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).
Less than a month ago Robert Samuelson told readers that it was unreasonable to expect the Super Committee to solve the country's deficit problem since the real issue is health care. He said that the Super Committee was not going to come up with a politically acceptable way to fix health care in three months so it was unrealistic to imagine that it would produce a solution to the long-run deficit problem.
His comments in today's column suggest that he is unfamiliar with the piece he wrote last month. (Hot rumor: there are two Robert Samuelsons.) This one tells us that the problems are that the Republicans don't want to raise taxes and the Democrats refuse to consider cuts in spending, therefore we are going to have a long-term budget problem that will lead to an enormous economic crisis.
Of course Samuelson's column last month was completely right. We pay more than twice as much per person as the average for other wealthy countries. If we get out health care costs in line with other countries we would be looking at budget surpluses not deficits. (Trade would be a good place to start. Unfortunately, the Washington Post and other major media outlets are dominated by hard-core protectionists.)
There are a few other points worth hitting Samuelson on in this piece. First, if we get military spending back down to its pre-September 11th share of GGP (3.0 percent), it will go far towards getting our future deficits down to sustainable course. (This would imply a savings of roughly $2 trillion over the next decade, if the reduction took place immediately.)
Second, there is no obvious reason that the Fed cannot simply continue to hold the assets that it has purchased as part of its quantitative easing program indefinitely. This means that the interest on these assets is refunded to the Treasury and therefore does not add to the deficit. Last year the Fed refunded $80 billion to the Treasury.
Third, listing Social Security as a benefit that people are unwilling to pay for is simply absurd. Samuelson uses 1960 as a base point. In the last five decades the Social Security tax has more than doubled and the age for receiving normal benefits has risen from age 65 to 66. It is scheduled to rise 67 in another ten years. People clearing are willing to pay for their Social Security benefits and have been.
Finally, the idea that if we don't get the deficit down something really bad is going to happen ignores the fact that something really bad is happening now. If someone had warned in 2007 that we face a prolonged downturn with an unemployment rate averaging over 9 percent for three years, they would have been ridiculed as a doomsayer. It is remarkable how easily Samuelson can ignore the disaster in front of his eyes, and would instead have us divert our attention to a vaguely defined really bad disaster in the indeterminate future.
Of course if the Post and other media outlets did not restrict their economic columns almost exclusively to people with no understanding of the economy, we might have been able to avoid the current disaster. After all, it does not take much economic sophistication to see an $8 trillion housing bubble, but the Post could not find anyone who rose to this level of knowledge.Add a comment
For family reasons I had occasion to see some of the Sunday morning talk shows. (These are best avoided for those with an attachment to reality.)
I got to see Jonathan Alter explain how President Obama and the Fed prevented a second Great Depression. The story went that the economy was losing 800,000 jobs a month when President Obama took office in January. If this had continued until the end of the year then we would have had a second Great Depression. Therefore the steps taken by President Obama and the Fed prevented the Second Great Depression.
There are two problems with this story. First, there is no reason to believe that the counterfactual, if the President and the Fed did not act, is that the economy would have continued to lose 800,000 jobs a month. In January the economy was still in a free fall from the Lehman bankruptcy. Is there any reason to believe that the free fall would have continued throughout the year in the absence of the stimulus and the Fed's aggressive actions? It's hard to see that.
It is hard to construct a coherent counterfactual for the Fed. In effect, the Fed is the fire crew that shows up at the scene and puts out the fire. What's the counterfactual to the fire crew showing up? If we assume that the counterfactual is that no fire crew shows up, then we can say that city would have burnt down, but that it is a highly unrealistic counterfactual. Similarly, a counterfactual that the Fed never does anything in response to an economic collapse seems rather unrealistic.
This brings up the second problem. The Great Depression was not one horrible year. It was a decade of double digit unemployment. To get a decade of double digit unemployment we would need the government to sit on its hands for a decade even as tens of millions of people are suffering. Again, this is possible, but it hardly seems the most likely counterfactual.
