Are 401(k)s Cheaper than Defined Benefit Pensions for Employers?

October 29, 2017

29 Octubre 2017

An NYT article discussing Republican plans to sharply limit the tax deduction for 401(k)s noted how these retirement accounts have largely replaced traditional defined-benefit pensions and said that they were cheaper for employers. This is not entirely clear. In principle, a payment for a retirement benefit is supposed to be a substitute for wages. If a worker gets $2,000 a year paid into a defined-benefit pension or a 401(k) plan, this is supposed to be offset by roughly a $2,000 reduction in wages. In the simple case, the retirement benefit is not costing the employer anything, since the worker is seeing a reduction in pay corresponding to the value of the benefit. (This is the same story economists tell about employer-provided health care insurance.) As a practical matter, the offset is almost certainly not one to one. Many workers will view the contribution for retirement as worth more than the same amount of dollars in their paycheck while younger workers who are far from retirement might view the contribution as being worth less than the same amount of dollars in their paycheck.

• WorkersSector del trabajo

Inventories and Robots: Missing Story in Third Quarter GDP

By CEPRCEPR

October 28, 2017

28 Octubre 2017

It seems the folks reporting on the third quarter GDP forgot to do their homework. The articles touted the 3.0 percent growth figure, which was somewhat stronger than generally expected. However, much of the basis for this stronger than expected growth was a pick-up in inventory accumulations that added 0.73 percentage points to the growth rate in the quarter. The growth in final demand was just 2.3 percent.

It is common to look at final demand growth, which excludes inventory changes, both because the inventory numbers are highly erratic and also are not sustainable. No one thinks that the pace of inventory accumulation will continue to increase at anything like the pace in the third quarter. This point is important since if we are trying to determine the underlying growth path of the economy, it is far more likely to reflect the rate of growth of final demand than a GDP number that is inflated (or deflated) by big changes in inventories.

One potentially very important item that seems to have been missed in the coverage of third quarter GDP was the pick-up in productivity growth implied by the GDP data. Output in the non-farm business sector rose at a 3.8 percent rate in the quarter. With hours worked in the private sector increasing by less than 1.0 percent, this likely means a rate of productivity growth close to 3.0 percent. This would be a huge uptick from the 0.7 percent rate we have seen the last five years.

Productivity data is highly erratic so a single quarter’s data should always be viewed cautiously. But an uptick in productivity growth has to start somewhere and if this is the first sign, it is a really huge deal. More rapid trend productivity growth would be far more important than whether the GDP growth rate in the quarter was 3.0 percent or 2.0 percent.

It seems the folks reporting on the third quarter GDP forgot to do their homework. The articles touted the 3.0 percent growth figure, which was somewhat stronger than generally expected. However, much of the basis for this stronger than expected growth was a pick-up in inventory accumulations that added 0.73 percentage points to the growth rate in the quarter. The growth in final demand was just 2.3 percent.

It is common to look at final demand growth, which excludes inventory changes, both because the inventory numbers are highly erratic and also are not sustainable. No one thinks that the pace of inventory accumulation will continue to increase at anything like the pace in the third quarter. This point is important since if we are trying to determine the underlying growth path of the economy, it is far more likely to reflect the rate of growth of final demand than a GDP number that is inflated (or deflated) by big changes in inventories.

One potentially very important item that seems to have been missed in the coverage of third quarter GDP was the pick-up in productivity growth implied by the GDP data. Output in the non-farm business sector rose at a 3.8 percent rate in the quarter. With hours worked in the private sector increasing by less than 1.0 percent, this likely means a rate of productivity growth close to 3.0 percent. This would be a huge uptick from the 0.7 percent rate we have seen the last five years.

Productivity data is highly erratic so a single quarter’s data should always be viewed cautiously. But an uptick in productivity growth has to start somewhere and if this is the first sign, it is a really huge deal. More rapid trend productivity growth would be far more important than whether the GDP growth rate in the quarter was 3.0 percent or 2.0 percent.

