Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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According to a piece [sorry, no link] in Politico this morning, former New York City mayor and multi-billionaire Michael Bloomberg is considering running for president. The piece said that he would probably only enter the race if Bernie Sanders wins the Democratic nomination or if Hillary Clinton hangs on to win the nomination, but “is significantly weakened by Sanders and lurches hard to the left.”

This is the sort of story that people might think was a whacky conspiracy theory dreamed up by someone who had spent too much time listening to Senator Sanders’ tirades about the millionaires and billionaires who run the country. After all, Politico is telling us that one of the richest people in the country is holding out the possibility of entering the race, and possibly throwing the presidency to the Republicans, if the voters nominate the wrong candidate for president or push the right candidate too far to the left.

And, Bloomberg can make this a meaningful threat solely because he is a billionaire. (He does have some standing as a moderately successful 3-term mayor of New York City, but no one thinks that if Bill de Blasio serves two more terms as New York’s mayor, he will be in a position to threaten to run as an independent if he doesn’t like the 2028 Democratic nominee.)

This is certainly getting to be an interesting race now that we have a billionaire threatening the Democrats not to nominate anyone who is too progressive. It is worth noting in this context the origins of Bloomberg’s billions. Unlike a Steve Jobs or Jeff Bezos, who can point to innovations that improved people’s lives as the basis of their billions, Bloomberg made his money by making business information available to traders faster than anyone else.

Bloomberg’s terminals allow traders to be the first ones to get news on the state of Florida’s orange crop or the state of cacao harvest in West Africa. This might not matter much to the world (it’s hard to see a big difference to the economy if the markets take ten minutes rather than one minute to adjust to the news of frost damage to Florida’s orange trees), but it makes a huge difference if you’re trading tens or hundreds of millions of dollars daily in these markets.

For this reason, traders are willing to pay thousands of dollars a month to get access to the Bloomberg terminals, thereby making Mr. Bloomberg one of the richest people in the country. (Senator Sanders’ proposal for a financial transactions tax, which would make short-term trading far less profitable, would be bad news for Bloomberg’s main line of business.)

So there we have it. Put one more item in the corner of the millionaires and the billionaires to add to all the other advantages they have in the political system. If the Democrats move too far left, they will jump in to try to throw the race to the Republicans.

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Robert Samuelson wades into the turf on the explanations for the recent worldwide stock plunge in his column today. Most of what he says is actually pretty reasonable, but the framing doesn’t make much sense.

He starts the piece by citing the view of several forecasters that the drop in worldwide markets does not indicate a recession is imminent. But then he tells readers:

“But there is a less reassuring interpretation: The global stock sell-off may reflect gloomy prospects for ‘emerging-market’ economies.  …

“If this theory is correct, then the worldwide sell-off of stocks represents a logical response to reduced economic prospects.”

It is not clear that these are in any way opposing views. Most forecasts had actually been for very slow growth even before the plunge in stock prices. In fact, we have been seeing slow growth (@2.0 percent) for the last five years. This is very weak for an economy that still has a long way to go to make up the ground lost in the downturn. 

As I and others had noted, the stock market was priced high for an economy that was experiencing slow growth and likely to continue to do so for the foreseeable future, absent some major boost in demand. For this reason, the drop in markets from their 2015 highs is totally consistent with the growth projections that the Congressional Budget Office, the I.M.F., and other forecasters have been publishing. In that sense, the markets are not providing new information, but rather coming into line with the existing information we had about the prospects for economic growth.

The other part of Samuelson’s argument makes less sense.  He tells readers:

“Oil companies have canceled $1.6 trillion worth of projects through 2019, estimates the consulting company IHS. The loss of these projects (and jobs) represents a drag on the global economy and, to some extent, justifies lower stock prices.”

Okay, losing $1.6 trillion worth of projects over the next four years sounds like a big hit. How large is it? Well, it amounts to $400 billion a year or roughly 0.5 percent of world GDP. That is not trivial, but we have to take account of the other side of the story. 

If we assume this is based on a drop in the average price of oil of $60 a barrel from the level of 2 years ago, this corresponds to savings on oil of more than $1.8 trillion a year. If just one quarter of this ends up in additional spending than it more than offsets the hit to the world economy from less money being spent on oil exploration. 

