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).
The Washington Post, which long ago abandoned rules of journalistic objectivity in pushing its agenda for cutting Social Security and Medicare, today covered up the plans by deficit commission's co-chairs to violate the commission's charter. The Post reported that the commission expects to delay voting on a plan until December 3. This means that the commission will miss the December 1 deadline for a final report specified in both its by-laws and its charter.
If the Post were not so committed to Bowles and Simpson's agenda then it would have called readers attention to the fact that they are violating the rules under which the commission was established. Of course, if it were following standard journalistic practices, the Post would have pointed out that the deficit increased not because of out of control spending, as the co-chairs have repeatedly claimed, but primarily due to the downturn caused by the collapse of the housing bubble.
It also would have pointed out that the huge long-term projected deficits are entirely attributable to the broken health care system. If the United States paid the same amount per person for health care as countries with longer life expectancies we would be facing huge budget surpluses, not deficits. However, because it editorial position dominates its news section, almost no readers of the Post would know this simple and important fact.Add a comment
Suppose that school teachers could keep teaching and get regular promotions year after year no matter how badly they performed in the classroom. Suppose also that there was no incentive to teach well. Economic theory predicts that we would get a large number of unmotivated mediocre teachers.
Okay, suppose that the people who design economic policy never need to worry about getting fired no matter how badly their policies turn out. They continue to hold their jobs and get regular promotions. Under such circumstances we should expect that we would get mediocre economists.
This simple fact should have been included in an interesting WSJ discussion of efforts to promote new directions in economics. If there is no incentive to get things rights, then economists should expect that economic policy will be largely done by people who are not competent.Add a comment
A new report from the Congressional Budget Office prompted another round of celebrations in the media over how little the program cost taxpayers. In fact, the program kept the major Wall Street banks in business preserving trillions of dollars in paper wealth for stockholders, bondholders, and top executives at these institutions.
The situation can be compared to one in which the government prints up a trillion dollars and hands it to the Wall Street gang. Since the money was just printed, it does not require any tax revenue. Nonetheless, this transfer will be a burden on all non-Wall Street types in future years, since the Wall Street crew will have a claim on society's resources that they would not otherwise have.
In the case of the TARP and related Fed and FDIC programs, the government made trillions of dollars in loans and loan guarantees available to the banks at far below market rates. This allowed them to survive in a situation where they would have gone under if the market had been left to work its magic. The fact that Goldman Sachs, Citigroup, Morgan Stanley and the rest still exist and its top executives are hugely wealthy is a direct result of the taxpayers' generosity.Add a comment
Nearly all economists speak derisively of tariff barriers that raise the price of imported goods above their marginal cost. In addition to the inefficiency this causes, tariff protection also invites corruption as the protected industries try to maximize the value of the rents they receive.
The identical logic applies to patent protection, except patents can raise the price of goods by tens or hundreds of times the competitive market price, not the 15-30 percent that would be more typical of tariff protection. It would be useful if this point was made in the context of an article reporting on how a drug company had ghost authored a textbook for two medical researchers.Add a comment
In the NYT they are. In a world where we have 9.6 percent unemployment and the deficit is problem #1, anything is possible.
The NYT reported on evidence of serious labor shortages in export centers and then told readers today:
"China can point to the labor shortage in the export hubs as one reason not to let the renminbi’s value rise, since companies are already grappling with the possibility that higher wages could make their goods less competitive. A significant currency appreciation could help cause a wave of business failures and bankruptcies, Chinese officials say."
Okay, black is white, night is day. This makes zero sense. China would have a good case against raising the value of the currency if the opposite were the case. If it had high unemployment so that reducing its exports could create serious deprivation and social unrest, then it would have a good argument against raising the value of its currency, but low unemployment?
If high labor costs push a firm out of business then this is because it uses its labor less efficiently than other firms. This is known as "capitalism." Firms that cannot compete are supposed to go out of business. Furthermore, in the context of a tight labor market, the bankruptcy does not even hurt workers, since the employees of a bankrupt firm just go over to one of the other firms that are desperate for workers.
