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

Showing the sort of balanced journalism that we have come to expect from the Washington Post, its oped page featured a column by Robert Pozen, a financial industry executive and proponent of Social Security privatization, telling liberals why they should support cuts to Social Security. The gist of Mr. Pozen's argument is that Social Security is becoming less progressive over time because the gap in life expectancies between higher paid workers and lower paid workers is growing.

Furthermore, because of growing wage inequality, a larger share of wage income is escaping the Social Security tax. In addition, Pozen tells us that the structure of retirement income subsidies is highly regressive since the bulk of the tax benefits go to high income earners.

So, how do we fix the situation? Maybe improve health care for the bottom half of wage earners (other countries don't have the same gap as the United States)? Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should try to restructure the economy to reverse the policies that have led to the upward redistribution of wage income over the last three decades. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should reverse the structure of retirement saving subsidies so that this is more progressive. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

How about raising the cap for the wages subject to the Social Security tax. No, Mr. Pozen tells us that Congress won't do that.

No, the best way that Mr. Pozen can think of for making Social Security more progressive is by cutting benefits for people earning $40,000 a year and higher. Yes, this has been the big problem the country is facing. School teachers, construction workers, and office clerks are getting too much money. We better take away their Social Security benefits so we can make this a fairer society. All good liberals would agree with that.

Remember you can read this only in the Washington Post.

Add a comment

The NYT reported on the Federal Reserve Board's payment of $82 billion to the Treasury last year, more than 2.3 percent of the total budget. This is striking because this figure vastly exceeds most of the budget items that have dominated the attention of Congress and the media.

In principle, the Fed can offset much of the burden of the debt run up to boost the economy during the downturn by simply buying and holding it. In that case, the interest would be paid to the Fed and then refunded to the Treasury, leaving no net burden for taxpayers. The Fed could prevent this from leading to inflation when the economy recovers by raising reserve requirements. Of course most economists agree that a somewhat higher inflation rate would be desirable at the moment since it would alleviate the debt burden of consumers.

It is remarkable that this path towards dealing with the deficit has garnered so little attention. This could perhaps be explained by the fact that the Wall Street actors who are the main financiers of the anti-deficit crusade are not interested in a deficit reduction path that does not cut social spending and risks somewhat higher inflation. Higher inflation is generally anathema to the financial industry, since it devalues the debt it owns.

It is also worth noting that most people involved in the debate on economic and budget policy are not very astute observers of the economy. They were unable to see the $8 trillion housing bubble that both gave us the current downturn and the large deficits that have fixated Washington.

Add a comment

Some folks might have heard of it. We had an $8 trillion bubble in this market in the last decade. It led to a huge construction boom. The wealth created by the temporary run-up in house prices also led to a consumption boom. When the bubble collapsed, construction plummeted and consumption fell back to more normal levels. The collapse of this bubble has given us the worse downturn since the Great Depression.

Given the importance of the housing market for the economy it might be reasonable for the media to pay some attention to important economic releases. However, news outlets don't seem to share that perspective. 

The news of a 9.6 percent drop in home sales in February seems to have escaped the notice of the New York Times and the Washington Post. The Wall Street Journal noticed the decline but raised the unlikely possibility that bad weather was a major factor explaining the falloff in sales.

This is unlikely since the data reports the number of sales that were closed in February. Since it typically takes 6-8 weeks between a contract's signing and the closing, most of the contracts for homes sold in February would have been signed in December and January. Weather would have only been a factor if bad weather at the end of the month had prevented people from coming in for a closing during February. 

It is also worth noting that both the median and average house price fell sharply in the month. The median house price is now 5.2 percent below its year ago level.

Add a comment

The WSJ ran an article in which implied that the ability of the Social Security to use the bonds in the trust fund to pay benefits was a debatable point. It noted that the benefits will soon exceed annual taxes, but then commented:

"Defenders of the program say there isn't an immediate need for changes in Social Security. Past surpluses and projected tax receipts are sufficient to pay full benefits until 2037. After that, seniors would get only 75% to 80% of promised benefits if changes aren't made."

Actually, all official budget agencies hold the view attributed by the Journal to "defenders" of the program. This is the law.

