Saturday, January 5, 2019

Tim Taylor: Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation [feedly]

"Utterly unsurprising" -- to economists!  Indeed. But a few in labor, and the 'left' continue to cut off their nose to spite their face on trade. A trade-ADAPTED, not trade-OPPOSED, economy and labor movement are required. Education and a 'Pay the Losers' policy on transitions can get us there.

Steel Tariffs: An Utterly Unsurprising Cost/Benefit Calculation
The Trump administration imposed tariffs on imported steel back in March 2018, using the implausible excuse that it was necessary for national security (for some countries, the tariffs were later changed to import quotas with similar effect). The results are utterly unsurprising: profits for US steel companies have risen and some jobs for US steelworkers have been gained, but at an exorbitant cost for US consumers and for other US workers. Gary Clyde Hufbauer and Euijin Jung lay it out in "Steel Profits Gain, but Steel Users Pay, under Trump's Protectionism" (December 20, 2018, Peterson Institute for International Economics).

A protected industry benefits from less import competition. It uses that protection to raise prices for consumers and to earn higher profits. It should be emphasized that these higher price and profits are not an unexpected outcome--they are the mechanism through which import tariffs help domestic firms. To put it another way, if tariffs didn't help domestic companies charge more and raise their profits, there would be no point to having such tariffs in the first place.

Hufbauer and Jung write:

"Calculations show that Trump's tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created."
Many studies over the years find that trade protectionism saves jobs, but at a high cost to consumers (For example, here's an example of how the Obama administration tariffs on imported tires cost consumers about $900,000 per job saved in that industry.) The underlying issue is that consumers aren't just paying higher prices to save US jobs--if that was the tradeoff, we could argue over whether it might be worth doing. But the higher prices are part of higher revenue for steel companies, which maybe used for purposes ranging from robots and automation to research and development, or higher profits for shareholders and higher bonuses for managers.

In addition, any jobs saved for US steelworkers are not a net gain for the US economy. The higher costs of steel are then passed along to products, leading to lower sales for those industries. The Whirlpool company offers a vivid example. The company strongly supported the Trump administration when it put tariffs on imported washing machines, which helped Whirlpool. But then when the Trump administration put tariffs on steel, driving up the price of making a washing machine in the US, it hurt Whirlpool. As the head of Whirlpool said: "the net impact of all remedies and tariffs has turned into a headwind for us." 

Hufbauer and Jung mention (without endorsing) some estimates that the steel tariffs could be a net loss in US jobs by the time that the effects of higher steel prices are passed through industrial supply chains, making many products more expensive to make within US borders.  And of course, these calculations don't take into account the economic effects of retaliation from other countries, and how that costs US jobs in other industries.

Again, this dismal cost/benefit calculation for the steel tariffs is utterly unsurprising. Steel tariffs are just an indirect subsidy to the steel industry. Sure, US steel tariffs also make foreign steel producers unhappy, but the happiness or unhappiness of foreign producers is not a useful goal for US economic policy.  The main costs of the steel tariffs are imposed on US firms that use steel (and will have a harder time selling inside and outside the US) and ultimately on US consumers (who will pay more than consumers around the world for products containing steel).   

 -- via my feedly newsfeed

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down [feedly]

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down

Warren-Schakowsky Bill Is a Huge Step Toward Bringing Drug Costs Down

Dean Baker
Truthout, December 24, 2018

See article on original site

Martin Shkreli managed to make himself a household name a few years back. His claim to fame stemmed from the decision by Turing Pharmaceuticals, a company he founded and controlled, to acquire the rights to produce Daraprim. He then raised the price of the drug by 5,000 percent.

This was very bad news for the people who were dependent on the drug. Daraprim is an anti-parasitic drug that is often taken by people with AIDS to keep them from getting opportunistic infections. People with AIDS who are being successfully treated with Daraprim are not going to want to experiment with alternatives.

Daraprim was already a 60-year-old drug at the time Turing acquired it and had long been available as a generic. This meant that other manufacturers could in principle come into the market and compete with Turing's inflated price.

Shkreli made the bet that no other drug company would take advantage of this opportunity, because even for a generic drug, there are still substantial costs for entry. Since the market for Daraprim was small, a new entrant would be unlikely to recover these costs if Turing pushed the price back down somewhere near its original level. While Daraprim was his biggest "success," Shkreli was trying this strategy with a number of other drugs before the Justice Department put him out of business with unrelated charges of securities fraud.

