Lower tariff barriers generally benefit consumers in the form of lower prices. If they don’t increase overall unemployment, they will lead to gains for the economy as a whole. However, there will almost always be specific industries that are losers. This is why it is a bit strange to read in a NYT article on a prospective trade deal between the European Union (EU) and Japan:
“Among other things, the pact would eliminate a 10 percent duty that the E.U. imposes on Japanese car imports, while removing obstacles that European automakers face in Japan. That would be particularly significant for luxury carmakers like BMW, Mercedes and Toyota’s Lexus brand, said Ferdinand Dudenhöffer, a professor at the University of Duisburg-Essen in Germany who focuses on the auto industry.
“Those vehicles suffer the most from high import duties. ‘It could be a chance for the high-value, premium vehicles,’ Mr. Dudenhöffer said. American brands like Cadillac or Lincoln ‘won’t have the same advantage and will be in a worse position,’ he said.”
The existing tariffs give the sellers in these markets the opportunity to charge a premium over the tariff-free price. This premium will be lost when the tariffs go away. It is possible that either EU car makers or Japanese car makers will gain enough market share that it will offset the loss of this premium, but it is highly unlikely that both would gain enough market share to offset the loss of the premium. The lower price will undoubtedly lead to some increase in sales and there is the possibility of gaining share at the expense of U.S. car makers and other third country sellers, but these gains would have to be extraordinary to make both sets of manufacturers as winners.
To make the arithmetic simple, suppose a 10 percent tariff is passed on fully to higher prices. Suppose the profit would be 5 percent of the sales price in the absence of the tariff. This means that the tariff makes the profit 15 percent of the sales price. (I’m rounding here.) The loss of tariff protection in this story would then cause the per car profit to fall by two-thirds, meaning that unless sales triple, the company ends up a net loser.
The real world story is more complicated. The tariff is not completely passed on in higher prices and some of the benefits of the higher prices are shared with workers in the form of higher wages. But unless a company in a protected industry has a very large gain in market share, it is unlikely to be a benefit from ending the protection.
Lower tariff barriers generally benefit consumers in the form of lower prices. If they don’t increase overall unemployment, they will lead to gains for the economy as a whole. However, there will almost always be specific industries that are losers. This is why it is a bit strange to read in a NYT article on a prospective trade deal between the European Union (EU) and Japan:
“Among other things, the pact would eliminate a 10 percent duty that the E.U. imposes on Japanese car imports, while removing obstacles that European automakers face in Japan. That would be particularly significant for luxury carmakers like BMW, Mercedes and Toyota’s Lexus brand, said Ferdinand Dudenhöffer, a professor at the University of Duisburg-Essen in Germany who focuses on the auto industry.
“Those vehicles suffer the most from high import duties. ‘It could be a chance for the high-value, premium vehicles,’ Mr. Dudenhöffer said. American brands like Cadillac or Lincoln ‘won’t have the same advantage and will be in a worse position,’ he said.”
The existing tariffs give the sellers in these markets the opportunity to charge a premium over the tariff-free price. This premium will be lost when the tariffs go away. It is possible that either EU car makers or Japanese car makers will gain enough market share that it will offset the loss of this premium, but it is highly unlikely that both would gain enough market share to offset the loss of the premium. The lower price will undoubtedly lead to some increase in sales and there is the possibility of gaining share at the expense of U.S. car makers and other third country sellers, but these gains would have to be extraordinary to make both sets of manufacturers as winners.
To make the arithmetic simple, suppose a 10 percent tariff is passed on fully to higher prices. Suppose the profit would be 5 percent of the sales price in the absence of the tariff. This means that the tariff makes the profit 15 percent of the sales price. (I’m rounding here.) The loss of tariff protection in this story would then cause the per car profit to fall by two-thirds, meaning that unless sales triple, the company ends up a net loser.
The real world story is more complicated. The tariff is not completely passed on in higher prices and some of the benefits of the higher prices are shared with workers in the form of higher wages. But unless a company in a protected industry has a very large gain in market share, it is unlikely to be a benefit from ending the protection.