To be clear, I don't think there is any doubt that the stimulus helped the economy and created in the range of 2-3 million jobs. The Fed's actions to prevent a financial collapse were also a plus, although there should have been some quid pro quo for the trillions of dollars in below market loans going to the banks. But, the second Great Depression is a figment of the imagination of the Washington policy wonks.
Also, to be fair to Alter, he made a number of good points in this segment. However, the one about the second Great Depression is DC drivel that deserves to be attacked whenever it rears its ugly head.
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As a general rule budget reporting in this country is atrocious. It is standard practice to report numbers for the aggregate budget or specific programs without providing any context that would make these numbers meaningful. Often articles do not even make clear the number of years over which spending or revenue will be spread, as though it makes no difference whether we are talking about spending $200 billion over one year or ten. The NYT carried this a step further in a news article on Detroit's budget which can only be taken to mean that the NYT wants you to think that Detroit has a serious budget problem.
Let's start with the basics:
"Within days of Mr. Bing’s [Detroit Mayor Dave Bing] announcement, state officials said they were starting a preliminary review of the city’s finances, which concluded this week with the announcement of a deeper state look at the books and an alarming snapshot of Detroit: more than $12 billion in long-term debt, an estimated general fund deficit of $196 million and no sufficient plan for dealing with the shortfall."
This is supposed to sound really bad to readers. After all, how many of us will ever see $12 billion? And a deficit of $196 million is also really scary. But what on earth does this mean to Detroit? The article gives us no information whatsoever on the size of the city's budget or its economy.
If we make the long trek to the City of Detroit's website, we find that its proposed budget for 2012 is $3.1 billion. This means that the deficit is just under 6.5 percent of its budget. Is that big? Well, the federal deficit is more than 30 percent of the federal budget, so by that metric Detroit is not doing bad. Federal debt (counting money owed to Social Security and other public trust funds) is just under 3 times the size of the budget, not hugely different than Detroit's ratio of a bit less than 4 to 1.
Of course the federal government is not bound by any balance budget requirements and it has the ability to print its own currency, so it does have far more ability to deal with debt and deficits than a city government. Still, the article really provides no basis for assessing how bad Detroit's budget problems actually are. If the city's economy turns around and begins to grow at a healthy pace, these deficits will likely be manageable. On the other hand, if it continues to shrink, as it has been doing for the last five decades, then the deficits will likely be a very serious problem.
The article also includes one other outstanding example of meaningless numbers. It told readers:
"With 11,000 city employees and 139 square miles of increasingly vacant land to tend to, it has struggled, year by year, deficit by deficit, to pay its bills. Once the nation’s fourth-largest city, it has seen its population drop since a high of 1.8 million in 1950 to a low last year of 714,000."
Imagine that, 11,000 city employees in a city that now has just 714,000 people. Is that a bloated bureaucracy or what?
The answer would have to be the "or what?" in really big letters. The Bureau of Labor Statistics reports that 14.1 million local government employees. With a population of just over 300 million people that translates into 1 employee for roughly every 21 people. By comparison, Detroit's government looks positively austere with a ratio of just 1 employee for every 65 people.
Of course the article is not entirely clear on who counts as a local employee. In most cities the schools are run by an independent entity. If we pull out local employees in education, we find that there are 6.2 million non-education employees at the local level. This translates into a ratio of 48 people for every city employee. This is closer but still implies a much lower ratio of people to city employees than Detroit's 65 to 1.
There may be more to this story and Detroit may really have a badly bloated city bureaucracy, but the numbers presented in this article do not support that story and they certainly give readers no ability to assess the issue for themselves.Add a comment
Several people have asked me about the news that the National Association of Realtors (NAR) are revising down their estimates of existing home sales over the last 4 years by an average of 14 percent. I have not looked at this issue in great detail, but the NAR explanation does seem plausible on its face.
