Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?

However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.

While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws. 

To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.

 

A World Without Patent and Copyright Monopolies

If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues. 

Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion. 

Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.

Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)  

After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product. 

The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.

In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.

There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost. 

These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits. 

The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.

Policy Choices on Promoting Innovation and Creative Work

If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase. 

Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades. 

We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past. 

We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet. 

In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.

However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.

Technology Policy, not Technology Creates Inequality

It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself.  That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.

As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)

And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.

It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?

However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.

While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws. 

To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.

 

A World Without Patent and Copyright Monopolies

If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues. 

Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion. 

Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.

Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)  

After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product. 

The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.

In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.

There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost. 

These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits. 

The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.

Policy Choices on Promoting Innovation and Creative Work

If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase. 

Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades. 

We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past. 

We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet. 

In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.

However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.

Technology Policy, not Technology Creates Inequality

It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself.  That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.

As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)

And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.

It’s amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

“First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

“Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.”

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation in the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates.) Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. This is loon tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run on the dollar story is also problematic for anyone who gives it a moment’s thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let’s say that it fell by 20 percent to its levels of 2010, would that be a crisis? That’s a bit hard to see.

Could it fall further? Well, how would the EU, China, Japan and other countries feel about us putting 25-30 percent tariffs on their exports to us? A drop in the dollar of this magnitude is equivalent to a tariff of the same size, except it is worse for their trade position. A drop in the dollar of 25-30 percent is also equivalent to a subsidy to our exports of 25 to 30 percent. The reality is that an uncontrolled fall in the dollar is at least as much a threat to our trading partners as it is to the United States, which is why we don’t have to worry about it as long as we have an otherwise healthy economy that produces tens of trillions of dollars of goods and services.

There are a couple of other points about Samuelson’s piece that need correcting. He tells readers:

“Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.”

Umm, no, we absolutely can blame higher deficits on Donald Trump. The deficit was relatively modest when he took office, with the debt to GDP ratio nearly stable. This is easy to show, we can just look the projections from the Congressional Budget Office. In January of 2017, before Trump’s tax cuts, we were projected to have a deficit this year of 2.9 percent of GDP in 2020. The most recent projections show a deficit of 4.5 percent of GDP.

The difference is entirely attributable to a drop in projected tax revenue equal to 1.8 percent of GDP. In other words, we can absolutely attribute our large current deficit to Donald Trump’s tax cuts.

Now just to qualify this point, the larger deficit was a good thing. It has helped to boost the economy, reduce the unemployment rate, and give workers more bargaining power to secure wage gains. Increasing the deficit by giving more money to rich people was just about the worse way to do this (we could have spent the money on education, infrastructure, clean energy etc.), but we are still better off with this larger deficit than a smaller one.

The last point is that Samuelson ignores the costs of government granted patent and copyright monopolies. These forms of implicit debt dwarf the actual debt over which Samuelson and others obsess, but I guess forcing people to pay hundreds of billions extra each year to drug and software companies is not the sort of thing that bothers Samuelson.

It’s amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

“First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

“Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.”

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation in the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates.) Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. This is loon tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run on the dollar story is also problematic for anyone who gives it a moment’s thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let’s say that it fell by 20 percent to its levels of 2010, would that be a crisis? That’s a bit hard to see.

Could it fall further? Well, how would the EU, China, Japan and other countries feel about us putting 25-30 percent tariffs on their exports to us? A drop in the dollar of this magnitude is equivalent to a tariff of the same size, except it is worse for their trade position. A drop in the dollar of 25-30 percent is also equivalent to a subsidy to our exports of 25 to 30 percent. The reality is that an uncontrolled fall in the dollar is at least as much a threat to our trading partners as it is to the United States, which is why we don’t have to worry about it as long as we have an otherwise healthy economy that produces tens of trillions of dollars of goods and services.

There are a couple of other points about Samuelson’s piece that need correcting. He tells readers:

“Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.”

Umm, no, we absolutely can blame higher deficits on Donald Trump. The deficit was relatively modest when he took office, with the debt to GDP ratio nearly stable. This is easy to show, we can just look the projections from the Congressional Budget Office. In January of 2017, before Trump’s tax cuts, we were projected to have a deficit this year of 2.9 percent of GDP in 2020. The most recent projections show a deficit of 4.5 percent of GDP.

The difference is entirely attributable to a drop in projected tax revenue equal to 1.8 percent of GDP. In other words, we can absolutely attribute our large current deficit to Donald Trump’s tax cuts.

Now just to qualify this point, the larger deficit was a good thing. It has helped to boost the economy, reduce the unemployment rate, and give workers more bargaining power to secure wage gains. Increasing the deficit by giving more money to rich people was just about the worse way to do this (we could have spent the money on education, infrastructure, clean energy etc.), but we are still better off with this larger deficit than a smaller one.

The last point is that Samuelson ignores the costs of government granted patent and copyright monopolies. These forms of implicit debt dwarf the actual debt over which Samuelson and others obsess, but I guess forcing people to pay hundreds of billions extra each year to drug and software companies is not the sort of thing that bothers Samuelson.

(This piece first appeared on my Patreon page.)

Last week, as Donald Trump was trying to distract attention from his impeachment trial, he was holding events touting his big trade victories. The two items for celebration were the new NAFTA, dubbed by Trump as the U.S.-Mexico-Canada Agreement, and a “phase one” trade deal with China. While these deals may be useful props for the impeachment distraction, they are unlikely to offer much to the manufacturing workers who Trump claims are at the center of his trade agenda.

The new NAFTA may lead to some modest shifts of employment in the auto industry, but its impact on the larger manufacturing sector will be invisible for all practical purposes. The China pact includes bizarre commitments of Chinese purchases of specific items. It’s not clear how these would be enforced, but if they choose to comply with the treaty and play games, there is nothing that prevents China from meeting its commitments by being an intermediary between the United States and other importers of U.S. goods.

Specifically, if China needs to buy another $50 billion of U.S. manufactured goods to meet its commitments, it could simply make $50 billion in purchases and then sell them to current U.S. importers in Japan, Korea, and elsewhere. That leads to no net gain in U.S. exports, but would comply with China’s trade commitments.

The markets have already indicated that they are not impressed with the impact of this deal on U.S. exports. The price of major farm commodities, like soy beans and wheat, remain well below their levels earlier in the decade. If there was an expectation that China’s purchases were going to substantially improve the fate of America’s farmers, then we should have seen the price of these products soaring after the outlines of the deal became known.

Trump punted on the one issue that likely would have made a substantial difference in the U.S. trade balance, the value of the dollar. After running around the country for two years denouncing China as a “world class currency manipulator,” the deal does nothing to change the exchange rate between the Chinese yuan and the dollar. (The term “manipulation” implies something which is surely not appropriate in this case. China openly manages the value of its currency, so we don’t have to catch them doing something secretly in the dark.)

Anyhow, it will take some time to see how these deals fully play out in practice, but we do have plenty of data to assess how manufacturing workers have been doing thus far under Trump. The answer for the most part is not very good.

At the most basic level, employment in the sector has been virtually flat since July, rising by a total of just 5,000 over this period. Manufacturing employment fell 12,000 in December. The situation looks considerably worse if we look at hours worked. The index of aggregate hours worked in the sector peaked in December of last year and has dropped 0.5 percent over the last year.

