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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Allan Sloan is a thoughtful business columnist whose work is generally quite insightful. His piece on the Social Security trust fund is not up to his usual standards.

There is nothing mysterious or shady about the trust fund. It is an asset to the Social Security system, which means that it can be used to pay benefits. Of course, as Sloan points out, its assets are U.S. government bonds, which are liabilities for the federal government, just like the government bonds held by banks, corporations and the general public.

To see the basic logic, imagine that we had a huge private pension fund to which we all contributed a portion of our wages. Call it "Private Social Security" or PSS. Suppose that PSS had an investment policy of investing its excess contributions entirely in Treasury bonds, just as Social Security does.

At some point, PSS plans to stop accumulating money and will instead begin to sell off its Treasury bonds to meet its benefit obligations. When it begins selling these bonds, the government will have to find other buyers for its debt. This could lead to higher interest rates for the federal government, as a major buyer for its debt has now become a seller. However, no one would describe this as a problem for PSS. It is selling its bonds just as any other bondholder might do. As long as it has bonds to sell to pay its benefits, we would consider PSS to be fine in terms of its ability to meet its obligations, unless the solvency of the federal government itself was called into question.

Now, let's take away the "P." What is the problem with the Social Security trust fund selling off its bonds to pay benefits? This is exactly the way the program was designed. It quite deliberately accumulated government bonds during the years that the baby boomers were in the work force with the intention that they would be sold off when baby boomers retire to help fund their benefits.

It's true that the government must find other buyers for these bonds, or alternatively raise taxes or spend less. But, that would be equally true in the case of PSS. This is an issue for the government, but not for either the PSS pension fund or Social Security. 

And, this is not just semantics. By definition workers, and only workers, pay Social Security tax. It is a payroll tax that is capped at just $106,000, so the chairman of Goldman Sachs pays no more in Social Security tax than a senior teacher or firefighter who may also hit the wage cap. By contrast, most of the general budget is financed through personal and corporate income taxes, which disproportionately come from higher income taxpayers. So it matters hugely that the bonds held by the trust fund are repaid from general revenue, as opposed to coming from additional Social Security taxes.

It is often claimed that the Social Security surplus has been used to hide the government deficit. It is not clear what is meant by this, but the government certainly has not been doing the hiding. Every government budget document directly shows the budget deficit, excluding the surplus from Social Security. If anyone has used the surplus to hide the deficit it would be the reporters who convey information about the deficit to the public.

 

 

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The NYT featured a bizarre column today by a family farmer who expressed concern that financial reform will drive speculators from the grain market. The column tells readers:

"According to the trading commission, about one-third of the long positions in hard red spring wheat futures, which is what I trade on the Minneapolis Grain Exchange, are owned by speculators. If speculators were driven out of the market, it would be as if I’d lost a third of my customers."

No, that is not quite right. Speculators may buy one-third of the wheat sold on the market, but unlike other customers, they don't keep it. Instead, they resell it. So, if speculators are driven from the market, it would be comparable to eliminating one-third of the buyers and one-third of the sellers, leaving prices on average unchanged.

The profit of speculators come at the expense of sellers and consumers. This may be an acceptable price, if they lend stability to the market. In effect, speculators can absorb the risk of price swings. However, there are reasons to believe that they can also contribute to price swings, making the market less stable. If this is the case, then their profits are a pure loss to the economy. It is also possible that the volume of speculation in the market far exceeds what would be necessary to stabilize prices. In this case the excess speculation would be a drain on the economy.

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David Leonhardt tells readers that the Great Recession has had some silver linings for many workers. High on his list is continued wage growth. This is misleading. All the real wage growth in this downturn occurred in the months of November and December of 2008. This was due to a plunge in the price of oil and other commodities. Since December of 2008 real wages have stagnated.

The wage growth in those two months also followed 6 years of wage stagnation. Essentially, nominal wage growth was eaten up by rising commodity prices during the upturn. These gains were then realized when prices crashed, but it is misleading to imply a pattern of consistent wage growth during the downturn.

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The piece also correctly notes that unemployment has been concentrated among a smaller segment of the workforce than was true in the 1981-82 recession. This is a direct implication of the high levels of long-term unemployment. However, it is also worth noting that part of the reason that unemployment is more concentrated is that the workforce is much older today.

In the 1981-82 recession the baby boom cohort was between ages 17 and 36, years when workers change jobs frequently. At present, they are between the ages of 46 and 64, years in which workers infrequently change jobs. This means that much of the reason for the greater concentration of unemployment may be due to a change in the workforce rather than the demand side of the market.