It's Not Debt That Keeps the U.S. from Investing in Education and Infrastructure

By CEPRCEPR

October 27, 2017

27 Octubre 2017

Fareed Zakaria pushes the pet myth of the arithmetically challenged elite (yes, that is probably redundant) that the federal debt is limiting spending for many important ends in his column this morning.

“It is politically paralyzed, unable to make major decisions. Amidst a ballooning debt, its investments in education, infrastructure, and science and technology are seriously lacking.”

Arithmetic fans would evaluate this assertion by looking for evidence that the debt is causing problems such as high interest rates and inflation and creating a large debt service burden.

The opposite is the case, with long-term interest rates still under 2.5 percent compared to more than 5.0 percent in the surplus years of the late 1990s. Inflation remains under the Fed’s 2.0 percent target and has actually been trending downward this year. And, debt service is less than 1.0 percent of GDP (net of interest rebated by the Fed), compared to over 3.0 percent in the 1990s.

In short, there is no evidence that debt is limiting our ability to spend more in these and other areas. There is a strong case that fears over the debt, raised by folks like Zakaria, are limiting our ability to invest for the future.

Fareed Zakaria pushes the pet myth of the arithmetically challenged elite (yes, that is probably redundant) that the federal debt is limiting spending for many important ends in his column this morning.

“It is politically paralyzed, unable to make major decisions. Amidst a ballooning debt, its investments in education, infrastructure, and science and technology are seriously lacking.”

Arithmetic fans would evaluate this assertion by looking for evidence that the debt is causing problems such as high interest rates and inflation and creating a large debt service burden.

The opposite is the case, with long-term interest rates still under 2.5 percent compared to more than 5.0 percent in the surplus years of the late 1990s. Inflation remains under the Fed’s 2.0 percent target and has actually been trending downward this year. And, debt service is less than 1.0 percent of GDP (net of interest rebated by the Fed), compared to over 3.0 percent in the 1990s.

In short, there is no evidence that debt is limiting our ability to spend more in these and other areas. There is a strong case that fears over the debt, raised by folks like Zakaria, are limiting our ability to invest for the future.

Roger Altman Is Confused: Policy Has Led to Inequality, not the Natural Workings of the Economy

By CEPRCEPR

October 27, 2017

27 Octubre 2017

Roger Altman, an investment banker and deputy treasury secretary under President Clinton, warned about the effect of growing inequality on national politics in a Washington Post column. He implies that this increase in inequality has been a natural outcome of the market:

“A series of powerful, entrenched factors have brought the American Dream to an end. Economists generally cite globalization, accelerating technology, increased income inequality and the decline of unions. What’s noteworthy is that these are long-term pressures that show no signs of abating.”

The “powerful entrenched factors” are all the result of deliberate policy choices that Mr. Altman apparently doesn’t want to see altered. In the case of globalization, we have made a deliberate decision to put our manufacturing workers in direct competition with low-paid workers in the developing world, while largely protecting our most highly paid workers like doctors and dentists. This has the predicted and actual effect of shifting income upward.

“Accelerating technology” (actually it has been decelerating as productivity growth has slowed to a crawl in the last decade) does not lead to upward redistribution; laws determining ownership of technology, such as patent and copyright monopolies redistribute income upward. There is a huge amount of money at stake with these government-granted monopolies. In the case of prescription drugs alone, patents and related protections add close to $370 billion a year (almost $3,000 per household) to what we pay for drugs in the United States. Bill Gates, the world’s richest person, would probably still be working for a living without patent and copyright monopolies for Microsoft software.

And, the drop in unionization rates in the United States has also been the result of deliberate policy to make it more difficult to organize unions and to weaken the unions that do exist. Canada, which has a very similar culture and economy, has seen no comparable decline in unionization rates over the last four decades.

