate I’ve played some role in getting started, with several books, most recently Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

In my view, it’s an area of enormous potential, and it presents the only plausible path forward for progressive politics in the US and elsewhere.

The basic logic of the argument is that markets are pretty much infinitely malleable. The government sets rules that can lead to relatively equal outcomes or can lead to enormous inequality. In the last four decades, the Right has managed to use its control of the rule-setting process to engineer an enormous upward redistribution of income. The process involved the leadership of both political parties, so it’s certainly not a story in which right-wing Republicans exclusively can be seen as the villains.

Since there’s nothing intrinsic to the market that caused this upward redistribution, it doesn’t make sense to talk about using the government to rein in the market. Reversing the upward redistribution will in some cases involve more government, but in some cases it will require less. Most importantly, it will require that the government act differently when structuring markets.   Read more…

Tax cuts boost growth, and other things they tell children

December 7, 2017 1 comment

from Dean Baker

It is a bit incredible that we are again being told that tax cuts directed primarily toward the wealthy will create a surge of investment and growth, thereby benefitting everyone. The Republicans may have the power to push their tax cut through Congress, but the claim that ordinary workers will benefit is not the sort of thing that serious people should take seriously.

The GOP’s basic story is that a cut in the corporate income tax will lead to a huge burst of investment. More investment will lead to gains in productivity, which will allow workers to have higher pay.

There are theoretical models that show this sort of result. But there are also all sorts of assumptions in these models that clearly do not correspond to the real world.

In these models, investment is highly responsive to changes in the after-tax profit rate. But we know this is not the case in the real world. This is demonstrated most immediately by the fact that investment is currently relatively weak.

The real world conflicts with these models since the after-tax profit rate has soared in the last 15 years as the before-tax profit share of income hit its highest level in 50 years. (In the models, investment doesn’t care if the after-tax profit rate goes up because of lower taxes or higher before-tax profits.) If a surge in profit rates due to higher before-tax profits didn’t lead to an investment boom, why would anyone think that a further increase in profit rates due to lower taxes would spur investment?  Read more…

Janet Yellen and Barack Obama’s economy is looking good

November 30, 2017 20 comments

from Dean Baker

As Congress debates plans to give even more money to the country’s richest people, it is worth briefly recounting where the economy is now, before we feel the effects of any tax plan. Basically, it is a pretty good story.

The overall unemployment rate for October was 4.1 percent. This is the lowest unemployment rate since 2000. And that was an extraordinarily good year for the labor market. We would have to go back to 1970 to find the last time the unemployment rate had been this low.

The unemployment rate for African Americans was 7.5 percent in October. The 7 percent level reached in September ties for the lowest figure on record. While these levels of unemployment are still unacceptably high, they are an enormous improvement from the near 17 percent rate hit at the low point of the downturn in 2010. The 4.8 percent rate reported for Latinos in October is also the lowest on record.

The good news on the unemployment rate must be qualified given the large number of people who have left the labor market. If we look at the employment rate (EPOP), the percent of people who are employed, it is still down for prime age workers (ages 25 to 54) by 1.5 percentage points from its pre-recession peak and by 3.1 percentage points from the high hit in 2000.  Read more…

Taking Issue with Dani Rodrik: Trade deficits are different with secular stagnation (see Addendum)

November 29, 2017 6 comments

from Dean Baker

I am a big fan of Dani Rodrik’s writings on trade, and I agree with most of what he says in his NYT column today, but I do have one major disagreement. However, before going there let me emphasize some of the key points he makes in the piece.

First, Rodrik is very much on the mark in arguing that recent trade deals, like the Trans-Pacific Partnership, have very little to do with free trade. As he says, these deals are about imposing a corporate-friendly structure of regulations on both our trading partners and the U.S. (The deals have the effect of locking in laws that could otherwise be more easily altered.)

He also is right in singling out the pharmaceutical industry as the biggest villain in this story. We have been using these trade deals to ensure ever longer and stronger patents and related protections. The result is to make drugs, which would otherwise be cheap, extremely expensive. The price of drugs can be a serious burden even in rich countries, but patent protection can make life-saving drugs altogether unaffordable in developing countries. We should be looking to foster alternative, more efficient, mechanisms for financing research, not using trade deals to impose patent monopolies everywhere.  Read more…

How would you donate $450 million?

