Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
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This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
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That was one explanation in an NYT article on the limited use of direct injection of chemotherapy into the abdomen, even though there is clear evidence of this being an effective way to extend the life of ovarian cancer victims. The article notes that there has been some increase in the use of this method since the National Cancer Institute made a clinical announcement promoting its merits in 2006, but still only 50 percent of patients receive the treatment.
The piece offers the use of generic drugs, which don’t provide large profit margins as one explanation:
“Dr. Markman [the president of medicine and science at Cancer Treatment Centers of America] said that when a treatment involves a new drug or a new device, manufacturers eagerly offer doctors advice and instructions on its use. But this treatment involves no new drugs or devices, so no one is clamoring to educate doctors about it. They are on their own to learn, and to train their nurses, a commitment that will take time and money.”
This is an interesting, if tragic, example of the ways in which patent monopolies reduce the quality of health care. They push people towards the use of patent protected drugs even in situations where they may not be the most effective form of treatment. This problem is widespread, even if the consequences may not always be as serious.
That was one explanation in an NYT article on the limited use of direct injection of chemotherapy into the abdomen, even though there is clear evidence of this being an effective way to extend the life of ovarian cancer victims. The article notes that there has been some increase in the use of this method since the National Cancer Institute made a clinical announcement promoting its merits in 2006, but still only 50 percent of patients receive the treatment.
The piece offers the use of generic drugs, which don’t provide large profit margins as one explanation:
“Dr. Markman [the president of medicine and science at Cancer Treatment Centers of America] said that when a treatment involves a new drug or a new device, manufacturers eagerly offer doctors advice and instructions on its use. But this treatment involves no new drugs or devices, so no one is clamoring to educate doctors about it. They are on their own to learn, and to train their nurses, a commitment that will take time and money.”
This is an interesting, if tragic, example of the ways in which patent monopolies reduce the quality of health care. They push people towards the use of patent protected drugs even in situations where they may not be the most effective form of treatment. This problem is widespread, even if the consequences may not always be as serious.
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The NYT had an article reporting on Secretary of State John Kerry’s promotion of the progress made in reaching a final agreement between the twelve countries on the terms of the Trans-Pacific Partnership (TPP). At one point the piece quotes Kerry:
“No country can expect its economy to grow simply by buying and selling to its own people …. It is just not going to happen. It defies the law of economics. Trade is a job creator and prosperity builder, period.”
Of course no one is proposing that countries not trade, so this is sort of a bizarre counter-factual. It would be bit like responding to opponents of a highway plan by saying that people depend on cars to get around. The assertion doesn’t have anything to do with the merits of the highway, just as the fact that countries trade has nothing to do with the merits of the TPP.
As a practical matter it is entirely possible that the TPP will lead to less trade. The rules that the United States is trying to impose on patents and copyrights and other forms of intellectual property claims will lead to considerably higher prices for the protected items. For example, the hepatitis C drug Sovaldi would sell for less than $1,000 per treatment without protection, but sells in the United States for $84,000 per treatment with patent protection.
As a result of these higher prices for a substantial category of goods, the total volume of trade may actually be lower with the TPP than without it. For this reason, those who want to see more trade may have good reason to oppose the TPP. (The various studies that analyze the impact of the TPP have not incorporated the impact of higher prices due to stronger patent and copyright related protections.)
The NYT had an article reporting on Secretary of State John Kerry’s promotion of the progress made in reaching a final agreement between the twelve countries on the terms of the Trans-Pacific Partnership (TPP). At one point the piece quotes Kerry:
“No country can expect its economy to grow simply by buying and selling to its own people …. It is just not going to happen. It defies the law of economics. Trade is a job creator and prosperity builder, period.”
Of course no one is proposing that countries not trade, so this is sort of a bizarre counter-factual. It would be bit like responding to opponents of a highway plan by saying that people depend on cars to get around. The assertion doesn’t have anything to do with the merits of the highway, just as the fact that countries trade has nothing to do with the merits of the TPP.