Shkreli's days of price gouging in the generic drug world may be over, but he established a model that other ambitious entrepreneurs are likely to follow. Close to 40 percent of generic drugs have only a single manufacturer. This is partly a result of the failure of anti-trust policy to stem a wave of mergers in the industry. It is also a result of the fact that many drugs simply have very limited markets where it is difficult to support multiple producers.

Most generic producers have not tried to follow the Shkreli model and jack up prices of drugs that people need for their health or even their lives, but some have. The soaring price of insulin is one important example, EpiPen, the asthma injector, is another. Both involve well-known treatments that have long been used, but the limited number of suppliers has allowed for huge price increases in recent years.

This is the context for the public drug-manufacturing corporation being proposed in a bill by Senator Elizabeth Warren and Representative Jan Schakowsky. The idea is that the federal government should create manufacturing capacity (which could be privately licensed) that would allow it to quickly enter a market to compete with the next Martin Shkreli.

If a company tries to jack up its prices by an extraordinary amount, it would find itself soon competing with a government manufacturer that is selling the same drug for the cost of production, plus a normal profit. This is a great strategy, since simply the existence of this capacity should be sufficient to discourage the next Shkreli.

There will be little money in jacking up the price of a drug by 5,000 percent if it quickly results in the disappearance of their market. This should encourage the generic industry to keep its prices in line.

It is important to note a key difference between the generic industry and brand industry. The brand pharmaceutical companies, like Pfizer and Merck, could argue that they need high prices to pay for research. These companies hugely exaggerate their research costs and downplay the extent to which high profits just mean more money for shareholders, but they actually do research.

By contrast, the generic industry is not researching new drugs. They are manufacturing drugs that have been developed by others. In this sense they can be thought of like a company that manufacturers paper plates or shovels. They need a normal profit to stay in business, nothing more.

For this reason, the Warren-Schakowsky proposal is very much the right type of remedy for excessive prices in the generic drug industry. At the same time, we have to recognize that generic drugs are the smaller part of the problem with high drug prices.

Although generics account for almost 90 percent of prescriptions, they account for only a bit more than a quarter of spending on prescription drugs. The story of drugs costing tens or hundreds of thousands of dollars a year is almost entirely a story of brand drugs with high prices as a result of patent monopolies or related protections.

This will require a larger fix, likely along the same lines, with the government paying for research and allowing new drugs to be sold as generics. But the Warren-Schakowsky bill is a huge first step in bringing drug costs down and ensuring that people will not find themselves suddenly at the mercy of the next Martin Shkreli.

 -- via my feedly newsfeed

Payrolls up big as a strong jobs report caps a strong year for the US labor market [feedly]

Payrolls up big as a strong jobs report caps a strong year for the US labor market

Well, it appears that the US jobs market didn't get the memo that a recession is just around the corner.

Payrolls rose a very strong 312,000 in December, bringing the full count of jobs added for 2018 up to 2.6 million, the strongest year for job gains since 2015. Unemployment ticked up to 3.9 percent, but largely because more people were drawn into the labor market, as the participation rate ticked up two-tenths to 63.1 percent, its highest level since early 2014, and yet another reminder that the job market has more capacity to expand than many observers heretofore believed. Nominal wage growth accelerated slightly and, at 3.2 percent for all private sector workers and 3.3 percent for mid-level earners, both measures tied cyclical highs. Weekly hours edged up slightly, jobs gains for the prior two months were revised up, and a very high 70 percent of private industries added jobs on net.

In other words, not only is the US labor market holding its own, it's actually gained momentum in recent months. Moreover–and remarkably–these uniquely strong results are occurring against a backdrop of low, stable inflation, implying that the Federal Reserve could still conceivably pause in their rate-hiking campaign, accommodating job market improvements that are so essential to middle and low-wage workers.

Key findings from today's report

To boost the underlying signal from the jobs data, our monthly smoother takes 3, 6, and 12-month averages of the monthly job gains from the payroll data. First, note that the bars show relatively high levels of job creation at this stage in the expansion, as many economists believed monthly gains would be slowing by now as the job market neared peak capacity. But at 254,000, the average monthly gain over the past quarter has been slightly higher than the earlier trends.

Tighter labor markets continue to noticeably boost wage growth, as shown in the two figures below. Nominal hourly wages were up 3.2 percent, year-over-year, for all private-sector workers, and 3.3 percent for middle-wage workers. The smoothed, 6-months moving average shows evidence of "wage-Phillips curve" awakening in 2018: low unemployment finally started to correlate with rising pay pressures. As discussed next, thanks largely to low energy prices, I expect real wage growth of over 1 percent for middle wage workers in 2018. While not a particularly high real growth rate in historical terms, it represents an important gain for working families.