It is sort of like saying that "defenders" of Bill Gates say that he has $50 billion to spend as he likes. Defenders of Bill Gates may say this, but it also happens to be true. 

In the same vein, the article seems badly confused about how bonds work. It told readers:

"many Americans believe their retirement benefits are financed by payroll taxes they pay during their working lives. But as a pay-as-you-go system, Social Security uses the money collected from current workers to pay beneficiaries. Congress has changed the rules of the program—such as eligibility and benefit formulas—many times over the years.

For decades, Social Security collected more in taxes than it paid in benefits. The program lent that surplus to the U.S. Treasury by buying government bonds, and the government spent that money."

Many Americans do believe that their retirement benefits are paid by their payroll taxes, just as many believe that the earth is round and the humans evolved from less-developed primates. This happens to be true, so it is strange that the WSJ would explain to readers that people happen to believe what is true.

The fact that the government spent the money it borrowed when it sold bonds to Social Security has nothing to do with the time of day. It has also spent the money it borrowed from Peter Peterson or the government of China when they bought government bonds. Similarly, when General Electric, Boeing or any other company sell bonds they typically spend the money that they borrow. It is not clear what point is intended by this comment, but it has no obvious bearing on the ability of Social Security to pay benefits to retirees.

Add a comment

There have been numerous media accounts of plant shutdowns (largely in the auto industry) as the result of a cutoff of the supply of parts from Japanese manufacturers due to the earthquake/tsunami/nuclear disaster. These accounts are somewhat misleading.

While these disruptions may lead to reduced supply of some types of products, they will almost certainly not lead to overall shortages in the market. In other words, there may be some cars that temporarily will be in short supply, but it is almost inconceivable that there will be a shortage of cars more generally. This means that car buyers may switch brands; they will not be unable to buy a car.

In this case, the shutdowns of certain factories are likely to be offset by increased production at other facilities, with the net effect on the industry being close to zero. The shutdowns are of course bad news to the workers affected, but they will be of little consequence to the economy as a whole.

Add a comment

Let's see, who is doing well in today's economy? Maybe the bankers at Goldman Sachs and J.P. Morgan with their below market bailout money and too big to fail subsidies? Maybe the defense industry with its huge mark-ups and no bid contracts? How about the drug companies who get handed hundreds of billions of dollars each year from government provided patent monopolies?

No, today's educated young are worried about being victimized by high living seniors who get Social Security and Medicare benefits. At least that is what Matthew C. Klein tells us in an oped column in the NYT.

The column bemoans the fact that the author and his highly educated friends see poor job prospects on the horizon. While there is much to complain about, if he really believes that the problem is generically people older than himself, rather than specifically the people who are a lot richer than himself, he has not gotten a very good education.

Add a comment

The Post had yet another piece warning of the horrors of Japan's declining population. Of course Japan is a densely populated country with very high priced land. However, it is possible that if its population declines too much that they will no longer be able to find workers to push people into over-crowded Tokyo subway cars. 

The piece also confuses the importance of foreign holdings of public debt and foreign indebtedness. It argues that Japan need not fear a run on its public debt because the vast majority of the debt is held domestically. The more important issue is that Japan is a huge net creditor country as a result of running large trade surpluses for decades.

Its net indebtedness position is the key factor in this story. If it had a large foreign debt it would have to fear a flight from the yen even if none of its public debt was held by foreigners. Such a run would send the yen plummeting and cause import prices to soar. This is exactly the same risk it would face if foreigners owned its public debt, since the central bank would always have the option to buy the debt sold by foreign investors.

This point is important because many deficit hawks make  the same sort of misleading comment about U.S. debt. Insofar as there is a problem of foreigners holding U.S. debt it is due to the trade deficit the country is running. This gives foreigners the dollars they need to buy U.S. assets of any sort, including the stocks and bonds of private companies, as well as U.S. government debt.

The trade deficit in turn is the result of an over-valued dollar, not the budget deficit. Therefore, if these deficit hawks were really concerned about foreign holdings of U.S. assets then they would be focusing their efforts on getting the value of the dollar down, not reducing the budget deficit.

