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Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

I have to disagree with Paul Krugman on his assessment of the current state of the economy. While I would agree with most of his comments about the state of the stock market and housing market, and also the competence of the Trump administration, I think he is wrong in saying that we are at or near full employment. There are a few points to be made here. First. Krugman rightly notes the aging of the population pushing down the overall labor force participation rates. However, employment-to-population rates for prime-age workers (ages 25 to 54) are still below pre-recession levels and well below 2000 levels. The falloff is pretty much across the board, applying to both men and women and both more educated and less educated workers (not all by the same amount) suggesting that a supply-side explanation is not likely. In other words, there is reason to believe that if there were more demand, more people would be working. While the 4.1 percent unemployment rate is low by the standards of the last 45 years, it is worth noting that other major economies (e.g. Japan and Germany) now have far lower unemployment rates than almost any economist thought plausible just four or five years ago. I don't see any reason to believe that the US unemployment rate can't fall to 3.5 percent, and possibly even lower, without kicking off an inflationary spiral. As evidence in the other direction, Krugman cites the quit rate, the percentage of workers who quit their job. He notes that this is almost back at pre-recession levels and not much below 2001 levels (the first year for which data are available). While this is true, much of the story here is a composition effect. A much smaller segment of the labor force is in sectors with low quit rates like manufacturing and the government. A larger share are in high quit rate sectors like restaurants and professional and business services. 
I have to disagree with Paul Krugman on his assessment of the current state of the economy. While I would agree with most of his comments about the state of the stock market and housing market, and also the competence of the Trump administration, I think he is wrong in saying that we are at or near full employment. There are a few points to be made here. First. Krugman rightly notes the aging of the population pushing down the overall labor force participation rates. However, employment-to-population rates for prime-age workers (ages 25 to 54) are still below pre-recession levels and well below 2000 levels. The falloff is pretty much across the board, applying to both men and women and both more educated and less educated workers (not all by the same amount) suggesting that a supply-side explanation is not likely. In other words, there is reason to believe that if there were more demand, more people would be working. While the 4.1 percent unemployment rate is low by the standards of the last 45 years, it is worth noting that other major economies (e.g. Japan and Germany) now have far lower unemployment rates than almost any economist thought plausible just four or five years ago. I don't see any reason to believe that the US unemployment rate can't fall to 3.5 percent, and possibly even lower, without kicking off an inflationary spiral. As evidence in the other direction, Krugman cites the quit rate, the percentage of workers who quit their job. He notes that this is almost back at pre-recession levels and not much below 2001 levels (the first year for which data are available). While this is true, much of the story here is a composition effect. A much smaller segment of the labor force is in sectors with low quit rates like manufacturing and the government. A larger share are in high quit rate sectors like restaurants and professional and business services. 
Heather Long had a column in the Washington Post telling us that "it feels like 2006." As someone who did his best to warn of impending disaster in 2006, I can say that it doesn't look at all like 2006. It is frustrating, but perhaps not surprising, that the economics profession and economic reporters have done their best to learn absolutely nothing about their enormous mistakes at that time. (Fortunately for them, economics is not an area where people are held accountable for the quality of their work, so this failure cost almost no one their job or even led them to miss a scheduled promotion.) The basic story of real world 2006 was that the impending disaster was not hidden. It did not require some super-sleuth to figure out what was wrong. It required access to widely available government data and knowledge of third-grade arithmetic. We had an unprecedented run-up in nationwide house prices. The national average had risen by more 70 percent since 1996, after adjusting for inflation. This followed a century in which house prices had just moved in step with inflation. And, this was a nationwide story. It was not just a few hot housing markets on the coasts, prices were soaring in Chicago, Minneapolis, and even Detroit. Furthermore, this run-up was clearly not connected with the fundamentals of the market. Unlike the last five years, nothing was going on with rents. They were just rising in step with the overall rate of inflation. Furthermore, we already were seeing record vacancy rates even before the collapse of the market. In short, we had a gigantic neon sign hanging over the housing market saying "bubble." I should also add that the bad loans fueling the bubble were hardly a secret either. The National Association of Realtors reported that more than 40 percent of first-time homebuyers put down zero or less (they borrowed to cover closing or moving costs) on their homes in 2005. And, there was widespread talk of "NINJA" loans, which stood for no income, no assets, no job.
Heather Long had a column in the Washington Post telling us that "it feels like 2006." As someone who did his best to warn of impending disaster in 2006, I can say that it doesn't look at all like 2006. It is frustrating, but perhaps not surprising, that the economics profession and economic reporters have done their best to learn absolutely nothing about their enormous mistakes at that time. (Fortunately for them, economics is not an area where people are held accountable for the quality of their work, so this failure cost almost no one their job or even led them to miss a scheduled promotion.) The basic story of real world 2006 was that the impending disaster was not hidden. It did not require some super-sleuth to figure out what was wrong. It required access to widely available government data and knowledge of third-grade arithmetic. We had an unprecedented run-up in nationwide house prices. The national average had risen by more 70 percent since 1996, after adjusting for inflation. This followed a century in which house prices had just moved in step with inflation. And, this was a nationwide story. It was not just a few hot housing markets on the coasts, prices were soaring in Chicago, Minneapolis, and even Detroit. Furthermore, this run-up was clearly not connected with the fundamentals of the market. Unlike the last five years, nothing was going on with rents. They were just rising in step with the overall rate of inflation. Furthermore, we already were seeing record vacancy rates even before the collapse of the market. In short, we had a gigantic neon sign hanging over the housing market saying "bubble." I should also add that the bad loans fueling the bubble were hardly a secret either. The National Association of Realtors reported that more than 40 percent of first-time homebuyers put down zero or less (they borrowed to cover closing or moving costs) on their homes in 2005. And, there was widespread talk of "NINJA" loans, which stood for no income, no assets, no job.