If half of the savings, still a conservative number, gets spent on consumption, it would amount to an additional $900 billion in annual consumption spending, more than twice the size of the hit from less spending on exploration. In short, there is good cause to worry about the environmental implications of lower oil prices, but the economic ones are positive for the world as a whole, even if some countries and regions will be very hard hit.

Finally, Samuelson gives us a line that we have heard before:

“The stock slump could be self-fulfilling. The Great Recession was a traumatizing event. Because it was so deep and unexpected, it made both consumers and business managers more risk-averse. With risks now rising and rewards falling, firms and households might cut their spending just a bit — and cause the very slump they’re trying to avoid.”

Actually there is no evidence that consumers and business managers have become more risk averse. Consumers are spending a larger share of their income than at any point in the last three decades, except at the peak of the housing and stock bubbles. If they have become more risk averse, it is not showing up in their spending.

The same applies to business managers. Investment spending as a share of GDP is back to its pre-recession level. It would be great if businesses would invest more, but why would we expect them to?

The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.) 

In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.    

One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region. 

The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth. 

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World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.

This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.

But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.

Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).

These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)

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Paul Krugman weighs in this morning on the debate between Bernie Sanders and Hillary Clinton as to whether we should be trying to get universal Medicare or whether the best route forward is to try to extend and improve the Affordable Care Act. Krugman comes down clearly on the side of Hillary Clinton, arguing that it is implausible that we could get the sort of political force necessary to implement a universal Medicare system.

Getting universal Medicare would require overcoming opposition not only from insurers and drug companies, but doctors and hospital administrators, both of whom are paid at levels two to three times higher than their counterparts in other wealthy countries. There would also be opposition from a massive web of health-related industries, including everything from manufacturers of medical equipment and diagnostic tools to pharmacy benefit managers who survive by intermediating between insurers and drug companies.  

Krugman is largely right, but I would make two major qualifications to his argument. The first is that it is necessary to keep reminding the public that we are getting ripped off by the health care industry in order to make any progress at all. The lobbyists for the industry are always there. Money is at stake if they can get higher prices for their drugs, larger compensation packages for doctors or hospitals, or weaker regulation on insurers.

The public doesn’t have lobbyists to work the other side. The best we can hope is that groups that have a general interest in lower health care costs, like AARP, labor unions, and various consumer groups can put some pressure on politicians to counter the industry groups. In this context, Bernie Sanders’ push for universal Medicare can play an important role in energizing the public and keeping the pressure on.

Those who think this sounds like stardust and fairy tales should read the column by Krugman’s fellow NYT columnist, health economist Austin Frakt. Frakt reports on a new study that finds evidence that public debate on drug prices and measures to constrain the industry had the effect of slowing the growth of drug prices. In short getting out the pitchforks has a real impact on the industry’s behavior.

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While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush. 

Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.

If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don't fall into this category.

According to the Federal Reserve Board's 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household's income up to $22,000 a year.

Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.

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Robert Samuelson used his column today to tout a Pew study that recycled well-known Census data showing stagnating family incomes over the last four decades. Unfortunately, Samuelson thought the results showed the opposite, telling readers:

"But the study convincingly rebuts the notion that the living standards of most Americans had stagnated for many decades. Pew calculated household incomes, adjusted for inflation, all along the economic spectrum and found that, until the early 2000s, most households reaped slow but steady increases. Growing inequality did not siphon off all gains for those who are not rich . Here’s how Pew describes this period:

"'Households typically experienced double-digit gains in each of the three decades from 1970 to 2000. Middle-income household income increased by 13% in the 1970s, 11% in the 1980s, and 12% in the 1990s. Lower-income households had gains of 13% in the 1970s, 8% in the 1980s and 15% in the 1990s.'"

Rather than representing impressive gains in living standards, these are very modest gains compared with both prior decades and the economy's rate of productivity growth. In the late forties, fifties, and sixties, family incomes were rising at an annual rate of more than 2 percent, which would translate into gains of more than 20 percent over the course of a decade. For example, the cutoff for the top third quintile of income rose by almost 16 percent in just the six years from 1967 to 1973. (The cutoffs for the second and first quintiles rose by 11.1 percent and 12.6 percent, respectively.)