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Dentists are apparently among the group of workers who lack the skills necessary to compete in the modern economy, who then turn to the government to protect their jobs and wages. This is in effect the story told in this Washington Post news article about the power of the American Dental Association (ADA).
The piece focuses on the ADA’s efforts to block other professionals from doing work that is now done by dentists. While the piece doesn’t mention this fact, the ADA also blocks foreign-trained dentists from practicing in the United States. Dentists cannot practice in the United States unless they have a degree from a U.S. dental school. (Since 2011, graduates of Canadian dental schools have also been allowed to practice here.)
As a result of this protectionism, the pay of dentists averages $200,000 a year, roughly twice as much as their pay in other wealthy countries. This costs the country $20 billion a year (roughly equal to the TANF budget) in higher dental expenses.
It’s striking that the protectionism for dentists gets so little attention relative to much less costly forms of protectionism, like tariffs for steel, cars, or other items. Perhaps it has something to do with the people reporting on the topic identifying with the beneficiaries. I discuss this in chapter 7 of Rigged: How Globalization and the Rules of the Modern Economy Have Been Structured to Make the Rich Richer (it’s free).
Dentists are apparently among the group of workers who lack the skills necessary to compete in the modern economy, who then turn to the government to protect their jobs and wages. This is in effect the story told in this Washington Post news article about the power of the American Dental Association (ADA).
The piece focuses on the ADA’s efforts to block other professionals from doing work that is now done by dentists. While the piece doesn’t mention this fact, the ADA also blocks foreign-trained dentists from practicing in the United States. Dentists cannot practice in the United States unless they have a degree from a U.S. dental school. (Since 2011, graduates of Canadian dental schools have also been allowed to practice here.)
As a result of this protectionism, the pay of dentists averages $200,000 a year, roughly twice as much as their pay in other wealthy countries. This costs the country $20 billion a year (roughly equal to the TANF budget) in higher dental expenses.
It’s striking that the protectionism for dentists gets so little attention relative to much less costly forms of protectionism, like tariffs for steel, cars, or other items. Perhaps it has something to do with the people reporting on the topic identifying with the beneficiaries. I discuss this in chapter 7 of Rigged: How Globalization and the Rules of the Modern Economy Have Been Structured to Make the Rich Richer (it’s free).
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That’s the question millions are asking after reading an NYT article on the state of the U.S. aluminum industry. The article notes that an increasing share of aluminum is imported, mostly from Iceland and other countries with low-cost electricity. (The industry uses huge amounts of electricity.) However, it also points out that China is getting a growing share of the market and the industry claims that the Chinese firms are subsidized by the government. The industry and steelworkers union are arguing for offsetting tariffs.
The piece then presents a comment from an executive at the Molson Coors Brewing:
“If there are duties on aluminum coming to this country, it will obviously get passed on to us and the customer … Our prices will go up.”
The piece doesn’t give any sense of how much beer prices to consumers would rise from the tariffs being considered. While it would take a bit of homework to calculate the prospective increase from a tariff, suppose that tariffs on Chinese aluminum raised the price of aluminum by 10 percent. This is almost certainly too high a figure, since Chinese aluminum only accounts for 5 percent of U.S. consumption, according to the article.
Suppose that the cost of the aluminum accounts for 10 percent of the price of a can of beer in the store. This is also almost certainly far too high since the current cost of aluminum is less than a dollar a pound. If you can get twenty cans out of a pound of aluminum that would make the cost per can less than five cents.
In this scenario, tariffs would raise the price of a can of beer by 1.0 percent. It’s a safe bet that the beer drinking public would rather not pay 1.0 percent more for their beer, but most would probably not be terrified by this prospect.
