IMF: New Data on World Debt: A Dive into Country Numbers [feedly]

New Data on World Debt: A Dive into Country Numbers
https://blogs.imf.org/2019/12/17/new-data-on-world-debt-a-dive-into-country-numbers/

The new update of the IMF's Global Debt Database shows that total global debt (public plus private) reached US$188 trillion at the end of 2018, up by US$3 trillion when compared to 2017. The global average debt-to-GDP ratio (weighted by each country's GDP) edged up to 226 percent in 2018, 1½ percentage points above the previous year. Although this was the smallest annual increase in the global debt ratio since 2004, a closer look at the country-by-country data reveals rising vulnerabilities, suggesting that many countries may be ill-prepared for the next downturn.

Global debt reached $188 trillion in 2018.

In advanced economies the average debt ratio declined, but there is no clear sign of a significant push to reduce debt. In emerging market economies and low-income developing countries, the average debt ratios rose further. Notably, China's total debt ratio reached 258 percent of GDP at end-2018—the same as the United States and nearing the average for advanced economies, which was 265 percent.

No big changes in 2018

The reduction in the global debt ratio in 2017 that we wrote about in our last blog did not mark the beginning of a declining trend. In 2018, the global debt ratio rose only slightly above the level in 2016.

Looking at overall trends, there are two distinct groups:

• Advanced economies. The debt ratio for both the public and private sectors declined in the majority of countries in 2018. It is worth noting that half of advanced economies ran fiscal surpluses in 2018 (that is, they had more revenues than spending). A third shrank the fiscal deficit or increased the fiscal surplus compared with the previous year. However, when we look at this group of countries as a whole, changes in the average total debt ratio were relatively small, declining 0.9 percent of GDP.
  
• Emerging markets and low-income developing countries. The upward trend in the total debt ratio showed no sign of halting or slowing in either group, with the main increase coming from public debt. The average public debt ratio increased by more than 2½ percentage points in sub-Saharan Africa.
  

Increasing vulnerabilities under the surface

A detailed look at the numbers reveals the following dynamics.

• In most countries, public debt ratios are high by historical standards. With some notable exceptions (such as the United States and Japan), advanced economies have already started to reduce some of the debt accumulated in the aftermath of the global financial crisis. Even so, public debt ratios are higher than before 2008 in almost 90 percent of advanced economies. In a third of them, the public debt ratio is 30 percentage points above the pre-crisis level. In emerging markets, the average public debt ratio has risen to levels comparable to those prevailing during the crises of the mid-1980s and 1990s. Public debt ratios are above 70 percent in almost a fifth of countries. Meanwhile, there has been a steady build-up of public debt in low-income developing countries as a whole, with two-fifths of them worldwide at high risk of, or in, debt distress.

 

• Private debt developments—in particular corporate debt—differ considerably across countries. Unlike public debt, the increase in global private debt over the last decade has been unevenly distributed. In advanced economies the corporate debt ratio has gradually increased since 2010 and it is now at the same level as in 2008, the previous peak. But there are big differences. In some large economies, such as Spain and the United Kingdom, the corporate sector has shed massive amounts of debt since the global financial crisis. In the United States, corporate debt grew consistently since 2011 and reached a record high at the end of 2018. A common pattern among several major economies is the increasing use of debt for financial risk-taking (to fund distribution of dividends, share buybacks, and merger and acquisitions) and high speculative-grade debt. This could amplify shocks if companies defaulted or decided to reduce their debt by cutting investment or firing workers. At the same time, household debt ratios declined in advanced economies as a whole compared to 2008, with large decreases in the United States and the United Kingdom and increases in one third of advanced economies. In emerging markets other than China the average corporate debt ratio has declined since 2015 and is now 4½ percentage points above 2009, but these countries have not been immune to a worsening of the quality of their corporate credit. The household debt ratio has been increasing steadily, but it remains half the level in advanced economies.

 

• China's efforts to rein in corporate debt continued in 2018.Corporate debt declined whereas sovereign debt increased sizeably and household debt kept rising in 2018. This came on the back of increasing corporate debt during the past decade, which contributed more than half of the rise in corporate debt worldwide.

Unlike before the global financial crisis, risks are not solely concentrated in the private sector but also in the public sector, partly reflecting the unresolved legacy of the global financial crisis. As discussed in the October 2016 Fiscal Monitor, excessive private debt levels increase the vulnerability to shocks and could lead to an abrupt and costly debt reduction process. But reducing debt in the private sector may also, in turn, be a burden for an already overindebted public sector if a decline in output leads to lower revenue or corporate defaults trigger losses and curb lending by banks. It is therefore important to reduce such vulnerabilities before the next adverse shock.

We are grateful to Juliana Gamboa Arbelaez, Virat Singh, and Yuan Xiang for outstanding research assistance.

Note: In the text and graphs, the average debt ratio for a group of countries is calculated by weighting each country's debt-to-GDP ratio by the share of that country's GDP in the group's aggregate GDP. To compute a group's aggregate GDP, each country's GDP is in U.S. dollars at the period-average exchange rate.

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Marty Hart-Landsberg:The Harsh Reality of Job Growth in America [feedly]

Great review of wage trends and job quality deterioration..

