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).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

The Washington Post had a piece on the reaction of financial markets to the debate over the budget. It included a comment from William Gross, the manager of the Pimco bond fund, complaining that if the United States did not reform entitlements then a default is inevitable. He then said that the default would take place through "inflation, currency devaluation and low-to-negative real interest rates.”

This sort of "default" probably does not sound too bad to the overwhelming majority of the public who do not hold large amounts of government debt. More importantly, the devaluation of the currency is essential if the United States is to stop being a huge net borrower from other countries.

Changes in the currency value are the main mechanism for adjusting trade balances in a system of floating exchange rates. If the dollar is over-valued by 20 percent then this has roughly the same effect as subsidizing our imports by 20 percent and placing a tariff of 20 percent on all our exports. The over-valued dollar has far more impact on our trade balance than all of our trade deals put together.

If the value of the dollar does not fall substantially, then the United States will continue to run large trade deficits. This logically implies that we will have negative domestic savings (i.e. it is an accounting identity, there is no way around it). Low private savings means either large budget deficits or very low private savings or some combination.

In other words, if Mr. Gross does not want the dollar to fall, then he either wants to see large budget deficits and/or very low private savings. Or alternatively, he doesn't understand basic economics.

Add a comment
The NYT had a piece discussing the impact on the economy of the budget cuts in the compromise agreement last week. The prospect of losing hundreds of thousands of jobs should have been a central theme in the discussion of the negotiations, but it was almost never mentioned. Add a comment

WAMU, my local NPR affiliate, had an especially appalling segment of "Power Breakfast" this morning. The segment highlighted a congressional hearing on the topic of financial literacy and then commented on the obvious irony.

Of course there is no obvious irony to anyone who has ever learned any economics. The government's large deficit (presumably the source of Power Breakfast's "irony") is supporting the economy right now. This spending is needed because the collapse of the housing bubble created a gap of more than $1.2 trillion in annual demand in the economy. Anyone who thinks that the government should balance its budget right now wants to throw millions more people out of work.

Our Power Breakfast crew might not understand enough economics to realize this fact, but that does not change the truth of the matter. It is of course ironic that someone who knows nothing about economics can have a job reporting on it, while millions of people who can do their jobs are going unemployed.

Add a comment

The NYT has a front page story on the debate over Representative Ryan's plan to privatize Medicare. The article is entirely in the form of he said/she said, providing readers with absolutely no information that would allow them to assess the arguments over the plan. This is especially important since the article reports that changes like those in the Ryan plan are necessary to control costs.

The assessment from the non-partisan Congressional Budget Office (CBO) is that the Ryan plan raises, not lowers, the cost of insurance. The CBO assessment implies that the Ryan plan would raise the cost to the country of buying Medicare equivalent policies by $20.5 trillion over the next 75 years (Medicare's planning period). This amount is almost four times as large as the projected Social Security shortfall. It comes to more than $60,000 for every man, woman, and child in the country. While this extra cost would not be borne by the government under the Ryan plan, it implies an enormous burden on future generations of retirees who may have to spend more than half of their income on health care.

Add a comment

In a column complaining that too many people are dependent on the government, Robert Samuelson badly underestimates how many people are dependent on the government. He failed to take note of the fact that nearly every person in the country is dependent on the U.S. Postal Service to deliver its mail.

Of course it would be silly to claim that people who use the Postal Service for some of their mail are dependent on the government, but much of Samuelson's column falls victim to the same sort of silliness. For example, he wants to say that Social Security beneficiaries are dependent on the government. The problem with this story is that these beneficiaries paid taxes during their working lifetime that cover the cost of their benefits.

Social Security is a retirement program that is run through the government because the government provides the service far more efficiently than the private sector. The administrative costs of the retirement portion of the Social Security program are equal to about 0.5 percent of the benefits paid out each year. By contrast, the administrative costs of privatized programs, like the one in Chile that is often held up as a model, are in the neighborhood of 15 percent of the benefits paid out. Why is it a problem that we choose to run our retirement system in the most efficient possible way?