That’s the question millions are asking after reading an NYT article on the state of the U.S. aluminum industry. The article notes that an increasing share of aluminum is imported, mostly from Iceland and other countries with low-cost electricity. (The industry uses huge amounts of electricity.) However, it also points out that China is getting a growing share of the market and the industry claims that the Chinese firms are subsidized by the government. The industry and steelworkers union are arguing for offsetting tariffs.
The piece then presents a comment from an executive at the Molson Coors Brewing:
“If there are duties on aluminum coming to this country, it will obviously get passed on to us and the customer … Our prices will go up.”
The piece doesn’t give any sense of how much beer prices to consumers would rise from the tariffs being considered. While it would take a bit of homework to calculate the prospective increase from a tariff, suppose that tariffs on Chinese aluminum raised the price of aluminum by 10 percent. This is almost certainly too high a figure, since Chinese aluminum only accounts for 5 percent of U.S. consumption, according to the article.
Suppose that the cost of the aluminum accounts for 10 percent of the price of a can of beer in the store. This is also almost certainly far too high since the current cost of aluminum is less than a dollar a pound. If you can get twenty cans out of a pound of aluminum that would make the cost per can less than five cents.
In this scenario, tariffs would raise the price of a can of beer by 1.0 percent. It’s a safe bet that the beer drinking public would rather not pay 1.0 percent more for their beer, but most would probably not be terrified by this prospect.
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In her column on “Five Myths About Health Insurance,” health economics professor Alexis Pozen pushes a common myth. As part of myth number five, Pozen tells readers;
“Although firms may boast about offering generous health-care benefits, the costs of coverage are largely borne by employees, in the form of lower wages than a competitive market would otherwise support. That helps explain why inflation-adjusted wages have remained flat, even while productivity has increased — it’s all going to cover rising health-care costs.”
While there is some truth to this story in prior decades (only some, since payments for insurance largely came at the expense of pensions), benefit growth has actually trailed wage growth in the recovery, as shown below.
Since benefits have not kept pace with wage growth over the last five years, we should be expecting wages to rise somewhat faster than productivity since we are seeing a shift in compensation from benefits to wages.
In her column on “Five Myths About Health Insurance,” health economics professor Alexis Pozen pushes a common myth. As part of myth number five, Pozen tells readers;
“Although firms may boast about offering generous health-care benefits, the costs of coverage are largely borne by employees, in the form of lower wages than a competitive market would otherwise support. That helps explain why inflation-adjusted wages have remained flat, even while productivity has increased — it’s all going to cover rising health-care costs.”
While there is some truth to this story in prior decades (only some, since payments for insurance largely came at the expense of pensions), benefit growth has actually trailed wage growth in the recovery, as shown below.
Since benefits have not kept pace with wage growth over the last five years, we should be expecting wages to rise somewhat faster than productivity since we are seeing a shift in compensation from benefits to wages.
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I’m not sure which it is since I never met the guy, but it really is tiresome to see people try to pass off as a serious argument on health care something that anyone with any knowledge on the topic knows to be false. In a column touting the virtues of health savings accounts, so that we can all do comparison shopping for our colonoscopies, Stephens pronounced Obamacare a failure.
He notes the high rate increases in the last two years for insurance plans offered on the exchanges (ignoring the fact that the costs were originally below projections, so that premiums are now roughly in line with the projections from before the plan was passed). He then tells readers:
“Same deal for employer-sponsored plans. ‘While Sen. Obama promised during his campaign in 2008 that the average family would see health insurance premiums drop by $2,500 per year, the average family premium for employer-sponsored coverage has risen by $3,671,’ noted Maureen Buff and Timothy Terrell in the Journal of American Physicians and Surgeons. That was back in 2014, and premiums continue to rise.”
Okay Obama’s $2,500 drop in premium number was relative to a growing baseline. This was completely obvious at the time and was apparent to anyone who spend two seconds looking at the projections. Health care costs had been rising 6 to 7 percent annually for decades. Obama was not saying that his plan would reverse this pattern and actually cause costs to decline. He was talking about costs relative to the baseline projection of growth. (Costs actually have dropped relative to baseline projections even more than Obama projected, although it is debatable how much the Affordable Care Act is responsible.)