The Harsh Reality of Job Growth in America
https://economicfront.wordpress.com/2019/12/17/the-harsh-reality-of-job-growth-in-america/

Marty Hart-Landsberg

The current US economic expansion, which began a little over a decade ago, is now the longest in US history.  But while commentators celebrate the slow but steady growth in economic activity, and the wealthy toast continuing strong corporate profits, lowered taxes, and record highs in the stock market, things are not so bright for the majority of workers, despite record low levels of unemployment.

The fact is, despite the long expansion, the share of workers in low-wage jobs remains substantial. To make matters worse, the share of low-quality jobs in total employment seems likely to keep growing. And, although US workers are not unique in facing hard times, the downward press on worker well-being in the US has been more punishing than in many other advanced capitalist countries, leaving the average US worker absolutely poorer than the average worker in several of them.

The low wage reality

According to a recent Bookings report by Martha Ross and Nicole Bateman, titled Meet the Low-wage Workforce,

Low-wage workers comprise a substantial share of the workforce.  More than 53 million people, or 44 percent of all workers ages 18 to 64 in the United States, earn low hourly wages. More than half (56 percent) are in their prime working years of 25-50, and this age group is also the most likely to be raising children (43 percent).

Ross and Bateman draw upon the Census Bureau's 2012-2016 American Community Survey 5-year Public Use Microdata Sample to identify low-wage workers.  Although their work does not incorporate the small increase in wages between 2017-2019, they are confident that doing so would not significantly change their findings.

Their workforce definition started with all civilian, non-institutionalized individuals, 18 to 64 years of age, who worked at some point in the previous year (during the survey period) and remained in the labor force (either employed or unemployed).  They then removed graduate and professional students and traditional high school and college students, as well as those who reported being self-employed or earning self-employment income and those who worked without pay in a family business or farm.  This left them with a total of 122 million workers.

Their definition of a low-wage worker started with the "often-employed threshold" of two-thirds the median hourly wage of a full-time/full year worker, with one major modification. They used the male wage because they wanted to establish a threshold that was not affected by gender inequality.  They identified anyone earning a lower hourly wage as a low-wage worker.

The average national threshold across their five years of data, in 2016 real dollars, was $16.03.  They then adjusted this value, using the Bureau of Economic Analysis's Regional Price Parities, to take into account variations in the cost of living in individual metropolitan areas.  The adjusted thresholds ranged from $12.54 in Beckley, West Virginia to $20.02 in San Jose, California.  Using these thresholds, the authors found that 44 percent of the workforce, some 53 million workers, were low-wage workers.

These low-wage workers were a racially diverse group.  Fifty-two percent were white, 25 percent Latinx, 15 percent Black, and 5 percent Asian American. Both Latinx and Black workers were over-represented relative to their share of the total workforce.

Strikingly, 57 percent of low-wage workers worked full time year-round.  And half of all low-wage workers "are primary earners or contribute substantially to family living expenses. Twenty-six percent of low-wage workers are the sole earners in their families, with median family earnings of $20,400."

Finally, as the authors also note, the economic mobility of low wage workers appears quite limited. They cite one study that "found that, within a 12-month period, 70 percent of low-wage workers stayed in the same job, 6 percent switched to a different low-wage job, and just 5 percent found a better job."

The growing share of low-wage jobs

The downward movement in a new monthly index, the job quality index (JQI), makes clear that economic growth alone will not solve the problem of too many workers employed in low-wage work.  The index measures the ratio of high-quality jobs (those that pay more than the average weekly income) to low quality jobs (those that pay less than the average weekly income).  The index steadily declined over the past three decades, during periods of expansion as well as recession, from a ratio of 94.9 in 1990 to a ratio of 79.0 as of July 2019 (as illustrated below).

The process of creating the index and its usefulness is described in a recent paper authored by Daniel Alpert, Jeffrey Ferry, Robert C. Hockett, Amir Khaleghi.  The index itself is maintained by a group of researchers from Cornell University Law School, the Coalition for a Prosperous America, the University of Missouri-Kansas City, and the Global Institute for Sustainable Prosperity.  As the authors note, the most prominent factor underlying the three decade fall in the ratio is the "relative devaluation" of US labor.

The index tracks private sector jobs provided by third party employers, which excludes self-employed workers, and, for now, covers only production and nonsupervisory (P&NS) positions, which account for approximately 82 percent of total private sector jobs in the country.

The index draws on the BLS's Current Employment Statistics which provides average weekly hours, average hourly wages, and total employment for 180 distinct job categories organized in industry groups.  As the authors explain:

JQI itself is a fairly simple measure. The index divides all categories of jobs in the US into high and low quality by calculating the mean weekly income (hourly wages multiplied by hours worked) of all P&NS jobs and then calculates the number of P&NS jobs that are above or below that mean. An index reading of 100 would indicate an even distribution, as between high- and low-quality jobs. Readings below 100 indicate a greater concentration in lower quality (those below the mean) positions, and a reading above 100 would greater concentration in high quality (above the mean) positions.

Recognizing that some groups are quite large and include a wide range of jobs hovering around the mean, the JQI is further adjusted by disaggregating those particular groups into subgroups. The average income of each of those subgroups is then compared with the mean weekly income derived from the entire sample to determine whether the positions should be classified as high or low quality jobs.