The NYT had a very good piece pointing out that the bonuses promised by many corporations following the tax cut are often less consequential than they appear. For example, many companies highlighted their maximum bonus amount. This was often a figure (e.g. $1,000) that went to a full-time worker who had been with the company for twenty years or more. At a company like Walmart, very few of their workers would have been there for twenty years and many are part-time. This means that the typical worker would receive much less than the hyped $1,000 bonus.

However, the most remarkable aspect of the bonus game is the fact that a bonus could be tax deductible in 2017 even if it was not paid until 2018. This inexplicable (on policy grounds) quirk in the tax code gave corporate America an enormous incentive to announce bonuses at the end of last year since bonuses announced in 2017 cost much less money than bonuses or pay increases announced and paid in 2018.

If a company like Walmart or AT&T gave its workers $100 million in bonuses or pay increases in 2018 it would cost the company $79 million in after-tax profits, given the new 21 percent corporate tax rate. However, if the same $100 million bonus was announced before the end of 2017 it would only cost the company $65 million in after-tax profits since it could be deducted in a year when the tax rate was 35 percent. (These calculations assume that the companies actually pay the marginal tax rate.)

This means, in effect, that the government would have been paying these companies $14 million to announce a bonus before the end of the year. Since we all believe that companies respond to incentives, it should not be surprising that many announced bonuses before the end of 2017.

The NYT had a very good piece pointing out that the bonuses promised by many corporations following the tax cut are often less consequential than they appear. For example, many companies highlighted their maximum bonus amount. This was often a figure (e.g. $1,000) that went to a full-time worker who had been with the company for twenty years or more. At a company like Walmart, very few of their workers would have been there for twenty years and many are part-time. This means that the typical worker would receive much less than the hyped $1,000 bonus.

However, the most remarkable aspect of the bonus game is the fact that a bonus could be tax deductible in 2017 even if it was not paid until 2018. This inexplicable (on policy grounds) quirk in the tax code gave corporate America an enormous incentive to announce bonuses at the end of last year since bonuses announced in 2017 cost much less money than bonuses or pay increases announced and paid in 2018.

If a company like Walmart or AT&T gave its workers $100 million in bonuses or pay increases in 2018 it would cost the company $79 million in after-tax profits, given the new 21 percent corporate tax rate. However, if the same $100 million bonus was announced before the end of 2017 it would only cost the company $65 million in after-tax profits since it could be deducted in a year when the tax rate was 35 percent. (These calculations assume that the companies actually pay the marginal tax rate.)

This means, in effect, that the government would have been paying these companies $14 million to announce a bonus before the end of the year. Since we all believe that companies respond to incentives, it should not be surprising that many announced bonuses before the end of 2017.