Furthermore, most of the rise in incomes enjoyed by households in the late 1970s, 1980s, and 1990s was due to women entering the labor force. While it is a good thing that women enjoyed increased opportunities in these decades, we would not ordinarily think of it as a rise in the standard of living because two earners have more income than a single earner. Since we know that the wages of most workers were nearly stagnant over this period, the only way that most households were able to acheive gains in income was by putting in more hours.

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The Wall Street Journal devoted an article to the presidential candidates economic plans and their potential to affect growth and to help the middle class. Remarkably, the piece never once mentions the Federal Reserve Board and its current plans to raise interest rates in order to slow growth.

The Fed's plans should be front and center in any discussion of efforts to boost growth either through tax cuts or additional spending, since if the Fed believes that such plans will simply lead to more inflation, then it will accelerate its rate hikes in order to prevent the economy from growing more rapidly. This means that in order to boost the growth rate, a plan would not just have to be well-designed for the economy, but it also would be necessary to get the approval of the Fed to allow additional growth. This point should have been mentioned.

In this respect, it is worth noting that Senator Bernie Sanders plan for a financial transactions tax would directly open up a considerable amount of economic space by eliminating close to $100 billion annually in wasteful financial transactions. Most research indicates that trading is relatively elastic, meaning that trading volume will decline in rough proportion to the extent that a tax raises cost. This means that the amount of revenue raised by a tax will correspond to resources freed up in the financial sector by reduced trading volume. These resources (worker and capital) could then be diverted to more productive sectors.

In principle, since this involves a reallocation from finance to other sectors, rather than a net increase in output, the Fed should be content to allow it to take place. Since so many of the top incomes are in finance, Sanders' proposal would be hugely redistributive from the rich to the middle class.

The piece also includes the bizarre comment:

"Some economists believe that 4% [the growth rate targeted by Governors Bush and Christie] would be a stretch, at least for any significant period of time, given an aging U.S. population and lethargic productivity, big factors in determining growth."

Actually, nearly all economists believe that 4 percent would be completely impossible on a sustained basis. Even sustaining a 3 percent growth rate over the next decade would be an extraordinary accomplishment. In other words Bush and Christie are just using nutty numbers. They presumably are aware of this fact, WSJ readers should be as well.

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Noam Scheiber had a good discussion yesterday in the NYT on recent changes in tax shares. The piece commits one major sin when it discusses the desire to lower the tax rate on capital income as stemming from a desire to reduce "double taxation." The logic of this argument is that profits are taxed at the corporate level, so when they are taxed again at the individual level when they are paid out as dividends or lead to capital gains, this amounts to "double taxation."

The problem with this logic is that the government gives individuals something of enormous value when it allows them to create a corporation as a legal entity. A corporation enjoys a wide range of privileges that these people would not have as individuals, most importantly that it allows them limited liability. This means that the individuals who own shares in the corporation are not liable for any harm the corporation may do beyond the value of their shares.

We know that limited liability and other benefits of corporate status have great value because people choose to incorporate. They would not do so, and save themselves from having to pay the corporate income tax, if they didn't think the value of corporate status exceeded the burden of the tax. In this sense, the corporate income tax is a 100 percent voluntary tax, people opt to pay it in order to get the benefits of limited liability.

There is one other point that would have been useful to include in this discussion. Taxes affect the before-tax distribution of income insofar as they allow for a lucrative tax avoidance industry. To a large extent the private equity industry, which has created rich people like Mitt Romney and Peter Peterson, is about devising ways to raise corporate profits through tax avoidance. This is an important cost associated with having an excessively complex tax code. That is an important point that is always necessary to keep in mind in any discussion of the tax code.

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Rewrites of history can pop up in the strangest places. This one appears in an obituary for Edward Hugh, an economist who became somewhat famous for his pessimistic blogposts about the prospects for the euro zone. Towards the end, the piece tells readers:

"On occasion his prognostications were overly pessimistic, and Spain’s surprisingly quick economic recovery was an event that he, along with many others, did not foresee."

