For those following such things, the strike by West Virginia school teachers, with an average annual pay of $45,700, is rather impressive. Yes, they want decent pay for themselves, but this is also about the quality of education for students in West Virginia.
We know that rich people think that teachers should be willing to educate children for nothing, but that is not the way the world works, at least in an economy where the government has not acted to ensure that unemployment is very high. Good teachers will look to the better-paying jobs in other states, or leave the profession altogether.
Even someone very committed to teaching would like to be able to have a decent home, be able to pay for their own kids upbringing, and also have some money for retirement. If the pay in West Virginia is not enough to allow for this, they won’t stay. This will leave the state with high turnover and teachers who don’t care much about educating children.
It is also worth noting that this strike is taking place at the same time the Supreme Court is hearing the Janus case, which is a right-wing effort to deny public employees’ freedom of contract. (If Janus wins, they will not be able to have contracts that require everyone who is represented by a union share in the cost of representation.) This is yet another effort to tilt the playing field so that workers have less power, and presumably, will have to accept lower pay and benefits.
For those who like to make such comparisons, the average West Virginia teacher makes less than 20 percent of the average doctor, less than 10 percent of what many highly paid specialists earn, and probably around 1 percent of the salary of the hedge fund and private equity crew that get paid to lose money for university endowments. There’s nothing like a system where people are rewarded on merit.
For those following such things, the strike by West Virginia school teachers, with an average annual pay of $45,700, is rather impressive. Yes, they want decent pay for themselves, but this is also about the quality of education for students in West Virginia.
We know that rich people think that teachers should be willing to educate children for nothing, but that is not the way the world works, at least in an economy where the government has not acted to ensure that unemployment is very high. Good teachers will look to the better-paying jobs in other states, or leave the profession altogether.
Even someone very committed to teaching would like to be able to have a decent home, be able to pay for their own kids upbringing, and also have some money for retirement. If the pay in West Virginia is not enough to allow for this, they won’t stay. This will leave the state with high turnover and teachers who don’t care much about educating children.
It is also worth noting that this strike is taking place at the same time the Supreme Court is hearing the Janus case, which is a right-wing effort to deny public employees’ freedom of contract. (If Janus wins, they will not be able to have contracts that require everyone who is represented by a union share in the cost of representation.) This is yet another effort to tilt the playing field so that workers have less power, and presumably, will have to accept lower pay and benefits.
For those who like to make such comparisons, the average West Virginia teacher makes less than 20 percent of the average doctor, less than 10 percent of what many highly paid specialists earn, and probably around 1 percent of the salary of the hedge fund and private equity crew that get paid to lose money for university endowments. There’s nothing like a system where people are rewarded on merit.
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News must travel slowly to corporate headquarters these days. How else can we explain the fact that corporate America isn’t rushing out to invest in response to the big tax cut Congress voted them last year?
According to data released by the Commerce Department, orders for non-defense capital goods fell by 1.5 percent in January after dropping 0.4 percent in December. We get the same story even if we pull out volatile orders for aircraft: a drop of 0.2 percent in January after a fall of 0.6 percent in December.
While these declines would not be a big story in normal times (the economic impact is very limited), they are huge in the context of the tax cuts. The main rationale for the cut in corporate tax rates was that it was supposed to lead to a surge in investment.
While investment takes time to put in place, these data are showing us orders. Orders can be made over the Internet or an old-fashioned landline telephone. They don’t take a lot of time.
And keep in mind, while the bill just passed in late December, the basic outlines had been known since early September. Fast-moving companies will begin to make plans from the day the bill seemed likely to pass, they aren’t going to wait until Donald Trump puts his pen to it and then start asking what they should do.
The businesses in Pyeongchang didn’t just start making plans for the Olympics the week the games opened, the hotels and restaurants began their expansion plans as soon as they knew Korea had landed the Olympics. We should expect the same story with corporate investment.
If the tax cuts matter for investment, then companies like GE, Microsoft, and Amazon were making plans as soon as it became clear that the Republican majority in Congress was serious about passing a tax bill. The fact that we are seeing zero evidence of an uptick in investment suggests that tax cuts don’t have much impact on investment.
Rather than being about promoting economic growth that would lead to productivity gains and higher wages for ordinary workers, the tax cuts were actually just another way to redistribute more money upward. As Speaker Ryan always says: #RichPeopleNeedTaxCuts.
News must travel slowly to corporate headquarters these days. How else can we explain the fact that corporate America isn’t rushing out to invest in response to the big tax cut Congress voted them last year?