The same story applies to Medicare. The Ryan plan for privatizing Medicare, which Samuelson smiles upon as a step forward, would add more than $20 trillion (more than $60,000 per person) to the cost of buying Medicare equivalent policies over the program's 75-year planning horizon. This $20 trillion is not the savings to the government from paying less for retirees' Medicare. This is the pure waste associated with establishing a more inefficient system of health care.

While Samuelson makes his usual point about a broken and bloated government, the facts tell a different story. The country has a broken health care system: full stop. If the United States paid the same amount per person for health care as people in any other wealthy country we would be looking at huge budget surpluses, not deficits.

Add a comment

Nearly every public opinion poll ever taken has shown that Medicare and Medicaid are enormously popular programs. People in all demographic and political groups support these programs by large majorities. Even the vast majority of Republicans support these programs.

This is why it is peculiar to see the Washington Post tell readers that:

"House Republicans upped the pressure on the president last week when they introduced a plan to slash government spending by $6 trillion more than the president’s plan over the next decade — largely by shrinking Medicare and Medicaid."

Given that the Republican plan to essentially end Medicare and Medicaid is likely to be enormously unpopular in addition to being bad policy (it would add more than $20 trillion to the cost to the country of buying Medicare equivalent policies for the next 75 years) it is hard to see why this would place additional pressure on President Obama to do anything. Would it increase pressure on Republicans to support tax increases on the wealthy if President Obama proposed large tax increases on the middle class?

The claim that President Obama is now under increased pressure to propose cuts to Social Security, Medicare, and Medicaid coincides with the Washington Post's political position (they want to see President Obama propose large cuts to the budget), but there is zero evidence presented in the article to support this claim.

Add a comment

I don't like to use this blog to settle personal scores, but I think it is important to clear up a serious misrepresentation that stemmed from an earlier post. Zero Hedge has me advocating default on the national debt because I had the audacity to point out that the world will not end if the U.S. defaults on its debt.

It did not occur to me that anyone could think that saying "the world will not end if we do X," is the same as saying "we should do X," but apparently the folks at Zero Hedge cannot see the distinction. Let me try to clarify. Defaulting on the national debt is very bad policy. It would lead to a financial crisis, as I said in my prior post. This would lead to a severe downturn in the economy and a big jump in the unemployment rate.

However the economy would eventually recover. The underlying factors that determine the country's wealth -- the physical stock of capital, the skills of the workforce, the state of technical knowledge -- will still be there following a default.

For this reason I would consider some policies worse than default. Representative Ryan's plan for ending Medicare as we know it would fit this bill. It would mean that people who spent their entire life working could not count on decent health care in their old age.

In my view, if the Republicans say "end Medicare or default," then the correct response for President Obama is "I'll see you after the crash." My guess is that in this scenario we don't get a default. Rather we get Jamie Dimon screaming his lungs out at the Republican leadership, and we get the Republicans running to compromise with their tails between their legs.

But, this assessment could be wrong. Still, in my view there has to be a bottom line. I draw the line before the elimination of Medicare.

I'm afraid that I don't really understand the opposite position. Is it the view of Zero Hedge that nothing is worse than defaulting on the national debt? If Speaker Boehner wants to bring back slavery as a condition of raising the debt ceiling should President Obama sign the bill? (We'll worry about the 13th amendment later.) If they agree that bringing back slavery is worse than defaulting on the national debt then is Zero Hedge also an advocate of default? 

If we want to have a serious argument on this issue it is going to have to be based on what I actually said, not positions that Zero Hedge has invented for me.

 

 

Add a comment

They did it again! The Washington Post had a front page article devoted to the budget debate that never once mentioned the job loss that is expected to result from budget cuts at a point where the economy is still far below full employment.

According to estimates from Mark Zandi, the original package put forward by the Republican leadership would have cost 700,000 jobs. Since the final package had cuts that were roughly two thirds as large, the implied job loss would be around 450,000. It is incredible that a major newspaper could discuss the budget without ever once mentioning its impact on the economy.