Someone seriously interested in reversing the upward redistribution of income would look to reverse these policies, but Altman seems to want us to believe that they are unalterable and instead focus on band-aid solutions. But, what do you expect from Jeff Bezos’ Washington Post? (Yes, this is the point of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

Roger Altman, an investment banker and deputy treasury secretary under President Clinton, warned about the effect of growing inequality on national politics in a Washington Post column. He implies that this increase in inequality has been a natural outcome of the market:

“A series of powerful, entrenched factors have brought the American Dream to an end. Economists generally cite globalization, accelerating technology, increased income inequality and the decline of unions. What’s noteworthy is that these are long-term pressures that show no signs of abating.”

The “powerful entrenched factors” are all the result of deliberate policy choices that Mr. Altman apparently doesn’t want to see altered. In the case of globalization, we have made a deliberate decision to put our manufacturing workers in direct competition with low-paid workers in the developing world, while largely protecting our most highly paid workers like doctors and dentists. This has the predicted and actual effect of shifting income upward.

“Accelerating technology” (actually it has been decelerating as productivity growth has slowed to a crawl in the last decade) does not lead to upward redistribution; laws determining ownership of technology, such as patent and copyright monopolies redistribute income upward. There is a huge amount of money at stake with these government-granted monopolies. In the case of prescription drugs alone, patents and related protections add close to $370 billion a year (almost $3,000 per household) to what we pay for drugs in the United States. Bill Gates, the world’s richest person, would probably still be working for a living without patent and copyright monopolies for Microsoft software.

And, the drop in unionization rates in the United States has also been the result of deliberate policy to make it more difficult to organize unions and to weaken the unions that do exist. Canada, which has a very similar culture and economy, has seen no comparable decline in unionization rates over the last four decades.

Someone seriously interested in reversing the upward redistribution of income would look to reverse these policies, but Altman seems to want us to believe that they are unalterable and instead focus on band-aid solutions. But, what do you expect from Jeff Bezos’ Washington Post? (Yes, this is the point of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

Response to Doctors Unhappy Over the Idea They Get Paid Too Much

By CEPRCEPR

October 27, 2017

27 Octubre 2017

Earlier this week I had a column in Politico pointing out that doctors in the United States get paid roughly twice as much as their counterparts in other wealthy countries and that we could save almost $100 billion a year ($700 per family) if we got doctors pay in line with their pay elsewhere by opening up the market. This made many folks (most identifying themselves as doctors) angry, as they let me know with e-mails, tweets, facebook comments and various other outlets. My response to these criticisms is below. Folks also may be interested in picking up the discussion with a segment next Monday (10-30) on Wisconsin Public Radio at 7:00 A.M. EDT. Response to Critics The criticisms of my piece took a variety of directions but the vast majority noted the large debt that many doctors incur in med school. This is a serious issue, but I would raise a couple of points here. First, a debt burden of $250,000 comes to less than $9,000 a year over a 30-year career. That’s less than 4 percent of the average doctors’ pay. Even if you add in one-third for interest costs, it is still less than 5 percent of the average doctors’ pay and only around 10 percent of the difference between the average doctors’ pay in the U.S. and their pay in other wealthy countries. I would agree that we should alter the way med school is financed and instead have it covered by the government, as is largely the story elsewhere. (The same applies to college.) However, it is interesting to note how when we talk about opening up the market for doctors to more international and domestic competition we get this huge outcry over the fate of doctors with high debt. I don’t recall similar outcries about the risk to the continued employment and pensions and retiree health care benefits of autoworkers and steelworkers when these sectors were opened to international competition. Nor do we hear these complaints expressed as vocally in reference to efforts to restrict Amazon and other internet retailers when it means the loss of hundreds of thousands or even millions of jobs in traditional retail stores. Many complained that I had no evidence for what I argued in the piece. The links in the piece provide pretty solid evidence that U.S. doctors are paid substantially more than their counterparts in other wealthy countries. Here’s another source that readers may find useful.