Add a comment

Sorry this one only seems to be available in print, but the Post had an editorial on Sunday ("The E.U.'s finger in the dike," 3-20-2011: A20) that deserved attention. The piece rightly noted that the latest euro zone rescue package is again likely to come up short and also called attention to the continued under-capitalization of the major European banks. But it also lashed out against a "raw exercise of power by Berlin and Paris."

Was the Post upset about demands that heavily indebted countries raise their retirement ages, end wage indexation or, in the case of Ireland, reduce their minimum wage? Nope, none of these demands struck any negative notes at the Post editorial board. The source of the Post's anger was the demand that Ireland raise its 12.5 percent corporate income tax rate.

Add a comment

The Washington Post continued its attack on public pensions with a front page story that focused on Costa Mesa, a small California city, that it reports is laying off half of its workforce to cover the costs of its pensions. The article then goes on to imply that Costa Mesa is in some way typical of the situation facing state and local governments across the country, telling readers that in 2009, 58 percent of state and local pension funds were less than 80 percent funded. (It is worth noting that the rise in the stock market since its trough in 2009 will have eliminated much of the reported shortfall.)

According to the information presented in the article, Costa Mesa is far from typical. The article claims that 20 percent of the city's revenue will be needed to pay retiree benefits in a few years. The national average is close to 3 percent.

The article also focuses on the pensions of police officers. These pensions are far more generous than those of most public employees. The pensions of non-security personnel average around $20,000 a year. Generally workers have to put in 30 years with the government to receive their pensions, so the cases of these workers retiring with full pensions in their early 50s are rare. Also, nearly a third of state and local employees are not enrolled in Social Security so their pension will likely be their only regular source of retirement income.

Add a comment

That was his word, but since he brought it up, the term can be rightly applied to his reference to the "unsustainable deficit." Of course people who are not dumb know that the story of exploding budget deficits is a story of exploding private sector health care costs. The United States already spends more than twice as much per person as the average for other wealthy countries, with little obvious benefit in outcomes.

This is why people who are neither dumb nor dishonest talk about the need to fix the country's health care system, not the budget deficit. If the U.S. health care system were as efficient as the system in Canada, Germany, the Netherlands or more than 2 dozen other countries, there would be no long-term deficit problem.

Add a comment

CNBC and USA Today told readers the shocking news that:

"A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008."

The piece later went on to present a comment from Stephen Weiss, who is identified as being with Short Hills Capital:

"This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs."

Actually this story is incredibly confused in almost every dimension. Prices rise almost every month with this "special index" and every other consumer price index as can be seen in the chart below.


Source: Bureau of Labor Statistics.


There was an extraordinary surge in commodity prices at the beginning of 2008 which was reversed when the world economy sank into recession. Now that the economy is starting to recover and developing countries like China and India are growing rapidly, prices for commodities are recovering from their recession slump. It was entirely predictable that prices would reach a "record high" again as they did in 1999, 2000, 2001, 2002, etc.

This news also provides no reason whatsoever why the Fed should shift its focus from core inflation, which excludes food and energy prices, to the broader measure that includes these prices. The Fed's actions will have virtually no effect on food and energy prices. These will be determined by world demand. The Fed could raise rates and slow growth in the U.S., but this would have only a marginal impact on the price of food and energy worldwide. Unless we can find a way to slow growth in China, India, and Latin America, we are not likely to see much reduction in food and energy prices.

Add a comment

In an article reporting on a letter from 64 senators urging president Obama to work on the recommendations from the co-chairs of his deficit commission, the Post described President Obama's own smaller budget cuts as "timid." (The sentence appears in the print version, but not in the on-line version.)

This is an interesting perspective. Politicians and policy workers around Washington and the country are being paid billions of dollars by wealthy people like investment banker Peter Peterson to support cuts to programs like Social Security and Medicare. It is interesting the Post apparently thinks that it is brave to harm poor and middle class people to benefit the wealthy, while it is "timid" to support the less privileged.

It is also worth pointing out that the Post wrongly refers to the recommendations from the deficit commission's co-chairs, former Senator Alan Simpson and Erskine Bowles, as the recommendations of the commission. The commission never voted on their proposals which almost certainly would not have been approved given the stated opposition of several commission members. 