The Post, which has long supported big cuts to Social Security and Medicare and other social programs, directly misrepresented reality to push its agenda. It told readers:

"the battle was fought on turf far more hospitable to Republicans, given the country’s concerns about spending that contributed to the Democrats losing the House in November."

Every post-election poll showed that the main concern of voters last November was jobs. As in JOBS!!!!, the one item that is not mentioned once in this article. Instead, the article tells readers that:

"The coming battle, which will be about fiscal priorities and society’s values as much as it is about controlling government spending."

The Post presents no evidence that the battle is about "society's values." Most obviously the battle is about redistributing trillions of dollars of income from ordinary workers to the health insurance industry and health care providers.

According to the Congressional Budget Office, the public would have to pay an extra $20 trillion over the next 75 years (an amount that is approximately equal to 4 times the projected Social Security shortfall) if Representative Ryan's plan for a Medicare voucher system is adopted. There may be questions of values here, but most immediately the question is whether we want to take money from low and middle income people and give it to these industries.

Add a comment

The NYT had a piece on the implications of the United States hitting its debt ceiling and running the risk of defaulting on its debt. The article exclusively presented the views of people who portrayed hitting the debt ceiling and defaulting on the debt as being an end of world scenario.

It would have been useful to present the view of people who do not consider a default on the national debt to be the worst possible outcome. While there can be little doubt that a default on the U.S. debt would lead to a financial crisis and would likely permanently reduce the role of the U.S. financial industry in world markets, it is also likely the case that the United States would rebound and possible rebound quickly from a default.

The experience of Argentina may be instructive in this respect. Argentina defaulted on its debt at the end of 2001. Its economy fell sharply in the first quarter of 2002 but had stabilized by the summer and was growing strongly by the end of the year. By the end of 2003 it had recovered its lost output. Its economy continued to grow strongly until the world recession in 2009 brought it to a near standstill.

Book1_22628_image001

Source: IMF.

While there can be no guarantee that the U.S. economy would bounce back from the financial crisis following a default as quickly as did Argentina, it's unlikely that U.S. policymakers are too much less competent than those in Argentina.

Readers should be made aware of the fact that countries do sometimes default and they can subsequently recover and prosper. Many people may consider the short-term pain stemming from a debt default to be preferable to the long-term costs that might come from policies adopted to prevent default.

For example, if Congress were to approve a Medicare plan along the lines proposed by House Budget Committee Chairman Paul Ryan, this would be subjecting tens of millions of middle class retirees to a retirement without adequate health care insurance and potentially devastating medical bills. Plans being put forward to cut Social Security could have similar consequences. Compared to these outcomes, a financial crisis and the subsequent slump that follows may seem like a relatively small cost.   

It is also worth noting that two of the people whose views were presented in this article, Jamie Dimon, the CEO of J.P. Morgan, and Robert Rubin, a former top executive at Citigroup, are both individuals whose situation is likely to make them view a debt default as an end of the world event. Both institutions would likely not survive a debt default. For the people whose wealth depends on the health of Wall Street financial firms, a default on the U.S. debt is probably one of the worst conceivable events in the world, however this group is tiny minority of the U.S. population. 

 

Addendum: Here is my response to Zero Hedge.

Add a comment

Has anyone told the White House press corps about the economic downturn? We have 8.8 percent [thanks Tony] of the workforce unemployed, more than 8 million people employed part-time who would like full-time jobs, and millions more who have given up looking for work altogether.

The reason is simple: there is not enough demand in the economy. When we cut government spending, there is less demand in the economy. As we used to say in intro econ class: Y = C+I+G+X-M. That means that GDP is equal to the sum of consumption, investment, government spending and net exports. If we cut government spending, then we have reduced demand, unless we think there are a lot of firms who will be inspired to hire people because the government is cutting back its spending.