The evidence in this article should support the case of those who believe that China should raise the value of its currency. That case should have been made to readers.Add a comment
Using the economic analysis that his advisers relied upon in designing the stimulus package, this would be the projected effect of President Obama's proposal to freeze the pay of federal employees. According the NYT, this will reduce the amount of money that federal employees have to spend by $2 billion in 2011 and by $5 billion in 2012.
Following the multipliers in the Romer-Bernstein paper released by the Obama transition team, we can assume that roughly half of this money would be re-spent. This means that consumption would fall by $1 billion in 2011 and $2.5 billion in 2012. The Romer-Bernstein analysis assumed that an increase in GDP of 1 percent would lead to an increase in employment of 1 million. In this case, GDP will be about 0.007 percent lower in 2011 and about 0.018 percent lower in 2012, implying drops in private sector employment in these years of 7,000 and 18,000 jobs, respectively. The NYT should have noted the impact that the Obama administration's economic team expects to result from this proposed pay freeze.Add a comment
It's actually pretty easy to do what the rich and powerful people want you do. After all, they are the ones that can give you jobs and money. This is why it is dishonest for reporters to describe the decision by people associated with the several of the deficit commissions to refer to proposals to cut Social Security and Medicare as "tough" decisions.
Given the constellation of power in the United States, these are relatively easy decisions. The really touch decisions would be to confront the doctors' lobbies, the pharmaceutical industry, the health insurance industry and Wall Street. People like the co-chair's of President Obama's commission, Erskine Bowles and former Senator Alan Simpson, lacked the courage for these tough decisions.Add a comment
Where is Michelle Rhee when we need her? That's what readers of Fareed Zakaria's column on the economy must have been asking.
Mr. Zakaria comments that the stimulus was helpful, but then says that it is not the right medicine to boost the economy. He tells readers:
"In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement."
This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.
Ironically, one policymaker who seemed to understand this was Barack Obama. Twelve weeks into his presidency he gave a speech at Georgetown University making the case for the long-term rebuilding of the American economy, away from an overreliance on debt and consumption and toward productive investment. Obama should have given 25 versions of that speech by now and relentlessly offered policies that expand on its basic focus on long-term growth."
Okay, Zakaria's wants more investment. That sounds good, but how much more does he think that President Obama's 25 versions of his Georgetown speech would prompt. In 2007, before the recession, investment in equipment and software were slightly less than 8 percent of GDP.
Private sector demand has fallen by close to 9 percent of GDP as a result of the collapse of the bubbles in residential and non-residential real estate. Roughly half of this decline is due to the end of the bubble driven construction booms and the other half is due to the loss of consumption that followed the destruction of close to $8 trillion of housing bubble wealth.
Does Mr. Zakaria really think that investment will double as a share of GDP in an environment where demand has collapsed. Mr. Obama can be a great speaker, but I think this one would exceed even his capabilities.
If only the people who wrote about economic policy for major news outlets had to know 3rd grade arithmetic we could be saved from having to deal with such arguments.Add a comment
This is the general policy being pushed by the Washington Post, various Peter Peterson funded deficit commissions, and of course Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's deficit commission. What is great about Robert Samuelson is that he is comes right and tells readers that he wants ordinary people to suffer for the greed and incompetence of the bankers and the people who design economic policy.
Samuelson says that bailouts in Ireland, Greece, Spain and elsewhere are about:
"persuading ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions."
Of course there is no economic reason whatsoever that ordinary people should be accepting lower pay, higher taxes, and reduced Social Security and pensions. The economies of Europe and the United States are no less productive than they were before the collapse of the housing bubble that the economic policymakers (almost none of whom have been fired) failed to see. In fact, in the United States productivity has risen substantially in the last 3 years.
The reduced output and unemployment stems from lack of demand. This in turn stems from the failure of the same group of economic policymakers to find ways to increase demand sufficiently to make up for the demand lost by the collapse of the bubble. Rather than trying to generate demand, policymakers are doing exactly what Mr. Samuelson said they are doing. They are trying to force ordinary people to endure high unemployment and accept cuts in pay, benefits, and public welfare programs.