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Confused readers may wonder based on its lead editorial complaining that supporters of Social Security: "pursue a maddening strategy of minimizing the existence of any problem and accusing those who seek solutions of trying to destroy Social Security (emphasis added)."

The piece begins by telling readers that: "THIS YEAR, for the first time since 1983, Social Security will pay out more in benefits than it receives from payroll taxes -- $41 billion. This development is not an emergency, but it is a warning sign (emphasis in original)." It certainly is a warning sign. The falloff in Social Security tax revenue is a warning that the economy is seriously depressed due to the collapse of the housing bubble. Double digit unemployment leads to all sorts of problems, including the strains that it places on pension funds like Social Security.

In a sane newspaper the next sentence would be pointing out the urgent need to get back to full employment. Instead the Post tells readers:

"Too soon, this year's anomaly will become the norm. By 2037, all the Social Security reserves will have been drained and the income flowing into the program will only be enough to pay 75 percent of scheduled benefits. If that sounds tolerable, consider that two-thirds of seniors rely on Social Security as their main source of income. The average annual benefit is $14,000. Those who care most about avoiding such painful cuts ought to be working on ways to bolster the program's finances -- and soon, when the necessary changes will be less drastic than if action is postponed."

Let's see, it would be intolerable to have Social Security pay 75 percent of scheduled benefits in 2037, but one of the Post preferred cuts is raising the retirement age to 70,a 15 percent cut in benefits when fully phased in. So the Post thinks it would be just fine to have beneficiaries get 85 percent of scheduled benefits in 2037.

Of course doing nothing today, or for the next decade, or even the next two decades, does not imply that beneficiaries will see their benefits cuts by 25 percent in 2037. The Post may not be familiar with the way Congress works, but it tends to wait until issues require action. They would know this if they had heard about the Greenspan Commission, which was established in 1982 to deal with Social Security's last crisis. It produced a set of fixes which is now expected to keep the program solvent for 54 years, and no one missed a check.

While it would not be desirable to wait until the system was literally facing a shortfall, as was the case when the Greenspan Commission, there is little obvious harm to waiting now in terms of the program's finances. A Greenspan Commission size fix put in place in 2030 would leave the program fully solvent for most of the rest of the century.

There is also a very good reason for delay. The opponents of Social Security have been spending huge amounts of money deliberately promoting misinformation. Peter Peterson, the richest and most prominent opponent, has repeatedly asserted that the Social Security trust fund does not exist. This flat earth view of the program has been given respectful treatment at the highest levels of government. When Peterson put on a daylong program on the deficit in the spring both of the co-chairs of President Obama's deficit commission took part in the program as did former President Clinton.

This massive effort to undermine confidence in the program has been largely successful. Polls show that substantial majorities of younger workers do not expect to receive their Social Security benefits.

That is not a good environment in which to debate substantial changes to the country's most important social program. Since there are several decades until the program faces any real problems, it is entirely reasonable for those who support the program to focus on educating the public about the program's financial health and to seek to delay any major changes until the Peterson-type misinformation campaigns have been defeated.

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Reporters continually discuss deflation as though something magical will happen if the rate of price growth crosses zero, and turns negative. This is silly. The point is that a lower rate of inflation raises real interest rates at a time when we want lower real interest rates. We can't lower nominal rates below zero, so any decline in the inflation rate right now is bad news.

In this sense, 0.5 percent inflation is worse than 1.5 percent inflation. The situation gets still worse if this goes to a negative inflation rate of -0.5 percent. But the drop from 0.5 percent to -0.5 percent is no worse than the drop from 1.5 percent to 0.5 percent.

This is important to understand because the fixation on deflation implies that somehow everything is okay as long as our inflation rate is still positive. That is not true: the economy is suffering from an enormous output gap leading to tens of millions of people needlessly facing unemployment or underemployment.

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This item might have been worth mentioning in a discussion of the economy's growth prospects and the Fed's response. Growth has been boosted over the last 4 quarters by an inventory cycle as firms went from depleting to building their inventories. This cycle has now ended. Inventory growth is unlikely to accelerate further in the quarters ahead.

This means that GDP growth will be close to final demand growth. Final demand growth has averaged 1.2 percent in the last four quarters and was 1.3 percent in the most recent quarter. There is no obvious reason to expect that the rate will increase in the near future.

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Why do reporters feel the need to indiscriminately label unauthorized copies as "counterfeits"? The distinction is very simple and important. A copy where the consumer understands that they are not getting the brand product is not counterfeit, regardless of whether or not there is an infringement of an individual or company's intellectual property protections. This distinction is important because the consumer is clearly benefiting in this case. The consumer is preferring to purchase the copy rather than the brand product.