As noted above, the JQI fell from 94.9 in 1990 to 79.0 as of July 2019.  As for the significance of this decline:

The decline confirms sustained and steadily mounting dependence of the U.S. employment situation on private P&NS jobs that are below the mean level of weekly wages. . . .

Notably, movements in the JQI are not particularly correlated with recession; it is important to note that the first big decline occurred during the expansion of the late 1990s. The index was steady during the 2001 recession, and its second big decline occurred during and after the Great Recession. There is admittedly some cyclical patterning evidenced in the JQI output, but this is overwhelmed by a larger secular phenomenon.

Losing ground

Not only are US workers facing a labor market increasingly oriented towards low-wage employment, the resulting downward pressure on wages appears to be proceeding at a more rapid pace in the US than in other countries.  As a consequence, a majority of US workers are now poorer, in real terms, than many of their counterparts in other countries.

For example, in a study comparing income inequality in France and the US, the economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman found that the average pre-tax national income of adults in the bottom 50 percent of the income distribution is now greater in France than in the United States.  "While the bottom 50 percent of incomes were 11 percent lower in France than in the US in 1980, they are now 16 percent higher."  Moreover,

The bottom 50 percent of income earners makes more in France than in the US even though average income per adult is still 35 percent lower in France than in the US (partly due to differences in standard working hours in the two countries). Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the US would be even greater after taxes and transfers.

A recent study by the Center for the Study of Living Standards finds that growing numbers of US workers are also falling behind their Canadian counterparts.  More specifically, "the study compares incomes in every percentile of the income distribution, and finds that up through the 56th percentile Canadians are better off than their U.S. counterparts."

The study's author, Simon Lapointe, in words that echo the comments of Piketty, Saez, and Zucman, adds:

Our income estimates may actually underestimate the economic well-being of Canadians relative to Americans. Indeed, Canadians usually receive more in-kind benefits from their governments, including notably in health care. Had these benefits been included in the estimates, the median augmented household income in Canada would likely surpass the American median by a greater margin. While these benefits also come with higher taxes, the progressivity of the income tax system is such that the median household is most likely a net beneficiary.

The takeaway

There are many reasons for those at the top of the US income distribution to celebrate the performance of the US economy and tout the superiority of current US economic and political institutions and policies.  Unfortunately, there is a strong connection between the continuing gains for those at the top and the steadily deteriorating employment conditions experienced by growing numbers of workers.  Hopefully, this economic reality will become far better understood, leading to a more widespread recognition of the need for collective action to transform the US economy in ways that are responsive to majority interests

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What Unilateralism Means for the Future of the U.S. Economy [feedly]

What Unilateralism Means for the Future of the U.S. Economy
https://hbr.org/2019/12/what-unilateralism-means-for-the-future-of-the-u-s-economy

Since January 2018, the United States has carried out one of the most massive swings in foreign economic policy since the trade wars of the 1930s, abandoning the multilateralism forged after World War II and adopting a new strategy of going it alone. The implications for U.S. and global economic growth are enormous, and the consequences for U.S. firms' ability to access foreign markets are sweeping.

The defining characteristic of this shift has been uncertainty. The U.S. has:

Unilaterally raised tariffs on hundreds of billions of dollars' worth of imported goods, on many by as much as 30 percent.
Further threatened to increase tariffs on billions of dollars more goods from places as diverse as the European Union, Guatemala, Japan, Mexico, Turkey, and Vietnam, sometimes for reasons unrelated to trade relations.
Withdrawn from the 12-nation Trans-Pacific Partnership (TPP) pact, which it previously led.
Threatened to withdraw from trade agreements even with close allies.
Gutted the arbitration body that helps enforce member obligations under the World Trade Organization (WTO), which may soon throw more than 70 years of global goods market integration into a tailspin.
Concluded a contentious set of negotiations to close the United States-Mexico-Canada (USMCA) trade agreement this month, but added to its foundational provisions a 16-year sunset clause when it will expire unless renewed, with reviews stipulated every six years.

What are the macroeconomic effects of these shifts in trade policy? In some ways, it can be hard to see the extent. After all, the U.S. average effective tariff (the "AVE") is still only 2.7 percent based on recent Census data (using year-to-date through August to compute the ratio of duties collected to overall imports for 2019). While tariffs produce large costs for buyers, they are to some degree offset by increased tariff revenue for government coffers and profits for protected industries. The overall loss to U.S. gross domestic product (GDP) from tariffs in 2018 and the first half of 2019, estimated using standard workhorse models, without accounting for complexities like uncertainty, amounts to a few tenths of one percent – which may sound small, but can represent an average cost of hundreds of dollars per year for a U.S. household.

Yet while the average effective tariff seems low, it is nearly double its level in 2017. In fact, the AVE has reached a level not seen for 25 years and conceals enormous variation across goods.  The average U.S. tariff on imports from China, the source of almost one-fifth of U.S. imports, now surpasses 20%, including on many inputs into production. It is still an open question as to how much of the tariffs are passed on to the final prices retail consumers pay, but studies show that virtually the full cost of the tariffs so far has been reflected in increased prices paid by importers on the goods as they cross the border.

