Yes Folks, Trade Deficits Really Can Create Unemployment

April 01, 2017

01 Abril 2017

I don't like being in the position of saying Trump is right, but when it comes to trade, otherwise reasonable people often say things that are rather silly, which mean that Trump can be right. Matt O'Brien takes the silly route when he takes issue with the idea that our trade deficit in the last decade could have led to an economy-wide lost of jobs and also says that the story of the trade deficit and jobs is all history anyhow. Before going to the woodshed, I'll give Matt credit for what he gets right. Matt acknowledges that the opening to China with its entry to the WTO had a devastating impact on millions of workers and their communities. For some reason, many economists and commentators feel a need to deny this fact. I suppose the flat earth society is larger than I imagined. I will add one point to Matt's discussion of this issue. Matt notes that in principle, the gains to the winners from trade are larger than the losses to the losers. This means that we should be able to compensate the losers and make everyone better off. Matt correctly points out that the compensation to the losers is invariably a joke. They don't get s**t, and then we call them names when they vote for Trump. But there is an additional point on this compensation story that is worth throwing in. The claim that the gains exceed the losses and therefore we can have compensation to make everyone better off is only necessarily true if we have a costless compensation process. In other words, if we can just vacuum up dollars from everyone who won and hand them out to the people who lost, then we can ensure that everyone is better off, but in the real world we don't actually have a costless process. In the real world we get money from the winners from things like income and sales taxes, which come with distortions. This means that for every dollar we collect in revenue, we are losing some amount of economic activity.

Yes, There Really Are Things We Can Do to Reduce the Trade Deficit

By CEPRCEPR

April 01, 2017

01 Abril 2017

Donald Trump’s bluster about imposing large tariffs and forcing companies to make things in America has led to backlash where we have people saying things to the effect that we are in a global economy and we just can’t do anything about shifting from foreign produced items to domestically produced items. Paul Krugman’s blog post on trade can be seen in this light, although it is not exactly what he said and he surely knows better.

The post points out that imports account for a large percentage of the cost of many of the goods we produce here. This means that if we raise the price of imports, we also make it more expensive to produce goods in the United States.

This is of course true, but that doesn’t mean that higher import prices would not lead to a shift towards domestic production. For example, if we take the case of transport equipment he highlights, if all the parts that we imported cost 20 percent more, then over time we would expect car producers in the United States to produce with a larger share of domestically produced parts than would otherwise be the case. This doesn’t mean that imported parts go to zero, or even that they necessarily fall, but just that they would be less than would be the case if import prices were 20 percent lower. This is pretty much basic economics — at a higher price we buy less.

While arbitrary tariffs are not a good way to raise the relative price of imports, we do have an obvious tool that is designed for exactly this purpose. We can reduce the value of the dollar against the currencies of our trading partners. This is probably best done through negotiations, which would inevitably involve trade-offs (e.g. less pressure to enforce U.S. patents and copyrights and less concern about access for the U.S. financial industry). Loud threats against our trading partners are likely to prove counter-productive. (We should also remove the protectionist barriers that keep our doctors and dentists from enjoying the full benefits of international competition.)

Anyhow, we can do something about our trade deficits if we had a president who thought seriously about the issue. As it is, the current occupant of the White House seems to not know which way is up when it comes to trade.

Donald Trump’s bluster about imposing large tariffs and forcing companies to make things in America has led to backlash where we have people saying things to the effect that we are in a global economy and we just can’t do anything about shifting from foreign produced items to domestically produced items. Paul Krugman’s blog post on trade can be seen in this light, although it is not exactly what he said and he surely knows better.

The post points out that imports account for a large percentage of the cost of many of the goods we produce here. This means that if we raise the price of imports, we also make it more expensive to produce goods in the United States.

This is of course true, but that doesn’t mean that higher import prices would not lead to a shift towards domestic production. For example, if we take the case of transport equipment he highlights, if all the parts that we imported cost 20 percent more, then over time we would expect car producers in the United States to produce with a larger share of domestically produced parts than would otherwise be the case. This doesn’t mean that imported parts go to zero, or even that they necessarily fall, but just that they would be less than would be the case if import prices were 20 percent lower. This is pretty much basic economics — at a higher price we buy less.

While arbitrary tariffs are not a good way to raise the relative price of imports, we do have an obvious tool that is designed for exactly this purpose. We can reduce the value of the dollar against the currencies of our trading partners. This is probably best done through negotiations, which would inevitably involve trade-offs (e.g. less pressure to enforce U.S. patents and copyrights and less concern about access for the U.S. financial industry). Loud threats against our trading partners are likely to prove counter-productive. (We should also remove the protectionist barriers that keep our doctors and dentists from enjoying the full benefits of international competition.)