Their story is that they rely on data from realtor sales for most of their estimate and then impute a fixed percentage for owner sold properties. In principle, they should also remove new homes that were sold by realtors. (These are not existing homes.) It seems that their survey was in fact capturing a larger portion of total sales since fewer people were selling homes on their own and builders were increasingly turning to realtors to sell new homes.
There were some people who had raised issues about the data previously, but it is time consuming and expensive to re-benchmark a survey. It is understandable that the NAR would not have done it sooner, although they could have made more of a point of noting some of the issues that had been raised about the survey's accuracy.
This sort of problem arises in other contexts. John Schmitt, my colleague at CEPR, found evidence that the Current Population Survey (CPS), which provides the basis for the monthly employment report, was overstating employment. This is due to the fact that it is covering a smaller share of the population than it did three decades ago. A comparison of the CPS with the 2000 Census data indicated that the people who are excluded from the survey are less likely to be employed than the people who are covered. This effect was especially large for young African American men. The CPS may overstate employment by this group by as much as 8 percentage points.
As a more general point, reporters should know that comments from the NAR, or any trade association, must be taken with a grain of salt. While its survey may in general be credible, its economists are not paid to give information to the public. They are paid to advance the interests of its members. In the case of the NAR, this means selling houses. It was absurd that David Lereah, then the chief economist of the NAR, was the primary and often only source in stories on the housing market during the bubble years. Remarkably, reporters tend to treat his successor, Lawrence Yun, the same way.Add a comment
The United States pays more than twice as much per person for its health care as the average for other wealthy countries. It has little to show for this in the way of outcomes as it ranks near the bottom in terms of life expectancy. If we paid the same amount per person as people in other wealthy countries then we would face no long-term deficit problem, as the long-term projections would show budget surpluses rather than deficits.
This is why it is striking that a lengthy Washington Post article on health care never mentioned the sharp contrast between health care costs in the United States and elsewhere in the world. This implies the potential for large gains from trade. For example, if beneficiaries opted to buy into the health care systems of Canada, Germany, or England, the Medicare projections imply that there would be tens of thousands of dollars a year in annual savings that could be split by the government and beneficiaries. A less protectionist paper would have noted these opportunities.
The article also includes a couple of assertions that are questionable or could use some further elaboration. It cites House Budget Committee Chairman Paul Ryan as saying that:
"cutting provider payments beyond the targets in the Affordable Care Act [is] a sure path to Medicare’s collapse."
Given the size of the Medicare program, it is not clear that many providers would have much choice but to accept lower rates. This is almost certainly true in the case of doctors. There are few wealthy patients who do not currently have all the physicians' services they want. This means that if doctors refused to take Medicare patients because they considered the payments inadequate they would simply have to work less or retire early. Since most doctors probably cannot afford to do this, they would likely have little choice but to accept lower pay. (Of course if we removed the protectionist barriers that exclude qualified foreign physicians there would be plenty of doctors willing to accept much lower Medicare payments.)
The article also fails to note the reason that Medicare Part D has cost less than projected. According to the Food and Drug Administration there has been a sharp slowdown in the development of breakthrough drugs. It is possible that the decision to run Part D through private insurers is responsible for the slowing pace of technical innovation in the drug industry, but it is difficult to see how this would be the case. However, if the proponents of this decision (using private insurers rather than Medicare to run the program) want to take credit for slower cost growth, this is what they would be claiming.Add a comment
In an article discussing House Speaker John Boehner's performance in his job, the Post referred to his negotiations last summer with President Obama over, "the federal government’s swelling debt problem." Newspapers interested in maintaining the separation between the news and opinion pages would have simple referred to the debate over raising the debt ceiling, which is what was at issue.
The debt has risen rapidly because of the recession that followed in the wake of the collapse of the housing bubble. Financial markets do not see the debt as a problem, which we know since they are willing to lend the government huge amounts of money at very low interest rates. There was no reason to interject this sort of editorial comment in a news story.Add a comment
It is more than a little bizarre to read a column on public attitudes to inequality in the NYT which completely equates reducing inequality with raising taxes. In fact, the main reason that inequality has risen so much over the last three decades has been the increase in the inequality of before-tax income.
