The New York Times ran a piece that mentions four factors that could be bad news for investors in 2019. While returns to investors are not my major economic concern, the piece left out what I would consider to be the biggest risk: a profit squeeze.
The low unemployment rate is finally leading to some acceleration in wage growth. The annual rate of hourly wage growth over the last year has been 3.2 percent. Taking the average of the last three months (September, October, and November) compared with the prior three months, it has been 3.3 percent. While this is still not terribly fast, it is up from 2.5 percent through most of 2017.
Suppose that wage growth edges higher in 2019 to 3.7 or 3.8 percent, hardly an absurd proposition. Productivity growth has been averaging around 1.2–1.3 percent. (The job-killing robots are still hiding from the Bureau of Labor Statistics.) This leads to two possible scenarios.
In the first, wage costs are fully passed on in prices. We would then expect to see inflation of close to 2.5 percent. If the Fed gets strict about its 2.0 percent inflation target (likely) it will jack up interest rates to slow the economy. The track record here is not good. The Fed tends to go too far with its rate hikes and push the economy into a recession. That is going to be bad news for investors, as well as the millions of workers who lose their jobs.
The other scenario is that corporations hold the line on prices, leaving inflation close to 2.0 percent. In this case, the more rapid rate of wage growth would be eating into profit margins. This is fine by me since it means that workers would be getting back some of the share of income they lost in the Great Recession.
But stocks are not moved by measures of social justice, they respond to current and expected future profits. If the profit share falls back to its pre-recession level, that will be bad news for investors.
So if folks asked me for the bad things that could happen for the stock market in 2019, this story of a potential profit squeeze or higher inflation prompted an overreaction from the Fed would top my list. I’m surprised it didn’t make it to the NYT’s.
The New York Times ran a piece that mentions four factors that could be bad news for investors in 2019. While returns to investors are not my major economic concern, the piece left out what I would consider to be the biggest risk: a profit squeeze.
The low unemployment rate is finally leading to some acceleration in wage growth. The annual rate of hourly wage growth over the last year has been 3.2 percent. Taking the average of the last three months (September, October, and November) compared with the prior three months, it has been 3.3 percent. While this is still not terribly fast, it is up from 2.5 percent through most of 2017.
Suppose that wage growth edges higher in 2019 to 3.7 or 3.8 percent, hardly an absurd proposition. Productivity growth has been averaging around 1.2–1.3 percent. (The job-killing robots are still hiding from the Bureau of Labor Statistics.) This leads to two possible scenarios.
In the first, wage costs are fully passed on in prices. We would then expect to see inflation of close to 2.5 percent. If the Fed gets strict about its 2.0 percent inflation target (likely) it will jack up interest rates to slow the economy. The track record here is not good. The Fed tends to go too far with its rate hikes and push the economy into a recession. That is going to be bad news for investors, as well as the millions of workers who lose their jobs.
The other scenario is that corporations hold the line on prices, leaving inflation close to 2.0 percent. In this case, the more rapid rate of wage growth would be eating into profit margins. This is fine by me since it means that workers would be getting back some of the share of income they lost in the Great Recession.
But stocks are not moved by measures of social justice, they respond to current and expected future profits. If the profit share falls back to its pre-recession level, that will be bad news for investors.
So if folks asked me for the bad things that could happen for the stock market in 2019, this story of a potential profit squeeze or higher inflation prompted an overreaction from the Fed would top my list. I’m surprised it didn’t make it to the NYT’s.
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Readers of this NYT piece on Robert Lighthizer, United States trade representative, and his negotiations with China may have missed this point. The piece said that one of Lighthizer’s main goals was to stop China’s practice of requiring that companies like Boeing and GE, who set up operations in China, take Chinese companies as business partners.
This is an effective way of requiring technology transfers since the partners will become familiar with the production techniques of the US companies. This will enable them in future years to be competitors with these companies.
If the US government prohibits contracts that require this sort of technology transfer, it will make it more desirable to outsource some of their production to China. This will be good for the profits of Boeing, GE, and other large companies but bad for US workers. It will also mean that we will be paying more for products in the future than would otherwise be the case, since if Chinese companies would have been able to out-compete US companies, it presumably means that would be charging lower prices or selling a better product.