Anyhow, we can do something about our trade deficits if we had a president who thought seriously about the issue. As it is, the current occupant of the White House seems to not know which way is up when it comes to trade.

The Story of Rising Inflation Is Not All It is Cracked Up to Be

By CEPRCEPR

March 31, 2017

31 Marzo 2017

The inflation hawks are getting restless. They are anxious to seize on any evidence of rising inflation as an opportunity to push the Fed to raise interest rates.

For this reason, many may be excited by the latest data from the Commerce Department showing that the overall PCE deflator is up 2.1 percent over the last year, with the core (excluding food and energy prices) rising by 1.8 percent. As the headline of the AP article carried by the New York Times put it, “consumer spending slows; inflation pushing higher.”

The case for a rise in the inflation rate is a bit weaker if we move out a decimal. The inflation rate in the core PCE deflator over the last year was 1.753 percent. This rounds up to 1.8 percent, but not by much.

Furthermore, this is a rent story. The rent component of the PCE has risen by 3.6 percent over the last year. If we pull this out, inflation in the core PCE would be just 1.3 percent over the last 12 months. That’s not a lot to get excited over.

The inflation hawks are getting restless. They are anxious to seize on any evidence of rising inflation as an opportunity to push the Fed to raise interest rates.

For this reason, many may be excited by the latest data from the Commerce Department showing that the overall PCE deflator is up 2.1 percent over the last year, with the core (excluding food and energy prices) rising by 1.8 percent. As the headline of the AP article carried by the New York Times put it, “consumer spending slows; inflation pushing higher.”

The case for a rise in the inflation rate is a bit weaker if we move out a decimal. The inflation rate in the core PCE deflator over the last year was 1.753 percent. This rounds up to 1.8 percent, but not by much.

Furthermore, this is a rent story. The rent component of the PCE has risen by 3.6 percent over the last year. If we pull this out, inflation in the core PCE would be just 1.3 percent over the last 12 months. That’s not a lot to get excited over.

The Generation of Nonsense in the Boston Globe

By CEPRCEPR

March 30, 2017

30 Marzo 2017

The main economic story of the last four decades is the massive upward redistribution of income that has taken place. The top one percent's share of national income has more than doubled over this period from roughly ten percent in the late 1970s to over twenty percent today. And, this is primarily a before-tax income story, the rich have used their control over the levers of economic power to ensure that an ever larger share of the country's wealth goes into their pockets. (Yes, this is the topic of my book, Rigged [it's free].) Anyhow, the rich don't want people paying attention to these policies (hey, they could try to change them), so they endlessly push out nonsense stories to try to divert the public's attention from how they structured the rules to advance their interests. And, since the rich own the newspapers, they can make sure that we hear these stories. This meant that yesterday the NYT gave us the story of how robots are taking all the jobs and driving down wages. Never mind that productivity growth is at its slowest pace in the last seven decades. Facts and data don't matter in the alternative world where we try to divert folks' attention from things like the Federal Reserve Board (who are not robots, last I checked) raising interest rates to make sure that we don't have too many jobs. One of the other big alternative facts for the diverters is the generational story. This is the one where we tell folks to ignore all those incredibly rich people with vast amounts of money, the reason most people are not seeing rising living standards is the damn baby boomers who expect to get Social Security and Medicare, just because they paid for it. The Boston Globe gave us this story with a piece by Bruce Cannon Gibney, conveniently titled "how the baby boomers destroyed everything." (Full disclosure: I am one of those baby boomers.) There is not much confusion about the nature of the argument, only its substance. Gibney complains about: "...the unusual prevalence of sociopathy in an unusually large generation. How does that disorder manifest? Improvidence is reflected in low levels of savings and high levels of bankruptcy. Deceit shows up as a distaste for facts, a subject on display in everything from Enron’s quarterly reports to daily press briefings. Interpersonal failures and unbridled hostility appeared in unusually high levels of divorce and crime from the 1970s to early 1990s." Starting with the bankruptcy story, the piece to which Gibney helpfully linked noted a doubling of bankruptcy rates for those over 65 since 1991. It reported: "Expensive health care costs from a serious illness before a patient received Medicare and the inability to work during and after a serious illness are the prime contributors to financial crises among those 55 and older." Yes, we have clear evidence of a moral failing here.

