Posts from Dean Baker

Elizabeth Warren Is Right on Currency Values

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Elizabeth Warren’s proposal to raise the value of the Chinese yuan and other currencies against the dollar is not getting good reviews in the media from economists. As can be expected, some of the arguments are pretty strange.

As the usually astute Noah Smith tells it in his Bloomberg piece, the problem with the trade deficit is:

“U.S. consumers are consistently living beyond their means, which seems unsustainable.”

The implication is that if the trade deficit were lower than we would be forced to cut back consumption. But the major problem the United States has faced over the last decade, according to many economists, is “secular stagnation,” which is an obscure way of saying, not enough demand.

Contrary to what Smith tells us, U.S. consumers are not living beyond their means, rather we actually need them to spend more money to bring the economy to full employment. To be more precise, we need them to spend more in the domestic economy, to increase demand here as opposed to in our trading partners. (We can also bring the economy to full employment by having the government spend more money on things like health care or a green new deal.)

Smith also disagrees with Warren’s mechanism for getting the dollar down, which involves a mixture of negotiations and threats of countervailing measures. The idea is that the biggest actor is China, who for some reason it is assumed would never agree to raise the value of its currency. CNN raises similar concerns. This view seems badly off the mark.

First, it is assumed in both pieces that China is no longer acting to deliberately keep down the value of the yuan against the dollar, even though most economists now concede that it deliberately depressed the value of its currency to maintain large trade surpluses in the last decade. (They did not acknowledge China’s currency management at the time.)

It is wrong to claim that China is not now acting to keep down the value of the yuan. While it is no longer buying large amounts of dollars and other currencies, it holds a stock of more than $3 trillion in reserves, which is well over $4 trillion if we add in its sovereign wealth fund.

This huge stock of foreign assets has the effect of depressing the value of the yuan against the dollar in the same way that the Fed’s holding of more than $3 trillion is assets helps to keep down interest rates. While few economists question that the Fed’s holding of assets leads to lower long-term rates than would otherwise be the case, they seem to deny that China’s holding of a large stock of foreign assets has similar effects in currency markets.

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Trump's Trade War with China is waged to make the rich richer

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

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.

The most bizarre aspect of this turn is that Trump's demands in this area have the support of economists and commentators across the political spectrum. We repeatedly hear the line that we have to stop China's theft of "our" intellectual property.

The problem with this argument is that it is not "our" intellectual property that Trump is protecting. After all, very few people have any patents or copyrights that we are worried about China using without compensation.

The intellectual property that Trump and his allies across the political spectrum want to protect belongs to major corporations like Boeing, Pfizer and Microsoft. Their goal is to make China pay more money to get access to technology these companies have developed. That's great for their profits - sort of like Trump's tax cut - but does not help the vast majority of people who do not own lots of stock in these companies.

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To Reduce Inequality, Let’s Downsize the Financial Sector

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

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.

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Robert Samuelson Says That He Is Very Closed-Minded and Won't Accept Wage Stagnation

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Sorry, I misread that one. This is what he quoted my friend Steve Rose saying about the people who disagree with him on income stagnation. Yes, it's Monday and Robert Samuelson is once again trying to insist that everyone's income is rising just fine.

The bizarre part of the story is that no one is really disagreeing on the facts, just how we talk about them. Before-tax income has been largely stagnant over the last four decades. For families at the middle and bottom, there has been some rise, but this has largely been because there are more earners per family, not rising hourly wages.

This is primarily the story of women entering the labor force. That was mostly a 1979–2000 story, since women's employment rates have actually slipped somewhat in the last two decades. It's great that barriers to women working are lower today than four decades ago (although discrimination is still huge), but saying that a two-earner family typically has higher income than a one-earner family doesn't really contradict the stagnation story.

The way Samuelson shows larger gains for families at the middle and bottom is by including government transfers, most importantly health care programs like Medicaid and SCHIP, in the story. As I pointed out in the past, the value of these transfers increases every time the pay of a heart surgeon or the cost of drugs increase, so people can be excused for not seeing this as a rise in their income.

It is also important to note that most people are healthy and have few health expenses. This means they don't directly benefit to any great extent from having these forms of insurance, although they are clearly valuable if their health deteriorates.

Samuelson is also intent on picking the price index that shows the lowest rate of inflation and therefore the most income growth. While he is in tune with most economists in this respect, it is worth making a couple of points on these inflation measures.