One study estimates that tariffs imposed in 2018 alone generated an increase in how much firms in the U.S. pay for raw materials (what's called the Producer Price Index) by 1%. That is equivalent to about 6 months of inflation in a typical year. Part of the rise is because when U.S. firms are protected from foreign competitors by the tariffs, they raise their prices when selling to other U.S. firms.  So the low average tariff rate conceals many large distortions affecting the sourcing and cost of goods that are widespread and difficult to measure, affecting both households purchasing imported final goods and firms importing machines, materials, and other inputs.

Perhaps most crucial for firms is the fact that this new unilateral path of U.S. trade policy going forward is extremely uncertain. The chart below shows one measure of trade policy uncertainty compiled by a team from Northwestern University Kellogg School of Business, Stanford Graduate School of Management, and University of Chicago Booth School of Business.  Trade policy uncertainty peaked this past August, hitting a point about twice as high as any other reading in the 34 years for which data exist.

Recent studies show that this trade policy uncertainty may have effects on the economy at least as large as the costs arising from the tariffs themselves.  Independent research from the Federal Reserve Board of Governors estimates that tariffs imposed in 2018 and the first half of 2019 will result in U.S. real GDP being 1 percentage point smaller in 2020 than it would have been without the new tariffs and trade policy uncertainty. That's equivalent to a loss of about $1700 per U.S. household on average. This is driven by dampened industrial production, as firms cut back on investment in the face of increased risk stemming from heightened uncertainty.

Some observers argue that the recent weakening of the Chinese RMB against the U.S. dollar offsets the costs of the tariffs, but this is misleading.  Strengthening of the dollar against the Chinese RMB or other currencies may mitigate the direct costs of tariffs, while still exposing firms to significant challenges.  The recent dollar strengthening against the RMB does not make up for the loss that results from distorting buying and sourcing decisions (if tariffs increase the prices of certain goods we want, this can lead us to buy other less-preferred goods that are not targeted by tariffs).  Strengthening of the dollar presents an additional challenge to U.S. firms that export, as their domestic costs go up relative to rivals in foreign markets. Currency adjustments also do not eliminate the uncertainty about the future path of trade policy that is weighing on firms' willingness to invest.

Increased uncertainty in trade policy from unilateral protectionist actions is not just a U.S. phenomenon. According to the Global Trade Alert, state interventions to impede imports increased fairly steadily across the globe over the last 10 years, and far outpaced liberalizing actions. The data suggest these protectionist efforts have accelerated since 2017.  The same Federal Reserve Board study mentioned above also found that the increase in trade policy uncertainty from just the first half of 2018 led to a 0.8 percentage point drop in global GDP — about $700 billion — one year later, compared to what it would have been without the increased uncertainty, again through a drop in industrial production and associated investment. The International Monetary Fund has also forecasted global GDP being 0.8% lower in 2020 than it would be otherwise, due to tariffs and uncertainty stemming from the U.S.-China trade war weakening business confidence and dampening productivity.

Regardless of whether the shift toward unilateralism in U.S. trade policy is short-lived, its macroeconomic effects are likely to be long-lasting. First, trade policy uncertainty has risen in a way that may not be easily or quickly reversed. This has already had a substantial impact on growth due to the depressing effect on firm activity, and it is likely to continue.

Second, the U.S. tilt toward unilateral protectionism is likely to reduce U.S. firms' ability to access many foreign markets for a long time to come. As the United States has been withdrawing from, renegotiating, and scaling down trade agreements, other countries have been busy forging them without us. While other countries' tariffs toward the U.S. have largely stayed the same or even increased due to retaliation, tariffs between many of our trading partners have been coming down.

The other 11 countries in the TPP decided to move forward with the agreement; seven (Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam) already have put it into force. Since 2016, the European Union has launched or put into force agreements with six large economies in the Asia-Pacific Rim region (Australia, Canada, Indonesia, Japan, New Zealand, and Vietnam), five of them TPP members. China is racing to finalize the Regional Comprehensive Economic Partnership (RCEP) with 15 countries in the region, including seven TPP members. It will be signed as early as February, forming the world's largest free trade area. All of this preferential access for foreign rivals puts U.S. firms and farms at a disadvantage when exporting to these markets, as higher trade barriers can limit or diminish their market share.

The new U.S. strategy of one-on-one trade negotiations has, at best, met with uneven success.  The bilateral "skinny deal" with Japan, which the U.S. signed in October, falls short of export access offered under TPP for some goods, like U.S. dairy and automotive exports, and leaves out other goods, like aircraft. This occurs as China and 13 other countries will soon gain preferential access to the Japanese market under RCEP.  The skinny deal may also may violate WTO rules governing preferential trade agreements. And while the threat of auto tariffs may have gotten Japan to engage in these bilateral negotiations, this strategy has not been effective with the EU, where talks to advance the Trans-Atlantic Trade and Investment Pact with the United States effectively collapsed this year.

Looking forward, the prospect of further trade frictions looms large, so uncertainty will continue to eat away at investment and economic growth. The U.S. trade agreement with China this month appears to promise a rollback of some of the new tariffs and restrictions, but the outcome even for this remains uncertain, since again it is a "skinny deal" and also may involve scheduled purchases of specific goods, leaving it vulnerable to challenges at the WTO. In addition, the trade war has disrupted ties central to sustaining progress in ongoing talks between the U.S. and China's governments on economic and security issues.