The wage picture looks even worse. Wage growth in manufacturing has consistently lagged overall wage growth in the private sector under Trump. The average hourly wage for manufacturing workers has risen by less than 2.3 percent annually over the last three years compared to almost 3.0 percent for the private sector as a whole. In fact, the average hourly wage for the private sector as a whole exceeded the average for manufacturing for the first time ever in May of 2018.

The situation looks even worse if we look at the weekly wage. While average weekly earnings have risen an average of 2.5 percent in the Trump years, in the last year they have risen just 1.3 percent. This means that the real weekly wage for manufacturing workers had fallen by roughly 1.0 percent over the last year.

While manufacturing has been hit hard by competition from low paid workers in the developing world, it has also been hit by a plunge in the unionization rate. The biggest hit was from 2000 to 2007, as the trade deficit exploded. The country lost nearly 40 percent of unionized workers in manufacturing in these years.

The number of union members in manufacturing fell further in the Great Recession. It then recovered somewhat as employment expanded, but peaked in 2013 and has been headed in a mostly downward path the last six years. The number of union members in manufacturing in 2019 was just over 46 percent of the number in 2000. The 8.7 percent current unionization rate in the sector is somewhat above the private sector average of 6.4 percent, but below the economy-wide average of 10.3 percent.

With this sharp drop in unionization rates, it is not surprising that manufacturing workers have not been able to secure wage gains in step with the rest of the workforce. The few new jobs that have been added in manufacturing in this recovery have mostly not been union jobs or especially well-paying.

This has meant that the industrial Midwest, which is still more heavily unionized, has largely been bypassed by the growth in manufacturing employment during the Trump years. Here is the story for the five Midwest states that were considered swing states in the last election.

Change in Manufacturing Employment

                                                                          Last Year                             Since January 2017

Michigan                                                             -6,100                                    +9,800 (1.5 percent)

Minnesota                                                          -1,900                                    +1,900 (0.6 percent)

Ohio                                                                   -2,200                                    +12,100 (1.8 percent)

Pennsylvania                                                      -4,500                                    +3,700 (0.6 percent)

Wisconsin                                                          -6,000                                    +4,100 (0.9 percent)

Source: Bureau of Labor Statistics.

By comparison, manufacturing employment for the country as whole is up 487,000 since Trump came into office, an increase of 4.0 percent. This means all of these states have seen gains in manufacturing far below the national average.

The prospects for the immediate future do not look much better. The Federal Reserve reported that manufacturing production increased a modest 0.2 percent in December, but that still left it 0.3 percent below its August level and 1.3 percent below its year ago level. Assuming even modest rates of productivity growth, production would have to increase by 1.0-1.5 percent annually just keep employment levels constant.

Other labor market measures also indicate weakness in manufacturing, most notably data on job openings. According to the Bureau of Labor Statistics, the rate of job openings in manufacturing was 2.9 percent in November, down from 3.8 percent last year. The one-month diffusion index, which reports the percentage of industries in the sector that expect to increase hiring next month, was just 44.7 last month. That compares to a reading of 65.1 in December of 2018 and 71.7 in December of 2017. These measures certainly suggest that a hiring boom in manufacturing is not imminent.

In fairness, it is difficult to know at this point how Trump’s trade deals, especially the one with China, will play out.  However, to date, Trump certainly has not been able to produce big gains for the manufacturing industries who he had promised to help in his campaign. The trade deficit has actually risen as a share of GDP in the first three years of his administration.

The major impact of his trade war to date has been to reduce manufacturing output and investment by both raising costs with his tariffs and increasing uncertainty about future trade arrangements. Investment in equipment and structures has been falling the last three quarters. There is still some time where things could turn around before the election, but with each passing month this is looking less likely.

(This piece first appeared on my Patreon page.)

Last week, as Donald Trump was trying to distract attention from his impeachment trial, he was holding events touting his big trade victories. The two items for celebration were the new NAFTA, dubbed by Trump as the U.S.-Mexico-Canada Agreement, and a “phase one” trade deal with China. While these deals may be useful props for the impeachment distraction, they are unlikely to offer much to the manufacturing workers who Trump claims are at the center of his trade agenda.

The new NAFTA may lead to some modest shifts of employment in the auto industry, but its impact on the larger manufacturing sector will be invisible for all practical purposes. The China pact includes bizarre commitments of Chinese purchases of specific items. It’s not clear how these would be enforced, but if they choose to comply with the treaty and play games, there is nothing that prevents China from meeting its commitments by being an intermediary between the United States and other importers of U.S. goods.

Specifically, if China needs to buy another $50 billion of U.S. manufactured goods to meet its commitments, it could simply make $50 billion in purchases and then sell them to current U.S. importers in Japan, Korea, and elsewhere. That leads to no net gain in U.S. exports, but would comply with China’s trade commitments.

The markets have already indicated that they are not impressed with the impact of this deal on U.S. exports. The price of major farm commodities, like soy beans and wheat, remain well below their levels earlier in the decade. If there was an expectation that China’s purchases were going to substantially improve the fate of America’s farmers, then we should have seen the price of these products soaring after the outlines of the deal became known.

Trump punted on the one issue that likely would have made a substantial difference in the U.S. trade balance, the value of the dollar. After running around the country for two years denouncing China as a “world class currency manipulator,” the deal does nothing to change the exchange rate between the Chinese yuan and the dollar. (The term “manipulation” implies something which is surely not appropriate in this case. China openly manages the value of its currency, so we don’t have to catch them doing something secretly in the dark.)

Anyhow, it will take some time to see how these deals fully play out in practice, but we do have plenty of data to assess how manufacturing workers have been doing thus far under Trump. The answer for the most part is not very good.

At the most basic level, employment in the sector has been virtually flat since July, rising by a total of just 5,000 over this period. Manufacturing employment fell 12,000 in December. The situation looks considerably worse if we look at hours worked. The index of aggregate hours worked in the sector peaked in December of last year and has dropped 0.5 percent over the last year.

The wage picture looks even worse. Wage growth in manufacturing has consistently lagged overall wage growth in the private sector under Trump. The average hourly wage for manufacturing workers has risen by less than 2.3 percent annually over the last three years compared to almost 3.0 percent for the private sector as a whole. In fact, the average hourly wage for the private sector as a whole exceeded the average for manufacturing for the first time ever in May of 2018.

The situation looks even worse if we look at the weekly wage. While average weekly earnings have risen an average of 2.5 percent in the Trump years, in the last year they have risen just 1.3 percent. This means that the real weekly wage for manufacturing workers had fallen by roughly 1.0 percent over the last year.

While manufacturing has been hit hard by competition from low paid workers in the developing world, it has also been hit by a plunge in the unionization rate. The biggest hit was from 2000 to 2007, as the trade deficit exploded. The country lost nearly 40 percent of unionized workers in manufacturing in these years.

The number of union members in manufacturing fell further in the Great Recession. It then recovered somewhat as employment expanded, but peaked in 2013 and has been headed in a mostly downward path the last six years. The number of union members in manufacturing in 2019 was just over 46 percent of the number in 2000. The 8.7 percent current unionization rate in the sector is somewhat above the private sector average of 6.4 percent, but below the economy-wide average of 10.3 percent.