The stock market tumbled by 2.0 percent on Friday. Given that the top 1.0 percent hold a grossly disproportionate share of stock wealth, this means they took a big hit. Are we more equal as a society now? Those who like to focus on wealth measures on inequality would have to say yes. And if the market continues to fall (not a prediction, but it certainly is possible that the correction will continue) then we will see a further gain on the inequality front. Suppose it falls 30 to 40 percent, bringing price-to-earnings ratios closer to historic averages. Will the country then look much different than it does today? I'm inclined to say no, at least if the distribution of income has not changed. To my view, the major story on inequality over the last four decades has been the more than doubling of the share of income that goes to the 1.0 percent, from less than 10 percent in the 1970s to slightly more than 20 percent today. The top 0.1 percent have been the biggest gainers in this picture. Wealth has not always followed the same pattern since so much of the wealth of the rich is tied up in stock. We had two big plunges in the stock market during this period, 2000 to 2002, when it fell by more than half, and again between 2007 and 2009. It's hard to see how the poor and middle class were doing any better at these troughs in wealth (2002 and 2009) than they were when wealth was at its peaks before the crashes.
The stock market tumbled by 2.0 percent on Friday. Given that the top 1.0 percent hold a grossly disproportionate share of stock wealth, this means they took a big hit. Are we more equal as a society now? Those who like to focus on wealth measures on inequality would have to say yes. And if the market continues to fall (not a prediction, but it certainly is possible that the correction will continue) then we will see a further gain on the inequality front. Suppose it falls 30 to 40 percent, bringing price-to-earnings ratios closer to historic averages. Will the country then look much different than it does today? I'm inclined to say no, at least if the distribution of income has not changed. To my view, the major story on inequality over the last four decades has been the more than doubling of the share of income that goes to the 1.0 percent, from less than 10 percent in the 1970s to slightly more than 20 percent today. The top 0.1 percent have been the biggest gainers in this picture. Wealth has not always followed the same pattern since so much of the wealth of the rich is tied up in stock. We had two big plunges in the stock market during this period, 2000 to 2002, when it fell by more than half, and again between 2007 and 2009. It's hard to see how the poor and middle class were doing any better at these troughs in wealth (2002 and 2009) than they were when wealth was at its peaks before the crashes.

Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau (CFPB), effectively decided to incentivize ripoff schemes by taking away the enforcement powers of the CFPB division that is charged with blocking such schemes. As fans of free markets everywhere know, if it possible to make money by designing deceptive financial products that rip off low- and moderate-income people, profit-maximizing companies will do it.

Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau (CFPB), effectively decided to incentivize ripoff schemes by taking away the enforcement powers of the CFPB division that is charged with blocking such schemes. As fans of free markets everywhere know, if it possible to make money by designing deceptive financial products that rip off low- and moderate-income people, profit-maximizing companies will do it.

As I have pointed out repeatedly, the Republicans story about how their corporate tax cut will benefit everyone hinges on the idea that it will kick off a huge round of new investment. In their telling, investment is hugely responsive to tax rates. This means their tax cut will spark an investment boom. The higher levels of investment will increase productivity, which will eventually lead to higher wages.

We got our first weak test of this story with the Commerce Department’s release of advanced data on capital goods orders for December. As I pointed out, these are orders, not deliveries, so fast-moving companies should have been able to get some in before the end of the month.

Even though the tax bill was not signed until almost the end of the year, its passage was virtually certain by the middle of the month. Furthermore, the outlines had been known since Labor Day, so unless a corporation’s management was sleeping on the job, they had four months to plan their response.

As it turned the initial release showed a modest 0.1 percent drop in new orders for capital goods. Today the Commerce Department released its full report on manufacturing orders for January, with more complete data. This showed a 0.5 percent drop in orders for non-defense capital goods (0.4 percent, excluding aircraft).

Perhaps we will see a different story in future months, but so far it doesn’t look like corporate America is feeling inspired to undertake an investment just yet.

As I have pointed out repeatedly, the Republicans story about how their corporate tax cut will benefit everyone hinges on the idea that it will kick off a huge round of new investment. In their telling, investment is hugely responsive to tax rates. This means their tax cut will spark an investment boom. The higher levels of investment will increase productivity, which will eventually lead to higher wages.

We got our first weak test of this story with the Commerce Department’s release of advanced data on capital goods orders for December. As I pointed out, these are orders, not deliveries, so fast-moving companies should have been able to get some in before the end of the month.

Even though the tax bill was not signed until almost the end of the year, its passage was virtually certain by the middle of the month. Furthermore, the outlines had been known since Labor Day, so unless a corporation’s management was sleeping on the job, they had four months to plan their response.

As it turned the initial release showed a modest 0.1 percent drop in new orders for capital goods. Today the Commerce Department released its full report on manufacturing orders for January, with more complete data. This showed a 0.5 percent drop in orders for non-defense capital goods (0.4 percent, excluding aircraft).

Perhaps we will see a different story in future months, but so far it doesn’t look like corporate America is feeling inspired to undertake an investment just yet.