As a practical matter it is entirely possible that the TPP will lead to less trade. The rules that the United States is trying to impose on patents and copyrights and other forms of intellectual property claims will lead to considerably higher prices for the protected items. For example, the hepatitis C drug Sovaldi would sell for less than $1,000 per treatment without protection, but sells in the United States for $84,000 per treatment with patent protection.
As a result of these higher prices for a substantial category of goods, the total volume of trade may actually be lower with the TPP than without it. For this reason, those who want to see more trade may have good reason to oppose the TPP. (The various studies that analyze the impact of the TPP have not incorporated the impact of higher prices due to stronger patent and copyright related protections.)
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This is an important piece of information that might have been worth including in a NYT article on premium increase requests by insurers in the state health exchanges. The Commerce Department reports that spending on personal health care services, which accounts for the overwhelming majority of health care spending, increased by 5.4 percent from the second quarter of 2014 to the second quarter of 2015. (The major item missing is prescription drugs, which did have a faster rate of increase.) This means that unless the insurers are facing a very skewed sample or they badly misunderstood the market, they should not need large premium increases to cover their costs.
This is an important piece of information that might have been worth including in a NYT article on premium increase requests by insurers in the state health exchanges. The Commerce Department reports that spending on personal health care services, which accounts for the overwhelming majority of health care spending, increased by 5.4 percent from the second quarter of 2014 to the second quarter of 2015. (The major item missing is prescription drugs, which did have a faster rate of increase.) This means that unless the insurers are facing a very skewed sample or they badly misunderstood the market, they should not need large premium increases to cover their costs.
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Actually, I want to skip over the minimum wage discussion (I’ll come back to it) to address another issue in his column this morning. In his prelude to attacking the $15 an hour minimum wage Samuelson takes a swipe at the economic policies of the 1960s:
“Consider the 1960s. Economists convinced themselves — and the public — that, through government budgets and interest rates, they could minimize recessions and sustain “full employment.” Early success was astounding. By late 1968, unemployment was 3.4 percent. But this was simply an inflationary boom, not a sophisticated advance in economic management. Double-digit price increases soon surfaced. We spent 15 years (and four recessions) combating inflation.”
This is close to incoherent. First, what does it mean to say “we spent 15 years (and four recessions) combating inflation.” If he means that we had people in Washington concerned about inflation, he should probably had said 40 years. Much of the Republican party has been yelling about hyper-inflation even as the inflation rate remains stubbornly below the Fed’s 2.0 percent target.
Does he mean inflation was a problem? Well perhaps it was higher than was desirable for much of the 1970s and the first few years of the 1980s, but that hardly makes it a crisis. After all unemployment has been higher than desirable (as measured by the Congressional Budget Office’s estimate of NAIRU) for most of the last 35 years. Furthermore, the four recessions line also doesn’t make any sense. We had four recessions in the fifteen years before 1960 also.
Furthermore, blaming the inflation on the 1970s on the policies of the 1960s is more than a bit bizarre. The more obvious cultpit would be the quadrupling of world oil prices in 1973-74 when OPEC first flexed its muscles and then again in 1979-1980 when the Iranian revolution shut off oil flows from what was then the world’s largest oil exporter. The sharp reversal of oil prices in the early 1980s, as more oil came on line and demand fell, was a major factor slowing inflation.
In fact, the 1960s were a decade of rapidly rising living standards for large segments of the population. Productivity was growing rapidly and most workers were getting wage gains in line with productivity growth, or close to 2.0 percent annually. That’s more than most workers have seen in the last fifteen years.
This brings us the Samuelson’s “minimum-wage madness.” In the period from 1938 (when the federal minimum wage was first established) to 1968 the minimum wage tracked productivity growth. This means that it not only kept pace with inflation, but minimum wage workers shared in the gains of the economy’s growth. If this pattern had continued, the minimum wage would be $18.42 an hour today.
