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 interviewed several business leaders who told them that additional stimulus would cause them to hire more workers. However, because of its poor grasp of economic relationships, it failed to understand what the business leaders were saying.
The article begins by asserting that:
"Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.... But here in the heartland of America, senior executives say neither side's diagnosis fits."
The article then cites several top executives who say that they will not hire until they see more demand. This is of course exactly the argument of those who urge more stimulus. Stimulus spending will hire workers and/or put money in their pockets through tax breaks. This will cause them to spend more money (the saving rate is still quite low by historical standards), which will translate into more demand for businesses. According to the executives interviewed in this article, additional demand will lead them to hire more workers.
The article also attributes a reluctance to hire workers to uncertainty about the future or pessimism. There is zero evidence that the failure to hire more workers is attributable to anything other than weak demand.
If firms were changing their hiring behavior due to pessimism, then we would expect to see an increase in hours worked per worker. We don't. The increase in average weekly hours since the low-point last fall has not been more rapid than in other recoveries and average weekly hours are still far below their pre-recession level. So, there is no evidence to support the view that hiring patterns are responding to demand any differently than they had in the past.
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In an article on the rise in weekly unemployment claims reported yesterday the Post told readers that: "economists say that the weekly claims number needs to get into the low 400,000s and stay there before employers will start hiring new workers and bringing back laid-off ones." Actually, employers are already hiring more than 4 million workers a month. The problem is that roughly 4 million workers a month are also leaving their jobs, half voluntarily and half involuntarily. The decline in claims is an indication of an improving labor market, it is not a signal to employers to start hiring.
It is also worth noting that claims are likely to have to fall below 400,000 before we see a substantial uptick in hiring. Weekly claims had fallen to the 370,000-380,000 range before the economy started generating jobs in the fall of 2003 following the last recession. And the economy has roughly the same number of jobs today as it did then.Add a comment
The Washington Post, which is losing subscribers at the rate of 10 percent a year, felt the need to tell readers in a front page story that many people at a congressional campaign event: "recognized the need to fix Social Security, which is on track to go bankrupt in the coming decades without changes." Actually, the projections show that if no changes are ever made to the program it will only be able to pay 78 percent of scheduled benefits 27 years from now. The program would not go bankrupt.
As a political reality, it is close to absurd to imagine that at a time when beneficiaries are almost 50 percent larger as a share of the voting population that Social Security would be allowed to substantially reduce benefits. Congress has in the past responded quickly to shortfalls in the program and it would almost certainly take steps to ensure that close to full benefits are paid, even if nothing is done over the next 27 years and the projections prove accurate.
It also would have been useful to point out that the discussion of Social Security privatization is largely a diversion of the real issue concerning Social Security. The co-chairs of President Obama's deficit commission have both publicly suggested that they would support cuts to Social Security, such as an increase in the retirement age. Such cuts are the most immediate issue affecting the program, not privatization.Add a comment
Actually, they made this assertion about the United States and the United Kingdom, which makes considerably less sense than saying Bill Gates is broke. There is no evidence that either country is coming up against any sort of spending limit. The bond markets are willing to lend both governments at very low interest rates and there is certainly no shortage of people who are willing to accept the currency of the two countries.
Since it has no basis in fact, the Post's assertion that these countries are broke is presumably an expression of its unhappiness with how these governments spend their money. This is the sort of sentiment that newspapers are supposed to leave for the opinion pages.Add a comment
The Federal Reserve Board reported a big uptick in industrial production in July. A large part of the increase was attributable to the fact that the Detroit auto manufacturers did not shut down in July for model changes as they ordinarily do. This led to a reported 8.8 percent rise in auto output for the month since the seasonal adjustments assume that this shutdown takes place. This virtually guarantees a large decline in output for August and is not by itself an indication of improvement in the auto industry.
The Post missed this fact and touted the upturn in auto production.Add a comment
Thomas Friedman begins his piece today by telling readers that: "over the past few weeks I’ve had a chance to speak with senior economic policy makers in America and Germany." This might lead readers to believe that he is about to share some great insights that would only be possible for someone with special access to these senior economic policy makers.