Add a comment

At a time when all the tough guys in Washington are making plans to cut Social Security and Medicare benefits for high-living seniors and to cut Head Start for low-income kids, it was generous of Warren Buffett to point out that we taxpayers gave over $1 billion to Goldman Sachs through TARP. Buffett probably didn't intend to point out this fact to the country, but it is an unavoidable implication of his $2 billion profit on his loans to Goldman. 

Buffett made his $5 billion loan to Goldman about a week before the Treasury lent $10 billion to Goldman through the TARP program. Buffet got 10 percent interest on his loans, while the Treasury got 5 percent on its loans. In addition, Buffett got a much more generous commitment of stock warrants, which is the basis of the $2 billion in profits that he is now set to pocket.

The Treasury boasted of getting a $1.1 billion profit on its loans to Goldman, but as Mr. Buffet showed, this was far below the market rate of interest on loans to Goldman at the time. The difference between the return received by Buffett and the return received by the Treasury was in effect a gift from taxpayers to the top executives at Goldman and their shareholders. When Treasury Secretary Geithner and other officials claim that the government made money on the TARP loans it is either due to their ignorance of the workings of financial markets or a deliberate effort to deceive the public.

It is also worth noting that the TARP money was only a portion of the extraordinary assistance that the taxpayers have given Goldman's top executives and shareholders. The FDIC also guaranteed tens of billions of loans to Goldman. Goldman was allowed to borrow tens of billions of dollars from the Fed at below market interest rates. And it was allowed to become a bank holding company, and thereby gain the protection of the Fed and the FDIC, at the peak of the crisis, averting a run that which would almost certainly have been fatal.

In addition, Goldman benefits from the implicit subsidy of its "too big to fail" status, the belief that the government will bail it out if it gets into trouble. This allows it to borrow in credit markets at a lower cost than if it did not have implicit government protection.

Add a comment

Charles Krauthammer still does not understand the concept of government bonds. He badly wants the government to default on the bonds held by the Social Security trust fund. It seems that the main reason is that these bonds are effectively wealth to ordinary workers, not rich people or banks.

Krauthammer complains that the government bonds held by the trust fund are "special issue" bonds. He must know of a meaning for "special issue" that the rest of us don't. These are non-marketable bonds. That doesn't mean that the government can just default on them as Krauthammer wants to do. The implication -- actually the assertion -- of Krauthammer's piece is that because he doesn't like the people to whom these bonds are owed, the government can default and there would be no consequence.

That obviously is what Krauthammer wants, but that does not make it true. If the government were to default on its debt to Social Security then workers would justifiably be outraged. This could have both political and economic consequences. The disrespect this might cause for the government may lead to a surge in tax evasion and ignoring of other laws (perhaps even copyright). After all, why should workers respect the laws of a government that steals from them while protecting the wealthy?

Workers may also use their power as voters to decide that if the government can default on the debt it owes to them through Social Security that it can also default on the debt held by wealthy individuals like Peter Peterson as well as Wall Street banks. There certainly is no moral argument for honoring the bonds held by the latter group of investors if the government has defaulted on the bonds held by the trust fund. As an economic matter, it may also be better for most workers to see the government default on its debt in this situation, even recognizing the incredibly disruptions this would cause in world financial markets. (The money going to debt service could instead be used to pay Social Security and other benefits for working people.)

At a more concrete level, the assertion by Krauthammer that the bonds held by Social Security are not counted in the calculations of the government debt is just wrong. It is easy to find examples where it is included in calculations of the ratio of debt to GDP, as we find in the Economic Report of the President. There is also no shortage of deficit hawks who eagerly use the $14 trillion measure of the gross debt to make their argument, including for example, Charles Krauthammer, a Washington Post columnist [thanks to Joe].

It would also be nice if Krauthammer could take 2 minutes to understand something about means testing so that he would realize that this is not a practical way to solve Social Security's projected long-term shortfall.

Add a comment

Floyd Norris has a good piece about how overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan's nuclear power plant. The piece makes the essential point that seems to have escaped great economic thinkers here, that there is no way Japan can default on its debt.