Everyone following the debate fully understood that Obama was making his claim relative to a baseline of rising cost growth, since it would have been completely absurd for him to claim he would actually cause premiums to fall in nominal terms. If Stephens is unaware of this fact, his level of ignorance on health care is truly astounding. Alternatively he could just be lying, deliberately misrepresenting Obama’s promises to score a cheap political point.
Either way, it doesn’t speak well for Stephens. I know the NYT has an affirmative action policy for conservatives, but this is ridiculous.
I’m not sure which it is since I never met the guy, but it really is tiresome to see people try to pass off as a serious argument on health care something that anyone with any knowledge on the topic knows to be false. In a column touting the virtues of health savings accounts, so that we can all do comparison shopping for our colonoscopies, Stephens pronounced Obamacare a failure.
He notes the high rate increases in the last two years for insurance plans offered on the exchanges (ignoring the fact that the costs were originally below projections, so that premiums are now roughly in line with the projections from before the plan was passed). He then tells readers:
“Same deal for employer-sponsored plans. ‘While Sen. Obama promised during his campaign in 2008 that the average family would see health insurance premiums drop by $2,500 per year, the average family premium for employer-sponsored coverage has risen by $3,671,’ noted Maureen Buff and Timothy Terrell in the Journal of American Physicians and Surgeons. That was back in 2014, and premiums continue to rise.”
Okay Obama’s $2,500 drop in premium number was relative to a growing baseline. This was completely obvious at the time and was apparent to anyone who spend two seconds looking at the projections. Health care costs had been rising 6 to 7 percent annually for decades. Obama was not saying that his plan would reverse this pattern and actually cause costs to decline. He was talking about costs relative to the baseline projection of growth. (Costs actually have dropped relative to baseline projections even more than Obama projected, although it is debatable how much the Affordable Care Act is responsible.)
Everyone following the debate fully understood that Obama was making his claim relative to a baseline of rising cost growth, since it would have been completely absurd for him to claim he would actually cause premiums to fall in nominal terms. If Stephens is unaware of this fact, his level of ignorance on health care is truly astounding. Alternatively he could just be lying, deliberately misrepresenting Obama’s promises to score a cheap political point.
Either way, it doesn’t speak well for Stephens. I know the NYT has an affirmative action policy for conservatives, but this is ridiculous.
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Just kidding, we know that newspapers don’t make a point of running stories on incompetent bosses. Instead we have Obama administration car czar Steve Rattner telling us in a NYT column that manufacturers are not hiring because they can’t get qualified workers. His evidence is data from the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey which shows a rise in job openings reported in manufacturing, but little increase in hires. Rattner says that this is because firms can’t find qualified workers.
The problem with this explanation is that employers are not acting like they have a shortage of workers. As Rattner himself points out, the real hourly wage in manufacturing has risen by just 0.8 percent over the last decade. (This is cumulative, not an annual rate.) If firms really were trying to hire people but couldn’t find qualified workers then they would be offering higher wages to attract workers from their competitors. We don’t see this happening.
The other way that employers would respond to a lack of qualified workers is by working their existing workforce more hours. This doesn’t seem to be happening either as the graph below shows.
Average Weekly Hours: Manufacturing Workers
Source: Bureau of Labor Statistics.
While average hours are high, they are no higher than they were in 2013 and down from the peaks hit in 2014, periods when the labor market was considerably weaker by all measures. This picture is not consistent with an industry desperate for qualified workers.
Another item that needs correcting in Rattner’s piece is the claim that college-educated workers are doing well in the current economy. His column includes a chart that shows the wages of college-educated workers (including those with advanced degrees) have increased by 10.7 percent since 1979. (This is actually a growth rate of just 0.3 percent annually — not very impressive.) Since 2000, the median wage of workers with just a college degree has fallen by 1.5 percent. So, even college grads have not shared in the gains from growth in this century.