With this sharp drop in unionization rates, it is not surprising that manufacturing workers have not been able to secure wage gains in step with the rest of the workforce. The few new jobs that have been added in manufacturing in this recovery have mostly not been union jobs or especially well-paying.

This has meant that the industrial Midwest, which is still more heavily unionized, has largely been bypassed by the growth in manufacturing employment during the Trump years. Here is the story for the five Midwest states that were considered swing states in the last election.

Change in Manufacturing Employment

                                                                          Last Year                             Since January 2017

Michigan                                                             -6,100                                    +9,800 (1.5 percent)

Minnesota                                                          -1,900                                    +1,900 (0.6 percent)

Ohio                                                                   -2,200                                    +12,100 (1.8 percent)

Pennsylvania                                                      -4,500                                    +3,700 (0.6 percent)

Wisconsin                                                          -6,000                                    +4,100 (0.9 percent)

Source: Bureau of Labor Statistics.

By comparison, manufacturing employment for the country as whole is up 487,000 since Trump came into office, an increase of 4.0 percent. This means all of these states have seen gains in manufacturing far below the national average.

The prospects for the immediate future do not look much better. The Federal Reserve reported that manufacturing production increased a modest 0.2 percent in December, but that still left it 0.3 percent below its August level and 1.3 percent below its year ago level. Assuming even modest rates of productivity growth, production would have to increase by 1.0-1.5 percent annually just keep employment levels constant.

Other labor market measures also indicate weakness in manufacturing, most notably data on job openings. According to the Bureau of Labor Statistics, the rate of job openings in manufacturing was 2.9 percent in November, down from 3.8 percent last year. The one-month diffusion index, which reports the percentage of industries in the sector that expect to increase hiring next month, was just 44.7 last month. That compares to a reading of 65.1 in December of 2018 and 71.7 in December of 2017. These measures certainly suggest that a hiring boom in manufacturing is not imminent.

In fairness, it is difficult to know at this point how Trump’s trade deals, especially the one with China, will play out.  However, to date, Trump certainly has not been able to produce big gains for the manufacturing industries who he had promised to help in his campaign. The trade deficit has actually risen as a share of GDP in the first three years of his administration.

The major impact of his trade war to date has been to reduce manufacturing output and investment by both raising costs with his tariffs and increasing uncertainty about future trade arrangements. Investment in equipment and structures has been falling the last three quarters. There is still some time where things could turn around before the election, but with each passing month this is looking less likely.

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It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

I ridiculed the NYT and Washington Post yesterday for telling us that China, the world’s most populous country, is in danger of running out of people. Using a tool that seems relatively scarce in Washington policy discussions, arithmetic, I showed that China’s gains in productivity will dwarf the effects of a falling ratio of workers to retirees. To put it simply, with each worker being far more productive, China will be able to enjoy a society in which both workers and retirees enjoy much higher living standards 20 years out than they do today.

I was hoping that we would not see another of these China population crisis stories for a while. I was wrong. Today, Ross Douthat used his NYT column to tell us how “Communist cruelty and western folly built an underpopulation bomb.” Douthat tells us:

“Like the United States and most developed countries, China has a birthrate that is well below replacement level. Unlike most developed countries, China is growing old without first having grown rich.”

This is a master statement of illogic. Yes, China is poorer than the U.S. and other wealthy countries, but there are two simple points that make Douthat complaint look incredibly silly.

First, we would want to look at rates of growth, not just levels. If we look at I.M.F. projections, China’s per capita income is projected to grow at rate of just under 5.5 percent annually for the next four years. If it continues this pace of growth for the next twenty years, when today’s too small birth cohort is entering the workforce, its per capita GDP will have nearly tripled. That would make it $64,200 per person, about 7.0 percent higher than the U.S. is today. In other words, China would be rich.

But maybe the 5.5 percent growth rate is too much to assume will be sustained for twenty years. Let’s cut it in half to 2.8 percent annually. In that case, China’s per capita income would grow by a bit more than 73 percent over the next two decades, making it $38,400 in twenty years. That is more than one-third less than the current per capita GDP in the U.S., but it’s only slightly below where Japan and Korea are today, two countries who Douthat apparently feels comfortable in saying have grown rich. It’s also roughly where the U.S. economy was in 1994, a year when most of us would have thought we were relatively rich by world standards.

But this is actually the less important problem with Douthat’s complaint. In 2020, China is considerably poorer than the United States. This means that its people on average have fewer cars, smaller housing units, and in other ways have lower material living standards than people in the United States.

Is this a crisis? Most people in China probably would not call it a crisis, since they are doing hugely better than they did twenty years ago and kids enjoy much higher living standards than their parents.

Now suppose that over the next two decades living standards increase somewhat less rapidly than they would otherwise because there is a falling ratio of workers to retirees. Is there any reason to think this would mean some sort of crisis in China because both its workers and retirees have lower living standards than people in the United States?

It’s very hard to see that story. In other words, this crisis of growing old before it grows rich is an absurdity on its face. There is no reason for anyone to take it seriously.

It is also worth mentioning in this context that we do face this problem called “global warming.” In that context, we should be very happy that China’s population is not 50 percent larger today. That might make people like Ross Douthat very happy, but it would make it hugely more difficult to limit the damage caused by global warming.

I ridiculed the NYT and Washington Post yesterday for telling us that China, the world’s most populous country, is in danger of running out of people. Using a tool that seems relatively scarce in Washington policy discussions, arithmetic, I showed that China’s gains in productivity will dwarf the effects of a falling ratio of workers to retirees. To put it simply, with each worker being far more productive, China will be able to enjoy a society in which both workers and retirees enjoy much higher living standards 20 years out than they do today.

I was hoping that we would not see another of these China population crisis stories for a while. I was wrong. Today, Ross Douthat used his NYT column to tell us how “Communist cruelty and western folly built an underpopulation bomb.” Douthat tells us:

“Like the United States and most developed countries, China has a birthrate that is well below replacement level. Unlike most developed countries, China is growing old without first having grown rich.”

This is a master statement of illogic. Yes, China is poorer than the U.S. and other wealthy countries, but there are two simple points that make Douthat complaint look incredibly silly.

First, we would want to look at rates of growth, not just levels. If we look at I.M.F. projections, China’s per capita income is projected to grow at rate of just under 5.5 percent annually for the next four years. If it continues this pace of growth for the next twenty years, when today’s too small birth cohort is entering the workforce, its per capita GDP will have nearly tripled. That would make it $64,200 per person, about 7.0 percent higher than the U.S. is today. In other words, China would be rich.

But maybe the 5.5 percent growth rate is too much to assume will be sustained for twenty years. Let’s cut it in half to 2.8 percent annually. In that case, China’s per capita income would grow by a bit more than 73 percent over the next two decades, making it $38,400 in twenty years. That is more than one-third less than the current per capita GDP in the U.S., but it’s only slightly below where Japan and Korea are today, two countries who Douthat apparently feels comfortable in saying have grown rich. It’s also roughly where the U.S. economy was in 1994, a year when most of us would have thought we were relatively rich by world standards.

But this is actually the less important problem with Douthat’s complaint. In 2020, China is considerably poorer than the United States. This means that its people on average have fewer cars, smaller housing units, and in other ways have lower material living standards than people in the United States.