Undoubtedly there would be large-scale unemployment if we were to try to quickly move to that wage today. Much has changed in the economy over the last 37 years and besides, it would take time for businesses to adjust. However the more modest goal of $12.00 by 2020 is certainly a reasonable target.
As Samuelson notes, there would be somewhat fewer jobs with this wage, but it is important to understand what this means. The jobs affected by the minimum wage tend to be high turnover jobs. People often hold them for only a few months at a time. In this context, fewer jobs will mostly mean that it takes people more time to find a new job when they leave another job or when they first start looking for work. That could mean that low wage workers get to work somewhat fewer hours over the course of a year than they would have liked, but when they do work they take home 65 percent more than if they were working at the $7.25 an hour minimum wage. Most would probably consider this a pretty good deal.
Samuelson is right that the minimum wage levels can be set too high where the loss of jobs more than offsets the benefits of the wage gains. Some cities may be moving into this territory now, but certainly the U.S. economy can support a minimum wage in 2020 that is more than one-third lower relative to productivity than the 1968 minimum wage.
Actually, I want to skip over the minimum wage discussion (I’ll come back to it) to address another issue in his column this morning. In his prelude to attacking the $15 an hour minimum wage Samuelson takes a swipe at the economic policies of the 1960s:
“Consider the 1960s. Economists convinced themselves — and the public — that, through government budgets and interest rates, they could minimize recessions and sustain “full employment.” Early success was astounding. By late 1968, unemployment was 3.4 percent. But this was simply an inflationary boom, not a sophisticated advance in economic management. Double-digit price increases soon surfaced. We spent 15 years (and four recessions) combating inflation.”
This is close to incoherent. First, what does it mean to say “we spent 15 years (and four recessions) combating inflation.” If he means that we had people in Washington concerned about inflation, he should probably had said 40 years. Much of the Republican party has been yelling about hyper-inflation even as the inflation rate remains stubbornly below the Fed’s 2.0 percent target.
Does he mean inflation was a problem? Well perhaps it was higher than was desirable for much of the 1970s and the first few years of the 1980s, but that hardly makes it a crisis. After all unemployment has been higher than desirable (as measured by the Congressional Budget Office’s estimate of NAIRU) for most of the last 35 years. Furthermore, the four recessions line also doesn’t make any sense. We had four recessions in the fifteen years before 1960 also.
Furthermore, blaming the inflation on the 1970s on the policies of the 1960s is more than a bit bizarre. The more obvious cultpit would be the quadrupling of world oil prices in 1973-74 when OPEC first flexed its muscles and then again in 1979-1980 when the Iranian revolution shut off oil flows from what was then the world’s largest oil exporter. The sharp reversal of oil prices in the early 1980s, as more oil came on line and demand fell, was a major factor slowing inflation.
In fact, the 1960s were a decade of rapidly rising living standards for large segments of the population. Productivity was growing rapidly and most workers were getting wage gains in line with productivity growth, or close to 2.0 percent annually. That’s more than most workers have seen in the last fifteen years.
This brings us the Samuelson’s “minimum-wage madness.” In the period from 1938 (when the federal minimum wage was first established) to 1968 the minimum wage tracked productivity growth. This means that it not only kept pace with inflation, but minimum wage workers shared in the gains of the economy’s growth. If this pattern had continued, the minimum wage would be $18.42 an hour today.
Undoubtedly there would be large-scale unemployment if we were to try to quickly move to that wage today. Much has changed in the economy over the last 37 years and besides, it would take time for businesses to adjust. However the more modest goal of $12.00 by 2020 is certainly a reasonable target.
As Samuelson notes, there would be somewhat fewer jobs with this wage, but it is important to understand what this means. The jobs affected by the minimum wage tend to be high turnover jobs. People often hold them for only a few months at a time. In this context, fewer jobs will mostly mean that it takes people more time to find a new job when they leave another job or when they first start looking for work. That could mean that low wage workers get to work somewhat fewer hours over the course of a year than they would have liked, but when they do work they take home 65 percent more than if they were working at the $7.25 an hour minimum wage. Most would probably consider this a pretty good deal.