Job Loss in Manufacturing: More Robot Blaming

By CEPRCEPR

March 29, 2017

29 Marzo 2017

It is striking how the media feel such an extraordinary need to blame robots and productivity growth for the recent job loss in manufacturing rather than trade. We got yet another example of this exercise in a NYT Upshot piece by Claire Cain Miller, with the title "evidence that robots are winning the race for American jobs." The piece highlights a new paper by Daron Acemoglu and Pascual Restrepo which finds that robots have a large negative impact on wages and employment. While the paper has interesting evidence on the link between the use of robots and employment and wages, some of the claims in the piece do not follow. For example, the article asserts: "The paper also helps explain a mystery that has been puzzling economists: why, if machines are replacing human workers, productivity hasn’t been increasing. In manufacturing, productivity has been increasing more than elsewhere — and now we see evidence of it in the employment data, too." Actually, the paper doesn't provide any help whatsoever in solving this mystery. Productivity growth in manufacturing has almost always been more rapid than productivity growth elsewhere. Furthermore, it has been markedly slower even in manufacturing in recent years than in prior decades. According to the Bureau of Labor Statistics, productivity growth in manufacturing has averaged less than 1.2 percent annually over the last decade and less than 0.5 percent over the last five years. By comparison, productivity growth averaged 2.9 percent a year in the half century from 1950 to 2000.

National Income Accounting for Robert Samuelson and Friends

By CEPRCEPR

March 27, 2017

27 Marzo 2017

It would be a much better world if the people involved in economic policy debates understood basic economics. Unfortunately, such knowledge is sorely lacking in Washington. Robert Samuelson gave us a great example of accounting ignorance in his column where he pushed the idea that the budget should be near balance when the economy is close to full employment. There is of course an important economic point; if we believe what economists thought about prime age (ages 25 to 54) labor force participation rates back before the recession, we are still around 2 million jobs below full employment. But leaving such trivia aside, there is the accounting issue of having a balanced budget at full employment. Samuelson cites economist Herbert Stein as his authority on this point. It is important to note that Stein made this comment when our trade was much closer to balanced. This matters because if we have a large trade deficit, it was $540 billion (around 2.9 percent of GDP) in the last quarter, then this is a reduction in domestic demand compared to a situation in which trade was balanced. This $540 billion is creating demand in Europe, Canada, China, and elsewhere , not in the United States. With this sort of drain on demand, we have to make this up from some other source. We can pray to the god of incentivizing entrepreneurs and hope that we will get a huge investment boom, but adults don’t believe in this nonsense. Investment has moved within a fairly small range as a share of GDP over the last half century. At best, we can hope that good policy will lead to very modest gains in investment as a share of GDP – not enough to make up for a trade deficit of 2.9 percent of GDP.

New Health Care Plan: Open Source Drugs, Immigrant Doctors, and a Public Option

By CEPRCEPR

March 25, 2017

25 Marzo 2017

Now that the Republican health care plan has been sent to the dust bin of history, it’s worth thinking about how Obamacare can be improved. While the ACA was a huge step forward in extending insurance coverage, many of the complaints against the program are justified. The co-pays and deductibles can mean the plans are of little use to middle-income people with relatively low bills. This is a great time to put forward ideas for reducing these costs and making other changes in the health care system. Obviously this congress and president are not interested in reforms that help low- and middle-income families, but the rest of us can start pushing these ideas now, with the expectation that the politicians will eventually come around. There are two obvious directions to go to get costs down for low- and middle-income families. One is to increase taxes on the wealthy. The other is to reduce the cost of health care. The latter is likely the more promising option, especially since we have such a vast amount of waste in our system. The three obvious routes are lower prices for prescription drugs and medical equipment, reducing the pay of doctors, and savings on administrative costs from having Medicare offer an insurance plan in the exchanges. Taking these in turn, the largest single source of savings would be reducing what we pay for prescription drugs. We will spend over $440 billion this year for drugs that would likely sell for less than $80 billion in a free market without patent monopolies and other forms of protection. If we paid as much as people in other wealthy countries for our drugs, we would save close to $200 billion a year. We spend another $50 billion a year on medical equipment which would likely cost around $15 billion in a free market. If the government negotiated prices for drugs and medical equipment its savings could easily exceed $100 billion a year (see chapter 5 of Rigged). It could use some of these savings to finance open-source research for new drugs and medical equipment. We already fund a huge amount of research, so this is not some radical departure from current practice. The government spends more than $32 billion on research conducted by the National Institutes of Health. It also picks up 50 percent of the industry’s research costs on orphan drugs through the Orphan Drug Tax Credit. Orphan drugs are a rapidly growing share of all drug approvals, as the industry increasingly takes advantage of this tax credit. The big change would not be that the government was funding research, but rather the research results and patents would be in the public domain, rather than be used by Pfizer and other drug companies to get patent monopolies. As a result, the next great breakthrough drug will sell as a generic for a few hundred dollars rather than hundreds of thousands of dollars. And MRI scans would cost little more than X-rays.