Any agreement is unlikely to eliminate the uncertainty introduced by breaking from earlier U.S. commitments under the WTO during the spat. Furthermore, a ruling from the WTO on the second half of the decades-long Boeing-Airbus dispute presents another danger to U.S. economic relations with Europe if the U.S. uses it as an opportunity to levy new tariffs against imports from the EU. Yet, more tariffs on more countries may be the general direction we are headed: A sweeping interagency report released by the Department of Defense in fall 2018 ostensibly lays a foundation to impose tariffs on large swaths of intermediate goods that so far have escaped direct hits from the trade war.  The more recent threat from the U.S. to eliminate exemptions from steel and aluminum tariffs for Argentina and Brazil is another example.

Overall, if we take stock of this shift to unilateralism in U.S. foreign economic policy, the benefits are still uncertain and the fallout is already breathtaking in scope. The complete path and consequences remain to be seen, but have the potential to last for decades.

________________________________

Katheryn Russ is Associate Professor of Economics at the University of California, Davis, specializing in open-economy macroeconomics and international trade. She is a faculty research associate in the National Bureau of Economic Research International Trade and Investment group and Co-Organizer of the International Trade and Macroeconomics working group. She served as Senior Economist for International Trade and Finance for the White House Council of Economic Advisers 2015-2016. She has been a visiting scholar at the central banks of Germany, Portugal and France, the Federal Reserve Banks of St. Louis and San Francisco, and the Halle Institute for Economic Research. She is a member of the Econofact network, and she has written numerous articles on international trade and finance, including in the Journal of International Economics; the Journal of Money, Credit
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Prescription Drug Prices are Falling (says the Consumer Price Index) [feedly]

Prescription Drug Prices are Falling (says the Consumer Price Index)
http://conversableeconomist.blogspot.com/2019/12/prescription-drug-prices-are-falling.html

Another parable from Tim Taylor on mistaking appearance (in news articles) from reality 

"[W]e conclude that the Bureau of Labor Statistics' (BLS) CPI Prescription Drug Index (CPI-Rx) is the best available summary measure of the price changes of prescription drugs. According to this measure, not only are drug prices increasing more slowly than general price inflation; in the most recent period, drug prices have been decreasing. From the peak in June 2018 through August 2019, the CPI-Rx has declined by 1.9 percent. Figure 1 plots the year-over-year percentage change in the CPI-Rx. Through August 2019, the year-over-year change in the index has now been negative for 8 of the previous 9 months."

So reports the White House Council of Economic Advisers in "Measuring Prescription Drug Prices: A Primer on the CPI Prescription Drug Index"(October 2019). The report offers a useful explanation of why it's hard to measure an overall change in prescription drug prices, the key choices made by the Bureau of Labor Statistics in doing so, and the basis for news stories which claim that prescription drug prices have been rising quickly. 

As a starter, here's the Consumer Price Index for Prescription Drugs as calculated by the US Bureau of Labor Statistics:

A price index is of course an average over all prices. In addition, it's a weighted average, where those items on which many people spend a lot get more weight than those items where only a few people spend.

Thus, if the price of an anti-cancer prescription drug used by a few thousand people rises by 100%, but but at the same time generic substitutes for some other prescription drug used by 20 million people become available at a fraction of the brand-name price, the overall price index for prescription drugs is likely to fall. The CEA report explains how the entry of generic equivalents into the prescription drug market are treated in this way:

The FDA approves generics if, among other things, the active ingredient is the same as the branded drug and the generic drug is bioequivalent to the brand name drug. As a result, generic drugs are considered substitutable (in fact, almost a perfect substitute) for the branded version but typically have a lower price, and many consumers switch from the branded version to the generic version shortly after the generic version becomes available. This switch is a price decline (lower price for an identical product) that is not captured by tracking the branded drug or the generic drug's price over time. The CPI-Rx accounts for generic substitution by tracking the initial entry of a generic drug. After roughly 6 months after patent expiration (enough time for the generic to establish market share), the branded drug is randomly replaced with the generic drug, with a probability equal to the generic's market share, and the price difference is recorded as a price decrease.

In addition, prescription drugs often have both a "list price" and an actual "transaction price," which results from a negotiation between drug manufacturers, health insurance companies, pharmaceutical benefit managers, as well as in some cases direct rebates to consumers. The BLS price index is based on the transaction price, not the list price. As the CEA report notes: "Express Scripts, one of the largest pharmacy benefit managers, reported that even though list prices increased in 2018, the prices paid by their clients fell. Some drug companies have themselves warned investors that increased discounts and rebates would offset any list price increases and that net prices would either be flat or fall in 2019 ..."

In addition, there is reason to believe that the prescription drug price index calculated by the BLS overstates the actual rise in prices because of a standard problem sometimes called the "quality" or "new goods" bias. Say that an old drug is replaced by a new drug, which works better and has fewer side effects, but sells for the same price. In this hypothetical, you are getting more for your money with the new drug; in fact, even if you paid a little more for the new drug, you might be better off. But while a perfect price index would presumably hold constant the quality and variety of drugs available, the practical reals-world price index doesn't do this, and for that reason will tend to estimate a higher rise in prices.

So why do so many news stories give the impression that prescription drug prices overall are rising quickly? Each news story has its own hook, of course, and the CEA report runs through a number of examples. In some cases, the news story might be focusing on a particular drug or small group of drugs. In other cases, the news story might focus only the average price increase for prescription drugs where the price rose, leaving out others. In other cases, the news story might count up how many drugs has price increase compared to how many did not, leaving out the issue of how much each of  the actual drugs is used.