And, as Mr. Samuelson says, he hopes that austerity can be accomplished "without [the public] resorting to paralyzing street protests or ineffectual parliamentary coalitions."
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Thomas Friedman told Congress to just shut up and reduce the living standards of the vast majority of the population. In his column today Friedman said that Congress should quickly embrace the cuts in Social Security and Medicare proposed by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit commission, and get on with the rest of Friedman’s agenda. Friedman has apparently decided there is no other way to move forward than to force moderate-income retirees to take big cuts in their living standards.
Of course others might point out that there are enormous potential savings to Medicare and Medicaid from allowing beneficiaries access to the more efficient health care systems in other countries. The government and private sector could also saving hundreds of billions of dollars a year from replacing the system of patent support for drug research with more efficient mechanisms.
In addition, the government could easily raise more than $100 billion a year from taxing the excesses in the financial sector, a route even advocated by the International Monetary Fund. This would require the sector most responsible for the economic wreckage the country is now experiencing to pay for the damage.
And, those who know basic economics (forget Friedman here) know that the current deficits pose no burden whatsoever. Deficits run in times of high unemployment do not displace private sector production; they simply utilize resources that would otherwise be idle.
And, there need be no future tax burden associated with the interest on this debt. There is no reason that the Fed can’t simply buy and hold the bonds issued to finance the deficit. This would mean that the interest paid on the bonds would go to the Fed, which would in turn refund it to the Treasury. This means that the interest imposes no net cost to taxpayers.
But Friedman doesn’t have time for thinking about these alternatives to cutting Social Security and Medicare. After all, each of these would involve confronting wealthy and powerful interest groups, Thomas Friedman doesn’t get paid to cause these people trouble.
Friedman’s line is to tell Congress to shut up and go after those high-living former schoolteachers and factory workers. After all, what business do these people have enjoying a decent standard of living when Thomas Friedman has an agenda to pursue?Add a comment
"As more boomers pack it in, the number of Americans collecting Social Security retirement benefits is projected to nearly double over the next 25 years to more than 76 million. The system won't be able to handle the strain without an overhaul."
Well, no that is not true. The projections from the Congressional Budget Office (CBO) show that the system can pay all benefits through the year 2039 with no changes whatsoever. The Social Security trustees are somewhat more pessimistic showing that full benefits can be paid through the year 2037 with no changes at all. By 2039 the oldest baby boomers will be age 93 and the youngest will be 74. By 2037, the oldest boomers will be 91 and the youngest 73.
This means that by both the CBO and the trustees projections, most of the retirement of the baby boomers can be supported with no change whatsoever. Furthermore, even after this date, the program would still be able to pay close to 80 percent of scheduled benefits, assuming no changes are ever made. This makes the use of the term "overhaul" somewhat dubious. If a change of the sort put in place by the Greenspan commission back in 1983 was implemented in 2030, it would make the program fully solvent through the rest of the century.
The country did not begin to prepare for the 1983 changes in 1963. There is no obvious reason that the country need to act now to change Social Security, even if CBS News apparently wants us to.
It is unfortunate that CBS chose to advocate its position on Social Security rather than inform the public. Since many people are under the impression that they will receive no Social Security benefit, it would have been helpful if CBS had pointed out this is not possible unless Congress votes to end the program.
It would have also been helpful if CBS noted that every official projection shows that workers will on average be far richer in 30 or 40 years than they are today. Groups like the Peter G. Peterson Foundation have spent vast sums of money trying to convince the public that workers on average are getting poorer through time. While many workers have gotten poorer, this is the result of the upward redistribution within generations to rich people like Peter G. Peterson (a successful investment banker). It is certainly possible that the continued upward redistribution of income will leave most workers poorer in the future than they are today, but this will be a question of intra-generational inequality, not inter-generational inequality.Add a comment
David Brooks told readers that he is very upset. It seems that even though the Social Security and Medicare cutters have spent tens of millions of dollars pushing their agenda, the politicians still are unlikely to act.