Is this a crisis? Most people in China probably would not call it a crisis, since they are doing hugely better than they did twenty years ago and kids enjoy much higher living standards than their parents.

Now suppose that over the next two decades living standards increase somewhat less rapidly than they would otherwise because there is a falling ratio of workers to retirees. Is there any reason to think this would mean some sort of crisis in China because both its workers and retirees have lower living standards than people in the United States?

It’s very hard to see that story. In other words, this crisis of growing old before it grows rich is an absurdity on its face. There is no reason for anyone to take it seriously.

It is also worth mentioning in this context that we do face this problem called “global warming.” In that context, we should be very happy that China’s population is not 50 percent larger today. That might make people like Ross Douthat very happy, but it would make it hugely more difficult to limit the damage caused by global warming.

Folks who have followed economic policy debates for the last few decades can never be surprised by the poor quality of reporting, but it still can get annoying. In a world where we are already doing irreparable damage to the environment through global warming, the idea that we will have fewer people in the future should be seen as a good thing.

Nonetheless, our leading news outlets are warning us that China, the world’s most heavily populated country may be seeing its population decline in the decades ahead. The story is that fewer babies will mean fewer workers twenty years out. We are warned that this would lead to a labor shortage and make it more difficult to support retirement pensions. The Post article warns that in Japan (it also talks about countries other than China), it could make it difficult to sustain economic growth.

Let’s deal with these one by one. What does a labor shortage mean? Presumably it will be hard to get people to do the least productive, lowest paying jobs. The obvious response is, so what? This is called “capitalism.” If a particular job holds little value then it won’t get done. This is the reason half of our workforce is not still in agriculture. They are doing more productive tasks elsewhere.

Going forward, if we do see serious labor shortages we will probably see fewer people serving tables in restaurants, working as housekeepers in hotels or providing valet parking. And, the people who still work at these jobs will get much higher pay. Sounds like a terrible crisis!

The second point is that with fewer workers per retiree, it will be harder to support retirement programs. The problem with the story is that the benefits from higher productivity growth swamp any possible increase in costs associated with changes in demographics. Here is what I wrote a few years back in reference to China.

“Suppose that China starts out with five workers per retiree, each with a wage before payments for retirees of 100. Let’s assume that the living standard of retirees requires that them to have 80 percent of the income of an average worker. In this story, we would need a tax rate of 13.8 percentage points on wages to maintain this living standard for retirees. This makes the wage net of payments to support the retired population equal to 86.2.

“Now suppose that over two decades the population ages so that the ratio of workers to retirees is just two to one. However, suppose over this two decade period productivity growth (output per worker hour) averages 5.0 percent annually. If we first calculate the tax rate needed to maintain a living standard for retirees, it is now 28.6 percent, leaving our worker with 71.4 percent of their pre-tax wage.

“But as a result of 5.0 percent annual productivity growth, the before tax wage will 265.3 percent of its level from twenty years earlier. This means that the pay net of the tax to support retirees would be 189.3 percent of the average before tax wage from twenty years earlier. If we compare after-tax wages for the two periods, the after-tax wage in the second period would be 219.6 percent of the after-tax wage in the first period. The living standards of retirees would also be correspondingly higher. So what’s the problem?

“This example is obviously highly stylized, but the assumptions used are almost certainly more negative than the reality. The demographic transition is taken place over 3–4 decades, not the two decades I have assumed here. Also, productivity growth has averaged 7–8 percent, not the 5.0 percent I assumed in these calculations. In short, China should have no problem supporting its retirees at a far higher standard of living than they enjoyed during most of their working lifetimes even as workers also see rising standards of living.”

While a 5 percent annual rate of productivity growth is plausible for China, it is certainly too high for the U.S., Europe and Japan. A more reasonable rate would be 1.0-1.5 percent. (Sorry, there is no evidence in these data that the robots are coming.) But even taking a 1.0 percent rate of productivity growth, the before tax wage (assuming wages keep pace with productivity growth) will be 22 percent higher in two decades. That is far more than enough to offset any tax increases needed to support plausible increases in the ratio of retirees to workers.

Many point out that wages for most workers have not kept pace with productivity growth. That is indeed a very serious problem, but the problem is wages not keeping pace with productivity growth, not the increasing numbers of retirees. There are many groups with lots of money that would like us to focus on the latter, but that doesn’t change the fact that the problem is intra-generational inequality, not inter-generational inequality.

Finally, we have the story that in a country like Japan, a declining population might mean that it cannot sustain economic growth. The proper response here is, who cares? Insofar as we are interested in growth at all, we care about per capita growth. If Japan’s population declines 1.0 percent a year and its economy shrinks modestly (say 0.2-0.3 percent annually), this is still consistent with a rise in per capita GDP of 0.7-0.8 percent annually. That’s not super-fast, but still decent for a wealthy country. And, if Japan chooses to take the benefits of higher productivity in the form of shorter work weeks and work years, as it has done over the last three decades, why is this is a problem?

In short, the concern about shrinking populations is complete nonsense. It is unfortunate that serious news outlets would waste time trying to scare people with this non-problem.

Folks who have followed economic policy debates for the last few decades can never be surprised by the poor quality of reporting, but it still can get annoying. In a world where we are already doing irreparable damage to the environment through global warming, the idea that we will have fewer people in the future should be seen as a good thing.

Nonetheless, our leading news outlets are warning us that China, the world’s most heavily populated country may be seeing its population decline in the decades ahead. The story is that fewer babies will mean fewer workers twenty years out. We are warned that this would lead to a labor shortage and make it more difficult to support retirement pensions. The Post article warns that in Japan (it also talks about countries other than China), it could make it difficult to sustain economic growth.

Let’s deal with these one by one. What does a labor shortage mean? Presumably it will be hard to get people to do the least productive, lowest paying jobs. The obvious response is, so what? This is called “capitalism.” If a particular job holds little value then it won’t get done. This is the reason half of our workforce is not still in agriculture. They are doing more productive tasks elsewhere.

Going forward, if we do see serious labor shortages we will probably see fewer people serving tables in restaurants, working as housekeepers in hotels or providing valet parking. And, the people who still work at these jobs will get much higher pay. Sounds like a terrible crisis!

The second point is that with fewer workers per retiree, it will be harder to support retirement programs. The problem with the story is that the benefits from higher productivity growth swamp any possible increase in costs associated with changes in demographics. Here is what I wrote a few years back in reference to China.

“Suppose that China starts out with five workers per retiree, each with a wage before payments for retirees of 100. Let’s assume that the living standard of retirees requires that them to have 80 percent of the income of an average worker. In this story, we would need a tax rate of 13.8 percentage points on wages to maintain this living standard for retirees. This makes the wage net of payments to support the retired population equal to 86.2.

“Now suppose that over two decades the population ages so that the ratio of workers to retirees is just two to one. However, suppose over this two decade period productivity growth (output per worker hour) averages 5.0 percent annually. If we first calculate the tax rate needed to maintain a living standard for retirees, it is now 28.6 percent, leaving our worker with 71.4 percent of their pre-tax wage.

“But as a result of 5.0 percent annual productivity growth, the before tax wage will 265.3 percent of its level from twenty years earlier. This means that the pay net of the tax to support retirees would be 189.3 percent of the average before tax wage from twenty years earlier. If we compare after-tax wages for the two periods, the after-tax wage in the second period would be 219.6 percent of the after-tax wage in the first period. The living standards of retirees would also be correspondingly higher. So what’s the problem?