This increase is attributable to policies like a trade policy that subjects manufacturing workers to competition with low-paid workers in the developing world, while largely protecting doctors, lawyers, and other highly paid professionals from similar competition. Inequality stems in part from the government's too big to fail insurance for large banks that allows them to take large risks with taxpayers bearing the downside.
Inequality is due to the enormous extension of patents and copyright monopolies over the last three decades. The country currently pays close to $300 billion a year for prescription drugs that would sell for around $30 billion in a free market. The difference of $270 billion a year is five times the amount of money at stake with the Bush tax cuts for the rich.
It is likely that the public would reject most of the policies that have allowed the wealthy to seize a much larger share of income over the last three decades if any politician ever had the courage to raise them. Instead, Gelman and many others would like to restrict debate to "Loser Liberalism," where the question is exclusively whether we want to tax the winners to help the losers.
Andrew Gelman has added to his earlier note and indicated that he was only referring to the particular pieces being discussed. He did not intend to restrict a discussion of inequality to tax rates.Add a comment
Politifact told its readers about the "Echo Chamber Nation" in its follow up to its "Lie of the Year" story, but not quite in the way they intended. To remind readers, the Politifact Lie of the Year was the Democrats' claim that the Ryan plan approved by the Republican House would end Medicare. The Ryan plan would in fact replace the fee for service Medicare that has been in place since the program was created in 1966 with a system of "premium supports," which most people would call vouchers.
This is comparable to replacing a traditional defined benefit pension with a 401(k). Most people would probably say that if a company had done this that they had ended their pension. However, if anyone said this, Politifact would call them a "liar" and possibly even the "liar of the year."
Yes, calling such a person a liar may make sense in some circles. This passes for wisdom in that narrow group of Washington elites who think that they are balanced because they can criticize both Democrats and Republicans without paying any attention to the evidence. Within this Echo Chamber, saying the Republicans voted to end Medicare could be the Lie of the Year, but not in reality land.Add a comment
We made John Nichols' Honor Roll for "Most Valuable Economic News Source" over at the Nation. I'd like to get a mention for most accurate, but no one gives awards for that.
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Some of us may have thought the dispute over the extension of the payroll tax cut involves maneuvering between politicians who are looking to get re-elected next fall. They all have important interest groups who they rely upon for votes and/or campaign contributions.
However the Post told us that we are wrong to think this. Its lead front page article yesterday told readers that:
"at its heart, the fight over the tax cut is only the latest incarnation of the same ideological clash that has afflicted Congress for the past year, over what the government should fund and how it should be paid for.
Once again, Democrats and Republicans foundered over whether to fund an initiative by cutting entitlements and other spending or by raising taxes on the wealthy."
Isn't it great that the Post can get into politicians' minds and determine the real motives for their actions? Ordinary people would just think of them as people who seek power, who say and do whatever is necessary to advance their careers, but the Post can tell us their innermost thoughts. That is why we need newspapers like the Washington Post.Add a comment
The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.
It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy's potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.
Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.Add a comment
The NYT reported on the Immigration and Customs Enforcement Agency's seizure of unauthorized copies of goods, which it priced at $77 million. (It's not clear whether this is the value of the copies or the price of the goods that were being copied.) The piece repeatedly refers to these goods as "counterfeit."
It is not clear from the article that the goods were in fact counterfeit. If they were counterfeit, then consumers were deceived into believing that they were getting the brand product that was being copied. Often consumers know that they are getting copies of the brand product, not the actual product produced by the company. In this case, the product cannot properly be termed "counterfeit."
This distinction is important because the consumer is being ripped off in the case of an actual counterfeit item. They would presumably cooperate with law enforcement in efforts to eliminate counterfeit items. However, consumers are often happy to buy unauthorized copies of brand products because they sell for much lower prices than the brand product. In this case, consumers will be allied with the sellers in trying to evade law enforcement, since both are benefiting from the transaction.