Moody's estimated that the original Republican plan for $61 billion in cuts would lead to a loss of 700,000 jobs. Goldman Sachs had a similar number. Since the final deal had a bit less than two-thirds of these cuts, the implication is that somewhat more than 400,000 workers will lose their jobs.

And the remarkable part of the story is that these newly unemployed workers are not even mentioned in the coverage in the NYT, the Post, or it seems anywhere else. Hey why ruin a great budget drama by talking about the people who will have their lives ruined?

Add a comment

I'm not kidding. Of course those who know anything about Japan recognize that the country is very densely populated and has high housing prices as a result. (Some of this also stems from a conscious effort to maintain farm land through high subsidies.) Anyhow, the prospect of less crowded cities and lower housing costs probably would not look bad to most Japanese, but it has the Washington Post terrified.

The Post tells us that the money spent on rebuilding from the earthquake and tsunami may pull funds away from programs intended to promote population growth. The article manages to combine both the concern with lack of jobs and lack of population. Japan's economy must be in really bad shape if it is simultaneously suffering from too little demand and too little supply of labor. Read about it only in the Washington Post.

The article also includes this gem:

"Hard-hit coastal towns such as Minamisoma and Rikuzentakata had been shrinking for decades, consolidating schools and struggling to provide adequate jobs for the young people who wanted to remain. The dearth of youth in rural areas will complicate long-term rebuilding efforts, observers say; even if infrastructure is rebuilt, will anybody live there?"

Ummm, I hate to spoil a crisis, but if people don't want to live in the towns destroyed by the disasters, why would anyone want to rebuild them? That doesn't seem very complicated, just common sense.

As a more general rule these shrinking population stories are just plain silly. The impact of even modest rates of productivity growth on increasing wealth per capita swamp the impact of rising dependency ratios in reducing per capita wealth.

When workforces shrink, the less productive jobs go unfilled. This is the way a market economy works. That is why half of our workforce no longer is employed in agriculture. It would be great if the Post would stop bombarding readers about an invented crisis of a less crowded Japan.

Add a comment

That is what readers of its analysis of the budget deal would conclude. It told readers:

"Once in the battle, Obama and his party felt pressure to show they heard the message that many Americans believe the government spends too much and that deficits are unsustainable. As a result, the president and congressional Democrats were forced to agree to much larger spending cuts than they had wanted, rather than appear resistant to popular will."

Actually, almost all of the polling data on the election showed that jobs were by far the most important issue as people went to vote. The deficit trailed by a large margin.

According to analysis from Moody's Analytics and Goldman Sachs, the original package of $61 billion in cuts put forward by the Republicans would lead to a loss of over 700,000 jobs. (The logic is simple. There is less spending, therefore fewer people are employed. Even a Washington Post reporter should be able to get that one.) Since the final package includes roughly two-thirds of these cuts, it is reasonable to infer that it will lead to a loss of close to 500,000 jobs.

Remarkably the Post's analysis says nothing, nada, zero about the jobs impact of this bill. When it comes to ignoring the message expressed in the election last fall it would be difficult to think of a better example.

Add a comment

We all know the line about history repeating itself. The first time is tragedy, but at this point we are well past farce. Ezra Klein calls attention, via Paul Krugman, to the fact Charles Krauthammer is impressed by Paul Ryan's use of 37 footnotes in his budget plan.

With the prospect of a government shutdown facing the country it's hard not to think of Dick Morris, the architect of President Clinton's triangulation strategy between the Republicans majority in Congress and the Democratic minority in Congress. Clinton had to break his ties to Morris when he was caught with a prostitute, with whom he apparently engaged in strange activities with her feet.

But the footnotes are far less important that Krauthammer's substantive errors which he kindly numbered for readers. His error number 1 is a criticism of Ryan's critics for claiming that Ryan's cuts would hurt the poor. Krauthammer's trump card is the foolishness of the liberals who complained about Clinton's welfare reform, singling out Peter Edelman who resigned from the administration in protest over the policy. We are told that:

"Within five years child poverty had declined by more than 2.5 million — one of the reasons the 1996 welfare reform is considered one of the social policy successes of our time."