“This example is obviously highly stylized, but the assumptions used are almost certainly more negative than the reality. The demographic transition is taken place over 3–4 decades, not the two decades I have assumed here. Also, productivity growth has averaged 7–8 percent, not the 5.0 percent I assumed in these calculations. In short, China should have no problem supporting its retirees at a far higher standard of living than they enjoyed during most of their working lifetimes even as workers also see rising standards of living.”

While a 5 percent annual rate of productivity growth is plausible for China, it is certainly too high for the U.S., Europe and Japan. A more reasonable rate would be 1.0-1.5 percent. (Sorry, there is no evidence in these data that the robots are coming.) But even taking a 1.0 percent rate of productivity growth, the before tax wage (assuming wages keep pace with productivity growth) will be 22 percent higher in two decades. That is far more than enough to offset any tax increases needed to support plausible increases in the ratio of retirees to workers.

Many point out that wages for most workers have not kept pace with productivity growth. That is indeed a very serious problem, but the problem is wages not keeping pace with productivity growth, not the increasing numbers of retirees. There are many groups with lots of money that would like us to focus on the latter, but that doesn’t change the fact that the problem is intra-generational inequality, not inter-generational inequality.

Finally, we have the story that in a country like Japan, a declining population might mean that it cannot sustain economic growth. The proper response here is, who cares? Insofar as we are interested in growth at all, we care about per capita growth. If Japan’s population declines 1.0 percent a year and its economy shrinks modestly (say 0.2-0.3 percent annually), this is still consistent with a rise in per capita GDP of 0.7-0.8 percent annually. That’s not super-fast, but still decent for a wealthy country. And, if Japan chooses to take the benefits of higher productivity in the form of shorter work weeks and work years, as it has done over the last three decades, why is this is a problem?

In short, the concern about shrinking populations is complete nonsense. It is unfortunate that serious news outlets would waste time trying to scare people with this non-problem.

(This is a guest post by Shawn Fremstad.)

In his column today, Paul Krugman rightly calls for more attention in the presidential campaign on family benefits and child poverty. As he points out, in Europe public social expenditures on family benefits (including benefits like child allowances, paid family leave, and child care) “average between 2 and 3 percent of G.D.P. The corresponding number for the United States is 0.6 percent of G.D.P.”  

I’d add there are at least three notable non-European examples of countries that substantially boosted their expenditures on family benefits over the last decades. In Canada, family benefits have increased from .9 percent of GDP in 2000 to 1.6 percent in 2015 (this is the latest year for Canada in the OECD’s comparative database, but their spending is likely even higher today for reasons noted below). In Japan, family benefits have increased from .6 percent of GDP in 2000 to 1.3 percent  in 2015. In Korea, family benefits have increased from .1 percent of GDP in 2000 to 1.2 percent 2017. 

While Krugman highlights child care and mentions paid family leave, he doesn’t mention a third important family-benefit reform that we need to make: turning the Child Tax Credit into an inclusive child allowance. In 2015, Justin Trudeau ran on reforming Canada’s then-byzantine set of tax credits for families with children into a single, simple, and progressive benefit. I was in Quebec during the run up to that election and remember seeing regular campaign ads touting his Child Benefit proposal. Notably, Trudeau pitched his plan in a way that was designed to appeal to both low- and middle-income families:

“… with [conservative Prime Minister] Harper you need to be a certain family to get his $2 billion tax break. For our plan, all you need is to be middle class, or hoping to join it. You can be a single mom, a stay-at-home dad, a family where both parents work or are divorced. It doesn’t matter. Our plan helps you.”

Trudeau won, and today the maximum credit is $6,639 (CA$) per child under age 6 and $5,602 per child age 6 through 17. Unlike in the United States, all very low-income families get the maximum credit, and child poverty has declined substantially in Canada as a result. 

Finally, I have to say that Krugman gets offtrack at the end when he argues that the Sanders campaign is to blame for the lack of attention to children because he made Medicare for All “a bright shiny object chased by the news media at the expense of other policies that could greatly improve American lives….” (My colleague Dean Baker has written about past Krugman critiques of Sanders on Medicare for All). While the media certainly needs to expand its focus to include family policy issues beyond health care, it is unfair to blame Sanders for their failings.

(This is a guest post by Shawn Fremstad.)

In his column today, Paul Krugman rightly calls for more attention in the presidential campaign on family benefits and child poverty. As he points out, in Europe public social expenditures on family benefits (including benefits like child allowances, paid family leave, and child care) “average between 2 and 3 percent of G.D.P. The corresponding number for the United States is 0.6 percent of G.D.P.”  

I’d add there are at least three notable non-European examples of countries that substantially boosted their expenditures on family benefits over the last decades. In Canada, family benefits have increased from .9 percent of GDP in 2000 to 1.6 percent in 2015 (this is the latest year for Canada in the OECD’s comparative database, but their spending is likely even higher today for reasons noted below). In Japan, family benefits have increased from .6 percent of GDP in 2000 to 1.3 percent  in 2015. In Korea, family benefits have increased from .1 percent of GDP in 2000 to 1.2 percent 2017. 

While Krugman highlights child care and mentions paid family leave, he doesn’t mention a third important family-benefit reform that we need to make: turning the Child Tax Credit into an inclusive child allowance. In 2015, Justin Trudeau ran on reforming Canada’s then-byzantine set of tax credits for families with children into a single, simple, and progressive benefit. I was in Quebec during the run up to that election and remember seeing regular campaign ads touting his Child Benefit proposal. Notably, Trudeau pitched his plan in a way that was designed to appeal to both low- and middle-income families:

“… with [conservative Prime Minister] Harper you need to be a certain family to get his $2 billion tax break. For our plan, all you need is to be middle class, or hoping to join it. You can be a single mom, a stay-at-home dad, a family where both parents work or are divorced. It doesn’t matter. Our plan helps you.”

Trudeau won, and today the maximum credit is $6,639 (CA$) per child under age 6 and $5,602 per child age 6 through 17. Unlike in the United States, all very low-income families get the maximum credit, and child poverty has declined substantially in Canada as a result. 

Finally, I have to say that Krugman gets offtrack at the end when he argues that the Sanders campaign is to blame for the lack of attention to children because he made Medicare for All “a bright shiny object chased by the news media at the expense of other policies that could greatly improve American lives….” (My colleague Dean Baker has written about past Krugman critiques of Sanders on Medicare for All). While the media certainly needs to expand its focus to include family policy issues beyond health care, it is unfair to blame Sanders for their failings.

I am speaking here in my capacity as “no one,” as in “no one saw the housing bubble and the risks it posed to the economy.” The reason for my comeback is the new consensus that we have to do something about China’s “bad practices,” which generally mean its lack of respect for the intellectual property claims of U.S. corporations.

This Washington Post piece gives us a good example, telling us:

“There is now a wide consensus in the United States to challenge China on its worst actions. After this agreement, U.S. firms in China are no longer supposed to be forced to hand their technology over to Chinese companies, a long-standing problem.”

Okay, at the risk of not getting included in the happy consensus, I will make a few points here.