Readers with this expectation will be seriously disappointed. There is nothing here that is more insightful than what can be found on the Washington Post's editorial pages on an average workday. Friedman rehashes the usual cliches, with the usual lack of thought. In doing so, he gets both the story of the recent past and the present seriously wrong.
Starting with the past, he badly misrepresents the prior business cycle:
"we’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines."
The main problem facing the U.S. economy of the last decade was a lack of demand. This was in large part due to the fact that China lent to us. China's lending was its policy of propping up the value of the dollar in order to maintain its export market in the United States. (At the start of the decade, the Clinton administration had also tried to promote an over-valued dollar.) The over-valued U.S. dollar made imports from China and other countries very cheap in the United States and made our exports expensive in other countries. This led to a large and growing trade deficit over most of the business cycle. The trade deficit replaced domestic demand, preventing the economy from approaching normal levels of employment (even with the boost from the housing bubble) until just before the crash.
There is no reason whatsoever to believe that China's decision to prop up the dollar was in any way affected by the Bush tax cuts. In other words, neither the Bush tax cuts nor the growth in entitlements had anything to do with our borrowing from China. The issue was China's decision to lend and thereby prop up the dollar. Given the weakness of demand through most of the decade, these expenses could have been easily filled by domestic production without borrowing from abroad.
Friedman does no better when he shifts the discussion from the past to the present. He refers to businesses' reluctance to hire as the result of "unusual uncertainty," a phrase attributed to Federal Reserve Board Chairman Ben Bernanke. Of course there is no reluctance to hire, there is simply a lack of demand for labor. A reluctance to hire would be reflected in an increasing number of hours per worker, as employers sought to meet their demand for labor by working the existing workforce more hours.
This is not happening. There is a modest uptick in hours from the low point of the downturn, but the increase in hours per worker is certainly no more rapid than in other recessions and the average workweek is still far shorter in just about every sector than it was before the downturn.
Later he tells readers:"America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever."
This is a great story -- social networking is soaring, IPads are everywhere -- does Friedman have any evidence whatsoever that this development has increased the demand for educated workers and reduced the demand for less educated workers? If so, this would be the place in his column to present the evidence. Otherwise, readers might think that the 4.7 percent unemployment rate for college grads (nearly triple the pre-recession level), coupled with a decline in their real wages over the decade, implies a reduced demand for the labor of highly educated workers as well as less educated workers.
Friedman's proposed fix also seems a bit wide of the mark. He insists:
"There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers $40 an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. There is no other way."
We better hope there is another way. A wage of $40 an hour would put a worker well over the 90th percentile on the wage distribution. Even if we double the number of jobs in this pay range -- an incredible accomplishment -- what happens to the other 80 percent of the workforce?
Friedman then warns us of the challenge from Europe by getting Germany's past and present wrong:
"Keeping up with Germany won’t be easy. A decade ago Germany was the 'sick man of Europe.' No more. The Germans pulled together. Labor gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidized firms to keep skilled workers on the job in the downturn."
Germany clearly has done some changes that benefited its economy, like work sharing, and some that haven't, but its past as the "sick man of Europe" is an invention of Friedman or his highly placed sources. Germany always ran a trade surplus. That is the most basic measure of a country's competitiveness: foreigners are buying its goods. Germany's unemployment rate in 2000 averaged 7.5 percent, not hugely different than its current 7.0 percent rate.
The story here is that Friedman seems to have completely missed the basics of the current economic crisis in spite of his weeks of conversing with senior economic policy makers. The current crisis is due to a lack of demand pure and simple. If we generate demand either through more expansionary Fed monetary policy, greater fiscal stimulus, or increased exports due to a falling dollar, there is no reason to believe that the economy will not return to high levels of employment. Certainly Friedman has presented no evidence that increased demand will not generate increased employment as it always has.