This piece provides no indication that the products seized were in fact counterfeit. It is only clear that they were unauthorized copies. Reporters should be careful to note this distinction.Add a comment
After being the big optimist who was bashing the double-dip gang in the summer and fall, I am now back to being the killjoy who refuses to join in the celebrations over the November data on housing starts reported yesterday. The point that I made in a prior post is that these numbers are highly erratic. This is especially true of the monthly data on starts of multi-family units, which were driving the jump reported for November.
This chart gives the basic picture.
Click for Larger Image
Source: Census Bureau.
This chart shows three important pieces of information. First construction of both single family units and multi-family units has plummeted since the peak of the bubble in 2006. Second, the monthly data on starts are far more volatile for multi-family units than single family units. Third, in the last year, starts of multi-family units have recovered much more than starts for single family units, which are still near their 2009 trough.
Combining points 2 and point 3, we can conclude that the monthly number on starts will be far more volatile now that multifamily units account for around one-third of all starts as compared to the good old days when they accounted for less than one-fifth. So this is why I am not celebrating just yet (except for Hanukkah).Add a comment
The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.
This sort of restriction should be viewed the same way as a tariff on imported steel. It has all the same negative effects on consumers and the economy. The main differences are that the restrictions on lawyers redistribute income upward to the top 5 percent or even 1 percent and the economic distortions are almost certainly much larger. The other major difference is that the protectionism that benefits lawyers gets much less attention from economists, reporters, and columnists.Add a comment
The Post has another piece showing some pre-mature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell.
In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, multi-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.
The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.
The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below 1.2 million given the country's current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.
(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)Add a comment
The NYT reported that the Republicans in the House want the federal government to allow states to use unemployment insurance tax revenue to pay for job training. It quotes Representative James B. Renacci on this topic:
"In this uncertain economy, using unemployment dollars to subsidize the training of a new employee to re-enter the work force is just good public policy."
It would have been worth pointing out that there is no major sector of the economy that seems to be short of workers. Real wages are flat or declining in every major occupational grouping. There is no occupation where job openings are especially high relative to job seekers (the overall average is more than 4 to 1).
If there are not obvious jobs for which to train workers, government training programs sound like a great example of ill-considered social engineering.Add a comment
I will join in the piling on exercise. Politifact, which is supposed to verify the veracity of claims made by politicians, jumped into the world of language devoid of meaning in its selection of the "lie of the year."
Politifact's "lie of the year" was the claim by Democrats that the House Republicans voted to end Medicare when they voted for Representative Ryan's system of premium supports, or vouchers. Under this plan, people who turn age 65 after 2022 would not get the traditional Medicare plan. Under the Ryan plan, seniors would be given a sum of money by the government, which they could then use to buy into a range of plans. The proposal includes no guarantee that the money provided by the government would be sufficient to purchase an adequate plan. The Congressional Budget Office's (CBO) projections imply that it would be grossly insufficient to pay for a Medicare equivalent policy.
Those are the basic facts [read the CBO analysis and/or the projections that we derived from the CBO analysis]. Given these facts, how can it be a "lie" to say that the Republicans voted to get rid of Medicare?
In the Politifact world, if a company replaces its defined benefit pension with a 401(k) plan, workers who said that the company was getting rid of the pension would be liars. The Medicare system has existed as a fee for service program for almost half a century. It does allow for other options, but people have always been able to choose the traditional fee for service plan and the vast majority of beneficiaries have always chosen this option.
Representative Ryan and his Republican colleagues in Congress voted to take away this option for people turning age 65 after 2022. That is the truth on Planet Earth, in Politifact-land this counts as not only a lie, but as the "lie of the year."Add a comment
The housing bubble apparently still has not gotten word about the housing bubble. Of course it is easy to see how an $8 trillion bubble whose collapse wrecked the economy could escape the attention of the nation's premier business publication.