The decline in child poverty was real, but it is more typically attributed to the unemployment rate dropping to 4.0 percent in the late 90s boom. More recently, the child poverty rate has risen back to its mid-90s level, meaning that we have made no progress in eliminating child poverty over the last 15 years. One of the reasons that Edelman and others objected to welfare reform is that the new TANF program that replaced the old welfare system would not guarantee that resources would expand during a recession when they were most needed. On this score, it looks like Edelman was exactly right.

In error number 2, Krauthammer complains about the people who have attacked Ryan's Medicare plan as privatization. He tells us that:

"instead of paying the health provider directly (fee-for-service), Medicare would give seniors about $15,000 of 'premium support,' letting the recipient choose among a menu of approved health insurance plans."

In fact the premium support is set at $8,000 per person in 2022. That translates into $6,100 a year in today's dollars. According to the Congressional Budget Office (CBO), this will be enough to pay less than 40 percent of the cost of a Medicare equivalent benefit in 2022. The assessment of CBO, based on the experiment with Medicare Advantage (we have tried this before) and an examination of the private health insurance market, is that Ryan's plan will raise, not lower, Medicare costs.

Krauthammer touts the lower than expected cost of Medicare Part D. The main reason that this program cost less than expected is that drug prices in general have risen less rapidly than had been projected. This in turn is due to the fact that many blockbuster drugs have gone off patent, leading to lower prices now that they face generic competition. The industry has produced few important new drugs in the last few years thereby reducing the upward pressure on costs.

Finally we have Krauthammer's error number 3:

"The final charge — cutting taxes for the rich — is the most scurrilous. That would be the same as calling the Ronald Reagan-Bill Bradley 1986 tax reform 'cutting taxes for the rich.' In fact, it was designed for revenue neutrality. It cut rates — and for everyone — by eliminating loopholes, including corrupt exemptions and economically counterproductive tax expenditures, to yield what is generally considered by left and right an extraordinarily successful piece of economic legislation."

No, actually it is not designed to be revenue neutral. It is designed to cut taxes on the wealthy. Ryan has not produced a set of loopholes whose elimination would offset the cost of his tax cuts. He just wrote in numbers. When the Tax Policy Center of the Urban Institute and Brooking Institution examined Ryan's tax plan, they found that it came up $2.9 trillion short over the course of the decade. Ryan did not describe a specific set of loopholes to close that they could score, but they would have to be quite large to fill this gap.

I suppose after reading through Ryan's plan, if you can't find much good to say about it, you can always talk about the footnotes.

Add a comment

According to David Brooks, in the days following the release of Representative Ryan's plan to essentially end Medicare and Medicaid to help finance more tax breaks to the wealthy:

"the Democrats are on defense because they are unwilling to ask voters to confront the implications of their choices."

I can't claim to have done a comprehensive survey, but all the Democrats I know think that they were handed the political gift of lifetime, as Representative Ryan has explicitly proposed doing exactly what Democrats have accused Republicans of wanting to do for decades: eliminate health care programs that are essential for middle class workers in order to give more money to their wealthy contributors.

Things may be different on Mr. Brooks' planet, but here in Washington there is no shortage of politicians willing to denounce a plan that would require most seniors to spend most of their income on health care, if they want an insurance package equivalent to the one provided by Medicare. The more obvious shortage is of Republicans who are openly willing to embrace the Ryan plan and say, "yes, we are the party that wants to eliminate Medicare and give more tax breaks to the richest people in the country."

Brooks again ignores the most obvious point that health care is not a sidebar in this story, it is the story. If the United States paid the same amount per person for its health care as do people in other wealthy countries, then we would be looking at huge budget surpluses not deficits.

He also tries to pass off to NYT readers nonsense from his Tea Party friends:

"The president’s health reform plan relies on a centralized board of technocrats to restrict choices. The Ryan plan relies on a premium support model that would allow individuals to exercise greater control over what sorts of procedures they would not be covered for."