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The Distortions from Tariffs and the Distortions from Patent Monopolies

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Jim Tankersley had a very interesting piece in the NYT on how clothing manufacturers manage to minimize the impact of tariffs. The gist of the piece is that the tariffs led to very few jobs in the United States, but instead cause companies to spend lots of time gaming the system. We would presumably rather see them spend their time trying to design better products and production techniques.

While this a very interesting piece, that is written in reference to Donald Trump's latest and future rounds of tariffs, it would be interesting to see a similar piece in reference to patent monopolies, especially in the case of prescription drugs. While the tariffs discussed in the piece range from 7 percent to 27 percent, in the case of prescription drugs, patent protection often raises the price by a factor of 100 or even more. This is equivalent to tariffs of 10,000 percent. The vast majority of drugs would sell for ten to twenty dollars per prescription in a free market, instead of the hundreds or thousands of dollars that are charged as a result of patent protection.

Patents have a purpose (as does all protection), providing an incentive for researching new drugs. But there are other mechanisms for financing research (see chapter 5 of Rigged and this paper). To have a basis for assessing the merits of the different systems we need to know the costs they imply.

In the case of patent monopolies, these costs are enormous. The NYT piece goes through the efforts companies will go through to avoid tariffs of 20 percent — think of the efforts that people can and do go through to avoid patent monopolies that are equivalent to tariffs of 1000 percent.

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Not Everything Trump Says on Trade is Wrong: Countries Don't Always Benefit from More Trade

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Donald Trump's tendency to make things up as he goes along naturally prompts a strong reaction from people who try to approach issues in a serious way. But serious people can sometimes get carried away in this reaction.

Glenn Kessler, the Washington Post's fact checker, got a bit carried away in trying to set readers straight on Trump's bizarre claim we have a $100 billion trade deficit with Canada. (We do have a trade deficit, but it is closer to $20 billion.) In his Fact Check piece, Kessler asserts:

"If overall trade increases between nations, people in each country gain, no matter the size of the trade deficit."

This is not necessarily true. Let me go through two cases, one in which the countries are below full employment and one in which they are at full employment.

Suppose in the first case one country, let's say Denmark, decided to subsidize $100 billion of exported cars to the United States, displacing $100 billion of domestic production. The immediate effect of the increased imports from Denmark is a loss of output and employment in the United States.

In principle, the Danes have another $100 billion to buy goods and services from the United States, but suppose they don't like anything we sell. In the textbook story, they would dump their $100 billion on world currency markets, driving down the value of the dollar. This would make US goods and services relatively cheaper, thereby causing us to export more and import less, possibly fully offsetting the $100 billion in increased imports.

But suppose the evil Danish central bank used these dollars to buy up US government bonds, as many countries have done over the last two decades. This would keep the dollar from falling. The purchase of US bonds would have some effect in lowering US interest rates, but this would be just like the Fed's quantitative easing policy. The lower interest rates would boost demand, but not nearly enough to offset the $100 billion increase in our trade deficit.

So, in this below full employment story we end up with a situation where trade has increased by $100 billion, but the US is left with lower employment and output. It sure looks like it has been hurt by more trade.

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CEO pay: Still not related to performance

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Earlier this year we did an analysis of CEO compensation in the health insurance industry to see if it was affected by the cap on deductibility imposed by the Affordable Care Act (ACA). One of the provisions of the ACA limited the amount of CEO pay that health insurers could deduct on their taxes to $500,000, beginning in 2013.

This provision effectively raised the cost of CEO pay to insurers by more than 50 percent. Prior to 2013, the deduction in effect meant that the government was picking up 35 cents of every dollar of CEO pay, while the companies were paying just 65 cents. 1 With the new provision in place, insurers are now paying 100 cents of every dollar of CEO pay in excess of $500,000.

If the pay reflects the value of the CEO to the company, we should expect this change to reduce the pay of CEOs in the insurance industry. For example, if a CEO gets paid $20 million a year, this should mean that she delivers roughly $20 million in additional value to shareholders.

When the CEO’s pay was fully deductible, the $20 million paid to the CEO actually only cost the company $13 million. This would presumably be the number that matters to shareholders since they care about how much money comes out of their pockets, not the number on the CEO’s paycheck.