Of course, the CPI measure of changes in prescription drug prices has practical problems, as do all price indexes. It's based on a sample of prescription drugs, not all of them, and less-prescribed drugs are more likely to be left out. It is based retail prescription drugs, and so it doesn't include prices for hospital- and doctor-administered drugs. Figuring out transaction prices and gathering information on rebates to consumers is imperfect. If you personally need a certain drug, where they aren't good substitutes, and the price of that drug goes up, it's perhaps not very comforting to read about what is happening with an overall price index of drugs that includes all the ones you are not taking.

But if our society is going to address issues like the out-of-pocket cost of many prescription drugs, it's important to see the overall issue clearly. And the overall evidence is that the price index for prescription drugs has risen in the last year or so

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Dean Baker: Impeachment Is About a Fair Election in 2020 [feedly]

Impeachment Is About a Fair Election in 2020
http://cepr.net/publications/op-eds-columns/impeachment-is-about-a-fair-election-in-2020

Some people on the left have been neutral or even opposed to the Democrats' drive to impeach Donald Trump over his effort to coerce Ukraine's government into taking steps to harm a 2020 competitor. Some argue that there are better reasons to impeach the president, or that Democrats' efforts are woefully inadequate. But part of this disdain for impeachment stems from objections to the New Cold War policies that the career State Department staff wanted to pursue. Many also are not fans of Joe Biden and don't mind seeing him slimed by the Trump administration.

These sentiments are understandable but incidental to the impeachment process. The issue here is whether Trump is allowed to use the full resources of the U.S. government to undermine his political opponents.

Biden is the target because he was (and still) is the front-runner for the Democratic nomination. Ukraine is involved because it happens to be convenient for a right-wing story. Trump can and will make up many other stories as the need arises.

If anyone thinks Trump plans to have a fair race against whoever wins the Democratic nomination, they haven't been paying attention. Trump and the Republican Party do not consider themselves bound at all by rules of electoral fairness or reality.

Remember, this is a guy that went around the country for five years saying that Barack Obama was born in Kenya. Trump insists that he had the largest inaugural crowd ever and that he was elected in a landslide.

He claims that this is the best economy ever and that he is responsible for that fact. (It isn't even close in terms of wage or median family income growth, and in any case, what we see is the continuation of trends that were in place years before he took office.)

Anyhow, we could just have a good laugh if it were only a question of Trump being delusional. But he has staffed the top levels of his administration with people who are totally prepared to ignore reality in his service. The most important figure in this respect is his Attorney General William Barr.

Barr demonstrated his contempt for reality with his four-page "summary" of the Robert Mueller report. This summary completely misrepresented the Mueller report's findings. However, it served a huge political purpose, as it was treated in the media as the actual Mueller report, which Barr kept out of public view for three weeks.

More recently, Barr found a political hack in federal prosecutor John Durham, who was assigned the job of making the Trump-Russia investigation into a "deep state" effort to undermine the Trump presidency. Durham recently signaled his intent to ignore procedures and the law to make this case. He took the unprecedented step of publicly criticizing the Justice Department inspector general's report on the Trump-Russia investigation, based on his ongoing investigation. (Prosecutors do not comment on ongoing investigations.)

Barr, of course, is not the only top-level official corrupting the agency they control to advance Trump's political agenda. We saw that top officials at the Commerce Department were prepared to punish the National Weather Service for correcting Trump's ridiculous claim about a hurricane's path. Earlier, the administration tried to rig the census so that immigrants would be undercounted.

Given what we know about how he operates, we should expect Trump to use the full power of the government against whoever runs against him. People may not be fond of Biden, but do you think it won't affect a Bernie Sanders or Elizabeth Warren candidacy if it is reported that they are under IRS investigation for cheating on their taxes?

How about if the Justice Department is investigating Warren for fraud in connection with her past consulting work, or Sanders for his wife's dealings as president of Burlington College? It doesn't matter at all that there may be absolutely no substance to such allegations; Trump and his lackeys care zero about reality.

Reality is, at most, an inconvenience for them. If it would help Trump's campaign to make up outlandish charges against his opponent, and then have the Justice Department pursue them. Why would anyone think that he wouldn't do it?

The impeachment process is calling Trump to account for a case where he clearly abused his power to advance his political agenda. We are fortunate that career public servants were prepared to risk their jobs and possibly more (some have received death threats) to expose this corruption.

If progressives want to laugh it off and get their way, then we should expect a lot more of this corruption in the 2020 election. If there is anything we should know about Trump at this point, it is that he will do whatever he can get away with.

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How Trump Lost His Trade War [feedly]

How Trump Lost His Trade War
https://www.nytimes.com/2019/12/16/opinion/trump-china-trade.html

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Trade wars rarely have victors. They do, however, sometimes have losers. And Donald Trump has definitely turned out to be a loser.

Of course, that's not the way he and his team are portraying the tentative deal they've struck with China, which they're claiming as a triumph. The reality is that the Trump administration achieved almost none of its goals; it has basically declared victory while going into headlong retreat.

And the Chinese know it. As The Times reports, Chinese officials are "jubilant and even incredulous" at the success of their hard-line negotiating strategy.