This one should have left readers scratching their heads. Spain did not have a surprisingly quick recovery. In fact it's recovery was much weaker and slower than almost anyone expected. In 2010, the I.M.F. projected that by 2015 Spain's GDP would be 4.7 percent above its 2008 pre-recession level. It's most recent projections show 2015 GDP coming in 3.1 percent below the 2008 level. If Hugh was wrong about the pace of Spain's recovery, he was most likely overly optimistic, since very few people expected an economic performance that would be this weak.

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The Washington Post opinion pages is not a place most people go for original thought, even if they do provide much material for Beat the Press. One major exception to the uniformity and unoriginality that have marked the section for decades was Harold Meyerson's column. Meyerson has been writing a weekly column for the Post for the last thirteen years. He was told by opinion page editor Fred Hiatt that his contract would not be renewed for 2016.

According to Meyerson, Hiatt gave as his reasons that his columns had bad social media metrics and that he focused too much on issues like worker power. The first part of this story is difficult to believe. Do other WaPo columnists, like BTP regulars Robert Samuelson and Charles Lane, really have such great social media metrics?

As far as part II, yes Meyerson was a different voice. His columns showed a concern for the ordinary workers who make up the overwhelming majority of the country's population. Apparently, this is a liability at the Post.

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The Washington Post gained notoriety in the last decade by relying on David Lereah as its main source the housing market. Lereah was the chief economist for the National Association of Realtors and author of Why the Real Estate Boom Will Not Bust and How You Can Profit from It. It continues to follow the pattern of relying on a narrow group of economists, most of whom seem to specialize in repeating what the others are saying.

It devoted a major news article to explaining why "$2 gasoline isn’t having the economic impact everyone thought it would." According to the piece, the main problem is that people have increased their savings:

"Kathy A. Jones, Schwab’s chief strategist on credit markets, said that consumers have increased their savings as oil prices have dropped. And as the savings rate has gradually edged higher, Jones said, the use of credit cards has declined. According to the Bureau of Economic Analysis, the personal savings rate climbed to 5.6 and 5.5 percent respectively in October and November, the highest rates in three years."

Actually, the saving rate is poorly measured since it depends on a measure of income that is subject to large revisions. If we take spending as a share of GDP, we find that it was 68.33 percent in the first three quarters of 2015, down trivially from its 68.4 percent measure in 2014 and almost identical to the 68.37 percent share in 2013. In other words, the data (as opposed to the economists) say people are spending pretty much what we should expect them to spend. If we want to find the sources of weak growth, we should look elsewhere.

While the piece correctly identifies equipment investment as one of the other sources of weakness, remarkably it ignores the trade deficit. Measured in 2009 dollars, the trade deficit rose from $442.5 billion in 2014 to $546.1 billion in the first three quarters of 2015. Assuming a multiplier on net exports of 1.5 this rise in the trade deficit would be sufficient to knock roughly a percentage point off GDP growth in 2015. 

It is remarkable that the Post would not include this sharp rise in the trade deficit in a discussion of the economy's weak growth in 2015. In this context, it is probably worth noting that the Post is a strong proponent of the Trans-Pacific Partnership (TPP). Supporters of the TPP tend to ignore the trade deficit and its impact on growth and jobs.

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Austin Frakt has an interesting discussion in the NYT of patterns in clinical testing of cancer drugs suggesting a bias towards testing drugs treating late-stage patients with little chance of survival as opposed to more promising drugs treating people at early stages or even prevention. However the remedies involve a less demanding testing process by the Food and Drug Administration and increased use of marketing exclusivity to provide more incentive to testing.

Incredibly, there is no discussion of publicly funded clinical trials. In addition to overcoming the bias reported in the piece, publicly funded trials would also have the advantage that the drugs would be available at generic prices as soon as they are approved. In addition, all of the data from the trials would be fully available to other researchers and physicians to help in their prescribing choices.

For those worried about the inefficiency of government testing, the process could be contracted out to private companies, just as the Defense Department contracts out the development of weapon systems. (A big advantage of drug testing over weapon development is that there is no excuse for secrecy in drug testing. Complete openness should be a condition of any contracts.) 