By contrast, an actual counterfeit product is ripping off the consumer. The consumer is an ally in combatting counterfeits, whereas consumers benefit from the opportunity to buy unauthorized copies.

This simple distinction is lost at the the Washington Post. It describes markets in China as selling "counterfeit" products when it is very clear that consumers realize that they are not purchasing the brand product.

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Morning Edition had a piece on people who hire undocumented workers to do tasks like landscaping their yards or cleaning their toilets. It quoted one person as saying that they hire immigrants rather than U.S. citizens or green card holders because she "believes American prices are inflated."

The article doesn't tell listeners what any of the employers in the piece do, but it is an absolute certainty that there would be a huge number of qualified people around the world who would be willing to do their jobs at a much lower wage than they receive. However, most people who work in occupations requiring more education enjoy much more protection from immigrant workers than people who landscape yards or clean toilets.

The position of the people interviewed in this piece is that they are entitled to protection from competition to keep their wages high, while they should be able to hire workers from the developing world at low wages to save money. It would have been helpful if the piece had elucidated their view more clearly.

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Yes, in the strange but true category, we have a columnist with a major national newspaper worrying that population growth in the United States could slow or even reverse. Yes, I have the same fear every time I push my way into the metro at the rush hour or get caught in a huge traffic jam. Imagine how awful it would be if cities were less crowded. It could make housing cheaper, reduce pressure on water and other resources and cut greenhouse gas emissions. Shortages of workers would drive up wages as the least productive jobs go unfilled (e.g. the midnight shift at 7-11 and parking valets at upscale restaurants). It's  a looming catastrophe if ever there was one.

Samuelson bizarrely thinks that slower or negative population growth will hurt the economy. He thinks that it will slow demand growth. There are two simple problems with this story. First, we are in an international economy, so if demand in the U.S. economy is growing less rapidly then we can sell our output elsewhere. The other problem is the big "so what?"

If we can produce everything we want in the United States and still not fully employ our workforce then we can all get longer vacations and have shorter workweeks. In a functioning economic system, having too much is not a problem -- you just work less. In the Netherlands they figured this out -- they use work sharing rather than layoffs to deal with inadequate demand. As a result its unemployment rate is close to 4.0 percent. In Germany, work sharing has been so effective that its unemployment rate is lower today than it was at the start of the downturn.

See, this is really simple for countries that have competent people guiding their economy. It is only inept economic policy that makes a shortage of demand a disaster for people and the economy. Too bad Samuelson won't discuss this failure of economic policy.

 

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The NYT has a very good piece on the Minerals Management Service and the culture at the agency that led to a disregard of safety and environmental concerns. However, it gets an important point dead wrong at the very beginning. It begins by discussing a lease auction held in March of 1997 and tells readers that this was a period of rising oil prices.

That's not what the data show. Oil prices had been weak throughout the 90s and were headed down in March of 1997. At that point, in inflation-adjusted dollars, oil prices were near their lowest level of the post-war period. This can be seen as a secondary issue in terms of the article's main focus, but it is important to recognize that the world was not suffering from anything resembling an oil shortage at the time that that the government began this renewed push to open the Gulf to drilling.

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As noted below, the NYT declared class war against school teachers and custodians, arguing that the public must focus on taking away their pensions. The prior note left out a very important point -- if the economists who make projections of pension returns knew arithmetic, then the pension funds would not be facing these huge shortfalls.

These "experts," all of whom draw high salaries in their working careers and much higher pensions than public employees (think of people like Harvard Professor Martin Feldstein, Boston University Professor Lawrence Kotlikoff, and Steve Goss the Chief Actuary for Social Security), all asserted that stocks would average 7.0 percent real returns even when the market was at its bubble peaks. If the market had performed as they had projected, then these pension funds would be just fine today.

In short, the biggest problem with these pension funds is that they listened to the country's leading economic experts in planning for the future. Unfortunately, the workers and the taxpayers will pay for the incompetence of the experts. The experts themselves are protected.  

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The Washington Post adopted a new tactic in its ongoing campaign to cut Social Security benefits, highlighting a relatively trivial amount of mispayments or fraud, leading readers to believe that the program has major administrative problems. The Post devoted a major news story to a GAO report that found "1,500 federal workers might have received improper or fraudulent Social Security payments in the past several years."

There are just under 8 million people who receive disability benefits. Summing over 4 years would give approximately 30 million disability years of benefits. The GAO report identifying 1,500 federal workers who received benefits would imply 3,000 per years of improper benefits, assuming an average of 2 years of benefits per worker. This is equal to 0.01 percent of the beneficiaries of the program.