It is also worth noting that the basic concern expressed by Lighthizer and others assumes that major US corporations are unable to look out for themselves. They are not being forced to enter into contracts with China. This problem arises because they decide to invest in China, even with conditions requiring technology transfer.
We have a great story here where the government, and many analysts, think our largest corporations lack the ability to look out for their best interests. By contrast, when it comes to individual workers who are forced to sign away their right to have class action suits, or individual investors who can be fleeced by the financial industry, the current position of the government is that they can look out for themselves.
The NYT piece also does some inappropriate mind reading when it tells readers:
“Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.”
The reporter/editor does not know that Trump is “increasingly eager” or that he “views” the markets as “a political electrocardiogram of his presidency.”
Good reporting says what politicians do and say. It does not report as fact their alleged opinions.
Readers of this NYT piece on Robert Lighthizer, United States trade representative, and his negotiations with China may have missed this point. The piece said that one of Lighthizer’s main goals was to stop China’s practice of requiring that companies like Boeing and GE, who set up operations in China, take Chinese companies as business partners.
This is an effective way of requiring technology transfers since the partners will become familiar with the production techniques of the US companies. This will enable them in future years to be competitors with these companies.
If the US government prohibits contracts that require this sort of technology transfer, it will make it more desirable to outsource some of their production to China. This will be good for the profits of Boeing, GE, and other large companies but bad for US workers. It will also mean that we will be paying more for products in the future than would otherwise be the case, since if Chinese companies would have been able to out-compete US companies, it presumably means that would be charging lower prices or selling a better product.
It is also worth noting that the basic concern expressed by Lighthizer and others assumes that major US corporations are unable to look out for themselves. They are not being forced to enter into contracts with China. This problem arises because they decide to invest in China, even with conditions requiring technology transfer.
We have a great story here where the government, and many analysts, think our largest corporations lack the ability to look out for their best interests. By contrast, when it comes to individual workers who are forced to sign away their right to have class action suits, or individual investors who can be fleeced by the financial industry, the current position of the government is that they can look out for themselves.
The NYT piece also does some inappropriate mind reading when it tells readers:
“Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.”
The reporter/editor does not know that Trump is “increasingly eager” or that he “views” the markets as “a political electrocardiogram of his presidency.”
Good reporting says what politicians do and say. It does not report as fact their alleged opinions.
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I often rail against liberals who wring their hands over the unfortunate folks who have been left behind by globalization and technology. E.J. Dionne gave us a classic example of such hand-wringing in his piece today on the need to help the left behinds to keep them from flaming reactionaries.
For some reason, it is difficult for many liberals to grasp the idea that the bad plight of tens of millions of middle class workers did not just happen, but rather was deliberately engineered. Longer and stronger patent and copyright protection did not just happen, it was deliberate policy. Subjecting manufacturing workers to global competition, while largely protecting doctors, dentists, and other highly paid professionals was also a policy decision. Saving the Wall Street banks from the consequences of their own greed and incompetence was also conscious policy.
I know it’s difficult for intellectuals to grasp new ideas, but if we want to talk seriously about rising inequality, then it will be necessary for them to try. (Yeah, I’m advertising my [free] book Rigged again.) Anyhow, let’s hope that in 2019 we can actually talk about the policies that were put in place to redistribute income upward and not just pretend that Bill Gates and his ilk getting all the money was a natural process.
I often rail against liberals who wring their hands over the unfortunate folks who have been left behind by globalization and technology. E.J. Dionne gave us a classic example of such hand-wringing in his piece today on the need to help the left behinds to keep them from flaming reactionaries.
For some reason, it is difficult for many liberals to grasp the idea that the bad plight of tens of millions of middle class workers did not just happen, but rather was deliberately engineered. Longer and stronger patent and copyright protection did not just happen, it was deliberate policy. Subjecting manufacturing workers to global competition, while largely protecting doctors, dentists, and other highly paid professionals was also a policy decision. Saving the Wall Street banks from the consequences of their own greed and incompetence was also conscious policy.
I know it’s difficult for intellectuals to grasp new ideas, but if we want to talk seriously about rising inequality, then it will be necessary for them to try. (Yeah, I’m advertising my [free] book Rigged again.) Anyhow, let’s hope that in 2019 we can actually talk about the policies that were put in place to redistribute income upward and not just pretend that Bill Gates and his ilk getting all the money was a natural process.