November 24, 2017 2 comments

from Dean Baker

Somehow, some way, someone paid $450 million, after buyer’s fees, for Leonardo da Vinci’s Salvator Mundi at Christie’s last Wednesday. Believed to be the last work by the artist in private hands, the painting’s price smashed all previous records. Since the price also seemed more on par with the education budget of a medium-sized country, Artsy asked a range of leaders from the arts, economics, bioethics, and development to tell us how they’d spend $450 million.

I have to decide whether I would use this money to try to end drug patents or copyrights. Since it is too early in the morning for such a weighty decision, I will put both on the table.

To do in drug patents, I would put up the money for nine orphan drugs trials. These cost around $50 million each, according to recent estimates from James Love, the director of Knowledge Ecology International. I would put all the trial results on the web so that other researchers and doctors would have the full benefit of this information (this would be subject to restrictions preserving the privacy of patients—economists know how to do this). This means they would know whether the drug is more effective for women than men, whether other conditions (e.g. arthritis or heart disease) had an impact on its effectiveness, etc. As it stands now, the drug companies only disclose information that helps them market their drug, so this should be a powerful precedent of how good science could be done.  Read more…

Productivity growth is up, are the robots finally coming?

November 9, 2017 8 comments

from Dean Baker

The Bureau of Labor Statistics (BLS) reported that productivity grew at a 3.0 percent annual rate in the third quarter of 2017. While this report got little attention, it is potentially very good news.

Before going into the good news part, it is worth briefly saying a bit about what productivity is. Productivity measures the value of the goods and services produced in an hour of work. It is the main determinant of living standards. If we want more or better housing or health care, we either have to work more hours to produce it, or we need higher productivity.

Alternatively, we may decide we are content with our material living standards but would like more leisure time. This could take the form of shorter workweeks, parental and family leave, or vacations. However, this would also require more productivity.

We could improve the living standards of much of the population with policies that reverse the upward redistribution of the last four decades. But if we don’t get productivity growth going forward, there is a limit to how far we can go with such policies. Unless people are content with stagnant living standards, we need productivity growth. Read more…

Blaming inequality on technology: sloppy thinking for the educated

November 3, 2017 5 comments

from Dean Baker

The most popular explanation for the sharp rise in inequality over the last four decades is technology. The story goes that technology has increased the demand for sophisticated skills while undercutting the demand for routine manual labor.

This view has the advantage over competing explanations, like trade policy and labor market policy, that it can be seen as something that happened independent of policy. If trade policy or labor market policy explain the transfer of income from ordinary worker to shareholders and the most highly skilled, then it implies inequality was policy driven, it is the result of conscious decisions by those in power. By contrast, if technology was the culprit, we can still feel bad about inequality, but it was something that happened, not something we did.

That view may be comforting for the beneficiaries of rising inequality, but it doesn’t make much sense. While the development of technology may to some extent have its own logic, the distribution of the benefits from technology is determined by policy. Most importantly, who gets the benefits of technology depends in a very fundamental way on our policy on patents, copyrights, and other forms of intellectual property.  Read more…

Intellectual property for the twenty-first-century economy

October 20, 2017 1 comment

from Joseph E. Stiglitz, Dean Baker and Arjun Jayadev

When the South African government attempted to amend its laws in 1997 to avail itself of affordable generic medicines for the treatment of HIV/AIDS, the full legal might of the global pharmaceutical industry bore down on the country, delaying implementation and extracting a high human cost. South Africa eventually won its case, but the government learned its lesson: it did not try again to put its citizens’ health and wellbeing into its own hands by challenging the conventional global intellectual property (IP) regime.

Until now. The South African cabinet is preparing to finalize an IP policy that promises to expand access to medicines substantially. South Africa will now undoubtedly face all manner of bilateral and multilateral pressure from wealthy countries. But the government is right, and other developing and emerging economies should follow in its footsteps.

Over the last two decades, there has been serious pushback from the developing world against the current IP regime. In large part, this is because wealthy countries have sought to impose a one-size-fits-all model on the world, by influencing the rulemaking process at the World Trade Organization (WTO) and forcing their will via trade agreements.  Read more…

The Republican tax plan to slow growth

October 17, 2017 2 comments

from Dean Baker

In the speech where President Reagan launched his push for the last major tax reform in 1986, he criticized a tax code that “treats people’s earnings, similar incomes, much differently regarding the tax that they pay; and… causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.” He was right to make these criticisms.

Unfortunately the current Republican plan goes in the opposite direction in two important areas: the treatment of the income from “pass-through” businesses and the taxation of the foreign earnings of U.S. corporations. By creating more opportunities for tax avoidance, the Republicans will be doing exactly what Reagan condemned, creating opportunities to make money through tax avoidance schemes rather than work and productive investment. For this reason, it could actually impede growth rather than being the promised boost to a slow growing economy.