Just kidding, we know that newspapers don’t make a point of running stories on incompetent bosses. Instead we have Obama administration car czar Steve Rattner telling us in a NYT column that manufacturers are not hiring because they can’t get qualified workers. His evidence is data from the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey which shows a rise in job openings reported in manufacturing, but little increase in hires. Rattner says that this is because firms can’t find qualified workers.
The problem with this explanation is that employers are not acting like they have a shortage of workers. As Rattner himself points out, the real hourly wage in manufacturing has risen by just 0.8 percent over the last decade. (This is cumulative, not an annual rate.) If firms really were trying to hire people but couldn’t find qualified workers then they would be offering higher wages to attract workers from their competitors. We don’t see this happening.
The other way that employers would respond to a lack of qualified workers is by working their existing workforce more hours. This doesn’t seem to be happening either as the graph below shows.
Average Weekly Hours: Manufacturing Workers
Source: Bureau of Labor Statistics.
While average hours are high, they are no higher than they were in 2013 and down from the peaks hit in 2014, periods when the labor market was considerably weaker by all measures. This picture is not consistent with an industry desperate for qualified workers.
Another item that needs correcting in Rattner’s piece is the claim that college-educated workers are doing well in the current economy. His column includes a chart that shows the wages of college-educated workers (including those with advanced degrees) have increased by 10.7 percent since 1979. (This is actually a growth rate of just 0.3 percent annually — not very impressive.) Since 2000, the median wage of workers with just a college degree has fallen by 1.5 percent. So, even college grads have not shared in the gains from growth in this century.
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That seems to be the case in an article on the recent drop in fertility rates that warns:
“If the trend (lower fertility) continues — and experts disagree on whether it will — the country could face economic and cultural turmoil.”
That is more than a bit hard to see. If we do see a sustained drop in the fertility rate it will mean that eventually we will have higher rates of retirees to workers, assume no offsetting increase in immigration or an increase in labor force participation by either the prime-age population (ages 25 to 54) or older potential workers.
However, the economic implications of this rise in the ratio of retirees to workers are very modest. According to the Social Security Trustees Report, the impact of a sustained fall in the fertility rate would increase Social Security’s projected shortfall over the next 75 years by an amount equal to 0.36 percent of payroll over this period. This is equal roughly 0.12 percent of projected GDP. There are other costs, such as Medicare, that would also increase with a larger ratio of retirees to workers; however, this would be offset in part by reduced spending on education and health care for the young.
By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was close to 2.0 percentage points of GDP. While these wars have prompted some opposition and protest, it has not led to economic turmoil. It is difficult to see why an increase in spending that is perhaps one-tenth as large would be expected to cause economic turmoil.
It is also worth noting that plausible changes in productivity growth swamp the impact of even large changes in fertility rates. If the country, had sustained the rate of productivity growth it experienced from 1995 to 2005 (also from 1947 to 1973) over the last twelve years, it would have the equivalent effect on workers’ take-home pay as reducing the Social Security tax by 10 percentage points. If the rate of productivity can be boosted by just 0.1 percentage point, it would swamp the long-term impact of a lower fertility rate on workers’ living standards. And, this is before even taking into the account the benefits of reduced stress on infrastructure and the environment.
In short, we should worry if people don’t have children because they don’t think they can afford them. We need not worry about running out of people.
That seems to be the case in an article on the recent drop in fertility rates that warns:
“If the trend (lower fertility) continues — and experts disagree on whether it will — the country could face economic and cultural turmoil.”
That is more than a bit hard to see. If we do see a sustained drop in the fertility rate it will mean that eventually we will have higher rates of retirees to workers, assume no offsetting increase in immigration or an increase in labor force participation by either the prime-age population (ages 25 to 54) or older potential workers.
However, the economic implications of this rise in the ratio of retirees to workers are very modest. According to the Social Security Trustees Report, the impact of a sustained fall in the fertility rate would increase Social Security’s projected shortfall over the next 75 years by an amount equal to 0.36 percent of payroll over this period. This is equal roughly 0.12 percent of projected GDP. There are other costs, such as Medicare, that would also increase with a larger ratio of retirees to workers; however, this would be offset in part by reduced spending on education and health care for the young.