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The New York Times has an interesting piece on the flood of books that are about to come into the public domain now that the term for the last extension of copyright (from 75 to 95 years) is about to be reached. This extension was applied retroactively, so it meant that virtually no copyrighted works came into the public domain for 20 years.
As policy, making a copyright extension is rather bizarre, since it is impossible to provide incentives for things that happened in the past. As the piece notes, one of the main motivations was Disney’s desire to keep some Mickey Mouse work under copyright protection, which is why the extension is sometimes referred to as the “Mickey Mouse copyright act.”
Anyhow, the fact that the work is now coming into the public domain both means that new editions can be published at just the cost of printing, making them more widely available. In addition, people can now freely do derivative works, as well as play and movies, derived from these books, without paying and/or getting permission from the copyright holders. It will be interesting to see how this change affects the treatment of the work newly in the public domain, which includes books by Agatha Christie, F. Scott Fitzgerald, and Kahlil Gibran.
The New York Times has an interesting piece on the flood of books that are about to come into the public domain now that the term for the last extension of copyright (from 75 to 95 years) is about to be reached. This extension was applied retroactively, so it meant that virtually no copyrighted works came into the public domain for 20 years.
As policy, making a copyright extension is rather bizarre, since it is impossible to provide incentives for things that happened in the past. As the piece notes, one of the main motivations was Disney’s desire to keep some Mickey Mouse work under copyright protection, which is why the extension is sometimes referred to as the “Mickey Mouse copyright act.”
Anyhow, the fact that the work is now coming into the public domain both means that new editions can be published at just the cost of printing, making them more widely available. In addition, people can now freely do derivative works, as well as play and movies, derived from these books, without paying and/or getting permission from the copyright holders. It will be interesting to see how this change affects the treatment of the work newly in the public domain, which includes books by Agatha Christie, F. Scott Fitzgerald, and Kahlil Gibran.
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The media apparently just love the story of everyone being a gig worker, and like Donald Trump, they are not going to let the data get in the way. The Washington Post just ran a column telling us that gig workers are everywhere.
While this person and millions of others are struggling to get by with non-standard employment, the most recent survey from the Bureau of Labor Statistics shows there has been no increase in gig-type employment over the last decade. The proliferation of gig economy jobs is a story the media like to tell for some reason. It would be nice if they instead tried to focus on the real economy.
The media apparently just love the story of everyone being a gig worker, and like Donald Trump, they are not going to let the data get in the way. The Washington Post just ran a column telling us that gig workers are everywhere.
While this person and millions of others are struggling to get by with non-standard employment, the most recent survey from the Bureau of Labor Statistics shows there has been no increase in gig-type employment over the last decade. The proliferation of gig economy jobs is a story the media like to tell for some reason. It would be nice if they instead tried to focus on the real economy.
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Justin Gillis argued in an NYT column that higher carbon taxes face too much political resistance to be a serious option in the near future. He points to the difficulties faced by politicians who have proposed such taxes, most recently the rise of the Yellow Vest movement in France in opposition to carbon taxes imposed by French President Emanuel Macron. Gillis instead proposes measures, such as increased public transit options, which will give people an incentive to use less energy.
While Gillis is right about the political opposition to carbon taxes, there are policies that can provide equivalent disincentives. (Gillis does understate the incentive effect. People in Europe use much less energy than in the US, presumably in large part because of the higher prices there.) If we convert car insurance from being largely a fixed cost to a per mile charge, it would have provide a substantial disincentive to driving.
An average insurance policy costs roughly $1,000 a year. If average miles driven per car are 10,000 a year, this would come to 10 cents a mile. For a car that gets 20 miles a gallon, paying 10 cents a mile in higher insurance premiums would provide the same disincentive as a $2.00 a gallon gasoline tax. The nice part about this switch is that it does not mean raising people’s insurance premiums on average, it just changes the way they pay.
We obviously have to do much more than switch to pay by the mile auto insurance to stop global warming, but this is a relatively simple and largely painless measure that could have a substantial impact.
Justin Gillis argued in an NYT column that higher carbon taxes face too much political resistance to be a serious option in the near future. He points to the difficulties faced by politicians who have proposed such taxes, most recently the rise of the Yellow Vest movement in France in opposition to carbon taxes imposed by French President Emanuel Macron. Gillis instead proposes measures, such as increased public transit options, which will give people an incentive to use less energy.