The issue with income from pass-through corporations is straightforward. Pass-through corporations pay zero tax; all their profits are passed through to their owners who currently pay tax on them at the ordinary income tax rate.

The Republicans are proposing to change this system by having a special 25 percent maximum tax rate on income from pass-through corporations. Under their plan, a high income person who got their money from their job would face a 35 percent marginal tax rate, whereas a person who got the same income from a pass-through corporation would only pay a 25 percent rate.

Read more…

Kevin Warsh as Fed Chair: The art of marrying rich and falling upward

October 12, 2017 1 comment

from Dean Baker

Since the dawn of time men have married into prominent families as a way to improve their career prospects, but as Jared Kushner can attest, the returns to marrying well have never been greater. We may see further proof of this proposition if Donald Trump selects Kevin Warsh to replace Janet Yellen as chair of the Federal Reserve Board.

Like Kushner, Warsh’s secret to success seems to rest largely on the family he married into. Warsh’s father-in-law is the billionaire Ronald Lauder, the heir to the Estee Lauder cosmetics fortune and a major Republican Party donor. 

If Warsh were picked his background would provide a sharp contrast to that of Janet Yellen. Yellen developed a reputation as a highly respected academic economist, having taught at both Berkeley and Harvard, and published dozens of articles in top journals. She went to Washington to become a member of the Fed’s Board of Governors under President Clinton and then served as the chair of his Council of Economic Advisers. She then served as president of the San Francisco Fed district bank, before being appointed as vice-chair by President Obama. She was elevated to chair in 2013 after Ben Bernanke completed his second term.

She not only has held top positions, but she has had a good track record in her performance in these positions. Notably, she began to be concerned about the fallout from the collapse of the housing bubble in early 2007.  Read more…

The Republicans’ tax plan will impede growth

October 3, 2017 4 comments

from Dean Baker

Surprising no one, the Republicans outlined a tax plan that could mean huge tax cuts for the very rich with little or no tax reductions for the bulk of lower and middle income taxpayers. However in spite of their claimed “pro-growth” agenda, the plan included several provisions that will likely be a boon to the tax shelter industry and therefore an impediment to growth.

The giveaways in the tax plan include the elimination of the estate tax, a great benefit to the tiny portion of the population that will have more than $10 million to pass on to their children. The plan also calls for the elimination of the alternative minimum tax (AMT). This is a provision that only affects high end taxpayers. It ensures that they pay a minimal level of tax even if they have managed to effectively used loopholes to limit their tax liability. Donald Trump was subject to AMT in the one tax return which was disclosed in part.

And the tax plan lowers the top marginal tax rate from 39.6 percent to 35 percent. For a Wall Street trader type earning $2 million a year, this can mean savings of more than $50,000 a year.

We can’t know yet what the rest of us will get since they haven’t bothered to figure out where the bracket cutoffs will be. We do know is it not likely to be much.

The Republicans have touted their plan to double the standard deduction for a single individual from $6,350 to $12,700. While that sounds really generous, they are also eliminating the personal exemption of $4,050. This means that under their plan, the first $12,700 of income would be untaxed, compared to $10,400 now.  Read more…

Adults in the room: The sordid tale of Greece’s battle against austerity and the Troika

September 16, 2017 9 comments

from Dean Baker

Yanis Varoufakis begins his account of his half year as Greece’s finance minister in the left populist Syriza government (Adults in the Room, Farrar, Straus, and Giroux) with a description of a meeting with Larry Summers. According to Varoufakis, Summers explains that there are two types of politicians. There are those who are on the inside and play by the rules. They can just occasionally accomplish things by persuading others in the room to take their advice.

Then there is the other type of politician, those who don’t agree to the rules and will never get anywhere. Summers asks Varoufakis which type of politician he is.

We don’t know what answer Varoufakis gave to Summers, but he wastes no time telling us he is the second type. He is committed to accomplishing something for his people, most immediately the people of Greece in the struggle to end mindless austerity, but ultimately the people of Europe and arguably the world, in an effort to fight against needlessly cruel economic policies. If this means breaking with the decorum of the elites, so be it.  Read more…

Welfare for Wall Street: fees on retirement accounts

September 14, 2017 4 comments

from Dean Baker

Most of us are willing to help out those who are less well off. Whether it comes from religious belief or a sense of basic decency we feel are an obligation to provide the basic necessities of life for the poor. But how would we feel about being taxed $1,000 a year to provide six figure salaries to people in the financial sector? Although no candidate to my knowledge has ever run on this platform, this is the nature of the retirement system the federal government has constructed for us.