The Commerce Department gave us more news today indicating that manufacturing isn’t bouncing back like Donald Trump promised. The Commerce Department released its data on construction spending for December.

It turns out that construction of manufacturing plants is down by 11.7 percent from its December 2016 level. It was running at $60,595 million annual pace in December of 2017, down from a $68,624 pace in December of 2016. This probably shouldn’t be a surprise given the $50 billion (0.26 percent of GDP) increase in the size of the trade deficit, but it does go against President Trump’s promises about bringing back manufacturing.

Another noteworthy change was a drop in construction spending on power plants of 10.8 percent. Also, spending on religious facilities fell by 8.3 percent.

The Commerce Department gave us more news today indicating that manufacturing isn’t bouncing back like Donald Trump promised. The Commerce Department released its data on construction spending for December.

It turns out that construction of manufacturing plants is down by 11.7 percent from its December 2016 level. It was running at $60,595 million annual pace in December of 2017, down from a $68,624 pace in December of 2016. This probably shouldn’t be a surprise given the $50 billion (0.26 percent of GDP) increase in the size of the trade deficit, but it does go against President Trump’s promises about bringing back manufacturing.

Another noteworthy change was a drop in construction spending on power plants of 10.8 percent. Also, spending on religious facilities fell by 8.3 percent.

An NYT article noted that people are more likely to work at home now than in the early part of the last decade and that this is reducing energy usage. Near the end, the piece included this paragraph:

“In addition, between 2003 and 2012 the number of part-time workers in the United States almost doubled, from 4.6 million part time workers to 8.3 million, many of whom are involuntarily part-time workers. “The number of people who are spending time at work is going to go down because you’re sort of swapping out a full-time worker for a part-time worker,” said Dr. Simon. That may be good for energy use, but not necessarily so great for the employee’s wallet.”

The problem is choosing 2012 as an endpoint. The labor market has tightened considerably since 2012. The percentage of workers who report working part-time because they could not find full-time jobs is the same now (3.5 percent) as it was in 2003.

Strangely, the piece ignores the much larger number of workers who choose to work part-time. (The workers say they choose to work part-time, that’s how we know.) In the most recent data, this number stood at 21.1 million workers or 13.9 percent of the labor force.

This is also roughly the same as the share in 2003, but the endpoints conceal an important pattern. Voluntary part-time had dropped considerably until 2014 when the main provisions of the Affordable Care Act. The number of people choosing to work part-time rose from 18.9 million in 2013 to 20.9 million last year, an increase of 10.6 percent. This is presumably due to the fact that people were now able to get insurance without working at full-time jobs.

 

Addendum

I thought I would add the link to our paper showing that the rise in voluntary part-time is almost entirely among young parents, the people who we would expect health care insurance to be most important to. Also, just to give numbers here, taking averages for the last three months (single month data is erratic) the number of people reporting that they are working part-time for non-economic reasons rose by 291,000 from the last three months of 2011 to 2012, then fell by 38,000 the following year. In the first year the ACA was fully in effect it rose by 1,043,000.

 

An NYT article noted that people are more likely to work at home now than in the early part of the last decade and that this is reducing energy usage. Near the end, the piece included this paragraph:

“In addition, between 2003 and 2012 the number of part-time workers in the United States almost doubled, from 4.6 million part time workers to 8.3 million, many of whom are involuntarily part-time workers. “The number of people who are spending time at work is going to go down because you’re sort of swapping out a full-time worker for a part-time worker,” said Dr. Simon. That may be good for energy use, but not necessarily so great for the employee’s wallet.”

The problem is choosing 2012 as an endpoint. The labor market has tightened considerably since 2012. The percentage of workers who report working part-time because they could not find full-time jobs is the same now (3.5 percent) as it was in 2003.

Strangely, the piece ignores the much larger number of workers who choose to work part-time. (The workers say they choose to work part-time, that’s how we know.) In the most recent data, this number stood at 21.1 million workers or 13.9 percent of the labor force.

This is also roughly the same as the share in 2003, but the endpoints conceal an important pattern. Voluntary part-time had dropped considerably until 2014 when the main provisions of the Affordable Care Act. The number of people choosing to work part-time rose from 18.9 million in 2013 to 20.9 million last year, an increase of 10.6 percent. This is presumably due to the fact that people were now able to get insurance without working at full-time jobs.