To understand what just went down, you need to ask what Trump and company were trying to accomplish with their tariffs, and how that compares with what really happened.


First and foremost, Trump wanted to slash the U.S. trade deficit. Economists more or less unanimously consider this the wrong objective, but in Trump's mind countries win when they sell more than they buy, and nobody is going to convince him otherwise.

So it's remarkable to note that the trade deficit has risen, not fallen, on Trump's watch, from $544 billion in 2016 to $691 billion in the 12 months ending in October.



And what Trump wanted in particular was to close the trade deficit in manufactured goods; despite giving lip service to "great Patriot Farmers," it's clear that he actually has contempt for agricultural exports. Last summer, complaining about the U.S. trade relationship with Japan, he sneered: "We send them wheat. Wheat. That's not a good deal."

So now we appear to have a trade deal with China whose main substantive element is … a promise to buy more U.S. farm goods.


Trump's team also wanted to put the brakes on China's drive to establish itself as the world's economic superpower. "China is basically trying to steal the future," declared Peter Navarro, a top trade adviser, a year ago. But the new deal, while it includes some promises to protect intellectual property, leaves the core of China's industrial strategy — what's been called the "vast web of subsidies that has fueled the global rise of many Chinese companies" — untouched.

So why did Trump wimp out on trade?

At a broad level, the answer is that he was suffering from delusions of grandeur. America was never going to succeed in bullying a huge, proud nation whose economy is already, by some measures, larger than ours — especially while simultaneously alienating other advanced economies that might have joined us in pressuring China to change some of its economic policies.

At a more granular level, none of the pieces of Trump trade strategy have worked as promised.

Although Trump has repeatedly insisted that China is paying his tariffs, the facts say otherwise: Chinese export prices haven't gone down, which means that the tariffs are falling on U.S. consumers and companies. And the bite on consumers would have gone up substantially if Trump hadn't called off the round of further tariff increases that had been scheduled for this past Sunday.

At the same time, Chinese retaliation has hit some U.S. exporters, farmers in particular, hard. And while Trump may quietly hold farm exports in contempt, he needs those rural votes — votes that were being put at risk despite a farm bailout that has already cost more than twice as much as Barack Obama's bailout of the auto industry.

Finally, uncertainty over tariff policy was clearly hurting manufacturing and business investment, even as overall economic growth remained solid.

So Trump, as I said, basically declared victory and retreated.

Will Trump's trade defeat hurt him politically? Probably not. Many Americans will surely buy the spin, and the trade war was never popular anyway.

Furthermore, voting mostly reflects the economy's direction, not its level — not whether things are good, but whether they've been getting better recently. It may actually be good political strategy to do stupid things for a while, then stop doing them around a year before the election, which is a fair summary of Trump's trade actions.



There will, however, be longer-term costs to the trade war. For one thing, the business uncertainty created by Trump's capriciousness won't go away; he is, after all, a master of the art of the broken deal.

Beyond that, Trump's trade antics have damaged America's reputation.

On one side, our allies have learned not to trust us. We have, after all, become the kind of country that suddenly slaps tariffs on Canada — Canada! — on obviously spurious claims that we're protecting national security.

On the other side, our rivals have learned not to fear us. Like the North Koreans, who flattered Trump but kept on building nukes, the Chinese have taken Trump's measure. They now know that he talks loudly but carries a small stick, and backs down when confronted in ways that might hurt him politically.

These things matter. Having a leader who is neither trusted by our erstwhile friends nor feared by our foreign rivals reduces our global influence in ways we're just starting to see. Trump's trade war didn't achieve any of its goals, but it did succeed in making America weak again.


Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman


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Boeing to Temporarily Shut Down 737 Max Production [feedly]

Boeing to Temporarily Shut Down 737 Max Production
https://www.nytimes.com/2019/12/16/business/boeing-737-max.html

Boeing next month will temporarily stop making the 737 Max, its most popular passenger jet, the company said on Monday.

The decision, after a two-day board meeting, is the culmination of the worst crisis in the company's 103-year history and follows two crashes that killed 346 people. Boeing had repeatedly signaled that the plane would be cleared to return to the sky before the end of the year.

Boeing's decision could ripple through the American economy. The company is America's largest manufacturing exporter and it views the 737 Max as critical to its future.

This new model of its workhorse 737 was begun under pressure in 2011 as the company sought to fend off competition from its European rival, Airbus. But after the two crashes, prosecutors, regulators and two congressional committees are investigating whether Boeing overlooked safety risks and played down the need for pilot training in its effort to design, produce and certify the plane as quickly as possible.


One focus for investigators is a software system known as MCAS, which was created for the Max and was found to have played a role in both crashes. Shortly after the first crash, off the coast of Indonesia in October 2018, Boeing promised a fix to MCAS. Then the second crash happened in March, in Ethiopia.

The plane was grounded days later, and Boeing has still not delivered a software fix for MCAS that has met federal approval. And there is still no timeline for the plane's return to the air.

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Boeing's reputation and stock price have been battered, with shares in the company falling 25 percent since March. The company has already announced more than $8 billion in charges related to the crisis, a figure that is expected to rise significantly.

