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

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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.

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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.

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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.

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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. 

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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
The NYT had a good piece describing the lives of some of the Ohio employees who its governor thinks are overpaid. Add a comment

NPR ran a piece that largely accepted untrue or misleading Republican assertions about Social Security. The piece told readers that:

"Republicans also believe [emphasis added] the very best time to fix Social Security is now, during a time of divided government when both Democrats and Republicans can share ownership of any changes."

Actually, NPR's reporters/editors have no clue what Republicans "believe." They are just making this up. The Republicans in question (like Democrats) are politicians. They say things that advance their political agenda whether or not they actually believe them. Competent reporters know this and don't try to tell their audience that these politicians actually believe their assertions; competent reporters just report the assertions and let their audience make up their own mind as to whether the politicians believe what they are saying. 

It is also not a fact that Social Security needs to be fixed in any meaningful sense of the term. The Congressional Budget Office projects that the program can pay all benefits for the next 28 years with no changes whatsoever and can pay nearly 80 percent of projected benefits indefinitely into the future, even if nothing is ever done to change the program.

The article includes a statement from Alabama Senator Richard Shelby noting that Social Security paid out more in benefits than it took in taxes last year: "

"Social Security is now at the tipping point, the first step of a long, slow march to insolvency if we don't do something about it."

It would have been worth noting that this actually was part of the design of the program. The reason that payroll taxes were raised to a point where they exceeded benefits was to cover the cost of the baby boomers' retirement, which meant that there would be points like the present where benefits exceeded taxes. Otherwise, the increase in the payroll taxes in the 1980s made no sense. It would have been appropriate to point out to listeners that Mr. Shelby either does not understand the program or is deliberately trying to mislead the public.

Similarly, the segment included an assertion from Oklahoma Senator Tom Coburn that money was stolen from Social Security:

"The fact is ... $2.8 trillion was stolen from Social Security .., The money was spent. It's broke. And we're going to have to fund $2.8 trillion over the next 20 years just to make the payments that we've got. I would think most people would think we ought to fix that."

Actually, not a penny was stolen from Social Security. Social Security lent money to the federal government by buying bonds, just as individuals, private corporations and banks do all the time. When an individual or company buys a bond from the government, it doesn't matter to them at all (except as citizens) whether or how the government spends the money. The government owes the exact same money regardless.

When the government pays back the bonds held by the Social Security trust fund it will effectively be replacing the bonds held by the trust fund with other bonds. The borrowing took place when the government sold bonds to the Social Security trust fund in the first place. It is not new borrowing when the government repays the bonds held by the Social Security trust fund.

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The Hill told readers today that:

"The [Social Security] trust fund itself has a theoretical $2.6 trillion surplus, but that money has been spent by the federal government like general revenues."

It is not clear what information the paper thinks is added by the word "theoretical." It is possible to add the word to almost any sentence (e.g. "Washington has a theoretical basketball team"). When something actually exists in the world, calling it "theoretical" is presumably intended to impugn it in some way.

Of course the trust fund does exist in the world, it is held in the form of U.S. government bonds. These bonds are referred to as "IOUs" in the Hill piece. It is highly unusual to refer to bonds of private corporations or government bonds as IOUs.

The article also makes the bizarre assertion that: "the payback [use of interest on the bonds held in the trust fund to pay Social Security benefits] has arrived at a very difficult time, when Washington is running a $1.6 trillion budget deficit." Actually, the interest rate on government debt is very low right now. This means that it is in fact a very good time for the government to be replacing the bonds held by Social Security with other bonds.

Readers can assume, based on these comments, that the Hill does not like Social Security and wants to see benefits cut. Usually this sort of editorializing is left to the opinion pages but apparently the Hill could not contain its animosity towards the program.

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The Washington Post is going into high gear pushing its trade agenda. It ran an editorial that included the term "free trade" in both the headline and the first sentence. While proponents of these deals like to call them "free" trade pacts, this is not accurate. They do little or nothing to reduce the barriers to trade in highly paid professional services, like those provided by physicians and lawyers, and they increase many forms of protectionism, most notably patent and copyright protection.

But the Post wants these deals to pass, so if calling them "free trade" pacts advances the cause, this is a small matter. After all, this is a newspaper that told readers that Mexico's GDP quadrupled between 1988 and 2007 to make its case that NAFTA was a huge success. The actual growth was 81 percent. Given the paper's willingness to ignore truth in the pursuit of its trade agenda, calling the pacts "free trade" deals is a relatively minor matter.

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David Leonhardt had a blogpost last week that left some of us here at CEPR stumped. It had two graphs, one on top of the other, showing patterns in wages since the start of the recession. The top graph showed wage gains by educational attainment. This showed that college grads had an increase of about 1.5 percent in their real weekly earnings, while everyone else saw modest declines. The second graph showed real wage growth by income cutoffs. Those at the 90th percentile saw real wage gains of 8.0 percent, but everyone else also saw modest wage gains as well.

At first glance, these seemed inconsistent and we thought that Leonhardt had made a mistake. After checking his data, we saw that he was exactly right. The explanation was a change in the composition of the employed workforce. There was a sharp drop in employment among workers without high school degrees and those with just a high school degree between 2007 and 2010. On the other hand, the number of people employed who had advanced degrees actually increased slightly.