I Am Out of Here

By CEPRCEPR

October 19, 2017

19 Octubre 2017

I’m off on vacation. I’ll be back October 27. So remember, don’t believe anything you read in the papers until then.

• Globalization and TradeGlobalización y comercio

Thomas Friedman Pushes the TPP Joke

By CEPRCEPR

October 18, 2017

18 Octubre 2017

When it became impossible to sell the Trans-Pacific Partnership (TPP) on its economic merits, proponents of the deal began to argue for it as a way to contain China's power in the region. Thomas Friedman picks up this line and runs with it in his latest column. "Trump came into office vowing to end the trade imbalance with China — a worthy goal. And what was his first move? To tear up the Trans-Pacific Partnership, the trade deal that would have put the U.S. at the helm of a 12-nation trading bloc built around U.S. interests and values, potentially eliminating some 18,000 tariffs on U.S. goods and controlling 40 percent of global G.D.P. And China was not in the group. That’s called leverage."Trump just ripped up the TPP to “satisfy the base” and is now left begging China for trade crumbs, with little leverage. And because he needs China’s help in dealing with North Korea, he has even less leverage on trade." Let's see, we're eliminating 18,000 tariffs. That sounds really impressive, except the vast majority of these tariffs were near zero anyhow. Admittedly, a zero tariff is more supportive of trade than a tariff of 1.0 percent, but it's not exactly going to lead to a flood of exports. It has roughly the same impact as a 1.0 percent decline in the value of the dollar, the sort of change in currency values that we often see in a single day. The touting of the number of tariffs, rather than the impact on trade is the sort of cheap trick propagandists resort to when they can't make a serious argument. It's worth also noting that the 18,000 tariff figure includes many altogether meaningless tariffs, like Brunei's tariffs on ski boots made in the United States and tariffs on items that are already banned from international trade, like shark fins.

Democrats Used to Be the Party of Slavery: Doug Schoen Pushes the Case for Keeping the Democratic Party Allied with Wall Street

By CEPRCEPR

October 18, 2017

18 Octubre 2017

Doug Schoen, a former consultant to Bill Clinton, argued the case that the Democrats should keep their ties to Wall Street in a NYT column this morning. While he does advance his argument with some red-baiting and bad logic, he uses tradition as a starting point. "Many of the most prominent voices in the Democratic Party, led by Bernie Sanders, are advocating wealth redistribution through higher taxes and Medicare for all, and demonizing banks and Wall Street."Memories in politics are short, but those policies are vastly different from the program of the party’s traditional center-left coalition. Under Bill Clinton, that coalition balanced the budget, acknowledged the limits of government and protected the essential programs that make up the social safety net."President Clinton did this, in part, by moving the party away from a reflexive anti-Wall Street posture. It’s not popular to say so today, but there are still compelling reasons Democrats should strengthen ties to Wall Street." Of course, memories are not actually short, contrary to what Schoen claims. Many supporters of harsher policies directed against the financial sector remember the stock bubble whose crash led to what was at the time, the longest period without job growth since the Great Depression. They also remember a financial sector that continued to run wild as the housing bubble inflated. And they remember the Great Recession that followed the collapse of that bubble. And, they remember the government's bailout policies that ensured that the financial industry-types would end up on their feet and not in jail. But Schoen does go beyond appealing to tradition.

• Globalization and TradeGlobalización y comercioLatin America and the CaribbeanAmérica Latina y el CaribeMexicoMexicoWorldEl Mundo

Study Finds that Reversing NAFTA Would Lead to Gains In Productivity for All Three Countries

By CEPRCEPR

October 18, 2017

18 Octubre 2017

Trade deals are usually thought to increase productivity by allowing countries to benefit from comparative advantage, where each country concentrates on the areas where it is relatively more efficient. For this reason, it is striking that a study on the impact of reversing NAFTA that was cited in an NYT article found that the United States, Canada, and Mexico would all see an increase in productivity if NAFTA was reversed.

