Last month the Peterson Institute for International Economics released a new study that projected the impact of the Trans-Pacific Partnership (TPP) on the U.S. economy. The study projected that when its effects are fully felt by 2030, the economy will be 0.5 percentage points larger than if we did not have the TPP. It also showed that annual exports would be $387 billion higher as a result of the deal.
These projections were widely reported in major media outlets and seen as evidence that the TPP would be a good deal for the United States and American workers. Unfortunately, a closer analysis of the Peterson Institute study indicates considerably less grounds for celebration.
First of all, some of the key questions that people have raised about the TPP are not answered by the Peterson Institute study because of the design of the model it used. First and foremost, people are worried that the TPP could open the door to another wave of imports, causing more workers to lose their jobs and putting downward pressure on the wages of the workers who keep their job.
Next month the Federal Reserve Board’s Open Market Committee (FOMC) will
meet in Washington to decide how many people in the United States
should have jobs. If that comment sounds overblown, then you need to do
some more reading about the Federal Reserve Board.
The basic
story is that the FOMC sets the short-term interest rates for banks.
This short-term interest rate in turn affects the interest rate on
longer term loans, like car loans, home mortgages, and corporate and
government bonds. When the FOMC raises interest rates, as it did back in
December, it generally leads to higher interest rates on other forms of
debt. This means that people will pay more money on a car loan or
mortgage, which in turn discourages them from buying cars or houses.
Social Security, the program that provides retirement, disability, and survivor benefits to millions of Americans just gave a valentine to those making $1,000,000 a year.
Many people do not realize that the taxes that fund Social Security only apply to the first $118,500 of wage income in 2016. Income above the cap is not subject to the tax and workers do not pay into Social Security on that income. That means that the vast majority of the population (those making under $118,500 a year) pay the 6.2 percent Social Security payroll tax for the entire year, but the wealthy don’t. It also means that the wealthy have a lower effective tax rate.
For example, someone making $1,000,000 paid into Social Security on every day in 2016, up until and including February 13th. On the 14th — Valentine’s Day — their income was no longer subject to the payroll tax, and their paychecks for the rest of the year became heftier.
Bernie Sanders has made the corrupting role of money in politics a centerpiece of his campaign. He has argued that because campaign contributions by the rich pay for political campaigns, they are able to control the political process. This gives us a political system that is very effective at serving Wall Street and the insurance and pharmaceutical industries. It is much less effective at serving the needs of ordinary people.
This has created an interesting dynamic in the race for the Democratic nomination. Secretary Clinton has flipped Sanders’ claim around and challenged him to show where she has reversed a position to serve the moneyed interests. This might be a useful campaign tactic, but it misrepresents the way in which money affects campaigns.
It is often said that in Washington, no bad idea stays dead for long. This is certainly true for the crazy paranoia we see around the budget deficit and idea that it is going to bankrupt the country and leave our children impoverished. The moral of this story is usually that we need to cut and/or privatize Social Security and Medicare.
The deficit hawks had been relatively quiet the last few years. They had a big victory with the 2011 budget deal between President Obama and the Republicans in the House. This led to substantial reductions in spending for 2012 and subsequent years. These cuts slowed the economy and kept millions of people from getting jobs, but the small positive from the deal was that it temporarily silenced the deficit hawks. After all, the deficit had fallen rapidly and the debt-to-GDP ratio was going down, what did they have to complain about?
Today, Federal Reserve Board Chair Janet Yellen will go before Congress to report on the economy and monetary policy. A key topic of discussion will be the Fed’s decision in December to raise the federal funds interest rate by one-quarter of a percentage point. This was the first time that the Fed had raised interest rates since the beginning of the recession in December 2007.
The Fed appears to have acted prematurely. Since the Fed announced its rate hike, we’ve received nothing but sobering economic news. Last week, the Commerce Department reported that the economy grew at just a 0.7 percent annual rate during the fourth quarter of 2015, down from a 2.5 percent rate for the previous two years. Similarly, the labor market added just 150,000 jobs in January, down over a third from the monthly average of 230,000 jobs for 2015.
The Fed has a dual mandate to constrain inflation and maximize employment. The Fed has interpreted the inflation side of this mandate as meaning that it should try to have an average annual inflation rate of 2 percent. In balancing these goals, the Fed raises rates when it wants to push down inflation at the cost of lowering employment; when the Fed wants to raise employment at the cost of higher inflation, it lowers rates.
As the Democratic presidential race heats up, the debate on financial reform has taken a bizarre twist. Somehow the measure of a good reform is its ability to prevent another 2008-type financial crisis.
While it is reasonable to subject a reform agenda to the 2008 test, this should be at most a side issue. After all, it is virtually certain that our next crisis will not look our last crisis. Financial reform first and foremost is not about preventing the last crisis, but rather about designing a financial system that more effectively serves the rest of the economy.
Finance is an intermediate good like trucking. It does not directly provide value like food or health care, the value in the financial sector depends exclusively on its ability to make the rest of the economy function better. This means effectively getting money to businesses and households who need to borrow. And it means providing safe investment vehicles for people to save for retirement or other purposes.
In 1996, the Congressional Budget Office (CBO) projected that unemployment would rise from 5.8 to 6.0 percent the next year and stay at that rate into the 2000s. The consensus among most economists and policy experts was that 6.0 percent unemployment was the lowest the unemployment rate could fall to before it caused inflation (this rate is known as the non-accelerating inflation rate of unemployment, or NAIRU), even though inflation was already very low.
In their minds, this meant the Federal Reserve (Fed), which has an obligation to pursue low unemployment, should keep interest rates as high as necessary to prevent the unemployment rate from falling much below 6.0 percent. While it might be possible to lower interest rates to reduce unemployment, as some economists and activists advocated for, the mainstream view was that this would not be worth the cost of higher inflation.
Alan Greenspan, then chair of the Fed, and Janet Yellen, the chair today, seemed to go along with that consensus. Yellen even called low interest rates to promote growth and employment “a very confused set of arguments.”
But over the next four years, Greenspan broke with orthodoxy and used his influence to keep rates relatively low,
unlike during the expansion in the 1980s. In 1997, when unemployment
had dipped below 6.0 percent without an uptick in inflation, Paul
Krugman doubled down on his belief that this would lead to accelerating inflation. He, like many other commentators, was wrong.
Read the rest of the post.
High drug prices have been big news lately. Some of this has been due to
straight out price gouging by the likes of Martin Shkreli, everyone’s
favorite young punk hedge fund tycoon and potential convict. However the
more common problem stems from the exorbitant price charged for
important new drugs like the Hepatitis C drug Solvaldi.
Gilead
Sciences, the patent holder for Solavldi, has a list price for this drug
in the United States of $84,000 for a 3-month course of treatment. The
company argues the drug is worth the price since it can cure people of a
debilitating and potentially deadly disease.
The business press has been obsessed in recent weeks over the volatility
in financial markets around the world. Most of the world’s major stock
markets have dropped by more than 10 percent from their peaks of 2015.
China’s market is down by more than 40 percent from its peak last
spring. Interest rates on high risk bonds have soared and the price of
oil has fallen by more than 70 percent from its levels of two years ago.
While these movements are dramatic, it is important to remember the
financial markets are not the economy. Markets often take sharp turns in
ways that have no obvious connection to the real economy. The best
example of this is the 1987 stock market crash in which the U.S. markets
lost more than 20 percent of their value in a single day. There was no
obvious cause for this plunge nor did it have a noticeable effect on the
economy. The U.S. economy continued to grow at a healthy pace for the
next two and a half years.