Source: Bureau of Labor Statistics.


What happened here is that the change in composition means that much of the bottom portion of the workforce is no longer employed. Therefore the 90th percentile worker in 2010, might have been the 92nd percentile worker in 2007. And, in 2007 the 92nd percentile worker earned 6.3 percent more than the 90th percentile worker.

So, what looks like a big rise in wages for higher-end workers is in fact the result of comparing different workers. This is worth keeping in mind. The wage growth at the middle and lower-end of the income distribution in the late 90s looks even better when we consider that many less educated workers found jobs in this period. 

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The financial markets seem relatively unconcerned about Japan's fiscal situation as evidenced by the fact that investors are willing to buy 10-year Treasury bonds from the Japanese government at an interest rate around 1.4 percent. Nonetheless, the Washington Post told readers that:

"Japan is already groaning under government debt equal to twice its yearly economic output."

As a result of the low interest rate on its debt, Japan's interest burden is actually smaller measured as a share of GDP than the interest burden in the United States. Also, close to half of Japan's debt is held by its central bank. The interest paid on debt held by the central bank is refunded to the government and therefore imposes no burden on Japan's budget.

Also, Japan has no fears whatsoever of inflation. As the article notes toward the end, many forecasters project that the economy will weaken further as a result of the earthquake/tsunami and cause another burst of deflation.

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E.J. Dionne had a good piece pointing out that the country is not "broke" as many of the deficit hawks have been claiming. Dionne rightly points out that per capita income is continuing to rise; the problem is that the bulk of income gains have been going to those at the top. Dionne rightly identifies the claim of national poverty as part of an "excuse" for "policies to lower taxes on well-off people and business while reducing government programs."

However, Dionne bizarrely describes this effort as "ideologically driven." It's not clear what ideology Dionne sees here and he certainly doesn't identify one. The more obvious story is that wealthy people pay for the political campaigns of politicians who will support give policies that will give them more money. Ideology plays no more obvious role in this scenario than it does in the operations of the Mexican drug cartels.

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The Post really outdid itself in running confused pieces when it ran a column by Lester Brown in its Outlook section warning us that China will start buying our grain in massive quantities. It's common for a column to get 2 or 3 things wrong, but just about every single assertion in this column is mistaken.

To start with, we are supposed to be concerned about China's ability to buy our food based on its holdings of $900 billion in Treasury bonds. Actually, as a country, China's ability to buy our wheat depends on its holding of any U.S. asset. It would have just as much ability to buy U.S. wheat if it did not have a single dollar in Treasury bonds, but instead held $900 billion worth of the stock and bonds of private corporations. (Most estimates put China's holdings of U.S. assets considerably higher than this.)

This distinction is important because U.S. indebtedness to China is a function of the trade deficit not the budget deficit. Many people deliberately promote this confusion in order to use xenophobic fears to promote their deficit reduction agendas. In reality, those who are concerned about indebtedness to China and other countries should want to see the value of the dollar decline. If we eliminated the budget deficit completely, and somehow maintained full employment, we would be borrowing just as much money from China and other countries each year, if we did not lower the value of the dollar. Conversely, if we lowered the value of the dollar to the point where our trade was balanced, the country would not be borrowing a penny from China or anyone else, on net, even if the federal government was still running large deficits.

This logic is also important in the threat that we would supposedly face if we tried to restrict grain sales to China. Brown tells us that China might then boycott our Treasury auctions.

Let's carry this one through for a moment. We have been pushing China to raise the value of its currency relative to the dollar. The way that they keep the value of their currency down is by using the dollars they earn from their trade surplus to buy Treasury bonds instead of just dumping them on international currency markets and allowing the dollar to fall. Of course if the dollar fell, then our trade deficit with China and other countries would shrink. 

So, China will threaten to do exactly what we have been asking them to do -- they will stop propping up the value of the dollar against the yuan. This is supposed to have us scared.

Finally, the real bad news in the picture -- China pushing up the price of wheat -- actually is not scary for people in the United States at all. The U.S. currently produces about 2 billion bushels of wheat a year, roughly half of which is exported. Prices have fluctuated a great deal in recent months, but let's start with a price of $10 a bushel, the higher end of the recent range.

At this price, we spend roughly $10 billion a year on the wheat we consume domestically and get $10 billion a year from the wheat we export. Suppose the buying by the Chinese doubled the price to $20 a bushel. This means that the wheat we consume would cost us another $10 billion a year. Meanwhile the wheat we sell overseas would allow us to buy twice as many imports as it had previously. The $10 billion rise in food prices would come to a bit more than $30 per person per year -- less than 10 cents a day. Are you scared yet?

Even if we said that the price of wheat tripled because of the Chinese and then doubled this impact because of China's buying up of corn, soy beans and other crops, we still only get 40 cents per person per day. In short, higher food prices are not going to be bad news for people in the United States.

Where this column misses the boat is that higher food prices will be a problem for the world's poor who must subsist on just 1-2 dollars a day. Hundreds of millions of people in Sub-Saharan Africa and other poor regions of the world will face serious consequences if world food prices rise substantially. Remarkably, these people did not find their way into this column.

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