The reluctance to consider public funding for clinical trials seems to stem from some strange belief that if the government touches the money, then the resulting process is hopelessly inefficient. It is difficult to understand the basis for such a view.

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The NYT headlined an article on the drop in unemployment insurance claims, "Jobless claims near 42-year low as labor market tightens." While it would be good news if fewer people were filing for unemployment insurance because they were not losing their jobs, this is only part of the story behind the drop in claims. Due to tighter restrictions on unemployment insurance, a much smaller share of the unemployed are eligible for benefits than in prior decades.

For example, in the most recent month, just under 2.2 million people were collecting benefits out of 7.9 million unemployed, which means that 29.1 percent of the unemployed were collected benefits. If we go back to November of 1973 (42 years ago), 1.7 million people were getting benefits out of unemployed population of 4.3 million, for a ratio of 39.5 percent.

Part of the drop in claims in recent years is due to the improvement in the labor market, but part of the decline is due to fewer people being eligible. One can debate whether the tighter restrictions are desirable, but this is clearly a separate issue from a tightening of the labor market.

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Catherine Rampell devoted her column today to a popular Washington pastime: trying to get young people angry at their parents and grandparents so that they are not bothered by the enormous upward redistribution of income taking place in this country.

She begins the piece by telling readers that college students are wasting their time complaining about diversity issues and sensitivity to racism and sexism, then gets to the meat of the story:

“Older generations have racked up trillions in debt and stuck young people with the bill. This is not just due to expensive wars, unfunded tax cuts, Keynesian financial interventions and the other usual scapegoats for fiscal profligacy.

“One of the largest ongoing sources of spending involves huge age-specific transfers: Our politicians are paying off older, higher-voter-turnout Americans in the form of generous benefits that those older people have not paid for and never will. Which means the tab will need to be picked up by someone else — i.e., someone younger.

“For example, a married couple with a single breadwinner who earned the average wage his whole life and turned 65 this year will collect more than six times as much in net Medicare benefits as the couple paid out in taxes. That’s after taking into account both Medicare premiums and other ways the couple could have invested their payroll tax money.

“'Invincible' youngsters are subsidizing health care for their not-yet-Medicare- eligible elders on the individual insurance market as well. And elsewhere on government balance sheets, spending on the old is crowding out spending on the young. At the state level, politicians have responded to swelling pension obligations by disinvesting from public higher education. These funding cuts have then been offset with massive tuition hikes — which fall to, you guessed it, today’s college students.

“Fiscal issues of course aren’t the only way that young people have been done wrong by their elders. The warming of our planet and some politicians’ promises to undermine what small progress has been made to curb climate change also come to mind.”

There is so much wrong here that it hard to know where to begin. Let’s start with an easy one, the story of Medicare and Social Security.

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I am going to do a bit of nitpicking on a Paul Krugman post on the Affordable Care Act (ACA). Krugman notes the continued progress of the ACA in reducing the number of uninsured and keeping costs down. Krugman basic points are right, the ACA is working and its opponents are determined to ignore its success.

The basis of the nitpick is that among the positive items, Krugman tells us that "the pool is getting younger." The problem with this comment is that the age of the enrollees really does not matter much, what matters is their health. It's true that on average young people have lower health care costs, but they also pay much lower premiums. The ratio of payments for the oldest group (ages 55-64) to the youngest is three to one for an average policy. The ratio of average costs is roughly 3.5 to 1.

This means that it matters somewhat for the ACA if the distribution skews older, but not very much. The Kaiser Family Foundation did the arithmetic a few years ago and found that even an extreme age skewing only raised costs by 2 percent. What matters much more is if there is a skewing by health. The difference in costs within each age group swamp the differences between age groups.

This matters because it is important to get a proper understanding of the progress of the ACA and what matters. I recall a few years ago talking with some twenty somethings who were saying that they didn't plan to sign up for the exchanges. They were putting it as sort of a threat because they didn't like the ACA. (They were single payer supporters -- so am I.) I encouraged them to sign up because I thought it was good that they had insurance, but explained it was far more important if the 60-year-olds in good health sign up than if they did.

If this sounds strange, think of the premium as a tax that varies by age. There are large numbers of people of all ages with near zero health care expenses, but the older ones pay a tax that is three times as high as the younger ones pay. In this case, it clearly matters much more that we get the older healthy people into the pool than the younger ones.