Lookback on the 2018 job market relative to earlier years

With today's report, we can evaluate the 2018 job market in historical context, as in the two tables below. The first focuses on jobs and the second on wages. Annual changes are for December 2017 over December 2018; level variables are for December 2018 (all these values may undergo some revisions).

Payrolls grew by 1.8 percent last year, a comparable, if slightly higher, rate to earlier years in the cycle, with gains of about 220,000 per month. The unemployment rate remains below that of earlier years in the last decade, and 6 percentage points below the almost 10 percent rate at the end of 2009, near the trough of the Great Recession. Another measure of labor slack—the employment rate of prime-age workers—at 79.7 last month, is still climbing back to its pre-recession peak of 80.3 percent reached in January at that year.

The next table offers a longer historical perspective on the growth in the hourly pay of middle-wage workers at business cycle peak years and 2018 (which may or may not turn out to be a peak year). Some key determinants of mid-level wage growth include the pace of inflation, productivity, unemployment, and bargaining power (which is, in turn, related to low unemployment, as well as unions and the depth of government labor standards, like minimum wages).

Thanks to the pressure of tighter labor markets, nominal wage growth picked up over the year, as shown in the figures above. But it remains below that of prior peaks. Part of this relates to lower inflation, and, in fact, real wage growth was faster for mid-level workers last year than in 2016-17, at least based on my forecast for December inflation (which isn't out yet; my guess is that CPI inflation is up 2 percent, Dec/Dec).

The key lesson is that very tight labor markets generate real gains for working people, even with productivity quite low. Importantly, these gains are occurring in the current economy without generating inflationary pressures, both in actual and in expected inflation. Any economic model that insists the monetary authorities hit the brakes hard to preclude further such gains is clearly out of touch with reality.

Recession ahead?

Amidst this positive labor market news, various economic headwinds have kicked up of late. Highly volatile financial markets, Trump's trade war, slower growth abroad, and fading fiscal stimulus are leading to some grim forecasts for near-term U.S. growth. Conversely, low unemployment, job gains, and higher real wages can be counted on to boost consumer spending, which is almost 70 percent of the U.S. economy. In other words, the economy faces both headwinds and tailwinds, with the latter reflecting the job-market induced strength of the highly acquisitive American consumer.

The next figure shows this relationship by plotting yearly growth rates of real, aggregate, weekly earnings (jobs times real wages times hours per week) against real, economy-wide consumer spending (not including December's results). They track each other well, though less so in recessions, when households dip into savings—if they can—to smooth their consumption through down labor markets. Most recently, both series have been steadily tracking 2.5 to 3 percent and my expectation is that this trend will persist, if not strengthen in coming months, as stronger real wage gains support spending.

Source: BLS. BEA, my analysis

However, the headwinds noted above are real and, especially as fiscal stimulus fades later this year, growth will likely slow, as will job gains, threatening the dynamic portrayed in the previous figure. For now–say, over the next 6-12 months–strong consumer spending should provide the US economy with good momentum. But it is important to sustain these gains for as long as possible, as it took a long while for many working households took benefit from the expansion.

 -- via my feedly newsfeed

Who Benefits from Trump’s Trade War?

Tuesday, January 1, 2019

Keynes: "You Cannot Convict Your Opponent of Error; You Can Only Convince Him Of It" [feedly]

"You Cannot Convict Your Opponent of Error; You Can Only Convince Him Of It"

Those of us who write about economics can only nod knowingly at a comment from John Maynard Keynes in 1934, in a a fragment of writing that was probably part of a draft of the preface for the General Theory. He wrote:
"[A]n economic writer requires from his reader much goodwill and intelligence and a large measure of co-operation ... In economics you cannot convict your opponent of error; you can only convince him of it." 
Happy New Year. And thanks to all the regular, semi-regular, occasional, and one-time readers for your goodwill, intelligence, cooperation--and for taking a look at this blog now and then. I published this same quotation a year ago on New Year's Day, but it still echoed in my mind this year.