 

Addendum

I thought I would add the link to our paper showing that the rise in voluntary part-time is almost entirely among young parents, the people who we would expect health care insurance to be most important to. Also, just to give numbers here, taking averages for the last three months (single month data is erratic) the number of people reporting that they are working part-time for non-economic reasons rose by 291,000 from the last three months of 2011 to 2012, then fell by 38,000 the following year. In the first year the ACA was fully in effect it rose by 1,043,000.

 

Some folks may have been impressed with Donald Trump’s plan for $1.5 trillion in infrastructure spending over the next decade. This is both because they have little sense of the size of the economy and also because they don’t realize that he is not proposing for most of this spending to come from the federal government.

While he didn’t lay out a specific plan, past documents indicate that he wants the federal government to increase spending by $200 billion, with the rest coming from state and local governments, as well as private investors. Since GDP is projected to be almost $240 trillion over the decade, Trump is proposing to spend an amount equal to a bit more than 0.08 percent of projected GDP.

Some folks may have been impressed with Donald Trump’s plan for $1.5 trillion in infrastructure spending over the next decade. This is both because they have little sense of the size of the economy and also because they don’t realize that he is not proposing for most of this spending to come from the federal government.

While he didn’t lay out a specific plan, past documents indicate that he wants the federal government to increase spending by $200 billion, with the rest coming from state and local governments, as well as private investors. Since GDP is projected to be almost $240 trillion over the decade, Trump is proposing to spend an amount equal to a bit more than 0.08 percent of projected GDP.

An important provision of the new federal tax code was the capping of the deduction for state and local taxes at $10,000. This was an explicit hit at states like New York and California, which have relatively high tax rates in order to provide relatively high-quality services in areas like education and health care. These states also tend to vote Democratic in national elections. One way that these states can partially get around this cap is by replacing a portion of the state income tax with an employer-side payroll tax. This can be in such a way that almost no one would end up paying more in state taxes, but they would effectively be able to still deduct their taxes from their federal income taxes. The way a payroll tax works is that an employer pays it on the worker's wage. If a worker gets paid $50,000 a year and we impose a 5 percent employer-side payroll tax, then the employer would pay $2,500 on this worker's pay. Economists generally believe that employer-side payroll taxes come out of wages. Employers don't care whether they have to pay the money to the worker or to the government, they will pay the same amount in either case. (To make the transition as easy as possible, it should be done in two or three steps, which would mean that workers would more likely be foregoing pay increases rather than looking at actual cuts in pay.) In this case, the new payroll tax would lead to a reduction in this worker's pay of $2,500 to $47,500. But if the worker had been paying 5 percent of their wage to the state income taxes, they are in the exact same position as they had been in previously. They have $47,500 income after the money paid to the state in taxes. The big difference comes when they pay their federal income tax. If they getting paid $50,000 and are unable to deduct their state taxes from their income, they will pay federal taxes on the full $50,000. However, with the employer side payroll tax, they will only pay income tax on the $47,500 they get paid by their employer. This will save them from paying income tax on $2,500 and also Social Security and Medicare taxes on this money.
An important provision of the new federal tax code was the capping of the deduction for state and local taxes at $10,000. This was an explicit hit at states like New York and California, which have relatively high tax rates in order to provide relatively high-quality services in areas like education and health care. These states also tend to vote Democratic in national elections. One way that these states can partially get around this cap is by replacing a portion of the state income tax with an employer-side payroll tax. This can be in such a way that almost no one would end up paying more in state taxes, but they would effectively be able to still deduct their taxes from their federal income taxes. The way a payroll tax works is that an employer pays it on the worker's wage. If a worker gets paid $50,000 a year and we impose a 5 percent employer-side payroll tax, then the employer would pay $2,500 on this worker's pay. Economists generally believe that employer-side payroll taxes come out of wages. Employers don't care whether they have to pay the money to the worker or to the government, they will pay the same amount in either case. (To make the transition as easy as possible, it should be done in two or three steps, which would mean that workers would more likely be foregoing pay increases rather than looking at actual cuts in pay.) In this case, the new payroll tax would lead to a reduction in this worker's pay of $2,500 to $47,500. But if the worker had been paying 5 percent of their wage to the state income taxes, they are in the exact same position as they had been in previously. They have $47,500 income after the money paid to the state in taxes. The big difference comes when they pay their federal income tax. If they getting paid $50,000 and are unable to deduct their state taxes from their income, they will pay federal taxes on the full $50,000. However, with the employer side payroll tax, they will only pay income tax on the $47,500 they get paid by their employer. This will save them from paying income tax on $2,500 and also Social Security and Medicare taxes on this money.

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