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Article Artículo

Good News, the Stock Market Is Plunging: Thoughts on Wealth

This post was originally published on my Patreon page.

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is the distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of the stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

CEPR / November 09, 2018

Article Artículo

Lessons from the Trump Cut

It’s a bit less than a year since Congress passed the Trump tax cut, but we are far enough along that we can be fairly confident about its impact on the economy. There are three main lessons we can learn:

  • The tax cut is to not leading to the promised investment boom;

  • The additional demand generated by the tax cut is spurring growth and reducing the unemployment rate;

  • The Federal Reserve Board’s interest rate hikes are slowing the economy in a way that is unnecessary given current inflation risks.

The Investment Boom: Just Like Jared Kushner’s Hidden Genius, No One Can See It

Taking these in turn, it is pretty clear at this point that we will not see the investment boom promised by proponents of the tax cut. This point really has to be front and center in any discussion of the benefits of the tax cut. By far, the largest chunk of the tax cut was the reduction in the corporate tax rate from 35 percent to 21 percent, along with various other measures lowering corporate taxes.

The immediate impact of a corporate tax cut is to give more money to the richest people in the country since stock ownership is highly skewed towards the top 10 percent of the income distribution and especially the top one percent.

CEPR / October 31, 2018

Article Artículo

Affordable Care Act

Health and Social Programs

Healthcare

Inequality

Yes, the Republicans Want People with Health Problems to Pay Up the Wazoo

The discussion of health care has been badly warped ever since the debate over the Affordable Care Act (ACA) in 2009. A central feature of the ACA was the requirement that everyone get insurance, or pay a penalty if they don’t. While many resented having the government force them to buy insurance, especially in a context where they had to buy it from a private insurance company (i.e. there was no public option), this was actually a central feature of the ACA.

The main point of the ACA was to make it possible for people with serious health issues to get coverage. Insurers are happy to cover healthy people. For the most part, covering a healthy person means insurers get a check every month for nothing. It’s good work, if you can get it.

People with health problems are a different story. They actually do cost the insurers money. This is why insurers either charged people with health problems very high premiums or didn’t allow them to buy insurance at all, in the years before we had the ACA.

The ACA prohibited discrimination based on pre-existing conditions. It only allowed insurers to vary premiums based on age, not health. But, as several states discovered, a ban on discrimination based on health will not work by itself. This means that the average cost of insurance will be much higher.

That makes it a bad deal for relatively healthy people, many of whom will then decide not to buy insurance. With fewer healthy people in the pool, the average cost per person rises. This leads to higher premiums, which leads to more relatively healthy people leaving the pool. You go through a few rounds of this process and you end up with an insurance pool with relatively few healthy people and very high premiums.

This is why the ACA came with a mandate for buying insurance. The point was to keep healthy people in the pool to ensure that health insurance would be affordable. Of course, even without discrimination based on health, insurance would still be very expensive. This was the reason for the subsidies.

Unfortunately, the subsidies were not very generous and they phased out at levels that left many middle-income families with very high insurance costs.  Still, many more people had access to insurance than before the ACA.

CEPR / October 27, 2018

Article Artículo

Economic Growth

Globalization and Trade

United States

Nerd Talk: Growth Trends and Final Sales to Private Domestic Purchasers

Matt O'Brien had a good piece on yesterday's GDP numbers noting that we are not seeing the investment boom promised by promoters of the tax cut. However, he argued that growth was likely to remain close to 3.0 percent based on the 3.1 percent growth rate reported in final sales to private domestic purchasers. In my GDP write-up, I was somewhat less optimistic about near-term growth prospects, pointing to the 1.4 percent growth rate in final sales.

The difference between these two measures is that the final demand measure pulls out inventory changes from GDP. The logic is that changes in the rate of inventory accumulation are erratic and no one thinks that the rate of inventory accumulation will expand infinitely relative to the economy nor the rate at which they are being run down will continually accelerate. For this reason, the final demand measure, which leaves out inventories, seems like a better measure of growth.

The final sales to domestic purchasers measure pulls out government spending and net exports, following a similar logic. Government spending is often erratic, jumping or falling in a given quarter, often due to the timing of purchases, especially with the military. Pulling it out can give a better measure of underlying growth. Net exports are also erratic, but we don't expect the trade deficit to either continually expand or shrink relative to the overall size of the economy. Therefore pulling out the quarterly changes can give us a better measure of the underlying growth rate.  

While the decision to pull government expenditures out of the GDP figure makes little difference in the most recent quarter (they grew at a 3.3 percent rate, almost the same as the 3.5 percent overall growth rate), the decision on net exports does. The increase in the trade deficit subtracted 1.78 percentage points from growth in the quarter. That is the explanation for the difference between the 3.1 percent growth rate in final sales to domestic purchasers and the 1.4 percent rate of growth of final demand.

CEPR / October 27, 2018

Article Artículo

Health and Social Programs

Inequality

Diverting Class War Into Generational War, Again

The wages of a typical worker have barely risen in four decades, many recent college grads are facing unbearable student loan burdens, housing costs are hugely outpacing inflation in many cities, making life especially hard for low- and moderate-income households. Naturally, the problem is the Social Security and Medicare received by baby boomers.

That's what Glenn Kramon, a former assistant managing editor at The New York Times, would have us believe according to his NYT column, seriously. He tells readers:

"My generation will say we paid into the system for decades and deserve our entitlements. But the one-earner baby boomer couple my age who have earned the average wage every year have paid less than $100,000 in Medicare taxes but are taking out benefits worth more than $400,000, after adjusting for inflation, according to C. Eugene Steuerle, a former Treasury official now at the Urban Institute.

"He also found that the couple will receive half a million dollars in Social Security after paying in little more than a quarter million."

Kramon even speculates that Medicare might have been responsible for Trump's victory in 2016.

"I even wonder whether increased Medicare spending is partly responsible for the election of Donald Trump, whose margin of victory came from voters in our generation. Without that spending, might enough of us have died sooner and tipped the balance in favor of Hillary Clinton?"

Before showing why this story is total nonsense, it is worth noting that the story that Social Security and Medicare are somehow responsible for all evil is a recurring theme at respectable news outlets like the NYT and National Public Radio. Just to give a few examples, we had this one last year in the Boston Globe on how the baby boomers are destroyed everything. (That's the title.) We had Abby Huntsman, whose main claim to fame is being born into a rich family, telling us on MSNBC how unfair these programs are to her generation. We have Thomas Friedman who periodically uses his NYT column for this purpose (e.g. here). And, we have Robert Samuelson who does it all the time with his Washington Post column.

CEPR / October 26, 2018