Of course the facts are very clear. There is no truth to the whining about out of control government spending. According to the Congressional Budget Office, non-interest federal spending was 18.8 percent of GDP in 1980. In 2020 it is projected to be 18.6 percent of GDP.
The story of Social Security impoverishing our children is just a fairy tale intended to scare little kids. According to the Congressional Budget Office it can pay all benefits through the year 2039 with no changes whatsoever. If the projected shortfall over its 75-year planning period was closed entirely with an increase in the payroll tax (as opposed to raising the cap and/or using other taxes) it would offset the projected increase in in real wages over about an 18 month period. That doesn't quite fit the story of child abuse that the deficit hawks like to push.
And of course the whole long-term deficit nightmare story is driven entirely by our broken health care system. If per person health care costs in the United States were the same as in any of the wealthy countries with longer life expectancies we would be looking at huge budget surpluses, not deficits.
Given the facts, it is not surprising that even conservatives are opposed to cutting Social Security and Medicare. But that leaves Mr. Brooks hugely disappointed. After all, the Wall Street gang spent a huge amount of money and effort to build up the current drumbeat for cuts to these key programs. In addition to the commissions, they have essentially enlisted the Washington Post and National Public Radio and other media outlets as full time cheerleaders in this effort, abandoning any pretext of journalistic objectivity. If all this effort goes to waste, how they ever going to take these benefits away from the middle class?Add a comment
Competent budget analysts know that the long-term budget problem is a health care cost problem. If U.S. per person health care costs were comparable to those in any other wealthy country, we would be looking at huge projected surpluses not deficits. Because health care costs are rising rapidly in the private sector, it means that the public sector programs that pay for these benefits (most important Medicare and Medicaid) also have rapidly rising costs.
If Medicare and Medicaid are lumped together with any other programs then the combination of Medicare, Medicaid, and the other program will be the cause of the deficit. For example, the categories of Medicare, Medicaid, and foreign aid explain the vast majority of the projected increase in the deficit over the next quarter century. Similarly, the combination of Medicare, Medicaid, and school lunch programs also explains the vast majority of the projected increase in the deficit over the next quarter century.
Robert Samuelson throws in Social Security as the third program so that he can tell readers:
"America's budget problem boils down to a simple question: How much will we let programs for the elderly displace other government functions."
Social Security does not in any honest way since it is fully financed over the period in question by the designated Social Security tax. But Samuelson does not feel bound by such details.
Of course there are easy ways to prevent health care costs from bankrupting the country, most obviously by taking advantage of the lower cost health care available in other countries. But, Samuelson never discusses such possibilities, focusing exclusively on cutting benefits on which the vast majority of retirees depend.Add a comment
A front page Washington Post editorial touted the "accord seen in debate over deficit." It begins by telling readers that: "the sacrifices necessary to achieve those goals are coming into sharp focus."
Included in the Post's list of sacrifices are cuts to Social Security. It never mentions the fact that poll after poll continue to show that the vast majority of the public strongly opposes cuts to Social Security. It is only the select group of Washington insiders that the Post chose to cite that is agreeing on the "sacrifices necessary."
It is also worth noting that the Post did not even mention plans by the Bowles-Simpson and the Pew-Peterson deficit commission to cut the annual cost of living adjustment. This change would reduce benefits by an average of 0.3 percentage point for each year that a worker receives benefits. This means that after 10 years their benefits will be 3 percent lower as a result of this cut. After 20 years the cut will be close to 6 percent. If the average beneficiary receives benefits for 20 years this means that the average benefit cut will be close to 3 percent.
For most retirees Social Security is most of their income. For the bottom 20 percent of the income distribution, it is almost their entire income. This means that the change in the Social Security indexation formula proposed by these deficit cutters would have almost as much effect on after-tax income for many retirees as the proposed ending of the Bush tax cuts for high income households, which would increase their tax rate by 4.6 percentage points on income above $200,000. While the Post has devoted endless news stories to the consequence of this change in the tax code, it did not even think it was worth mentioning the proposed cut in Social Security benefits.