With the company still unable to win approval from global regulators to let the plane fly again, executives and board members have made, in halting production, one of the most consequential decisions in the manufacturer's history, one that will also affect its hundreds of suppliers around the country.

Shutting down the factory "emphasizes the uncertainty of getting Max back in the air," Jonathan Raviv, an analyst at Citi, wrote in a note on Monday.


Boeing has only rarely stopped production of its airplanes, most recently in 2008. But the company has never faced a situation like the one it now confronts. Boeing has sold roughly 5,000 of the jets, making it the best-selling aircraft in its history, and it has built nearly 400 Max jets that it has not yet delivered.

"It will have enormous ripple effects," said Susan Houseman, director of research for the Upjohn Institute for Employment Research. "It will have very real effects on many people's lives, and it's never good for this to happen right before the holidays."

Boeing said it intended to redeploy the roughly 12,000 workers building the Max in its factory in Renton, Wash., to other projects, avoiding layoffs or furloughs for the time being.

It will try to manage the disruption to suppliers, though it did not give details. It may continue to accept parts from major suppliers, so that when the company restarts the Max line production can be quickly ramped up. Other suppliers are likely to endure significant financial pain if Boeing's shutdown halts part of their assembly line for a period of months.

"Our objective continues to be ensuring supply chain health and production system stability, including the preparedness for seamless transition in the future," a Boeing spokesman, Gordon Johndroe, said in a statement.

Boeing's shares were down more than 4 percent before the announcement. Shares of Spirit AeroSystems, which makes the fuselage of the Max, fell nearly 2 percent on Monday.

But because Boeing is not planning significant layoffs and its suppliers are distributed around the country, the overall effect on the broader economy will depend on how long the stoppage lasts.

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"It's a blow to the collective psyche," said Mark Zandi, chief economist at Moody's Analytics. "But the American economy is performing well, job growth is strong, and the stock market is near a record high. If there was a time when the economy could digest something like this, it is now."

Boeing had already slowed production at the factory after the crashes. In April, the company said it would reduce the number of 737 planes it produced each month to 42 from 52.

It was not clear how long the Max factory will be shut down. Boeing continues to encounter hurdles with the Federal Aviation Administration and other global regulators as it works to return the plane to service.

The delays have varied from the technical to the procedural, and have now made it likely that the Max will be grounded for a full year, if not longer. Boeing has still not completed all the steps necessary to satisfy regulators.

As a result, Boeing has repeatedly pushed back the projected date of a return to service for the Max. Dennis A. Muilenburg, Boeing's chief executive, said in October that he expected the planes to be approved to fly this year. But last week, Stephen Dickson, the administrator of the F.A.A., said the Max would not fly until 2020.

Southwest Airlines and United Airlines had already postponed Max flights until March, while American Airlines has said it won't fly the Max until April.

The production shutdown adds to the pressure facing Mr. Muilenburg. Among his challenges: the company's fraying relationship with the F.A.A., which has become more willing to openly question Boeing in recent weeks.

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In a meeting at F.A.A. headquarters in Washington last week, Mr. Dickson told Mr. Muilenburg that it would be impossible to get the plane flying by the end of the year, despite Boeing's previously rosy predictions.

"Boeing continues to pursue a return-to-service schedule that is not realistic," an F.A.A. official wrote in an email to Congress before the meeting. "More concerning, the administrator wants to directly address the perception that some of Boeing's public statements have been designed to force F.A.A. into taking quicker action."

The board stripped Mr. Muilenburg of his title as chairman in October, saying the move would allow him "to focus full time on running the company as it works to return the 737 MAX safely to service." David Calhoun, who became chairman of the board, has expressed confidence in Mr. Muilenburg.

But in an interview on CNBC last month, Mr. Calhoun did not offer a clear answer when asked whether the company would keep Mr. Muilenburg in his role as chief executive after the Max returned to service.

"Why speculate on that?" Mr. Calhoun said in the interview. "If we successfully get from where he started to where we need to end up, I would view that as a very significant milestone and something that speaks to his leadership and his courage and his ability to execute and get us through this."

Mr. Calhoun added that "the board deliberates, every single meeting, on the subject of our leaders and how well they're doing, and do they have our confidence."

Boeing's board was in Chicago on Monday as the company decided between reducing Max production or temporarily halting it. Though shutting down the line rather than further reducing the rate of production is a drastic step, it could help the company in some ways.

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The process of delivering the Max jets it has already built but not delivered will take at least a year, and reducing the backlog would simplify that process. It would also reduce the time the newly built planes sit idle.

But the task of delivering its growing backlog was made more complicated last month, when the F.A.A. took control of issuing certificates of airworthiness for each airplane. That decision means Boeing won't be able to deliver planes as quickly as it had hoped.

Boeing first suggested it might halt production of the Max in July. Last week, Boeing reached a partial settlement with Southwest Airlines to compensate it for some of the costs it has incurred as a result of the protracted grounding of the Max.

"Boeing still has credit lines and probably the ability to incur new debt," said Scott Hamilton, managing director of the Leeham Company, an aviation consultancy. "Even so, at some point, Boeing — even with its financial resources — has to stop the cash bleeding."

At the very moment Boeing announced it was ceasing production of its most important product, the company took steps to meet Wall Street's expectations. As it announced the shutdown on Monday, it sent a simultaneous news release announcing a regular quarterly dividend for shareholders


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