According to data released by the Commerce Department, orders for non-defense capital goods fell by 1.5 percent in January after dropping 0.4 percent in December. We get the same story even if we pull out volatile orders for aircraft: a drop of 0.2 percent in January after a fall of 0.6 percent in December.
While these declines would not be a big story in normal times (the economic impact is very limited), they are huge in the context of the tax cuts. The main rationale for the cut in corporate tax rates was that it was supposed to lead to a surge in investment.
While investment takes time to put in place, these data are showing us orders. Orders can be made over the Internet or an old-fashioned landline telephone. They don’t take a lot of time.
And keep in mind, while the bill just passed in late December, the basic outlines had been known since early September. Fast-moving companies will begin to make plans from the day the bill seemed likely to pass, they aren’t going to wait until Donald Trump puts his pen to it and then start asking what they should do.
The businesses in Pyeongchang didn’t just start making plans for the Olympics the week the games opened, the hotels and restaurants began their expansion plans as soon as they knew Korea had landed the Olympics. We should expect the same story with corporate investment.
If the tax cuts matter for investment, then companies like GE, Microsoft, and Amazon were making plans as soon as it became clear that the Republican majority in Congress was serious about passing a tax bill. The fact that we are seeing zero evidence of an uptick in investment suggests that tax cuts don’t have much impact on investment.
Rather than being about promoting economic growth that would lead to productivity gains and higher wages for ordinary workers, the tax cuts were actually just another way to redistribute more money upward. As Speaker Ryan always says: #RichPeopleNeedTaxCuts.
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That is the implication of an NYT article reporting on the fact that the returns on university endowments trailed a simple index mix of either 60 percent stock and 40 percent bonds or 70 percent stock and 30 percent bonds. According to the article, university endowments had an average nominal return over the last decade of 4.6 percent. This compares to a return of 5.3 percent for a 60–40 stock/bond index mix and 5.4 percent for a 70–30 stock/bond index fund.
This means that universities were throwing billions of dollars in the toilet in order to invest with hedge funds and private equity funds rather than going with a simple index. It is worth noting that the managers of these funds routinely earn salaries of millions of dollars a year. Paychecks in the tens of millions and even hundreds of millions are not uncommon.
It will be interesting to see if universities will continue with an investment strategy that has the effect of losing them money while making a tiny group of people incredibly rich, especially in a context where so many have refused demands to divest holdings in fossil fuel corporations, claiming the need to maximize returns. This article implies there is less concern about maximizing returns when it comes to investing with hedge funds and private equity.
That is the implication of an NYT article reporting on the fact that the returns on university endowments trailed a simple index mix of either 60 percent stock and 40 percent bonds or 70 percent stock and 30 percent bonds. According to the article, university endowments had an average nominal return over the last decade of 4.6 percent. This compares to a return of 5.3 percent for a 60–40 stock/bond index mix and 5.4 percent for a 70–30 stock/bond index fund.
This means that universities were throwing billions of dollars in the toilet in order to invest with hedge funds and private equity funds rather than going with a simple index. It is worth noting that the managers of these funds routinely earn salaries of millions of dollars a year. Paychecks in the tens of millions and even hundreds of millions are not uncommon.
It will be interesting to see if universities will continue with an investment strategy that has the effect of losing them money while making a tiny group of people incredibly rich, especially in a context where so many have refused demands to divest holdings in fossil fuel corporations, claiming the need to maximize returns. This article implies there is less concern about maximizing returns when it comes to investing with hedge funds and private equity.
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When it comes to talking honestly about the impact of trade on the labor market few papers flunk the test as badly as the Washington Post. It is a consistent and unreflective supporter of the pro-business trade policy that has been pursued by administrations of both parties for the last four decades.
Regular Beat the Press readers know how in an editorial defending NAFTA the paper absurdly claimed that Mexico’s GDP quadrupled between 1987 and 2007. According to the I.M.F., the actual growth figure was 84.2 percent. More than ten years later the paper still has not corrected this error.
Given the paper’s bias, it was not surprising to see a headline in the print edition that noted the loss of jobs over the last two decades and told readers, “it’s the robots.” The reason why this headline is out of line is that the article actually said the opposite. (The headline of the online version is identical, but excludes the reference to robots.)
The article is reporting on new research by Katharine Abraham and Melissa Kearney which examines the factors that might have led to the drop in employment rates since 2000. (I have not yet read the paper, but Katharine Abraham is one of the best labor economists anywhere, so I take seriously anything she does.) The article lists the factors in order of importance. It reports Abraham and Kearney’s assessment:
“Abraham and Kearney estimate that this competition [from Chinese imports] cost the economy about 2.65 million jobs over the period.”