It is also worth mentioning that the Post's consensus on reducing the deficit excludes the proposal from the IMF for more taxes on the financial sector. Insofar as taxes on the financial sector are not being considered it is likely attributable to the fact that financial interests are playing such a central role in the debate. A newspaper would call attention to this fact.Add a comment
The lead story on Morning Edition presented Joe Minarik, from the Committee of Economic Development, as a neutral budget expert to talk about the deficit. Minarik assured listeners of the need to both cut spending and raise taxes. Mr. Minarik never bothered to point out that the long-term deficit problem is entirely a health care cost problem. If per person health care costs in the United States were comparable to costs in any other wealthy country (all of which enjoy longer life expectancies) the long-term projections would show huge budget surpluses, not deficits.
The piece also implies that the deficits being run at present pose a serious problem, with the host asking Mr. Minarik whether some of the current $1.4 trillion deficit can be seen as a "good" deficit since it involves an investment for the future.
In fact, all of the current deficit can be seen as a "good" deficit since it is increasing output and employment. If the government was currently spending less or taxing more it would be putting less money into the economy. This would lead to less demand and fewer jobs. In other words, we would be throwing our children's parents out of work. It is difficult to see how this helps them.
It would also have been useful to find a budget expert who knew that when a debt is accumulated makes a difference in terms of its burden. A debt that is run up as a result of deficits when the economy is far below its potential need pose no burden whatsoever. The central bank can simply hold the bonds issued to finance the debt. This means that the interest is paid to the central bank which in turn pays it right back to the Treasury.
If debt is run up due to a weak economy, then an economy can sustain much larger levels of debt. For example, Japan now has a debt to GDP ratio of almost 230 percent. Yet, it can still borrow long-term in financial markets at just a 1.0 percent interest rate. This indicates that debt levels that are far higher than anything currently projected for the United States can be easily sustained. A real budget expert would know this.Add a comment
The lead Washington Post editorial told readers that:
"Yet buying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name."
Huh? How does pushing interest rates down to boost employment look like fiscal policy? Isn't that pretty close to the textbook definition of monetary policy? Back when I was learning economics, fiscal policy was when the government directly spent money or gave tax cuts, it wasn't about making it cheaper for the private sector to borrow.
The editorial is also troubling by seeming to suggest that the Fed should no longer have a mandate to pursue full employment.
"Still, the Fed is nearly unique among central banks in the developed world in having responsibility to maximize both price stability and employment. The fact that the left can attack him for not pursuing full employment aggressively enough, while the right can accuse him of pursuing it at the risk of hyperinflation, suggests that the dual mandate piles a heavy political burden on what is and should be a nonpolitical institution."
The Post is apparently upset that Chairman Bernanke and the Fed are attracting criticism. Sure no one likes to be criticized, but why would anyone think that this is a problem? From the standpoint of an economist this boils down to the question of whether all the nasty comments directed at Bernanke are causing us to have trouble getting people to serve at the Fed. That doesn't seem to be an issue at the moment, so there is no obvious reason that criticisms of the Fed chair should bother us.
The other flaw in the Post's logic is the utterly crazy idea that taking away the Fed's mandate to pursue full employment is somehow non-political. Monetary policy has enormous impact on the level and distribution of income in society. If the Fed has a green light to ignore high levels of unemployment and it takes advantage of this option, then it will be potentially costing the country trillions of dollars of lost output.
Furthermore, since the incomes of middle and lower income workers are most sensitive to the rate of unemployment, the bulk of these losses would be endured by those at the middle and bottom of the income distribution. The negative hit to the incomes of those at the middle and bottom due to high unemployment dwarfs everything that Congress ever debates in terms of TANF, EITC, UI and just about any other tax and transfer program. It is hard to understand why anyone who believes in democracy would want to put such a central economic decision (the trade off between the unemployment rate and the risk of inflation) outside of the scope of political action.
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The NYT reports that China's central bank is raising the reserve requirements for banks. It claims that this is being done to give the central bank more money with which to buy dollars in international currency markets, which will keep the yuan from rising.