While both the article and the study highlighted the number of jobs that would be lost if NAFTA were repealed, the study actually projects that GDP would fall by a considerably smaller percentage for each of the three countries. In the case of the United States, the study projects a loss of 255,000 jobs or 0.17 percent of total employment. However, GDP is projected to fall by just 0.08 percent. This implies a gain in productivity of 0.09 percentage points.

Canada is projected to lose 125,000 jobs or 0.69 percent of total employment. However, its GDP is only projected to drop by 0.48 percent, implying a productivity gain of approximately 0.21 percent. Mexico turns out to be the big winner, with its employment falling by 951,000 or 1.82 percent, while GDP only drops by 0.87 percent, implying a productivity gain of approximately 0.95 percent.

This gain in productivity is presumably associated with higher wages, since we expect workers to be paid in accordance with their productivity. In principle, governments could tax away a portion of these wage gains and redistribute them to the unemployed to ensure that everyone gains, making the reversal of NAFTA a win-win for all involved.

No, I don’t take these projections seriously, but the NYT apparently wants us to. So, if we buy what the NYT is selling, we should believe that we could get a modest boost to productivity if we just did away with NAFTA altogether.

Trade deals are usually thought to increase productivity by allowing countries to benefit from comparative advantage, where each country concentrates on the areas where it is relatively more efficient. For this reason, it is striking that a study on the impact of reversing NAFTA that was cited in an NYT article found that the United States, Canada, and Mexico would all see an increase in productivity if NAFTA was reversed.

While both the article and the study highlighted the number of jobs that would be lost if NAFTA were repealed, the study actually projects that GDP would fall by a considerably smaller percentage for each of the three countries. In the case of the United States, the study projects a loss of 255,000 jobs or 0.17 percent of total employment. However, GDP is projected to fall by just 0.08 percent. This implies a gain in productivity of 0.09 percentage points.

Canada is projected to lose 125,000 jobs or 0.69 percent of total employment. However, its GDP is only projected to drop by 0.48 percent, implying a productivity gain of approximately 0.21 percent. Mexico turns out to be the big winner, with its employment falling by 951,000 or 1.82 percent, while GDP only drops by 0.87 percent, implying a productivity gain of approximately 0.95 percent.

This gain in productivity is presumably associated with higher wages, since we expect workers to be paid in accordance with their productivity. In principle, governments could tax away a portion of these wage gains and redistribute them to the unemployed to ensure that everyone gains, making the reversal of NAFTA a win-win for all involved.

No, I don’t take these projections seriously, but the NYT apparently wants us to. So, if we buy what the NYT is selling, we should believe that we could get a modest boost to productivity if we just did away with NAFTA altogether.

David Brooks Goes Into Full Name Calling Mode

By CEPRCEPR

October 17, 2017

17 Octubre 2017

No regular reader of the NYT expects great insights from David Brooks, but the sort of name-calling in today's column is the sort of thing one expects from a grade schooler. It turns out that if you don't agree with Brooks' view of the world you are a "downswinger," you have gone from an "optimistic, progress-embracing view toward a pessimistic, system-doubting view." Well hey, who wants to be a downswinging pessimist, as opposed to someone who embraces progress? How about we instead divide the world between those who live in reality and work for a living and those who earn a good salary lying in NYT columns. David Brooks begins his piece by telling us these are the best of times, especially for those of us who live in the United States. Here's his second paragraph: "In 1980 the U.S. had a slight edge in G.D.P. per capita over Germany, Japan, France and the U.K. But the U.S. has grown much faster than the other major economies over the past 37 years, so that now it produces about $54,000 of output per capita compared with about $39,000 for Japan and France." Hmmm, a slight edge in 1980? Here are the numbers according to the International Monetary Fund.