The next paragraph is about robots:
“…the duo estimated that robots cost the economy another 1.4 million workers.”
So Abraham and Kearney very clearly see robots as being considerably less important in causing job loss than trade. In fact, their assessment implies the impact of trade was almost twice as large as the impact of robots.
To put it as simply as possible, the Post’s headline directly contradicts the information presented in the article. I suppose that Washington Post headline writers are not allowed to say anything that might reflect negatively on our patterns of trade.
And, just to be clear, this is not about pushing some seemingly noble goal like “free trade.” The Post has no problem with protectionist barriers that raise the pay of doctors and keep drug prices high. This is about pushing trade policies that redistribute income upward.
When it comes to talking honestly about the impact of trade on the labor market few papers flunk the test as badly as the Washington Post. It is a consistent and unreflective supporter of the pro-business trade policy that has been pursued by administrations of both parties for the last four decades.
Regular Beat the Press readers know how in an editorial defending NAFTA the paper absurdly claimed that Mexico’s GDP quadrupled between 1987 and 2007. According to the I.M.F., the actual growth figure was 84.2 percent. More than ten years later the paper still has not corrected this error.
Given the paper’s bias, it was not surprising to see a headline in the print edition that noted the loss of jobs over the last two decades and told readers, “it’s the robots.” The reason why this headline is out of line is that the article actually said the opposite. (The headline of the online version is identical, but excludes the reference to robots.)
The article is reporting on new research by Katharine Abraham and Melissa Kearney which examines the factors that might have led to the drop in employment rates since 2000. (I have not yet read the paper, but Katharine Abraham is one of the best labor economists anywhere, so I take seriously anything she does.) The article lists the factors in order of importance. It reports Abraham and Kearney’s assessment:
“Abraham and Kearney estimate that this competition [from Chinese imports] cost the economy about 2.65 million jobs over the period.”
The next paragraph is about robots:
“…the duo estimated that robots cost the economy another 1.4 million workers.”
So Abraham and Kearney very clearly see robots as being considerably less important in causing job loss than trade. In fact, their assessment implies the impact of trade was almost twice as large as the impact of robots.
To put it as simply as possible, the Post’s headline directly contradicts the information presented in the article. I suppose that Washington Post headline writers are not allowed to say anything that might reflect negatively on our patterns of trade.
And, just to be clear, this is not about pushing some seemingly noble goal like “free trade.” The Post has no problem with protectionist barriers that raise the pay of doctors and keep drug prices high. This is about pushing trade policies that redistribute income upward.
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We would usually expect that a 12-year-old kid would be taller than a 6-year-old kid. However, if a 12-year-old had only grown one inch over their last six years, we would probably be somewhat worried.
David Brooks devotes his most recent column, “the virtue of radical honesty” to presenting data from Steven Pinker’s new book, Enlightenment Now, which purports to show that things are better than ever. Most of the data has the character of boasting over our 12-year-old’s one inch of growth over the last six years.
Brooks tells us:
“For example, we’re all aware of the gloomy statistics around wage stagnation and income inequality, but Pinker contends that we should not be nostalgic for the economy of the 1950s, when jobs were plentiful and unions strong. A third of American children lived in poverty. Sixty percent of seniors had incomes below $1,000 a year. Only half the population had any savings in the bank at all.
“Between 1979 and 2014, meanwhile, the percentage of poor Americans dropped to 20 percent from 24 percent. The percentage of lower-middle-class Americans dropped to 17 from 24. The percentage of Americans who were upper middle class (earning $100,000 to $350,000) shot upward to 30 percent from 13 percent.”
The problem with the Brooks–Pinker story is that we expect the economy/people to get richer through time. After all, technology and education improve. In the fifties, we didn’t have the Internet, cell phones, and all sorts of other goodies. In fact, at the start of the fifties, we didn’t even have the polio vaccine.
The question is not whether we are better off today than we were sixty years ago. It would be incredible if we were not better off. The question is by how much. In the fifties, wages and incomes for ordinary families were rising at a rate of close to two percent annually. In the last forty-five years, they have barely risen at all.
This fact can be seen even looking at the numbers that Brooks is bragging over. While it’s not clear where they got their poverty data, the child poverty rate comes closest to the numbers in the article. This was at 22.3 percent in 1983. It was down to 21.1 percent in 2014 and fell further to 18.0 percent in 2016.