Can we get out the extra large ridicule box for this one? There is nothing, as in zero, in President Obama's health care plan that prevents any individual from getting any health care procedure that he or she wants to pay for. The "centralized board of technocrats" he mentions would determine the procedures that Medicare would pay for, not the procedures that individuals could receive.

Obviously this will be a very serious restriction for people who cannot pay for expensive procedures on their own, but Ryan's plan does not change this situation one iota. It gives people a choice of insurance companies, each of which will rely on a board of technocrats to restrict choices.

Using the Tea Party terminology, if President Obama's plan is viewed as creating death panels, then Mr. Ryan's plan gives seniors a choice of death panels and, according to the Congressional Budget Office, we pay trillions more for this choice.

 

Addendum:

Some folks have asked me about the generational equity concerns raised by Brooks who tells readers that:

"two 56-years-olds with average earnings will pay about $140,000 in dedicated Medicare taxes over their lifetimes. They will receive about $430,000 in benefits. This is an immoral imposition on future generations."

There are two important points here. First, most of that $430,000 is over-payments to drug companies, hospitals, doctors and other health care providers. If these two 56-years-olds were buying their health care in Canada, Germany, or any other country with comparable health care outcomes, they would pay less than half as much for their care. Should my older brother feel that he has done me an injustice because the government gets overcharged for his health care? Maybe on Planet Brooks, but that's not an easy one to see here on Earth.

The other point that Brooks seems to have missed is that people are getting richer through time. The lifetime earnings for two average 26-year-olds will be more than $1.3 million greater on average than the average lifetime earnings for today's 56-year-olds. If the 26-year-old gets to pocket this much more cash, simply by virtue of being born later, is there any reason for the 56-year-old to feel they have committed an injustice because they got a better deal on their Medicare?

Now, there is a serious issue of inequality that must be considered. As a result of the fact that a larger share of income is being distributed to those at the top, most 26-year-olds may see little of this $1.3 million gain in earnings. But this is an issue of intra-generational inequality, not inter-generational inequality. On this dimension, Representative Ryan's plan is a huge leap in the wrong direction.

 

Add a comment

The NYT had a good piece that reported on the sharp rise in the number of people getting government disability payments over the last two decades. While this is partly due to the aging of the baby boom cohort into the peak years of disability, some of the increase also reflects changes in the economy.

The piece also points out that the disability portion of the Social Security program is much more poorly funded than the much larger retirement and survivor programs. The projected 75-year shortfall in the disability program is more than 16 percent of its income, where it is just over 10 percent of the income of the larger retirement and survivors program.

Add a comment

Folks in Greece are being taught Keynesian economics by people who don't believe in it. It seems that when you strangle your economy, budget deficits rise. Greece's shrinking economy is leading to larger deficits (less growth means lower taxes and more transfer payments for things like unemployment insurance) and a rise in its debt to GDP ratio (when GDP falls, the debt to GDP ratio rises).

The news is that the austerity being imposed by the EU and the IMF is making Greece's debt situation worse, not better, just as all of us Keynesian types predicted. While the Greek experience should be a warning against going down the austerity path in the United States, due to the incompetence of the U.S. media it will be taken as a further warning of the need to act on the budget deficit quickly.

This is sort of like pointing to the medical problems of a person suffering from anorexia as evidence of the urgent need to lose weight. That makes no sense, unless you are involved in the national debate over economic policy.  

Add a comment

My home town paper, the Chicago Tribune, wants us all to take House Budget Committee Chairman Paul Ryan's budget proposals very seriously. Remarkably the paper, which recently went through a leveraged buyout that puts ordinary tax scams to shame, tells readers to "trust us."

Even if it weren't for the stench of the paper's leveraged buyout it would be hard to trust an editorial that never once mentions health care costs and uses the cheap trick of lumping Social Security in with Medicare and Medicaid as unaffordable "entitlements." Of course everyone involved in the budget debate knows that the real story of the federal government's long-term deficit problem is health care. If we paid the same amount for health care per person as other wealthy countries we would be looking at huge budget surpluses, not deficits.

