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Article Artículo

Economic Growth

United States

Workers

A Warning for Trump: Warsh and Taylor Would Stunt Our Chance at Full Recovery, Especially for Those Who Are Less Educated

Last week, Donald Trump met for an hour-long meeting with economist John Taylor, who is now regarded as a potential candidate for the opening Fed chair seat, currently occupied by Janet Yellen. Taylor, the man behind the Taylor Rule, which attempts to set rules-based guidelines for the Fed regarding inflation and interest rates, is among the candidates for the chair position, as is Kevin Warsh. Nominating either of these candidates would be a tremendous step backward for the economy, especially following the recent and promising signs of growth for those who are less educated, as well as for blacks and Hispanic/Latinos, since the devastation of the recession.

The Federal Reserve website suggests that the lowest level of unemployment that the US can withstand without causing excessive inflation is within a range of 4.5 and 6 percent. However, in this past quarter in 2017, unemployment averaged 4.3 percent, well below the Fed’s accepted range with no signs of inflation above the target rates. Following strict rules-based policy, as celebrated by economists like Taylor and Warsh, would have led to the maintenance of higher than necessary unemployment rates, as well as a loss in employment, and would contribute to slowing the already lagged recovery since the financial crisis. According to an analysis conducted by the Federal Reserve Bank of Minneapolis, had the Fed complied with the generally accepted rules surrounding target unemployment levels, 2.5 million people would have been kept out of work.

CEPR and Daniella Zessoules / October 20, 2017

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Democrats Used to Be the Party of Slavery: Doug Schoen Pushes the Case for Keeping the Democratic Party Allied with Wall Street

Doug Schoen, a former consultant to Bill Clinton, argued the case that the Democrats should keep their ties to Wall Street in a NYT column this morning. While he does advance his argument with some red-baiting and bad logic, he uses tradition as a starting point.

"Many of the most prominent voices in the Democratic Party, led by Bernie Sanders, are advocating wealth redistribution through higher taxes and Medicare for all, and demonizing banks and Wall Street.

"Memories in politics are short, but those policies are vastly different from the program of the party’s traditional center-left coalition. Under Bill Clinton, that coalition balanced the budget, acknowledged the limits of government and protected the essential programs that make up the social safety net.

"President Clinton did this, in part, by moving the party away from a reflexive anti-Wall Street posture. It’s not popular to say so today, but there are still compelling reasons Democrats should strengthen ties to Wall Street."

Of course, memories are not actually short, contrary to what Schoen claims. Many supporters of harsher policies directed against the financial sector remember the stock bubble whose crash led to what was at the time, the longest period without job growth since the Great Depression. They also remember a financial sector that continued to run wild as the housing bubble inflated. And they remember the Great Recession that followed the collapse of that bubble. And, they remember the government's bailout policies that ensured that the financial industry-types would end up on their feet and not in jail.

But Schoen does go beyond appealing to tradition.

CEPR / October 18, 2017

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Globalization and Trade

Thomas Friedman Pushes the TPP Joke

When it became impossible to sell the Trans-Pacific Partnership (TPP) on its economic merits, proponents of the deal began to argue for it as a way to contain China's power in the region. Thomas Friedman picks up this line and runs with it in his latest column.

"Trump came into office vowing to end the trade imbalance with China — a worthy goal. And what was his first move? To tear up the Trans-Pacific Partnership, the trade deal that would have put the U.S. at the helm of a 12-nation trading bloc built around U.S. interests and values, potentially eliminating some 18,000 tariffs on U.S. goods and controlling 40 percent of global G.D.P. And China was not in the group. That’s called leverage.

"Trump just ripped up the TPP to “satisfy the base” and is now left begging China for trade crumbs, with little leverage. And because he needs China’s help in dealing with North Korea, he has even less leverage on trade."

Let's see, we're eliminating 18,000 tariffs. That sounds really impressive, except the vast majority of these tariffs were near zero anyhow. Admittedly, a zero tariff is more supportive of trade than a tariff of 1.0 percent, but it's not exactly going to lead to a flood of exports. It has roughly the same impact as a 1.0 percent decline in the value of the dollar, the sort of change in currency values that we often see in a single day.

The touting of the number of tariffs, rather than the impact on trade is the sort of cheap trick propagandists resort to when they can't make a serious argument. It's worth also noting that the 18,000 tariff figure includes many altogether meaningless tariffs, like Brunei's tariffs on ski boots made in the United States and tariffs on items that are already banned from international trade, like shark fins.

CEPR / October 18, 2017

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David Brooks Goes Into Full Name Calling Mode

No regular reader of the NYT expects great insights from David Brooks, but the sort of name-calling in today's column is the sort of thing one expects from a grade schooler. It turns out that if you don't agree with Brooks' view of the world you are a "downswinger," you have gone from an "optimistic, progress-embracing view toward a pessimistic, system-doubting view."

Well hey, who wants to be a downswinging pessimist, as opposed to someone who embraces progress? How about we instead divide the world between those who live in reality and work for a living and those who earn a good salary lying in NYT columns.

David Brooks begins his piece by telling us these are the best of times, especially for those of us who live in the United States. Here's his second paragraph:

"In 1980 the U.S. had a slight edge in G.D.P. per capita over Germany, Japan, France and the U.K. But the U.S. has grown much faster than the other major economies over the past 37 years, so that now it produces about $54,000 of output per capita compared with about $39,000 for Japan and France."

Hmmm, a slight edge in 1980? Here are the numbers according to the International Monetary Fund.

CEPR / October 17, 2017

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Confusion on Profits, Wages, and Taxes at the White House

The White House is pushing the line that their proposed cut to corporate tax rates will lead to an increase in average household income of more than $4,000.

“Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggests that over a decade, this effect could be much larger.”

This is a pretty impressive claim, but it gets even better a couple of pages later:

“When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”

There are few things worth pointing out about the White House’s claims here. First, the idea that workers would see large gains from a reduction in corporate income tax rates is not based on the idea that lower taxes will be directly passed on in wages. The amount of tax at stake is far too small to have the sort of impact on wages claimed here.

Rather the implication is that there would be a huge burst of investment leading to a huge increase in productivity and growth. The higher levels of productivity would be passed on to workers in the form of higher wages.

CEPR / October 16, 2017