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The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.
I will pick on one here, because it doesn’t seem to make any sense. According to the article, President Obama’s proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.
According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.
If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.
If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama’s proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?
Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?
Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn’t make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.
The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.
I will pick on one here, because it doesn’t seem to make any sense. According to the article, President Obama’s proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.
According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.
If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.
If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama’s proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?
Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?
Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn’t make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.
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It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon) and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.
When confronted with two sharply divided views about the world, the NYT doesn’t help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen’s ostensible contribution is to tell us:
“both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs.” He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.
Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee’s side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.
To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we’ll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we’re just printing money.
But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?
If Brynjolfsson and McAfee are right, and we are not seeing growth, it’s because boneheaded policymakers (I didn’t say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about “when the growth model fails.” What we should be talking about is teaching economics 101 to the people determining economic policy.
Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don’t expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.
It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon) and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.
When confronted with two sharply divided views about the world, the NYT doesn’t help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen’s ostensible contribution is to tell us:
“both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs.” He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.
Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee’s side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.
To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we’ll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we’re just printing money.
But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?
If Brynjolfsson and McAfee are right, and we are not seeing growth, it’s because boneheaded policymakers (I didn’t say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about “when the growth model fails.” What we should be talking about is teaching economics 101 to the people determining economic policy.
Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don’t expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.
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That’s not my line, it’s the headline of an AP article in the Washington Post. The exact words were, “cheaper gas lowers retail sales; spending up elsewhere.” Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
“The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. …
“Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
“‘With lower gasoline prices leaving households with more to spend … the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,’ Paul Ashworth, an economist at Capital Economics, said in a note to clients.”
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being “on fire.” The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain’t many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.
That’s not my line, it’s the headline of an AP article in the Washington Post. The exact words were, “cheaper gas lowers retail sales; spending up elsewhere.” Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
“The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. …
“Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
“‘With lower gasoline prices leaving households with more to spend … the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,’ Paul Ashworth, an economist at Capital Economics, said in a note to clients.”
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being “on fire.” The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain’t many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.
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David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,
“The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?”
What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.
In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.
The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.
David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,
“The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?”
What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.
In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.
The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.
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The NYT reported on a decision by the Obama administration to file a complaint before the World Trade Organization over alleged subsidies by China to its exports. The subsidies take the form of government support for product design, information technology, and worker training for exported items. According to the article, the value of these subsidies came to roughly $1 billion over the last three years.
It would have been helpful to put this complaint in some context for readers. China has an explicit policy of holding its currency to a level that is far below its market value. If we assume that the market value of the yuan would be 20 percent higher than the current value, the export subsidy implied by keeping the yuan below its market level would be on the order of $260 billion over the last three years. Even if the gap between the market value and China’s targeted rate is just 10 percent, the implied subsidy would be over $130 billion over this period.
As the piece notes, the administration’s move was intended primarily as a gesture to win support from Congress for fast-track authority to allow the passage of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact. The effectiveness of this gesture would be substantially reduced if the NYT had pointed out that the Obama administration continues to do nothing with reference to an export subsidy that is more than 100 times as large.
The NYT reported on a decision by the Obama administration to file a complaint before the World Trade Organization over alleged subsidies by China to its exports. The subsidies take the form of government support for product design, information technology, and worker training for exported items. According to the article, the value of these subsidies came to roughly $1 billion over the last three years.
It would have been helpful to put this complaint in some context for readers. China has an explicit policy of holding its currency to a level that is far below its market value. If we assume that the market value of the yuan would be 20 percent higher than the current value, the export subsidy implied by keeping the yuan below its market level would be on the order of $260 billion over the last three years. Even if the gap between the market value and China’s targeted rate is just 10 percent, the implied subsidy would be over $130 billion over this period.
As the piece notes, the administration’s move was intended primarily as a gesture to win support from Congress for fast-track authority to allow the passage of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact. The effectiveness of this gesture would be substantially reduced if the NYT had pointed out that the Obama administration continues to do nothing with reference to an export subsidy that is more than 100 times as large.
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Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to “put our fiscal house in order.” He apparently hasn’t been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)
Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.
Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.
In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don’t earn enough to provide them with a comfortable upbringing.
Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to “put our fiscal house in order.” He apparently hasn’t been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)
Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.
Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.
In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don’t earn enough to provide them with a comfortable upbringing.
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I see Robert Waldmann has taken up the old challenge from the Social Security privatization days of whether it was possible to get a 7.0 percent real return when price to earnings ratios in the stock market were over 20 to 1 (2005 days) or 30 to 1 (late 1990s privatization craze). He claims to have done the trick by assuming that stock prices grow at a 3.0 percent real rate (the same as the growth rate for the economy), stocks pay out 1.9 percent in dividends, and effectively pay out 3.3 percent of their value to shareholders in the form of share buybacks.
I’ll make two quick points on this one. First, the assumption of 3.0 percent real GDP growth is far above what the Social Security trustees were assuming at the time (@ 1.5-1.8 percent). It is also above most current projections which tend to be near 2.0 percent for long-run growth. Waldmann’s projection may well prove right, but the point is that he is using a different growth projection than is being used in other contexts (like projecting the size of the Social Security shortfall).
The other problem is that he has companies paying out an amount equal to 5.2 percent of their stock price either as dividends or share buybacks. If the price to earnings ratio is over 20 (it is), then he has them paying out more than 100 percent of their profits to shareholders. That doesn’t seem like a sustainable policy in the long-run, but I am prepared to be shown otherwise.
Note: corrections made — thanks folks.
I see Robert Waldmann has taken up the old challenge from the Social Security privatization days of whether it was possible to get a 7.0 percent real return when price to earnings ratios in the stock market were over 20 to 1 (2005 days) or 30 to 1 (late 1990s privatization craze). He claims to have done the trick by assuming that stock prices grow at a 3.0 percent real rate (the same as the growth rate for the economy), stocks pay out 1.9 percent in dividends, and effectively pay out 3.3 percent of their value to shareholders in the form of share buybacks.
I’ll make two quick points on this one. First, the assumption of 3.0 percent real GDP growth is far above what the Social Security trustees were assuming at the time (@ 1.5-1.8 percent). It is also above most current projections which tend to be near 2.0 percent for long-run growth. Waldmann’s projection may well prove right, but the point is that he is using a different growth projection than is being used in other contexts (like projecting the size of the Social Security shortfall).
The other problem is that he has companies paying out an amount equal to 5.2 percent of their stock price either as dividends or share buybacks. If the price to earnings ratio is over 20 (it is), then he has them paying out more than 100 percent of their profits to shareholders. That doesn’t seem like a sustainable policy in the long-run, but I am prepared to be shown otherwise.
Note: corrections made — thanks folks.
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