Should we celebrate this reduction in poverty rates over the last 33 years? Well, the poverty rate had fallen from 27.3 percent in 1959 (the first year for this data series) to 14.0 percent in 1969. That’s a drop of 13.3 percentage points in just ten years. The net direction in the last 47 years has been upward.
It’s true that a larger share of the population is earning over $100,000 a year. This is due to some growth in hourly wages, but also due to more work per family. A much larger share of women are working today than fifty years ago and a larger share of the women working are working full-time. If family income had continued growing at its pace from 1967 to 1973 (the last years of the Golden Age), median family income would be almost $150,000 today.
There are a whole a range of other measures which leave real enlightenment-types appalled by the state of the country today. While Brooks–Pinker tell us “only half the population had any savings at all” in the 1950s, a recent survey found that 63 percent of the country could not afford an unexpected bill of $500. The homeownership rate is roughly the same as it was sixty years ago. Life expectancy for those in the bottom 40 percent of the income distribution has barely budged in the last forty years.
In short, a serious analysis of data shows that most people have good grounds for complaints about their situation today since they have not shared to any significant extent in the economic growth of the last four decades. But apparently, there is a big market for the sort of dog and pony show that Brooks and Pinker present trying to argue the opposite.
We would usually expect that a 12-year-old kid would be taller than a 6-year-old kid. However, if a 12-year-old had only grown one inch over their last six years, we would probably be somewhat worried.
David Brooks devotes his most recent column, “the virtue of radical honesty” to presenting data from Steven Pinker’s new book, Enlightenment Now, which purports to show that things are better than ever. Most of the data has the character of boasting over our 12-year-old’s one inch of growth over the last six years.
Brooks tells us:
“For example, we’re all aware of the gloomy statistics around wage stagnation and income inequality, but Pinker contends that we should not be nostalgic for the economy of the 1950s, when jobs were plentiful and unions strong. A third of American children lived in poverty. Sixty percent of seniors had incomes below $1,000 a year. Only half the population had any savings in the bank at all.
“Between 1979 and 2014, meanwhile, the percentage of poor Americans dropped to 20 percent from 24 percent. The percentage of lower-middle-class Americans dropped to 17 from 24. The percentage of Americans who were upper middle class (earning $100,000 to $350,000) shot upward to 30 percent from 13 percent.”
The problem with the Brooks–Pinker story is that we expect the economy/people to get richer through time. After all, technology and education improve. In the fifties, we didn’t have the Internet, cell phones, and all sorts of other goodies. In fact, at the start of the fifties, we didn’t even have the polio vaccine.
The question is not whether we are better off today than we were sixty years ago. It would be incredible if we were not better off. The question is by how much. In the fifties, wages and incomes for ordinary families were rising at a rate of close to two percent annually. In the last forty-five years, they have barely risen at all.
This fact can be seen even looking at the numbers that Brooks is bragging over. While it’s not clear where they got their poverty data, the child poverty rate comes closest to the numbers in the article. This was at 22.3 percent in 1983. It was down to 21.1 percent in 2014 and fell further to 18.0 percent in 2016.
Should we celebrate this reduction in poverty rates over the last 33 years? Well, the poverty rate had fallen from 27.3 percent in 1959 (the first year for this data series) to 14.0 percent in 1969. That’s a drop of 13.3 percentage points in just ten years. The net direction in the last 47 years has been upward.
It’s true that a larger share of the population is earning over $100,000 a year. This is due to some growth in hourly wages, but also due to more work per family. A much larger share of women are working today than fifty years ago and a larger share of the women working are working full-time. If family income had continued growing at its pace from 1967 to 1973 (the last years of the Golden Age), median family income would be almost $150,000 today.
There are a whole a range of other measures which leave real enlightenment-types appalled by the state of the country today. While Brooks–Pinker tell us “only half the population had any savings at all” in the 1950s, a recent survey found that 63 percent of the country could not afford an unexpected bill of $500. The homeownership rate is roughly the same as it was sixty years ago. Life expectancy for those in the bottom 40 percent of the income distribution has barely budged in the last forty years.
In short, a serious analysis of data shows that most people have good grounds for complaints about their situation today since they have not shared to any significant extent in the economic growth of the last four decades. But apparently, there is a big market for the sort of dog and pony show that Brooks and Pinker present trying to argue the opposite.
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That’s a bit of background that might have been helpful for people reading this Washington Post article on Disney’s threat to withhold a $1,000 bonus from union workers unless they accept a contract offer from the company. According to the article, the company will be paying out a total of $125 million in one-time bonuses.