A mistake of this magnitude would warrant little or no attention in a newspaper reporting issues that affected people's lives in any way. However, it is not surprising that it would get substantial attention in a newspaper like the Post, which is on a campaign to cut Social Security and freely uses its news section to advance this agenda.

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Apparently not. A lengthy magazine piece that discussed the music industry's costly efforts to track down restaurants and bars that play copyrighted music without authorization never mentioned the possibility that there could be alternative mechanisms for financing music in the Internet Age. Instead, it held out the hope that new technology may allow the industry to monitor every radio, computer, and cell phone so that Time Warner would know every time one of its copyrighted songs was being played. Add a comment
The "Buy America" provisions of the stimulus package got huge amounts of ink from the NYT, the Washington Post, and other media outlets, all of which were anxious to feature economists denouncing them as protectionist. For some reason the NYT did not feel the need for similar denunciations in an article reporting on a bill that quite explicitly protects highly-skilled workers by imposing a tax for visas. The bill also is peculiar in that it is structured so that large U.S. companies would escape the tax. Only foreign-owned companies with relatively few U.S. employees would pay the tax. Add a comment

In its discussion of the weak July jobs report the Post noted that the Fed could take steps to boost the economy. It listed the possibilities as: "pledging to keep interest rates low for even longer than now expected, cutting the interest rate on banks' reserves, or buying additional mortgage securities."

These are all relatively modest steps. There are measures that have been proposed that would have much more impact. For example, Greg Mankiw, President Bush's chief economist, and Oliver Blanchard, the chief economist at the International Monetary Fund, have both suggested that the Fed could set an inflation target of 3-4 percent as a way of lowering the real interest rate.

The Fed could also commit itself to buy and hold a large amount of government debt (e.g. $1 trillion to $3 trillion) to alleviate concerns that the debt will impose large interest burdens on the government in the future, thereby creating more room for aggressive stimulus. The Post should be listing the full range of options that are being put forward in policy debates, not just a small narrow set of relatively inconsequential measures.

It also would have been worth mentioning that the Census still employed 200,000 temporary workers in July. Most of these jobs will disappear in the next two months, which means that the economy will have to generate 100,000 jobs a month in August and September just to keep employment flat.

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Columnists are given considerably more leeway than reporters, but serious newspapers still expect their pieces to bear some relationship to reality. This is why the Ron Lieber's column warning of a class war ("The Coming Class War Over Public Pensions"), with government workers as the new "haves," may leave many readers wondering about the NYT.

We have just seen the Wall Street crew get trillions of dollars of loans and loan guarantees to protect their multi-million dollar salaries and bonuses. The government routinely gets taken left and right by Halliburton and other defense contractors. Doctors and drug companies use their political power to ensure that they can charge far above competitive market prices.

With all these millionaires and billionaires getting even richer at the public's expense, why would there be a class war over public pensions? Clearly this is Mr. Lieber's desire, but so what?

Lieber does his best to whip up the hysteria, near the beginning of the article he describes the pension shortfall: "At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying." Since we're doing the alliterations with "t," how about throwing in "two" as in a shortfall that is less than 2 percent of projected state and local government spending. Current spending is close to $2 trillion a year. If we assume that a shortfall must be filled over a 30-year period, then this would imply a gap that is less that 2 percent of projected spending over this period. 

That is not a trivial sum, but it is not obviously "titanic" or "terrifying," at least to adults who do not scare easily. The piece does eventually point out that most public pensions are not especially large and that in many cases these pensions are also substitutes for Social Security (many state and local workers are not part of the Social Security system), but that information only appears near the bottom of the piece, long after the call to class war.

The reality is that public pensions are better than private pensions, but this is largely because most private sector workers have little or nothing by way of pensions. With a few notably exceptions (police and fire pensions, along with those of IMF economists, tend to be very generous) most public sector pensions do not provide retirees with an especially high standard of living.

It is more than a little bizarre, and arguably more than a little offensive, that the NYT would publish an explicit call for an attack on the pensions of millions of workers who never earned more than $40,000 or $50,000 a year. This is in a country where people like Erskine Bowles (the co-chair of President Obama's deficit commission) get $350,000 a year serving as a director of a company (Morgan Stanley) that only exists today because of the generosity of the Fed and the taxpayers when they rescued it in its time of need. (What does a director of Morgan Stanley do to get $350,000 a year?) Of course, the full-time Wall Streeters can pocket 100 times as much.