The first should be the obvious one, if U.S. corporations don’t have to worry about being forced to transfer technology when they set up operations in China, then they will be more likely to set up operations in China. That’s pretty much Econ 101. Boeing obviously is happier when it is not forced to transfer technology to a future competitor, Boeings’ workers have no reason to be happy about more of their jobs going to China.

The second point is that China’s economy is already 30 percent larger than the U.S. economy. By the end of the decade it will almost certainly be more than twice as large as the U.S. economy. It spends roughly the same share of its GDP on research and development as the United States.

I know that the media are dominated by America First Trumper types, but if a country is spending twice as much on R&D as the U.S. it is likely to have more technology that we will want from them, then we will have technology that they will want from us. A trade policy that actually looked to benefit the United States and the world would be looking to share innovation as quickly as possible rather than lock down the patent and copyright monopolies of U.S. corporations.

Think of how much we could gain if clean technologies developed in both countries were immediately available for the whole world to use. The same applies to breakthroughs in health care and other areas. Yeah patents might have been a great system in the 16th century, but it might be worth a bit of rethinking on whether they are the best way to promote innovation in the 21st century. (This is the topic of chapter 5 in Rigged [it’s free].)

Finally, stronger and longer patent and copyright monopolies give more money to the people in a position to benefit from the rents from patent and copyrights (think Bill Gates). One of the great pieces of idiocy in economics (there are many) is the idea that technology is responsible for the upward redistribution of the last four decades. Sorry folks, it was not technology, it was our policy on technology. In a world without patents and copyrights, Bill Gates would probably still be working for a living. (Actually he is old enough to be getting Social Security.)

It was our policies on technology which allowed some people to get hugely rich while devaluing the skills of tens of millions of others. It is possible to argue that these policies were still best for the country as a whole in that they provided incentives to develop new technologies (that seems a hard argument, given the pathetic productivity growth of the last fifteen years), but the point is that it was a policy choice that redistributed income upward, not the technology itself.

The China case is just a classic example of this story. We are being told about the wide consensus by our media, without any indication that there is actually a policy choice here. That is the simple and obvious point that no one is saying.

I am speaking here in my capacity as “no one,” as in “no one saw the housing bubble and the risks it posed to the economy.” The reason for my comeback is the new consensus that we have to do something about China’s “bad practices,” which generally mean its lack of respect for the intellectual property claims of U.S. corporations.

This Washington Post piece gives us a good example, telling us:

“There is now a wide consensus in the United States to challenge China on its worst actions. After this agreement, U.S. firms in China are no longer supposed to be forced to hand their technology over to Chinese companies, a long-standing problem.”

Okay, at the risk of not getting included in the happy consensus, I will make a few points here.

The first should be the obvious one, if U.S. corporations don’t have to worry about being forced to transfer technology when they set up operations in China, then they will be more likely to set up operations in China. That’s pretty much Econ 101. Boeing obviously is happier when it is not forced to transfer technology to a future competitor, Boeings’ workers have no reason to be happy about more of their jobs going to China.

The second point is that China’s economy is already 30 percent larger than the U.S. economy. By the end of the decade it will almost certainly be more than twice as large as the U.S. economy. It spends roughly the same share of its GDP on research and development as the United States.

I know that the media are dominated by America First Trumper types, but if a country is spending twice as much on R&D as the U.S. it is likely to have more technology that we will want from them, then we will have technology that they will want from us. A trade policy that actually looked to benefit the United States and the world would be looking to share innovation as quickly as possible rather than lock down the patent and copyright monopolies of U.S. corporations.

Think of how much we could gain if clean technologies developed in both countries were immediately available for the whole world to use. The same applies to breakthroughs in health care and other areas. Yeah patents might have been a great system in the 16th century, but it might be worth a bit of rethinking on whether they are the best way to promote innovation in the 21st century. (This is the topic of chapter 5 in Rigged [it’s free].)

Finally, stronger and longer patent and copyright monopolies give more money to the people in a position to benefit from the rents from patent and copyrights (think Bill Gates). One of the great pieces of idiocy in economics (there are many) is the idea that technology is responsible for the upward redistribution of the last four decades. Sorry folks, it was not technology, it was our policy on technology. In a world without patents and copyrights, Bill Gates would probably still be working for a living. (Actually he is old enough to be getting Social Security.)

It was our policies on technology which allowed some people to get hugely rich while devaluing the skills of tens of millions of others. It is possible to argue that these policies were still best for the country as a whole in that they provided incentives to develop new technologies (that seems a hard argument, given the pathetic productivity growth of the last fifteen years), but the point is that it was a policy choice that redistributed income upward, not the technology itself.

The China case is just a classic example of this story. We are being told about the wide consensus by our media, without any indication that there is actually a policy choice here. That is the simple and obvious point that no one is saying.

(This post first appeared on my Patreon page.)

This is not an abstract philosophical question. Boeing forced out its CEO, Dennis Muilenburg last week. Muilenberg had played a major role in overseeing the development and production of the Boeing 737 Max, a plane which was recently involved in two major crashes, resulting in hundreds of deaths. Following these crashes, and the grounding of the plane in March, evidence has come out that Boeing did not take seriously many safety issues that were raised by people working on the plane.   

Since Muilenberg was the person in charge for the last four and a half years, it is certainly understandable that the company would want to send the guy packing. Boeing had long been a company with a solid record of putting safety as a top priority. It no longer has that reputation, which is hugely important for a maker of civilian airplanes. While this was clearly not all Muilenberg’s fault, as CEO he has considerable responsibility.

All of this is pretty straightforward. The part of the story that many people may find jarring is that Muilenberg walked away with $62 million in pay and benefits when he left the company.

This is jarring because it would be pretty hard to argue that Muilenberg had done a good job running the company. He leaves it with a horrible reputation problem, for which it may take many years to recover.

But we know shareholders don’t care about reputation, they care about money in their pockets. They might be okay with handing Muilenberg $62 million if he made them a lot of money.

However, that doesn’t seem to be the case. Boeings stock did do quite well under Muilenberg, rising by just under 130 percent over the four and half years that he was at the helm. But the stock of Airbus, Boeing’s main global competitor, almost matched this performance, and that was without the assistance of the big cut in corporate taxes that Trump gave to U.S. corporations in 2017. In other words, there is little reason to think that Muilenberg did anything for shareholders that any other Boeing CEO would not have done.

According to the press statements about Muilenberg’s parting gift, this was money that Muilenberg was owed, not some sort of severance package. It would take a careful reading of his contract to determine whether this is completely true, but from an economic standpoint, it doesn’t really matter.

The people on Boeing’s board presumably are not stupid, and in any case, they hire lawyers to write contracts who should understand the law. They all know how to write a contract that says the CEO walks away with little or nothing if they have done major damage to the company in their tenure, sort of like custodians and dishwashers typically walk away with little or nothing when they get fired for messing up on the job. For some reason, Boeing’s board chose not to write a contract like this for its CEO.

This would just be a peculiar quirk if Boeing was the only company whose board didn’t seem to know how to write contracts, but in fact this seems to be the norm. To take another recent example, John Stumpf walked away with $130 million from Wells Fargo after he was caught in a major scandal where the bank issued phony accounts for hundreds of thousands of customers.

Going back another decade, Home Depot CEO, Robert Nardelli, got a $210 million severance package in 2007 even though the company’s stock price had been cut in half under his tenure. The stock price of Lowes, the company’s major competitor, went up 40 percent over the same period.