Even though Japan's debt is more than twice its GDP (about three times the size of the U.S. debt), there is no risk of default since its debt is in its own currency. In this way Japan is like the United States and the United Kingdom, and unlike Greece and Ireland.

In the worst case scenario, Japan or the United States would print lots of money and see inflation. Given that Japan has been flirting with deflation for almost two decades this doesn't seem like a plausible scenario, but in any case it is not the story of Greece being held at the mercy of the bond vigilantes who will not buy its debt.

The people who hold up Greece's crisis as a possible scenario for Japan and the United States deserve our contempt if they are deliberately misleading their audience or our empathy if their mistake stems from their problems with understanding basic economics. However their arguments do not deserve serious consideration by people involved in policy debates.

Add a comment

It's always scary when someone in a position of responsibility doesn't understand some of the basics of their job. Apparently this is the case with Wisconsin Governor Scott Walker.

In a column in the Washington Post this morning Walker noted that under his new compensation package for public sector employees in Wisconsin, workers in the state will still be paying a far smaller portion of their health care benefits than most workers in the private sector or federal employees. He then comments:

"It’s enough to make you wonder why there are no protesters circling the White House."

Actually, it's enough to make you wonder what Governor Walker could possibly be thinking.

Employer payments for pensions, health care coverage and other benefits are part of a total compensation package. It makes little difference to an employer whether they pay another dollar for health care or for wages. Public employees in Wisconsin had bargained for a compensation package that gave them lower wages than their private sector counterparts, but more generous benefits. Their total compensation package was still somewhat lower than for private sector workers with the same education and experience. When Governor Walker increased the amount that workers had to pay for their pensions and health insurance, he cut their pay pure and simple putting them further behind their private sector counterparts.

Governor Walker seems not to understand this simple fact. According to the logic of his column, a worker getting a salary of $40,000 a year with full health care benefits and an employer-provided pension would be better off than a worker getting $200,000 a year and no benefits. Obviously this makes no sense. It would be good if one of Governor Walker's aides could explain this to him.

Add a comment

The Post noted that Japan's central bank is buying government debt in order to hold down interest rates. While this is true, it is also worth noting that its holding of debt reduces the interest rate burden on the government.

Interest on debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. Under some circumstances, this can lead to inflation. However, Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.

Add a comment

The NYT told readers this morning:

"Once this year’s budget battle is settled, Congress will move on to potentially bigger fights over whether to raise the national debt limit and how to rein in the costs of Medicare, Medicaid and Social Security."

Wow, huge majorities oppose cuts to Social Security (Medicare also), but the only debate in Congress is over "how" to cut the program. So much for democracy in America.

Add a comment

The Power Breakfast segment this morning on WAMU, my local NPR affiliate, told listeners that the debate on reducing the country's dependence on foreign energy was between people who wanted to increase supply by increased drilling and those who favored conservation. This is not true. There is not enough reserves of oil or gas to make more than a small difference in U.S. dependence on imported energy.

A news organization would point this fact out, since it is the job of reporters to know this fact. Unlike listeners, they are paid to know this information. Unfortunately, Power Breakfast led listeners to believe that the country has an option of being energy independent if it were only willing to put its environment at risk. While increased drilling may be able to wreck the environment it can have no noticeable effect on the country's need for foreign oil. Reporters old enough to remember the BP spill in the Gulf understand what is at issue.

Add a comment
It seems from his comments on Marketplace Radio that Senator Conrad doesn't realize that the economy is in a serious downturn. If he did, his complaint that the government borrows 40 cents of every dollar it spends would make no sense. The reason that the economy has a large deficit at present is that the economy has an 8.9 percent unemployment rate and is operating well below its potential level of output. If the government were not borrowing 40 cents of every dollar it spends the economy would be weaker and the country would have a higher unemployment rate. Senator Conrad should have been asked about this issue during his interview. Add a comment
The NYT told readers that Fannie Mae and Freddie Mac collapsed due to their movement into the subprime and Alt-A market in 2005 to regain market share. While the move into lower quality mortgages worsened their situation, Fannie and Freddie would have suffered very large losses even if they had stuck to their traditional market. The collapse of the housing bubble led to record default rates on all mortgages. The majority of mortgages in default now are on prime loans. Add a comment