The longer term debt problem is overwhelmingly a health care story. Apparently Mr. Friedman's sources don't have access to documents like the Medicare trustees report, which imply that U.S. health care costs will be controlled and there will be no serious long-term deficit problem. This may prove wrong, but it seems that it would have at least been worth noting in his column. Of course, if we have not fixed our health care system, we can always achieve huge saving by relying on the more efficient health care systems in other countries.
If Friedman's intention was to scare us, he succeeded. After all, if senior economic policy makers in the U.S. and Germany are as badly misinformed as Friedman implies, then we can expect some very bad times ahead.
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Yep, I paid for the paper this morning. Okay, most people would not call that "raiding." But where on earth does the WSJ get off saying that the government has been "raiding" Social Security for decades? Was this article a paid political advertisement? (It reads that way.)
Of course, it makes as much sense to say that WSJ raided my bank account as to say the government raided Social Security. (Perhaps more, I thought I was buying a newspaper.) There was absolutely nothing improper done with Social Security money. It was used to buy government bonds. Readers of a business paper like the WSJ may have thought that its reporters understood how U.S. government bonds work.
The Social Security trust fund will redeem the bonds when they are needed to pay benefits, just as private citizens and corporations often buy bonds and then sell them off when they need the money for some other purpose. In the meantime, the government used the money it borrowed for other purposes. That is the way government bonds and other bonds work. It is also exactly how the law was been written, and it has been followed.
It also would have been helpful to point out that there is no obvious problem with the deficit and debt levels discussed in the article. The text seems to have been written by a hyperventilating reporter, when the numbers should raise about as much concern as a 4-2 baseball score.
The economy of course does face a crisis. The collapse of the housing bubble has left 15 million people unemployed and is costing us $1.5 trillion a year in lost output. Remarkably, these basic facts are largely absent from the article as the WSJ seeks to get readers and voters to focus on the deficit and its goal of cutting programs like Social Security and Medicare.
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Contrary to what the NYT apparently wanted readers to believe when it told them: "But sustaining a benevolent nanny state is proving to be challenging even for the notably generous Danes."
Actually, Denmark's debt to GDP ratio is just over 40 percent, roughly one-third less than the United States. Its deficit for the year will be around 3 percent of GDP, approximately one-third of the size of the U.S. deficit. Denmark has also consistently been running large trade surpluses, building up claims against foreigners in contrast to the United States, which has been running large trade deficits.Add a comment
Yes, NPR looked into the eyes and now they know what the Republican leaders believe:
"In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy."
In Journalism 101 reporters are told not to say things that they don't know to be true. And high on the list of things that reporters do not know is what politicians really believe.
News flash! Politicians sometimes say things that they do not believe to be true. The Republican allegations about Fannie and Freddie would likely be on this list, since they are so obviously not true as one of the sources in this piece points out.
Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage-backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.
It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.
Responsible reporters would simply present the facts here. They would not try to tell us what the politicians really believe, since they really have no idea.
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The NYT is touting the big news. China just passed Japan as the world's second largest economy! This is painful because the piece badly misleads readers about the relative size and importance of China's economy.
Measured by purchasing power parity -- a measure that assigns the same price to goods and services regardless of where they are produced -- China has long been the world's second largest economy and in fact is already more than twice as large as Japan's economy. It is only by using an exchange rate measure of GDP that China's economy ends up being a close rival of Japan.
The exchange rate measure adds up the size of the economy's output in its own currency, then it converts this measure into dollars at the current exchange rate. Of course there is a large arbitrary component of the exchange rate at any point in time. In China's case, the government has a policy of deliberately depressing the value of its currency. Some estimates put the under-valuation at more than 40 percent. If China allowed the value of its currency to rise, then its exchange rate measure of GDP would rise accordingly. In other words, China could have passed Japan in GDP by this measure two years ago if it had allowed its currency to rise by 20 percent against the dollar.
This is why economists generally use the purchasing power parity measure for most purposes. This much better reflects the relative productive capacity of different countries' economies.Add a comment
The NYT has an article touting the success of Germany's economy. It notes that the Germany's strong growth in the second quarter (8.8 percent annual rate) and relatively low current unemployment rate (7.0 percent) support the view of Germany's leadership that austerity was the right path to foster growth.