Anyhow, this is a relatively small point, but people should be clear on what it is at issue. We should kill the "young invincible" myth for good.

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By Cherrie Bucknor and Dean Baker

Those of us unhappy with the Fed rate hike this month frequently point to the sharp drop in employment rates (EPOP) compared with the pre-recession level. The overall employment rate (the percentage of the adult population with jobs) is still down by more than 3.0 percentage points from pre-recession peaks. Even if the unemployment rate is not far above the pre-recession level, there remains a very large gap in the percent of the population that is working. This doesn't show up in the unemployment rate because many people have dropped out of the labor force and are not looking for work, and therefore are not counted as unemployed. 

One response is that because of the aging of the population many baby boomers are now retired and have no interest in working. A way to get around this issue is to restrict the comparison to the prime age population, people between the ages of 25–54. These people are not likely to be retired. This gives us pretty much the same story: the EPOP for prime age workers was down by 2.9 percentage points in November compared with its peak pre-recession level.

The next argument is that we have many prime age workers who have dropped out because they don't have the skills needed to find work in today's economy. This one might seem peculiar because these workers apparently did have the skills back in 2007 and the economy has not changed that much in the last eight years. But we can also test this one fairly easily.

If the drop in labor force participation was explained by less-skilled workers leaving the labor force then we should see most of the drop in employment rate among less-educated workers, with little or no change in employment rates for more educated workers. That is not what the data show.

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Source: Authors' analysis of Current Population Survey.

As can be seen, the overall EPOP is lower than the EPOP for people with college or advanced degrees. It has also dropped the most, falling by 3.3 percentage points from its 2007 level and 4.8 percentage points from its 2000 level. But the EPOP for prime age workers with college degrees has also fallen sharply, dropping by 1.7 percentage points from its 2007 level and 2.7 percentage points from the 2000 level. Even people with advanced degrees have seen substantial drops in employment with a decline in their EPOP of 1.6 percentage points from 2007 and 2.9 percentage points from 2000.

What should we make of these drops in employment among the most highly educated workers? We could twist the skills argument and say that even though these people are highly educated, they got their degrees in the wrong areas. Or, we could just say that we have a serious shortfall in demand in the economy and that it is not showing up in the unemployment rate because so many people have given up looking for work.

Or, we could say that millions of prime age workers suddenly decided they would take a long vacation. A shortfall in demand seems more likely and the Fed's rate hike does not help in this case.

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Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.

While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.

We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)

The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.

For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.



Since folks asked, roughly 40 percent of the shortfall projected by the Social Security trustees would not be there if there had not been a massive upward redistribution of income over the last three decades. The story is here.

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I have yet to see the Big Short, but folks I know who have seen it say it's a great movie. But apart from its dramatic qualities, we have to once again raise the question of whether the story of the downturn is really a story of a financial crisis or a burst housing bubble.

I see that the generally astute Neil Irwin weighs in on the side of the financial crisis in his review of the movie.

"A lot of people thought a decade ago that there might be a housing bubble. Few of them understood the connections between housing prices and poor lending practices, and the connection from poor lending practices to complex, highly rated securities, the connection between those securities to the balance sheets of major banks, and the peril to the economy if just a few of them faltered.

"At each link in that chain, there were people aware that something was wrong, but lacked the ability to put those pieces together and connect bad lending in Florida suburbs with the existential risk being taken by companies like Bear Stearns and Lehman Brothers.

"The impossible job for the regulators (and journalists, and credit rating agencies) of the future is to better understand how the pieces within the infinitely complex economy and financial system connect with one another.

"'The Big Short' is a powerful reminder of how hard that will be."

I have been around the block on this one many times, most recently with Brad DeLong back in April (see also here and here). The basic point is that the demand created by the housing bubble was driving the economy prior to the crash. This demand was felt through two channels. First, record high house prices pushed residential construction to record levels of GDP. Second, at its peak the bubble had created $8 trillion (@ 60 percent of GDP) of ephemeral housing equity.This led to an enormous consumption boom as people were spending based on this bubble generated equity.