If the WSJ had gotten word about the housing bubble it would not have said silly things about the baby boom cohorts like:
"In part because of improvidence and weak wage growth, in part because many have lost jobs and in part because of the severe recession, Baby Boomers as a group are unready for two or even three decades of life after they stop working."
See people who have heard of the housing bubble, and the stock bubble that preceded it, know that tens of millions of baby boomers did not save because their house was doing it for them. If a $250,000 home goes up 10 percent in price, this is as good as putting $25,000 into a 401(k).
This is the well-known (among people who have taken intro econ) housing wealth effect. There is also a stock wealth effect. These asset bubbles are the main reason that baby boomers did not save sufficiently for retirement.
This predicted effect of asset bubbles is one of the reasons why people who know economics thought it was incredibly bad policy for Robert Rubin, Larry Summers and Alan Greenspan to celebrate the stock bubble in the 90s and for George W. Bush, Robert Rubin, and Alan Greenspan to celebrate the housing bubble in the last decade. The fact that tens of millions of baby boomers would end up ill-prepared for retirement was a 100 percent predictable outcome from these bubbles.
Unfortunately the people who were making economic policy at the time did not give a damn and the Wall Street Journal is covering up for them now.Add a comment
Charles Lane tells Washington Post readers that:
"Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece."
An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF's data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.
The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.
It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.
The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don't, the taxpayers get the bill. This policy promotes rent-seeking, not growth.
Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.
We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.
And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.
These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.Add a comment
Marketplace Radio had a segment on the proposed merger of AT&T and T-Mobile. It reported that AT&T argued that the acquisition of T-Mobile would allow it to better serve consumers by giving it a large number of cell phone towers in areas where AT&T currently provides inadequate coverage. The segment then said that the Federal Communications Commission (FCC) saw things differently. They blocked the merger because they argued it would lead to excessive concentration and higher prices for consumers.
Actually, there is no conflict between these views. AT&T was arguing that there are substantial economies of scale in the industry that can still be gained even for a firm that already has a 25 percent market share. The FCC argued that allowing firms to gain an even larger market share would imply substantial monopoly pricing power.
These are totally consistent positions. This is why phone companies have historically been either publicly owned or subject to government regulation. The argument is that the nature of the technology would lead to natural monopolies (in the old days, no one was going to lay a parallel set of wires to the old AT&T network).
It is desirable to let firms take advantage of all the available economies of scale to reduce their costs. However, if left unregulated they would take advantage of the lack of competition to gouge consumers. The answer is to have regulators set their prices based on an assessment of their actual costs. It is remarkable that this standard economic solution has not been raised in the public debate over the merger.Add a comment
Okay, Samuelson actually wants to say goodbye to Keynes, but he would have had a better case if he was talking about Darwin and the theory of evolution. After all, when we have seen nothing but confirming evidence for years, why should we still accept the theory?
Samuelson tells readers:
"The eclipse of Keynesian economics proceeds. When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work."
It seems the problem here is that Robert Samuelson has not heard about the euro. The countries he has identified as reaching a situation where they "lose control over their economy" are all on the euro. These are countries that do not issue their own currency. In this sense they are like Ohio and Texas. These states cannot freely run deficits because the Federal Reserve Board has no explicit or implicit commitment to back up their debt. Greece, Italy and Spain are in the same situation, as the European Central Bank (ECB) has repeatedly insisted that it will not back up the government debt they issue.
Samuelson says it is "unclear" why, given our own debt and deficit, interest rates are still just 2 percent and investors are willing to lend us trillions of dollars. Actually it is very clear. The Federal Reserve Board stands behind the debt of the United States government and there are few good investment opportunities in the current economy.
Comparing the interest rate on government debt of countries with similar debt/deficit situations, it is very clear that being able to issue currency makes an enormous difference. For example, the interest rate on Spain's and Austria's debt is much higher than the interest rate on UK debt, even though both countries have much lower debt to GDP ratios. In short, Samuelson finds mystery and confusion where in fact there is none.