Twenty or 30 years ago, most middle-class workers had defined benefit pensions. This meant that they could count on a fixed benefit that was some fraction of their average salary during their working years. For example, a person who spent 30 years at a company may be entitled to a pension that was equal to 60 percent of their average salary over their final five years of work.

With a defined benefit pension system, most of the risk was born by the employer. The worker did not have to worry about the stock market being down when she chose to retire. Nor did it matter to her if the pension made bad investment choices; the employer was liable for the promised benefits, unless it went bankrupt.

The virtues of the defined pension system can be exaggerated, although recent researchindicates it provided more retirement income than we had recognized. Workers who changed jobs frequently or worked part-time rarely qualified for pension coverage. This excluded many women, African American and Latino workers. But for those who were eligible the defined benefit system provided a substantial degree of retirement security.

Read more…

Houston, Bangladesh, and Global Warming

September 1, 2017 Leave a comment

from Dean Baker

We are seeing many terrible pictures from Houston as a result of Hurricane Harvey. People with young children and pets are wading through high water in the hope of being rescued by boat or helicopter. Elderly people in nursing homes are sitting in waist high water waiting to be rescued. It’s a pretty horrible story.

One thing we can feel good about is that because the United States is a wealthy country, we do have large numbers of boats and helicopters and trained rescue workers able to assist the victims of the storm. We also have places where we can take these people where they will have shelter, as well access to food and medical care. However bad the human toll will be from Harvey, it would be hugely worse without these resources.

This might be a good time for people to take a moment to think about Bangladesh, a densely populated country on the other side of the world. More than 160 million people live in Bangladesh. Almost half of these people live in low-lying areas with an elevation of less than 10 meters (33 feet) above sea level.

Bangladesh experiences seasonal monsoon rains which invariably lead to flooding, as well as occasional cyclones. The monsoon rains and cyclones are likely to get worse in the years ahead, as one of the effects of global warming. This will mean that the flooding will be worse.  Read more…

Media’s biased reporting on China serves only the rich and powerful

August 28, 2017 2 comments

from Dean Baker

This month, a leading newspaper ran a column bashing China by two former U.S. intelligence officials. The piece claimed that the United States loses $600 billion a year due to “intellectual property theft” and that “China accounts for most of that loss.”

This was striking for two reasons. First, the number is obviously absurd. Reputable news outlets usually make writers provide some backup for the numbers they use. That doesn’t seem to have been the case here. Second, if the number were plausible, the implications for policy on intellectual property and inequality would be enormous.

Starting with the absurdity of the $600 billion figure, this is more than 25 percent of the value of all U.S. exports. It’s more than one-third of all after-tax corporate profits in America. Does anyone really want to argue that corporate profits in the U.S. would be one third higher if companies were paid for intellectual property that was stolen from them?

While the piece gave no source, industry groups have produced such outlandish numbers in the past by assuming that all unauthorized versions of their product would sell at the retail price in the United States. This means that if the retail price of Windows and the Microsoft Office Suite is $100, and a hundred million unauthorized copies are in use in China, they would count this as $10 billion.  Read more…

Social Security: still the most efficient way to provide retirement income

August 25, 2017 3 comments

from Dean Baker

Last week marked the 82nd anniversary of Franklin Roosevelt’s signing the bill that created Social Security. The program has stood the test of time well.

It accounts for more than half of the income for 60 percent of senior households and more than 90 percent for almost one third. It has reduced poverty rates among the elderly from more than one-third to roughly the same as the rest of the adult population. In addition, it provides disability insurance, as well as life insurance for family members, for almost the entire working-age population.

This is a pretty good track record. This is the reason the program is hugely popular and efforts at privatization, like President George W. Bush’s 2005 effort, have all gone down in defeat. It’s hard to beat Social Security.

A big part of the benefit of Social Security is that it is very efficient. The administrative costs of the retirement portion of the program are just 0.4 percent of what is paid out in benefits each year. By comparison, the costs of even relatively well-run privatized systems, like those in Chile or the United Kingdom, are 10–15 percent of benefits. That difference would amount to $80 billion a year (close to $1 trillion over a 10-year budget horizon) being paid out to the financial industry instead of to retirees.

This was a huge hurdle for President Bush to overcome with his privatization plan. His main route was to invent stories about the much higher returns that workers would be able to earn with the privatized accounts he promised them.  Read more…