Last year, the company paid $4,422 million in taxes on $13,788 million in pre-tax income for an effective tax rate of 31.9 percent. If the new tax law lowers Disney’s tax rate to 21 percent (this assumes it pays the statutory rate, without being able to benefit from various special provisions in the tax code), it would save just under $1.5 billion based on its 2017 income. It would presumably save comparable or larger amounts in future years as its profits grow. By contrast, the bonuses are being offered to workers are a one-time event which may not be repeated.
That’s a bit of background that might have been helpful for people reading this Washington Post article on Disney’s threat to withhold a $1,000 bonus from union workers unless they accept a contract offer from the company. According to the article, the company will be paying out a total of $125 million in one-time bonuses.
Last year, the company paid $4,422 million in taxes on $13,788 million in pre-tax income for an effective tax rate of 31.9 percent. If the new tax law lowers Disney’s tax rate to 21 percent (this assumes it pays the statutory rate, without being able to benefit from various special provisions in the tax code), it would save just under $1.5 billion based on its 2017 income. It would presumably save comparable or larger amounts in future years as its profits grow. By contrast, the bonuses are being offered to workers are a one-time event which may not be repeated.
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An NYT article discussed a plan being pushed by Ivanka Trump and several Republicans in the Senate which would allow for new mothers to take up to twelve weeks of paid family leave. This would be paid for by delaying their Social Security retirement benefits beyond age 67, which would be when they would now be able to collect full benefits.
The piece quotes Carrie Lucas, the President of the Independent Women’s Forum saying:
“Sixty-seven is really late middle age, and many people are really happy to continue working.”
We actually have data on the percentage of women age 65 to 69 who are now in the labor force and continuing to work, happy or not. In the most recent data, less than 28 percent of women in the age group were in the labor force. The share is considerably lower for less-educated workers, who would be the ones most in need of paid leave. The share falls off rapidly as women age so that the labor force participation rate for women between the ages of 70 and 74 is less than 16.0 percent.
It also worth noting that a large percentage of these women work at physically demanding jobs like housekeepers or table servers. These women are likely to find it quite difficult to add another six months or year to their working careers.
An NYT article discussed a plan being pushed by Ivanka Trump and several Republicans in the Senate which would allow for new mothers to take up to twelve weeks of paid family leave. This would be paid for by delaying their Social Security retirement benefits beyond age 67, which would be when they would now be able to collect full benefits.
The piece quotes Carrie Lucas, the President of the Independent Women’s Forum saying:
“Sixty-seven is really late middle age, and many people are really happy to continue working.”
We actually have data on the percentage of women age 65 to 69 who are now in the labor force and continuing to work, happy or not. In the most recent data, less than 28 percent of women in the age group were in the labor force. The share is considerably lower for less-educated workers, who would be the ones most in need of paid leave. The share falls off rapidly as women age so that the labor force participation rate for women between the ages of 70 and 74 is less than 16.0 percent.
It also worth noting that a large percentage of these women work at physically demanding jobs like housekeepers or table servers. These women are likely to find it quite difficult to add another six months or year to their working careers.
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An NYT Magazine piece does a very nice job laying out the argument as to how platform monopolies like Google could be engaging in anti-competitive practices.
An NYT Magazine piece does a very nice job laying out the argument as to how platform monopolies like Google could be engaging in anti-competitive practices.
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It is amazing how frequently we hear people asserting that the massive inequality we are now seeing in the United States is the result of an unfettered market. I realize that this is a convenient view for those who are on the upside of things, but it also happens to be nonsense.
Today’s highlighted nonsense pusher is Amy Chua, who warns in an NYT column about the destructive path the United States is now on where a disaffected white population takes out its wrath on economic elites and racial minorities. The key part missing from the story is that disaffected masses really do have a legitimate gripe.
We didn’t have to make patent and copyright monopolies ever longer and stronger, allowing folks like Bill Gates to get incredibly rich. We could have made Amazon pay the same sales tax as their mom and pop competitors, which would mean Jeff Bezos would not be incredibly rich. We could subject Wall Street financial transactions to the same sort of sales taxes as people pay on shoes and clothes, hugely downsizing the high incomes earned in this sector. And, we could have rules of corporate governance that make it easier for shareholders to rein in CEO pay.
None of the rules we have in place that redistribute upward were given to us by the market. They were the result of deliberate economic policy. (Yes, this is the topic of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) It is understandable that the losers from this upward redistribution would be resentful and they likely are even more resentful when the beneficiaries of the rigging just pretend that it was just a natural outcome of the market.