He does the same in warning us off stimulus. First he cites Christine Romer, President Obama's former chief economic adviser, as saying that determining the exact number of jobs created by the last stimulus is "incredibly hard." As Barbie would say, so is math.
We can't know the exact number of jobs generated by the stimulus because a hell of a lot things were going on in the economy at the time and it is very difficult to construct a proper counterfactual. This does not amount to an argument against stimulus.
It is incredibly hard to determine the counterfactual if the United States did not enter World War II. In Samuelson's world that would be a compelling argument against having fought Hitler. The research that has attempted to measure the number of jobs created found that the impact was pretty much along the lines predicted by the Obama administration, but yes, there is a large degree of uncertainty around these numbers.
Finally, he comes up with a harsh warning against trying the more stimulus route. Quoting Berkely economist Barry Eichengreen, he tells readers:
"At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."
So Eichengreen, through Samuelson, is telling us that if we go the route of more stimulus we will get a really bad situation. There are two issues here. First is Eichengreen's story credible? And second, what is the alternative?
Eichengreen presumably has not made the same mistake as Samuelson, but again we issue our own currency, so the United States can never literally be in the same situation as Europe in 2010. We can always pay our debt, it is denominated in dollars and we issue dollars.
But Eichengreen tells us the "dollar will fall." Actually, the official policy of both the Bush and Obama administrations were that we want the dollar to fall (mostly against the yuan). This is the only plausible way to address our trade deficit. A lower valued dollar will make imports more expensive, leading us to buy less of them, and make our exports cheaper, causing foreigners to buy more.
If we could get the dollar to fall enough to balance our trade it would create over 5 million jobs in manufacturing. This is more than 250 times the number of jobs that the oil industry claims will be created by the Keystone pipeline. Why would we be concerned about this prospect?
If Eichengreen means that the dollar would go into a free fall -- reaching 3 or 4 dollars to a euro, 2 cents to a yen, 40 cents to a yuan -- this is more than a bit hard to imagine. Under such circumstances U.S. exports would be hyper-competitive and our import market for other countries would vanish. Maybe Eichengreen wants to bet that this is a plausible future, but I doubt that many others would.
If for some reason investors really did send the dollar into a free fall, our trading partners would have no choice but to intervene in order to avoid the enormous damage that such a collapse would imply for their own economies. (Of course it is worth remembering that the long-term deficit horror stories are entirely driven by health care costs, a fact that Samuelson used to know.)
In short, the horror story is nice for little kids, but not terribly plausible in the real world. (Japan's debt to GDP ratio is over 200 percent, we have a very long way to go before we get there. It can borrow long-term in financial markets at interest rates a bit over 1.0 percent.)
Finally, what is the alternative? Tens of millions of people are supposed to go unemployed or underemployed. These are people unable to care for their children properly, unable to prepare for their own retirement, and in many cases, unable to keep their homes. Absent major stimulus, things are not going to get better for these people anytime soon. And given the consistently overly optimistic track record of forecasters, it may be close to a decade until we have fully recovered from the downturn.
It is important to remember that the unemployed/underemployed are not in financial trouble because they messed up. They are in financial trouble because people like Alan Greenspan, Ben Bernanke, and Robert Rubin messed up. They are in financial trouble because news outlets like the Washington Post only had room in their news and opinion pages for people whining about budget deficits. (This is back in 2004-2007, when deficits were small.) They had no room for the people warning that the housing bubble would inevitably burst and sink the economy.
But Samuelson says that we have no choice but to make these people suffer because if we don't then something really bad will happen. It is difficult not to ask whether Samuelson's assessment of this risk of the bad unknown may be somewhat different if it was his family that was facing unemployment and eviction.
Samuelson ended his column by saying:
"Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today."
As Gary Burltess reminds me, the debt to GDP ratio in the UK in the mid-30s when Keynes was writing The General Theory was close to 200 percent.Add a comment