Remarkably health care costs never get mentioned in the piece. According to the Congressional Budget Office, Ryan's plan would actually increase what we pay for health care, giving tens of trillions of dollars over the coming decades to the health care industry. And, contrary to the Tribune's assertion, it would likely put many elderly and sick into poverty by dismantling Medicare and Medicaid.

The editorial also neglected to mention the tax cuts that Representative Ryan wants to give the wealthy. Under current law, folks like Goldman Sachs CEO Lloyd Blankfein would be paying a marginal tax rate of 39.6 percent on income above $500,000. Instead, Mr. Ryan would have them pay a tax rate of just 25 percent. (He would also cut Goldman Sach's corporate taxes as well.) This means that if Mr. Blankfein earned $20 million of income subject to the ordinary tax rate, Mr. Ryan would be giving him a tax break that is worth almost $3 million a year.

So, if you're keeping score, Representative Ryan's plan would give the wealthy hundreds of billions a year in tax cuts, it would give the health insurance industry and health care providers hundreds of billions of dollars of additional revenue each year, and it would deny tens of millions of retirees and sick people any guarantee of decent health care. And the Chicago Tribune tells us that this is "what real leaders do."

Add a comment

That is what headlines would look like if the United States had an independent press. After all, this is one of the main takeaways of the Congressional Budget Office's (CBO) analysis of the plan proposed by Representative Paul Ryan, the Republican chairman of the House Budget Committee. Representative Ryan would replace the current Medicare program with a voucher for people who turn age 65 in 2022 and later. This voucher would be worth $8,000 for someone turning age 65 in that year. It would rise in step with the consumer price index and also as people age. (Health care expenses are higher for people age 75 than age 65.)

According to the CBO analysis the benefit would cover 32 percent of the cost of a health insurance package equivalent to the current Medicare benefit (Figure 1). This means that the beneficiary would pay 68 percent of the cost of this package. Using the CBO assumption of 2.5 percent annual inflation, the voucher would have grown to $9,750 by 2030. This means that a Medicare type plan for someone age 65 would be $30,460 under Representative Ryan's plan, leaving seniors with a bill of $20,700. (This does not count various out of pocket medical expenditures not covered by Medicare.)

According to the Social Security trustees, the benefit for a medium wage earner who first starts collecting benefits at age 65 in 2030 would be $32,200. (This adjusts the benefit projected by the Social Security trustees [$19,652 in 2010 dollars] for the 2.5 percent annual inflation rate assumed by CBO.) For close to 70 percent of seniors, Social Security is more than half of their retirement income. Most seniors will get a benefit that is less than the medium earners benefit described here since their average earnings are less than that of a medium earner and they start collecting Social Security benefits before age 65.

Furthermore, the portion of income going to health care costs will increase through time according to the CBO analysis. This is due both to aging of individuals and to increasing health care costs through time. As noted insurance for older beneficiaries will cost more than insurance for younger beneficiaries, but Representative Ryan's voucher would still only pay the same amount for their care. This means that if the average 80-year-old cost twice as much to insure as the average 65-year-old, then the premium that would come out of a seniors' pocket would be twice as large. This implies that if the program had been in effect for 15 years in 2030 then the average senior would be paying $41,400 for a Medicare equivalent insurance package in 2030, 25 percent more than the medium earner's benefit in that year.

The other reason that Representative Ryan's plan will lead to rising health care costs for seniors through time is that the voucher payment does not keep pace with health care cost inflation. As costs continue to rise relative to the voucher, seniors will be required to pay a larger portion of their health care costs themselves. It is worth noting that 2030 is only 8 years after the voucher program kicks in.

Add a comment

Economists usually think that firms increase hiring when they see more demand for labor, but we have a new story coming from John Lott Jr, courtesy of Fox. Mr Lott argues that firms will hire more workers because the government is laying off workers.