There are no shortages of examples where CEO pay doesn’t bear any relationship to the returns provides to shareholders. Corporate boards surely can write contracts that more closely tie CEO pay to the returns that they provide to shareholders, above someone just spinning their wheels in the CEO position. The fact that boards fail to tie CEO pay closely to value actually provided to shareholders strongly suggests that the boards are not working for shareholders, they are working for the CEOs.

For some reason, most progressives have been determined to say that CEOs get their outlandish pay for serving shareholders, in spite of evidence to the contrary. This matters if we are interested in bringing down CEO pay, both because shareholders can be powerful allies and also because it says a lot about the legitimacy of CEO pay.

If CEO pay is justified by the extraordinary returns they provide to shareholders, then the $10 million, $20 million, or even $30 million paychecks are a story of capitalism working as it is supposed to. In this story, CEOs are hugely productive people who manage to produce enormous benefits to shareholders, who should be happy to give back a fraction of their gains in CEO pay. (For this discussion, I’m ignoring the fact that the gains may be the result of breaking unions, making unsafe products, wrecking the environment, or other anti-social acts. I’m just focusing narrowly on returns to shareholders.)

But if the pay is not closely related to returns to shareholders, but rather the result of having their friends on corporate boards deciding how much they get paid, then it implies that these outlandish paychecks are not justified by the logic of the market. This is just flat out corruption.

And, the exorbitant pay of CEOs has an enormous spillover effect. If the CEO is getting $20 million, the other top executives are likely getting paychecks close to $10 million, even the third tier of corporate executives is likely earning $1-2 million a year. Imagine we were back in the world of fifty years ago when CEO pay was 20-30 times the pay of a typical worker. This would mean paychecks in the neighborhood of $2 to $3 million. In that world, the next echelon of the corporate hierarchy is likely earning not too much over $1 million, and the third tier is way back in the high six figures.

Exorbitant CEO pay also affects pay outside the corporate sector. It is common for the heads of major charities and universities presidents to earn well over $1 million a year. Other top executives can be earning at least in the high six figures, if not also crossing $1 million. These salaries would be radically lower if these top executives could not claim that they would be able to earn ten times as much in the private sector.

At the most basic level, the idea that the huge run-up in CEO pay over the last four decades is justified by the returns they produce for shareholders is undermined by the fact that returns have been relatively low by historical standards. They were high in the 1980s and 1990s, as there was a historic run-up in price to earnings ratios, but since then they have been relatively much lower than in the decades of the 1950s and 1960s.

This largely reflects the fact that when the price-to-earnings ratio is high, it is impossible to give shareholders the same percentage return on their investment. When the PE is 15 to 1, a 3 percent dividend is just 45 percent of earnings. However, when the PE is 30 to 1, a 3 percent dividend would be 90 percent of corporate earnings. The dividend yield, or its equivalent in buybacks, almost certainly has to fall when the PE rises.

Slower growth, now averaging close to 2.0 percent annually, (compared to 3-4 percent in prior decades) also means lower capital gains on average. To maintain historical stock yields, it would be necessary for PEs to fall in a period of slow growth.

A possible explanation for the rise in PEs is that share buybacks drive up the price-to-earnings ratios in a way that dividend payouts do not. (I hope to be able to test this later this year.) This would be completely irrational behavior by investors, but we have seen plenty of irrational behavior by big investors in recent decades, such as the stock and housing bubbles.

If paying out money as share buybacks does raise PEs, then it would create a scenario in which corporate management is effectively making money for itself and current shareholders, at the expense of future returns to shareholders. At a point in time, shareholders are presumably largely indifferent between getting their money in dividends or buybacks (tax considerations can make the latter more desirable), but a higher PE means returns will be lower for people buying stock in the future.

Anyhow, it is clear from the data that the last two decades have not been especially good ones for shareholders, which is consistent with the idea that they are being ripped off by top management. It is also the case that the vast majority of the upward redistribution of the last four decades has been from ordinary workers to high-end earners, not from labor to capital.

This means that if we want to reverse the upward redistribution we should be focusing on the high-end earners who got the money. CEOs should be among our prime targets, both for the money they directly receive and for the impact that their pay has on the wage distribution as whole.

It is unfortunate that few progressives seem interested in pursuing the evidence that CEOs are ripping off their companies. Part of this may be due to the usual difficulty that progressives have in dealing with new ideas, but part of it likely stems from their desire to lash out at the market rather than asking how the market can be structured to produce different outcomes.

It was not the market that led to a situation where mediocre CEOs can earn $20 million a year, it was a corrupt structure of corporate governance. The latter can be changed much more easily than eliminating the market economy.

(This post first appeared on my Patreon page.)

This is not an abstract philosophical question. Boeing forced out its CEO, Dennis Muilenburg last week. Muilenberg had played a major role in overseeing the development and production of the Boeing 737 Max, a plane which was recently involved in two major crashes, resulting in hundreds of deaths. Following these crashes, and the grounding of the plane in March, evidence has come out that Boeing did not take seriously many safety issues that were raised by people working on the plane.   

Since Muilenberg was the person in charge for the last four and a half years, it is certainly understandable that the company would want to send the guy packing. Boeing had long been a company with a solid record of putting safety as a top priority. It no longer has that reputation, which is hugely important for a maker of civilian airplanes. While this was clearly not all Muilenberg’s fault, as CEO he has considerable responsibility.

All of this is pretty straightforward. The part of the story that many people may find jarring is that Muilenberg walked away with $62 million in pay and benefits when he left the company.

This is jarring because it would be pretty hard to argue that Muilenberg had done a good job running the company. He leaves it with a horrible reputation problem, for which it may take many years to recover.

But we know shareholders don’t care about reputation, they care about money in their pockets. They might be okay with handing Muilenberg $62 million if he made them a lot of money.

However, that doesn’t seem to be the case. Boeings stock did do quite well under Muilenberg, rising by just under 130 percent over the four and half years that he was at the helm. But the stock of Airbus, Boeing’s main global competitor, almost matched this performance, and that was without the assistance of the big cut in corporate taxes that Trump gave to U.S. corporations in 2017. In other words, there is little reason to think that Muilenberg did anything for shareholders that any other Boeing CEO would not have done.

According to the press statements about Muilenberg’s parting gift, this was money that Muilenberg was owed, not some sort of severance package. It would take a careful reading of his contract to determine whether this is completely true, but from an economic standpoint, it doesn’t really matter.

The people on Boeing’s board presumably are not stupid, and in any case, they hire lawyers to write contracts who should understand the law. They all know how to write a contract that says the CEO walks away with little or nothing if they have done major damage to the company in their tenure, sort of like custodians and dishwashers typically walk away with little or nothing when they get fired for messing up on the job. For some reason, Boeing’s board chose not to write a contract like this for its CEO.

This would just be a peculiar quirk if Boeing was the only company whose board didn’t seem to know how to write contracts, but in fact this seems to be the norm. To take another recent example, John Stumpf walked away with $130 million from Wells Fargo after he was caught in a major scandal where the bank issued phony accounts for hundreds of thousands of customers.

Going back another decade, Home Depot CEO, Robert Nardelli, got a $210 million severance package in 2007 even though the company’s stock price had been cut in half under his tenure. The stock price of Lowes, the company’s major competitor, went up 40 percent over the same period.