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The Tax Scam We Know and the Tax Scam We Don't Know

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

There has been much attention to the plan put forward by Republicans in Congress to cut individual and corporate income taxes. According to analysis done by independent sources, close to 80 percent of these cuts will go to the richest 1 percent of the population.

While this may seem unfair and unwarranted in an economy where the rich have seen the overwhelming majority of the gains from growth in the last four decades, we have been told not to worry because the boost to growth will make everyone winners. The average family has been promised an income gain of $4,000 a year and possibly as much as $9,000.

It is possible to construct economic theories where corporate tax cuts do produce large gains, but these theories clearly do not describe the world we live in. For example back in the mid-1980s, the US lowered the corporate tax rate from 46 percent to 35 percent. Rather than producing an investment boom, the late 1980s were the weakest non-recession period for investment in the post-World War II era.

The idea that investment is highly responsive to the after-tax rate of profit stands history on its head. The strongest period of investment in the last seven decades was the late 1970s when the profit rate was at its post-war low. By contrast, the near record profit rates seen in this recovery have coincided with mediocre levels of investment. It's difficult to believe that if we raised the rate of profit even further by cutting taxes, investment would somehow boom.

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Opposition to Trade Deals

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

The usually sensible Brad DeLong is very unhappy with those who oppose the agenda that has passed for globalization over the last three decades. He argues that people are foolish for believing that globalization has had a major impact on employment and the distribution of income in recent years. I'll take the side of Brad's "fools" in this matter.

First, Brad is well aware that the economy has operated well below full employment at least since the collapse of the housing bubble, I would argue this has been the case for almost all of the period since the collapse of the stock bubble in 2001. But he attributes this to a simple failure of the government to run full employment policies, rather than the large trade deficits we saw develop following the East Asian financial crisis in 1997.

While Brad is right, the government could maintain full employment by running much larger budget deficits, as he is well aware, that does not appear to be politically feasible. Even among Democrats, very few are willing to say that we should have larger budget deficits to bring the economy to full employment and some even insist on balanced budgets. There is no need to talk about Republican ideas on stimulus here.

It's also worth noting that the costs of being below full employment are disproportionately borne by disadvantaged groups in the labor market, especially African Americans and Hispanics.

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Senator Lankford Is Confused About the Trade Deficit

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Yep, the senator from Oklahoma says it is good in a Washington Post column. Most of Senator Lankford's confusions are pretty standard, but he does come up with an original one.

"For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that."

Okay, we have a trade deficit simply because we are a rich country. I suppose someone forgot to tell Germany that it is a rich country since it has a massive trade surplus of more than 8 percent of GDP (roughly $1.6 trillion in the U.S. economy.)

He then tells us that our imports frrom Mexico will help it to grow and eventually make Mexico a better market for U.S. products. While this is true, Mexico's economy has actually grown less rapidly on a per person basis than the U.S. since NAFTA went into effect in 1994. While NAFTA may not be the cause of weak growth in Mexico, it apparently has not prevented the two economies from diverging further.

Then we get some of the standard confusion pushed by denialists:

"Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.

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Union Matters

PRO Act Would Put Power Back in Workers’ Hands

By Kathleen Mackey
USW Intern

Between 1935 and 1965, union membership rose precipitously in the United States. Wages increased in tandem with productivity, benefits improved, the middle class blossomed and income inequality dwindled.

Those good times are over, however. After 1965, the rate of unionization steadily fell from the high of about 30 percent to 10.5 percent now. Wages stagnated after 1970, even as productivity increased. Income inequality rose to Gilded Age rates.

This was no accident. It was a result of a calculated campaign launched by the U.S. Chamber of Commerce and financially fed by corporations and right wing billionaires. They secured appointment of conservative, anti-union judges who ruled against unions. They bankrolled right-wing political candidates who passed anti-union legislation. And they subsidized anti-union organizations that taught corporations how to skirt the law and twist workers’ arms to defeat union organization efforts at workplaces.

Now, however, Democrats in the U.S. House and U.S. Senate have introduced legislation intended to reverse the union slide by restoring workers’ rights. 

The Protecting the Right to Work (PRO) Act, introduced on May 2, would make it easier for workers to form unions and would more effectively punish employers that violate the rights of workers trying to organize.

The proposed law would facilitate unionization, which Democrats believe would raise workers’ wages and reduce income inequality. Union workers earn about 13 percent more than nonunion workers and receive better benefits and pensions.

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The Richest Fantasy

The Richest Fantasy