By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was close to 2.0 percentage points of GDP. While these wars have prompted some opposition and protest, it has not led to economic turmoil. It is difficult to see why an increase in spending that is perhaps one-tenth as large would be expected to cause economic turmoil.
It is also worth noting that plausible changes in productivity growth swamp the impact of even large changes in fertility rates. If the country, had sustained the rate of productivity growth it experienced from 1995 to 2005 (also from 1947 to 1973) over the last twelve years, it would have the equivalent effect on workers’ take-home pay as reducing the Social Security tax by 10 percentage points. If the rate of productivity can be boosted by just 0.1 percentage point, it would swamp the long-term impact of a lower fertility rate on workers’ living standards. And, this is before even taking into the account the benefits of reduced stress on infrastructure and the environment.
In short, we should worry if people don’t have children because they don’t think they can afford them. We need not worry about running out of people.
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I suppose that is their natural state. After all, they completely missed the housing bubble and then somehow expected the economy would bounce right back even though there was nothing to replace the demand generated by the bubble. Anyhow, at least according to this NYT article, they are very confused about the course of technology.
There are two big issues that the piece implies the bankers are missing. First, contrary to the concern of massive job displacement by robots, productivity growth has actually been very slow in recent years. It has averaged just over 1.0 percent annually over the last decade. This compares to a 3.0 percent annual rate in the long post-war Golden Age from 1947 to 1973 and again from 1995 to 2005.
It is also worth noting that these periods of rapid job displacement due to technology were also periods of low unemployment and rapid wage growth. (The 2001 recession, following the collapse of the stock bubble, put an end to the late 1990s wage growth.) There is no reason to blame weak wage growth and high unemployment on rapid productivity growth. If there is a weak labor market the problem is with macroeconomic policy that is leading to insufficient demand. (Bizarrely, this piece never once mentions trade deficits, which are a major drain on demand.)
The other big issue missing here is attributing distribution effects to technology. The ownership of technology is determined by policy, specifically rules on patents and copyrights, it is not determined by the technology. If we are seeing an upward redistribution associated with trends in technology, it would indicate that patents and copyrights are too long and too strong.
That would be a strong argument for making these forms of protection shorter and weaker (policy has been going in the other direction). There is no indication this topic even came up at the meetings. This suggests the central bankers are once again very confused about the economy.
I suppose that is their natural state. After all, they completely missed the housing bubble and then somehow expected the economy would bounce right back even though there was nothing to replace the demand generated by the bubble. Anyhow, at least according to this NYT article, they are very confused about the course of technology.
There are two big issues that the piece implies the bankers are missing. First, contrary to the concern of massive job displacement by robots, productivity growth has actually been very slow in recent years. It has averaged just over 1.0 percent annually over the last decade. This compares to a 3.0 percent annual rate in the long post-war Golden Age from 1947 to 1973 and again from 1995 to 2005.
It is also worth noting that these periods of rapid job displacement due to technology were also periods of low unemployment and rapid wage growth. (The 2001 recession, following the collapse of the stock bubble, put an end to the late 1990s wage growth.) There is no reason to blame weak wage growth and high unemployment on rapid productivity growth. If there is a weak labor market the problem is with macroeconomic policy that is leading to insufficient demand. (Bizarrely, this piece never once mentions trade deficits, which are a major drain on demand.)
The other big issue missing here is attributing distribution effects to technology. The ownership of technology is determined by policy, specifically rules on patents and copyrights, it is not determined by the technology. If we are seeing an upward redistribution associated with trends in technology, it would indicate that patents and copyrights are too long and too strong.
That would be a strong argument for making these forms of protection shorter and weaker (policy has been going in the other direction). There is no indication this topic even came up at the meetings. This suggests the central bankers are once again very confused about the economy.
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