There are no shortages of examples where CEO pay doesn’t bear any relationship to the returns provides to shareholders. Corporate boards surely can write contracts that more closely tie CEO pay to the returns that they provide to shareholders, above someone just spinning their wheels in the CEO position. The fact that boards fail to tie CEO pay closely to value actually provided to shareholders strongly suggests that the boards are not working for shareholders, they are working for the CEOs.

For some reason, most progressives have been determined to say that CEOs get their outlandish pay for serving shareholders, in spite of evidence to the contrary. This matters if we are interested in bringing down CEO pay, both because shareholders can be powerful allies and also because it says a lot about the legitimacy of CEO pay.

If CEO pay is justified by the extraordinary returns they provide to shareholders, then the $10 million, $20 million, or even $30 million paychecks are a story of capitalism working as it is supposed to. In this story, CEOs are hugely productive people who manage to produce enormous benefits to shareholders, who should be happy to give back a fraction of their gains in CEO pay. (For this discussion, I’m ignoring the fact that the gains may be the result of breaking unions, making unsafe products, wrecking the environment, or other anti-social acts. I’m just focusing narrowly on returns to shareholders.)

But if the pay is not closely related to returns to shareholders, but rather the result of having their friends on corporate boards deciding how much they get paid, then it implies that these outlandish paychecks are not justified by the logic of the market. This is just flat out corruption.

And, the exorbitant pay of CEOs has an enormous spillover effect. If the CEO is getting $20 million, the other top executives are likely getting paychecks close to $10 million, even the third tier of corporate executives is likely earning $1-2 million a year. Imagine we were back in the world of fifty years ago when CEO pay was 20-30 times the pay of a typical worker. This would mean paychecks in the neighborhood of $2 to $3 million. In that world, the next echelon of the corporate hierarchy is likely earning not too much over $1 million, and the third tier is way back in the high six figures.

Exorbitant CEO pay also affects pay outside the corporate sector. It is common for the heads of major charities and universities presidents to earn well over $1 million a year. Other top executives can be earning at least in the high six figures, if not also crossing $1 million. These salaries would be radically lower if these top executives could not claim that they would be able to earn ten times as much in the private sector.

At the most basic level, the idea that the huge run-up in CEO pay over the last four decades is justified by the returns they produce for shareholders is undermined by the fact that returns have been relatively low by historical standards. They were high in the 1980s and 1990s, as there was a historic run-up in price to earnings ratios, but since then they have been relatively much lower than in the decades of the 1950s and 1960s.

This largely reflects the fact that when the price-to-earnings ratio is high, it is impossible to give shareholders the same percentage return on their investment. When the PE is 15 to 1, a 3 percent dividend is just 45 percent of earnings. However, when the PE is 30 to 1, a 3 percent dividend would be 90 percent of corporate earnings. The dividend yield, or its equivalent in buybacks, almost certainly has to fall when the PE rises.

Slower growth, now averaging close to 2.0 percent annually, (compared to 3-4 percent in prior decades) also means lower capital gains on average. To maintain historical stock yields, it would be necessary for PEs to fall in a period of slow growth.

A possible explanation for the rise in PEs is that share buybacks drive up the price-to-earnings ratios in a way that dividend payouts do not. (I hope to be able to test this later this year.) This would be completely irrational behavior by investors, but we have seen plenty of irrational behavior by big investors in recent decades, such as the stock and housing bubbles.

If paying out money as share buybacks does raise PEs, then it would create a scenario in which corporate management is effectively making money for itself and current shareholders, at the expense of future returns to shareholders. At a point in time, shareholders are presumably largely indifferent between getting their money in dividends or buybacks (tax considerations can make the latter more desirable), but a higher PE means returns will be lower for people buying stock in the future.

Anyhow, it is clear from the data that the last two decades have not been especially good ones for shareholders, which is consistent with the idea that they are being ripped off by top management. It is also the case that the vast majority of the upward redistribution of the last four decades has been from ordinary workers to high-end earners, not from labor to capital.

This means that if we want to reverse the upward redistribution we should be focusing on the high-end earners who got the money. CEOs should be among our prime targets, both for the money they directly receive and for the impact that their pay has on the wage distribution as whole.

It is unfortunate that few progressives seem interested in pursuing the evidence that CEOs are ripping off their companies. Part of this may be due to the usual difficulty that progressives have in dealing with new ideas, but part of it likely stems from their desire to lash out at the market rather than asking how the market can be structured to produce different outcomes.

It was not the market that led to a situation where mediocre CEOs can earn $20 million a year, it was a corrupt structure of corporate governance. The latter can be changed much more easily than eliminating the market economy.

Tim Geithner might have left his job as Treasury Secretary seven years ago, but his legacy lives on. The Wall Street Journal reported that the financial firm Morningstar had reached a settlement with the SEC over marketing it had done for firms whose bonds it had rated.

SEC rules prohibit rating agencies from doing promotional work for firms whose bonds it rates. This is done to prevent the obvious conflict of interest, that it may give better ratings as part of a promotional effort.

This conflict of interest is inherent in the rating process as it is now designed. Rating agencies have an incentive to give high ratings as a way to attract business.

This was one of the problems that led to the run-up in the housing bubble, the collapse of which caused the Great Recession. Rating agencies gave investment grade ratings to mortgage backed securities that they knew were filled with bad mortgages because they did not want to lose the business.

There is a very simple solution to this problem which was addressed in an amendment to the Dodd-Frank financial reform bill inserted by Senator Al Franken. (I worked with Senator Franken’s staff on this amendment.) The amendment would require issuers to contact the SEC, who would then select the rating agency. This would eliminate the incentive to give good ratings to attract more business. The Franken amendment passed with bipartisan support, getting 65 votes in the Senate.

Unfortunately, as he discusses in his autobiography, Tim Geithner arranged to have the amendment killed in the conference committee. Ensuring that the corrupt system we had in the housing bubble years was left in place.

Tim Geithner might have left his job as Treasury Secretary seven years ago, but his legacy lives on. The Wall Street Journal reported that the financial firm Morningstar had reached a settlement with the SEC over marketing it had done for firms whose bonds it had rated.

SEC rules prohibit rating agencies from doing promotional work for firms whose bonds it rates. This is done to prevent the obvious conflict of interest, that it may give better ratings as part of a promotional effort.

This conflict of interest is inherent in the rating process as it is now designed. Rating agencies have an incentive to give high ratings as a way to attract business.

This was one of the problems that led to the run-up in the housing bubble, the collapse of which caused the Great Recession. Rating agencies gave investment grade ratings to mortgage backed securities that they knew were filled with bad mortgages because they did not want to lose the business.

There is a very simple solution to this problem which was addressed in an amendment to the Dodd-Frank financial reform bill inserted by Senator Al Franken. (I worked with Senator Franken’s staff on this amendment.) The amendment would require issuers to contact the SEC, who would then select the rating agency. This would eliminate the incentive to give good ratings to attract more business. The Franken amendment passed with bipartisan support, getting 65 votes in the Senate.

Unfortunately, as he discusses in his autobiography, Tim Geithner arranged to have the amendment killed in the conference committee. Ensuring that the corrupt system we had in the housing bubble years was left in place.

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