While Gillis is right about the political opposition to carbon taxes, there are policies that can provide equivalent disincentives. (Gillis does understate the incentive effect. People in Europe use much less energy than in the US, presumably in large part because of the higher prices there.) If we convert car insurance from being largely a fixed cost to a per mile charge, it would have provide a substantial disincentive to driving.
An average insurance policy costs roughly $1,000 a year. If average miles driven per car are 10,000 a year, this would come to 10 cents a mile. For a car that gets 20 miles a gallon, paying 10 cents a mile in higher insurance premiums would provide the same disincentive as a $2.00 a gallon gasoline tax. The nice part about this switch is that it does not mean raising people’s insurance premiums on average, it just changes the way they pay.
We obviously have to do much more than switch to pay by the mile auto insurance to stop global warming, but this is a relatively simple and largely painless measure that could have a substantial impact.
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A friend called my attention to this Project Syndicate piece by Kenneth Rogoff, a Harvard economics professor and former chief economist at the IMF. Rogoff argues that Russia will need major economic reform and political reform in order for its economy to get back on a healthy growth path.
In the course of making his argument, Rogoff makes a quick and dirty case that the fact Putin was able to win re-election despite the economic downturn in 2015–2016 resulting from the collapse of world oil prices, shows that the country is not a western democracy.
“The shock to the real economy has been severe, with Russia suffering a decline in output in 2015 and 2016 comparable to what the United States experienced during its 2008–2009 financial crisis, with the contraction in GDP totalling about 4 percent. …
“In a western democracy, an economic collapse on the scale experienced by Russia would have been extremely difficult to digest politically, as the global surge in populism demonstrates. Yet Putin has been able to remain firmly in control and, in all likelihood, will easily be able to engineer another landslide victory in the presidential election due in March 2018.”
First, the IMF data to which Rogoff links does not support his story of an economic collapse in Russia. The reported decline in GDP is 2.7 percent, not the 4.0 percent claimed by Rogoff. And, it is more than reversed by the growth in 2017 and projected growth in 2018. In other words, there does not seem to be much of a story of economic collapse here.
But the idea that a Russian government could not stay in power through an economic downturn, if it were democratic, is an interesting one. According to the IMF, Russia’s economy shrank by more than 25 percent from 1992 to 1996 under Boris Yeltsin, a close US ally. Yet, he managed to be re-elected in 1996 despite an economic decline that was an order of magnitude larger than the one under Putin from 2014 to 2016. By the Rogoff theory, we can infer that Yeltsin should not have been able to win re-election through democratic means.
A friend called my attention to this Project Syndicate piece by Kenneth Rogoff, a Harvard economics professor and former chief economist at the IMF. Rogoff argues that Russia will need major economic reform and political reform in order for its economy to get back on a healthy growth path.
In the course of making his argument, Rogoff makes a quick and dirty case that the fact Putin was able to win re-election despite the economic downturn in 2015–2016 resulting from the collapse of world oil prices, shows that the country is not a western democracy.
“The shock to the real economy has been severe, with Russia suffering a decline in output in 2015 and 2016 comparable to what the United States experienced during its 2008–2009 financial crisis, with the contraction in GDP totalling about 4 percent. …
“In a western democracy, an economic collapse on the scale experienced by Russia would have been extremely difficult to digest politically, as the global surge in populism demonstrates. Yet Putin has been able to remain firmly in control and, in all likelihood, will easily be able to engineer another landslide victory in the presidential election due in March 2018.”
First, the IMF data to which Rogoff links does not support his story of an economic collapse in Russia. The reported decline in GDP is 2.7 percent, not the 4.0 percent claimed by Rogoff. And, it is more than reversed by the growth in 2017 and projected growth in 2018. In other words, there does not seem to be much of a story of economic collapse here.
But the idea that a Russian government could not stay in power through an economic downturn, if it were democratic, is an interesting one. According to the IMF, Russia’s economy shrank by more than 25 percent from 1992 to 1996 under Boris Yeltsin, a close US ally. Yet, he managed to be re-elected in 1996 despite an economic decline that was an order of magnitude larger than the one under Putin from 2014 to 2016. By the Rogoff theory, we can infer that Yeltsin should not have been able to win re-election through democratic means.
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