The quotation from Keynes appears in volume XIII of the Collected Works of John Maynard Keynes, edited by Donald Moggridge and published in 1973 (pp. 469-471). Here's a fuller quotation from the passage, both worth reading for itself, and also to give some context:
When we write economic theory, we write in a quasi-formal style; and there can be no doubt, in spite of the disadvantages, that this is our best available means of conveying our thoughts to one another. But when an economist writes in a quasi-formal style, he is composing neither a document verbally complete and exact so as to be capable of a strict legal interpretation, nor a logically complete proof. Whilst it is his duty to make his premises and his use of terms as clear as he can, he never states all his premises and his definitions are not perfectly clear-cut. He never mentions all the qualifications necessary to his conclusions. He has no means of stating, once and for all, the precise level of abstraction on which he is moving, and he does not move on the same level all the time. It is, I think, of the essential nature of economic exposition that it gives, not a complete statement, which, even if it were possible, would be prolix and complicated to the point of obscurity but a sample statement, so to speak, out of all the things which could be said, intended to suggest to the reader the whole bundle of associated ideas, so that, if he catches the bundle, he will not in the least be confused or impeded by the technical incompleteness of the mere words which the author has written down, taken by themselves. 
This means, on the one hand, that an economic writer requires from his reader much goodwill and intelligence and a large measure of co-operation; and, on the other hand, that there are a thousand futile, yet verbally legitimate, objections which an objector can raise. In economics you cannot convict your opponent of error; you can only convince him of it. And, even if you are right, you cannot convince him, if there is a defect in your own powers of persuasion and exposition or if his head is already so filled with contrary notions that he cannot catch the clues to your thought which are trying to throw to him. 
The results is that much criticism, which has verbal justification in what the author has written, is nevertheless altogether futile and maddeningly irritating; for it merely indicates that the minds of authors and reader have failed to meet. ....
I ask forgiveness, therefore, if I have failed in the necessary goodwill and intellectual sympathy when I criticise; and to those minds to which, for whatever reasons, my ideas do not find an easy entry, I offer the assurance in advance that they will not find it difficult, where the country to be traversed is so extensive and complicated, to discover reasons which will seem to them adequate, for refusing to follow. Time rather than controversy ... will sort out the true from the false.

 -- via my feedly newsfeed

China’s Xi Urges Self-Reliance Amid Change ‘Unseen in 100 Years’ [feedly]

China's Xi Urges Self-Reliance Amid Change 'Unseen in 100 Years'

Chinese President Xi Jinping stressed self-reliance amid "changes unseen in 100 years," as the country faced an economic slowdown and a more confrontational U.S. under President Donald Trump.

In his annual New Year's Eve address, Xi stressed China's capacity to weather the storm, citing a series of industrial and technological achievements in 2018. He said the government would keep growth from slowing too quickly and follow through on a tax cut as part of an effort "to ease the burden on enterprises."

"Despite all sorts of risks and challenges, we pushed our economy towards high-quality development, sped up the replacement of the old drivers of growth, and kept the major economic indicators within a reasonable range," Xi said.

The speech followed reminders of Xi's twin challenges: another dose of weak economic data Monday and a phone call with Trump on Saturday touching on their trade dispute. China's factories slid back into contraction territory in December, with the manufacturing purchasing mangers index dropping to 49.4.

Meanwhile, a U.S. delegation led by Deputy Trade Representative Jeffrey Gerrish was preparing for talks in Beijing next week that would test a tariff cease-fire established earlier in the month by the two sides. Trump said he and Xi spoke at length and that "big progress" is being made toward a deal.

Looking Ahead

Next year marks 70 years since Mao Zedong led the Communist Party to power -- a milestone that would surpass the Soviet Union. The anniversary underscores the urgency Xi faces in turning around stalled growth and investor confidence, while pushing forward an agenda of political reform that will strengthen his power.

The government launched over 100 reform measures in 2018, Xi said Monday, and stepped up efforts to improve standards of living.

"Our people are the country's solid foundation and our main source of confidence to govern," he said.

A little less than a year since he scrapped term limits, clearing the path toward his indefinite rule, Xi has seen his major initiatives -- notably the Belt and Road trade and infrastructure program -- draw international backlashamid the unprecedented trade war.

Over the next few months, March's National People's Congress and April's Belt and Road Summit, both to be held in Beijing, could see the announcement of new regulations and investments meant to counter skepticism over Xi's leadership.

China is already considering a new law on the practice of forced technology transfer that has drawn U.S. ire, and stepped up internal scrutiny of Belt and Road as poorer countries adopt a more cautious approach to China's plans for what it regards as its backyard.

The country's growth is still slowing as it transitions from a high-growth, export-led model to a consumer- focused state. Top economic policy makers last week pledged to exact "significant" stimulus policies this coming year.

 -- via my feedly newsfeed

Hope for a Green New Year

Hope for a Green New Year

A very helpful review of the green New deal.