The article claims that China does not want the yuan to rise because a higher yuan would make its exports less competitive and therefore cost jobs. However, raising reserve requirements will reduce lending, thereby also throwing people out of jobs.
The article also says that China is worried about inflation. If this is true, then the most obvious way to reduce inflationary pressure would be to just let the yuan rise. This would make imports cheaper and also slow growth by reducing exports.
The actions of China's central bank is inconsistent with the motives attributed to it in this article. Either those governing China's central bank are confused about basic economics or the article has inaccurately presented the motives for its actions.Add a comment
BusinessWeek editor Peter Coy told Market Place radio listeners that Peter Peterson spent $1 billion of his own money to inform people about the budget problems facing the country (emphasis in original). This is not true.
Peterson has consistently pushed for cuts to Social Security and Medicare. He has never supported the presentation of a balanced picture of the country's budget situation. For example, even though it is easy to show that the projected long-term budget deficit is entirely attributable to projections that per person health care costs in the U.S. will rise to three or four times the average for rich countries, this fact is largely concealed in Peterson-financed budget projects.
Peterson has almost completely excluded any discussion of financial sector taxes (the source of his wealth) from budget debates, even though there is wide recognition that the sector is a source of massive waste and rents. He has also routinely misrepresented the state of Social Security's finance in his public statements, repeatedly insisting that there is no trust fund. This is completely untrue and is an invention of Mr. Peterson. As can be seen in the Social Security trustees report and numerous other budget documents, the trust fund currently holds more than $2.5 trillion in government bonds.
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It's okay for reporters to point out when important people aren't making sense. In fact, it is really part of their job.
We are told in the same piece that there is concern that the Fed's QE2 policy will drive down the value of the dollar and also that:
"Brazil, Thailand and other emerging economies, which fear that a surge of foreign capital will drive up prices and interest rates."
In this situation, it is appropriate to point out these views are contradictory. If the dollar falls in value relative to these countries' currencies, then it will make imports from the United States cheaper, driving down prices in these countries, not pushing them up. A lower dollar will also reduce exports from these countries, which will lower employment, thereby also reducing inflationary pressures. An inflow of foreign capital would be expected to push interest rates down, not up.
In short, if the views of the leaders of these countries have been presented accurately, then they badly misunderstand basic economics. This should have been pointed out to readers.Add a comment
The Washington Post thought it was important to tell readers that the IMF thought that deficit reduction plans in many countries are inadequate because these countries were overly optimistic in their growth projections:
"in its recent review, the IMF warned that governments were relying on optimistic assumptions about economic growth and had not yet specified adequate cuts in spending to control their finances."
It would have been worth reminding readers that the IMF managed to overlook the housing bubbles in the United States, Spain, Ireland and other countries that led to the current economic crisis. In fact, if IMF economists were held to the same standard of accountability as ordinary workers, the vast majority of them would be among the 15 million unemployed. If readers were aware of the quality of the economic work produced by the IMF they would probably not give its concerns much credence.Add a comment
NPR departed from normal journalistic standards this morning when it gave a reporter the opportunity to present her opinions on dealing with the deficit as facts to its listeners. Mara Liasson told listeners that it is not possible to address the deficit while leaving any specific area untouched. She included Medicare and Social Security on this list.
Her statement is of course not true, as many people have shown that it easy to meet deficit targets without touching Social Security. In fact, on Tuesday, Representative Jan Schakowsky, a member of the President's deficit commission, laid out a plan for meeting the commission's deficit target that did not touch Social Security or Medicare. Ms. Liasson may not like Representative Schakowsky's proposal, but it is dishonest journalism to deny that a plan like this exists.
It is also easy to show that the deficit is first and foremost the result of our broken health care system. The country currently pays more than twice as much per person for health care as people in other wealthy countries. This ratio is projected to rise to three and four to one in the decades ahead.
If these projections for health care prove accurate then it will devastate our economy regardless of what we do with the budget deficit. On the other hand, if our health care costs are brought in line with costs in the rest of the world, then the country does not face a long-term deficit problem. Honest reporting on the deficit would point out this simple fact.Add a comment