It is amazing how frequently we hear people asserting that the massive inequality we are now seeing in the United States is the result of an unfettered market. I realize that this is a convenient view for those who are on the upside of things, but it also happens to be nonsense.
Today’s highlighted nonsense pusher is Amy Chua, who warns in an NYT column about the destructive path the United States is now on where a disaffected white population takes out its wrath on economic elites and racial minorities. The key part missing from the story is that disaffected masses really do have a legitimate gripe.
We didn’t have to make patent and copyright monopolies ever longer and stronger, allowing folks like Bill Gates to get incredibly rich. We could have made Amazon pay the same sales tax as their mom and pop competitors, which would mean Jeff Bezos would not be incredibly rich. We could subject Wall Street financial transactions to the same sort of sales taxes as people pay on shoes and clothes, hugely downsizing the high incomes earned in this sector. And, we could have rules of corporate governance that make it easier for shareholders to rein in CEO pay.
None of the rules we have in place that redistribute upward were given to us by the market. They were the result of deliberate economic policy. (Yes, this is the topic of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) It is understandable that the losers from this upward redistribution would be resentful and they likely are even more resentful when the beneficiaries of the rigging just pretend that it was just a natural outcome of the market.
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In the last six months, Republicans gave up being a party that pretends to care about budget deficits as they happily pushed through large tax cuts (roughly 0.7 percent of GDP over the next decade) and big increases in spending (roughly 0.7 percent of GDP over the next two years). The deficit picture looks much worse today than it did a year ago.
While the few remaining deficit hawks at the Washington Post and the Peter Peterson–funded organizations are screaming, the question serious people should be asking is: why don’t the markets don’t share their concerns? In particular, the bond market, where the “bond vigilantes” live, should be going nuts with much larger deficits now being projected for as far as the eye can see.
It is true that rates have gone up. At just under 2.9 percent, the interest rate on 10-year Treasury bonds is almost half a percentage point higher than it was a year ago. But a 2.9 percent rate is still very low by any reasonable standard. After all, it was over 3.0 percent at the end of 2013 and it was over 5.0 percent in the late 1990s as the deficits were turning to surpluses.
The current 2.9 percent rate is also well below what the Congressional Budget Office (CBO) had projected just a couple of years ago when it expected deficits to stay on their prior no tax cut path. In January of 2016, CBO projected that the interest rate on 10-year Treasury bonds would be 3.7 percent by now. This means that even with the recent run-up, long-term interests are still 0.8 percentage points below what CBO had projected without any major increases in the budget deficit.
This might suggest that the concerns that deficits would send interest rates through the roof have little basis in reality. After all, long-term interest rates are driven by expectations, and unless investors in the bond market have hugely different expectations about the size of deficits than folks in Washington, they apparently don’t believe that the larger deficits we are now looking at are that big a deal.
In the last six months, Republicans gave up being a party that pretends to care about budget deficits as they happily pushed through large tax cuts (roughly 0.7 percent of GDP over the next decade) and big increases in spending (roughly 0.7 percent of GDP over the next two years). The deficit picture looks much worse today than it did a year ago.
While the few remaining deficit hawks at the Washington Post and the Peter Peterson–funded organizations are screaming, the question serious people should be asking is: why don’t the markets don’t share their concerns? In particular, the bond market, where the “bond vigilantes” live, should be going nuts with much larger deficits now being projected for as far as the eye can see.
It is true that rates have gone up. At just under 2.9 percent, the interest rate on 10-year Treasury bonds is almost half a percentage point higher than it was a year ago. But a 2.9 percent rate is still very low by any reasonable standard. After all, it was over 3.0 percent at the end of 2013 and it was over 5.0 percent in the late 1990s as the deficits were turning to surpluses.
The current 2.9 percent rate is also well below what the Congressional Budget Office (CBO) had projected just a couple of years ago when it expected deficits to stay on their prior no tax cut path. In January of 2016, CBO projected that the interest rate on 10-year Treasury bonds would be 3.7 percent by now. This means that even with the recent run-up, long-term interests are still 0.8 percentage points below what CBO had projected without any major increases in the budget deficit.
This might suggest that the concerns that deficits would send interest rates through the roof have little basis in reality. After all, long-term interest rates are driven by expectations, and unless investors in the bond market have hugely different expectations about the size of deficits than folks in Washington, they apparently don’t believe that the larger deficits we are now looking at are that big a deal.
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