Mr. Lieber obviously wants to direct public anger at school teachers and custodians rather than the people who hold real power and wealth in this country. It is a pathetic and disgusting exercise and the NYT should be embarrassed to provide Mr. Lieber with the ink and electrons for this effort.

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Much of the whining over current and projected future deficits is couched in terms of inter-generational equity. The story goes that we are doing bad things to our children and grandchildren by running up a huge debt that will threaten their living standards. In this story, the bottom line is supposed to be the living standards of future generations.

This should leave the public wondering why it seems that absolutely no one among the deficit whiners (including the reporters and editorial writers) commented on the fact that the Social Security trustees report released yesterday showed much higher wage growth than the previous year's report. According to the new report, average annual wages (adjusted for inflation) will be 47.8 percent higher in 2040 than in 2010. Last year's report showed wages would be 39.1 percent higher in 2040 than in 2010.

This higher wage growth projection dwarfs the impact of any potential tax increases that could be necessary to deal with budget deficits. For example, the change from last year's projections to this year's projections, if it proves accurate, would have more than twice as much impact in raising living standards as a 3 percentage point increase in the payroll tax would have in reducing living standards.

If the deficit hawk gang was actually concerned about the living standards of future generations, it is inconceivable that they would not be discussing these new projections. The fact that they have completely ignored them suggests that their concern with deficit projections have nothing to do with the living standards of our children and grandchildren.

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The Post wants cuts so badly that they just can't resist using its news section to push its agenda. In an article on the release of the new trustees reports for Medicare and Social Security, the article notes the projected shortfall in these programs and then tells readers: "but Democrats and Republicans have disagreed about the best approach and shied away from the political pain of paring benefits for older Americans in the highly popular entitlements."

A serious newspaper would point out that both Democrats and Republicans have shied away from any changes that would substantially improve the financial health of Social Security. This would include measures like raising the wage cap on the Social Security payroll tax. It would also include raising the tax rate itself, which poll after poll has shown is more popular than cutting benefits. A serious newspaper would also point out that the projected shortfall is far in the future and that there is no obvious reason that Congress should take steps to address it any time soon. A fix comparable to the 1983 fix could be put in place in 2030 and leave the program fully solvent until close to the end of the century.

The piece should also have noted that the Medicare Trustees projections show that Congress just eliminated 80 percent of the projected shortfall in the Medicare program. If this proves accurate, then this would be an enormous accomplishment.

 

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The WSJ had a piece on the European Central Bank's (ECB) decision to buy a small amount of government bonds. It raises the question of whether this could jeopardize the ECB's credibility as an inflation fighter.

This is an interesting question. According to central bank folklore, credibility as an inflation fighter comes from being willing to impose a severe recession to squeeze inflation out of the system. Paul Volcker sits at the top in the Central Banker's Hall of Fame for his willingness to keep interest rates high through 1981-82 recession. The folklore tells us that we don't  want to lose this hard-earned credibility by allowing inflation to rise now.

It is worth noting that in its length and depth, the 1981-82 recession is being dwarfed by the current downturn. In other words, even if aggressive monetary expansion did lead to inflation that central banks subsequently felt necessary to rein in, the cost in terms of unemployment and lost output is likely to be less than we are now experiencing.

This should make more expansionary policy at present a no-brainer, but we have to remember, our central banks are run by people who could not see an $8 trillion housing bubble.

 

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For those wondering what those Wall Street boys do to earn tens of millions a year in salary and bonuses, the NYT has part of the answer. The Wall Street boys rip off school districts and other governmental units who pay them high fees for creating complex financial instruments that they don't understand. Add a comment

This exciting tidbit was conveyed in the lead-in to a story on the failure of the Obama administration's mortgage modification program (HAMP). That is a surprising assessment given the fact that purchase mortgage applications have dropped by more than 30 percent from year ago levels since the end of the homebuyer's tax credit on April 30th. Unless 30 percent fewer people feel like selling their homes in 2010 than 2009 (a relatively weak period for house sales), then house prices will be headed sharply lower. (This is based on a complex technical process known as "supply and demand.")

The issue of the direction of house prices is actually very relevant to the topic. The housing bubble has not fully deflated in many areas of the country. This means that government efforts to keep people in their homes are likely to still leave many people underwater. In other words, by design, the Obama program will be paying servicers and investors money for mortgage modifications that still leave homeowners with no equity in their homes. This makes HAMP a good mechanism for getting money to banks, but a very way to help homeowners.

It is not possible to assess the merits of this sort of mortgage modification program without a serious assessment of the future course of house prices. NPR excluded such a discussion with the unsupported assertion in its lead-in.

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