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This is what the NYT told readers in an article that reported Secretary Clinton wants to embrace her husband's economic record as president. While the last four years of the Clinton presidency did have low unemployment and rising real wages for workers at the middle and bottom of the income distribution, these gains were driven by the demand generated by the stock bubble.

The bubble led to a surge of investment in high tech, as start-ups were using the money they could raise from issuing stock to finance their investment. (Generally companies first issue stock to allow the founders to cash out some of their profits.) The stock wealth generated by the bubble also led to a consumption boom as savings rate fell to what were at the time record lows.

While the bubble did produce a period of prosperity, its collapse was both inevitable and predictable. While the recession resulting from the crash is usually thought to have been short and mild, it actually led to what was at the time the longest period without job growth since the Great Depression. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, the economy was being propelled by the housing bubble.

Clintonomics set the economy on this path of bubble driven growth through its engineering of the bailout from the East Asian financial crisis. The result of the bailout was a huge run-up in the dollar against other currencies. Developing countries, which had been borrowing capital, switched to become huge lenders of capital as they tried to accumulate all the reserves they could to protect themselves from facing a similar situation as the East Asian countries.

The direct result of the run-up in the dollar was an explosion in size of the U.S. trade deficit, as the over-valued dollar made U.S. produced goods and services less competitive in the world economy. The trade deficit has led to a huge gap in demand (now around $500 billion annually) which can be filled only by large budget deficits or bubble-driven growth. 

It is striking that Secretary Clinton would embrace policies that have led to so much pain for large segments of the American public. This could hurt her prospects in getting the nomination or winning the general election.

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A NYT article on the uncertain politics in Spain following an election which left no obvious path to a majority government noted that the outcome was in large part a revolt against the austerity imposed on the country. There have been similar revolts in Greece and Portugal. The piece points out the popular discontent and tells readers:

"As the result in Greece showed, even anti-austerity parties have to answer to financial markets and balance national budgets, and the numbers are still deeply stacked against the policies of the old left and their heavy spending on welfare states."

The countries of southern Europe actually had relatively less developed welfare states. The countries with heavy spending on welfare states are mostly in northern Europe. They have relatively small budget deficits and face extremely low interest rates in financial markets. The difference between these countries and the countries in southern Europe is that the latter collect less money in tax revenue.

It is also worth noting that, least in the case of Spain, the problems with deficits followed the crisis. Before 2008, the country was running budget surpluses and had a very low national debt.

It is also worth mentioning that it is not the financial markets that are constraining Spain and other southern European governments. The decision by Germany and other northern European countries to deliberately keep their rates of inflation very low is requiring the southern European countries to adjust trade imbalances through deflation and austerity.

If these countries still had their own currencies, they would simply allow the value to decline. Within a currency union, it would be expected that the surplus countries would share in the adjustment process by having moderately higher rates of inflation, but Germany and its followers have refused to accept this responsibility.

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It's hardly a surprise to see a column in the Washington Post opinion pages calling for lower federal budget deficits. In spite of the continued weakness of the labor market and the economy, the Washington Post continues to push for less demand, growth, and employment.

Fred Hiatt did the job today by praising Rhode Island Governor Gina Raimondo for cutting public employee pensions, and contrasting these cuts with increased tax cuts and spending at the federal level. Hiatt's complaint is that Congress agreed to extend tax cuts, which with interest are projected to cost $780 billion over the next decade. This comes to roughly 0.4 percent of GDP over this period.

In a context where the economy is likely to face a shortfall in demand, this addition to the deficit will lead to more growth and jobs, although its impact would be larger if more of the money were committed to items like education and infrastructure or the tax cuts went to lower or middle income people. Assuming a multiplier of 1, the addition to GDP would be approximately 0.4 percent of GDP, implying around 500,000 more jobs. (If the Fed is deliberately blocking growth by raising interest rates, then the tax cuts will not boost growth.)

It is also worth noting that Raimondo's pension strategy in Rhode Island has meant a windfall for hedge funds, which are now collecting substantial fees from the state's pension funds. While the Washington Post is generally happy to see cuts to ordinary workers' pensions and Social Security, it consistently applauds actions, such as the TARP, which give public money to the financial sector.

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