Lott tells readers that:

"Democrats respond that government spending can’t be cut because it would eliminate jobs. Just the proposed $61 billion cuts by House Republicans in the current budget is said to “amount to a loss of 700,000 jobs.” The claim only counts the jobs funded by the government and assumes that this spending isn’t offset by the loss of private sector jobs. The notion is that if the government doesn’t spend the money, it never really exists."

Actually many of these lost jobs are not funded by the government. (The federal government only employs a bit over 2 million workers directly. It will not lose one-third of its work force as a result of these cuts.) Most of the lost jobs would be from reduced spending on private sector goods and services by the government or from reduced spending by workers who had formerly been employed by government agencies.

It is difficult to see how the government cutbacks would be offset by increased private sector hiring. If the economy were closer to full employment then we might expect to see interest rates fall in response to a cutback in government spending. This could spur increased consumption and investment, which would then lead to more hiring.

However in the current environment it is difficult to believe that these cutbacks would lead to any noticeable reduction in interest rates, nor that the reduction in interest rates would lead to any noticeable increase in spending. In other words, in the current circumstances it is likely that government cutbacks simply lead to a reduction in demand and employment as seems to be the case in the United Kingdom at present. (The OECD just lowered its growth projection for the UK this year to 1.0 percent. The UK adopted a Republican-type austerity program last summer.)

Add a comment

Okay, we haven't seen this headline yet, but given current fashions in Washington policy circles it can only be a matter of time. Today the New York Times ran a column on Social Security by Alicia Munnell, the Director of the Center for Retirement Research at Boston College and a former member of President Clinton's Council of Economic Advisors.

This column made the claim that Social Security does contribute to the deficit, telling readers that:

"scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness."

This is an interesting observation. These projections are supposed to reflect current law. Under the law, as Munnell points out, Social Security is prohibited from spending anything beyond the money in its trust fund. This means that if these baseline projections show deficits from the program spending at levels beyond what can be supported by the trust fund, then they are not making projections based on what Social Security can legally spend.

The more obvious complaint would seem to be with the nature of the projections than with the Social Security program. In effect, the projections assume that Congress will opt to maintain the level of scheduled benefits without doing anything to increase revenues. While this is a possibility, that seems a rather strong assumption to include in a baseline projection.

The column also includes another serious stretch. It tells readers that people are taking Social Security at the earliest possible age of eligibility because they are worried that the program will not be there for them if they wait until a later age. The article links to a USA Today article which supports this view by noting that the percentage of people who began taking benefits at age 62 rose sharply in 2009.

The most obvious reason that the share of people age 62 who took benefits rose in 2009 is that the unemployment jumped by 5 percentage points from its 2008 level. There were undoubtedly many workers age 62 who unexpectedly lost their job and saw little prospect of finding a new one. Therefore they decided to start collecting their Social Security benefits.

There has been a lack of confidence in the Social Security system for decades. And there has been much more serious talk of reform at other times, notably the late 90s and 2005 when President Bush proposed to privatize the program. Concern about the future of the program is not a plausible explanation for the jump in people collecting early benefits in 2009, nor is it likely a major factor in the decision of workers to take early benefits more generally.

(Thanks to Eric Kingson, the co-director of Social Security Works, for calling this one to my attention.)

Add a comment

That is what the NYT told readers this morning. Of course the NYT has no ability to determine what needs politicians actually see, if in fact they do see anything. Politicians get elected by appealing to powerful interest groups who can supply them the money and support needed to win elections. They are not required to have visions of the country or the economy. What they present to the public as their vision is what they say, it may have nothing to do with what they actually believe.

The correct way to have reported this information would have been to tell readers that many Republicans "say" they see a need to revamp Social Security. It may have also been worth reminding readers that the Social Security trustees project that the program could pay all scheduled benefits for more than a quarter century and that after this date it would still be able to pay close to 80 percent of scheduled benefits, even if nothing is ever done to change the program. The benefit that is payable after 2037 would always be considerably larger than the benefits that retirees receive on average today.

Add a comment