Marketplace Radio Has Not Heard About the Productivity Slowdown

By CEPRCEPR

March 24, 2017

24 Marzo 2017

Marketplace radio had a peculiar piece asking what the world would have looked like if NAFTA never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

“As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

“‘We economic developers have an old joke,’ said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. ‘The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn’t touch the equipment.’

“Ouch. But it turns out technology replaced workers in the course of reporting this very story.”

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

Book2 9104 image001

Source: Bureau of Labor Statistics.

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity to discourage workers from joining unions and to make wage concessions. It’s surprising that the piece did not discuss this effect of NAFTA.

Marketplace radio had a peculiar piece asking what the world would have looked like if NAFTA never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

“As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

“‘We economic developers have an old joke,’ said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. ‘The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn’t touch the equipment.’

“Ouch. But it turns out technology replaced workers in the course of reporting this very story.”

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

Book2 9104 image001

Source: Bureau of Labor Statistics.

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity to discourage workers from joining unions and to make wage concessions. It’s surprising that the piece did not discuss this effect of NAFTA.

Requiring Essential Health Benefits in Insurance Plans Is Part of Getting the Healthy to Subsidize the Less Healthy

By CEPRCEPR

March 23, 2017

23 Marzo 2017

Morning Edition had a segment on Republican efforts to repeal Obamacare which reported on the desire of many Republican members of Congress to reduce the number of essential health benefits that must be covered by insurance. While the piece noted that part of the reason for the required benefits is to ensure people are covered in important areas, this is probably the less important reason for imposing requirements.

If people are allowed to pick and choose what conditions get covered, many more healthy people may opt for plans that cover few conditions and cost very little. If this happens, then plans that offer more comprehensive coverage will have a less healthy pool of beneficiaries, and therefore have to charge high fees. This will make insurance unaffordable for the people who most need it.

Morning Edition had a segment on Republican efforts to repeal Obamacare which reported on the desire of many Republican members of Congress to reduce the number of essential health benefits that must be covered by insurance. While the piece noted that part of the reason for the required benefits is to ensure people are covered in important areas, this is probably the less important reason for imposing requirements.

If people are allowed to pick and choose what conditions get covered, many more healthy people may opt for plans that cover few conditions and cost very little. If this happens, then plans that offer more comprehensive coverage will have a less healthy pool of beneficiaries, and therefore have to charge high fees. This will make insurance unaffordable for the people who most need it.

NPR Performs Mind Reading on Republicans Debating ACHA

By CEPRCEPR

March 23, 2017

23 Marzo 2017

It’s great that there are so many jobs for mind readers in the media. This morning Tamara Keith used her talents in this area to tell listeners that members of the Republican “Freedom Caucus” in the House “believe” that reducing the areas of mandated coverage is the key to reducing the cost of insurance.

It’s good that we have someone who can tell us what these Freedom Caucus members really believe. Otherwise, many people might think that they were trying to reduce the areas of mandated coverage in order to allow healthy people to avoid subsidizing less healthy people.

Someone in good health can buy a plan with very little coverage, since odds are they will not need coverage for most conditions. These plans would be relatively low cost, since they are paying out little in benefits. On the other hand, plans that did cover more conditions would be extremely expensive and unaffordable to most people. If we didn’t have a NPR mind reader to tell us otherwise, we might think that this is the situation that the Freedom Caucus members are trying to bring about.

It’s great that there are so many jobs for mind readers in the media. This morning Tamara Keith used her talents in this area to tell listeners that members of the Republican “Freedom Caucus” in the House “believe” that reducing the areas of mandated coverage is the key to reducing the cost of insurance.

It’s good that we have someone who can tell us what these Freedom Caucus members really believe. Otherwise, many people might think that they were trying to reduce the areas of mandated coverage in order to allow healthy people to avoid subsidizing less healthy people.

Someone in good health can buy a plan with very little coverage, since odds are they will not need coverage for most conditions. These plans would be relatively low cost, since they are paying out little in benefits. On the other hand, plans that did cover more conditions would be extremely expensive and unaffordable to most people. If we didn’t have a NPR mind reader to tell us otherwise, we might think that this is the situation that the Freedom Caucus members are trying to bring about.