Samuelson is right that the minimum wage levels can be set too high where the loss of jobs more than offsets the benefits of the wage gains. Some cities may be moving into this territory now, but certainly the U.S. economy can support a minimum wage in 2020 that is more than one-third lower relative to productivity than the 1968 minimum wage.
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And the Fed and corporate governance structures. That is the implication of his column where he describes the debate over inequality as a debate “between people who think you need strong government to defeat oligarchy and those who think you need open competition.”
Actually, his side in this debate thinks you need a strong government to enforce patent and copyright monopolies, jailing any potential competitors. It believes you need a strong government, in the form of a central bank, to slow the economy any time the demand for labor gives ordinary workers enough bargaining power to push up wages and demand better conditions from employers. And Brooks believes that the government should set rules for corporate governance that essentially allow top management to set its own pay, since it effectively controls the boards that set their pay.
It is these and other man-made rules that have given us an economy in which a very small segment of the population enjoys the bulk of the gains from the economic growth of the last thirty five years. (You can get more of the story in The End of Loser Liberalism: Making Markets Progressive.) All of these rules could easily be different. For example, we could rely on tax credits rather than patent monopolies to fund research along with more direct funding through entities like the National Institutes of Health (which is strongly supported by the pharmaceutical industry).
It is undoubtedly convenient for Brooks’ side to pretend that the rules put in place to redistribute income upward are simply the natural workings of the market, but it is not true. It’s unfortunate that the NYT can’t find a columnist who would defend these rules on their merits rather than make an absurd claim that they are somehow facts of nature.
And the Fed and corporate governance structures. That is the implication of his column where he describes the debate over inequality as a debate “between people who think you need strong government to defeat oligarchy and those who think you need open competition.”
Actually, his side in this debate thinks you need a strong government to enforce patent and copyright monopolies, jailing any potential competitors. It believes you need a strong government, in the form of a central bank, to slow the economy any time the demand for labor gives ordinary workers enough bargaining power to push up wages and demand better conditions from employers. And Brooks believes that the government should set rules for corporate governance that essentially allow top management to set its own pay, since it effectively controls the boards that set their pay.
It is these and other man-made rules that have given us an economy in which a very small segment of the population enjoys the bulk of the gains from the economic growth of the last thirty five years. (You can get more of the story in The End of Loser Liberalism: Making Markets Progressive.) All of these rules could easily be different. For example, we could rely on tax credits rather than patent monopolies to fund research along with more direct funding through entities like the National Institutes of Health (which is strongly supported by the pharmaceutical industry).
It is undoubtedly convenient for Brooks’ side to pretend that the rules put in place to redistribute income upward are simply the natural workings of the market, but it is not true. It’s unfortunate that the NYT can’t find a columnist who would defend these rules on their merits rather than make an absurd claim that they are somehow facts of nature.
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The Labor Department reported that the Employment Cost Index rose by just 0.2 percent in the second quarter. This brings the growth in the index over the last year to 2.0 percent. This undermines any claim that wage growth is accelerating.
With inflation still well under the Fed’s target of 2.0 percent as an average rate of inflation (not a ceiling), and wage growth remaining flat or possibly even falling, the Fed would have little basis for raising interest rates to slow the economy. With this most recent report it seems likely that the Fed will put off a rate hike until the end of the year at soonest.
The Labor Department reported that the Employment Cost Index rose by just 0.2 percent in the second quarter. This brings the growth in the index over the last year to 2.0 percent. This undermines any claim that wage growth is accelerating.
With inflation still well under the Fed’s target of 2.0 percent as an average rate of inflation (not a ceiling), and wage growth remaining flat or possibly even falling, the Fed would have little basis for raising interest rates to slow the economy. With this most recent report it seems likely that the Fed will put off a rate hike until the end of the year at soonest.
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