It would have been worth noting that it is not possible for every country to follow Germany's path of relying on a large trade surplus (someone must have a corresponding deficit). Germany and some number of other nations can create domestic demand through trade surpluses, but this strategy cannot be followed everywhere.
It also would have been helpful if this article reported economic data that would have been meaningful to its readers. For example, GDP is always reported as an annual growth rate, not a quarterly rate. Also, it would have been more useful to present the OECD harmonized unemployment rate for Germany (7.0 percent), which is measured in the same way as the U.S. rate, rather than the German official rate, which counts part-time workers as part of the unemployed.Add a comment
The NYT tells us that the Feds are investigating drug companies again. It appears that they were making payoffs to foreign doctors to get them to prescribe their drugs.
A brief reference to econ 101 would be helpful here. Economists like it when goods sell for their marginal cost. Trade barriers like tariffs or quotas often raise the price of items by 20-30 percent above their marginal cost. The extra profit created by this gap provides the protected industry with an incentive to engage in corrupt activities like payoffs to politicians to preserve their protection.
Drug patents can raise the price of protected drugs by more than 100 times (10,000 percent) above the free market price. This gives them very large incentives to engage in corrupt activities, so we should not be surprised to find out that they do.Add a comment
The Washington Post really really hates Social Security. They hate Medicare almost as much. Therefore they are willing to give its critics space to say almost anything against the program (the real cause of September 11th) no matter how much they have to twist reality to make their case.
Today, Republican Representative Paul Ryan stepped up to the plate. The Post felt the need to give him an oped column after Paul Krugman cruelly subjected Mr. Ryan's "Roadmap for America's Future" to a serious analysis last week. This violated the long accepted practice in elite Washington circles of not holding proponents of Social Security and Medicare cuts/privatization accountable for the things they say. It is therefore understandable the Post would quickly give a coveted oped slot to Mr. Ryan to make amends for such a grievous breach of protocol.
The rest of us may not have the power to invent the facts that would be needed to push our policies, but that doesn't mean we can't have fun. Let's count the inaccuracies (they call them something else outside of DC) in Mr. Ryan's piece.
1 and 2) In the second sentence we get the line:
"Only in Washington could the government raid one entitlement program [Medicare] to finance a brand-new one [Obama's health care program] and still claim that deficits have been reduced and entitlements have been reformed."
Let's see, "raid" refers to proposals to contain costs in Medicare. If I spend less on groceries this week, have I "raided" my food budget? At the least, this is an interesting use of the term "raid." Assume for the moment that the projected cost savings can be achieved without jeopardizing the quality of care (Ryan does not argue this point), what is the problem with using savings from one program to finance another and still have some additional savings left over to reduce the deficit?
That's the same arithmetic they use everywhere, even in Representative Ryan's home state of Wisconsin. (I know this, when I was in high school I went to a math contest there.) And President Obama's program was scored as reducing the budget deficit by the non-partisan Congressional Budget Office, so it was not his administration's own funny numbers.
The second sentence of the second paragraph tells readers: "Last year's report revealed a $38 trillion shortfall over the next 75 years."Actually, that was the projected shortfall over an infinite horizon with the vast majority of the bad news coming after 2100. The shortfall over the 75 year horizon was $13.1 trillion.
Presenting a huge sum like this without any context (e.g. approximately 2.6 percent of future GDP) is certainly misleading, but in keeping with the Post's policy of affirmative action for deficit hawks like Ryan, we'll ignore this one.
3) In the next sentence Ryan tells readers:
"This year the shortfall appears to have decreased, but only after the Democrats' health bill cut $529 billion from Medicare." Okay, this may not be a misrepresentation, just a non sequitur. Yes, if you are to improve a program's finances you must either increase its revenue or cut its spending, so the Democrats propose to cut spending on Medicare. You caught them in the act, Mr. Ryan.
4) In the next sentence we have: "This apparent improvement was the basis for Democratic celebration -- even though the program remains tens of trillions of dollars in the hole."
This one is beyond debate. The new projections show a Medicare shortfall equal to 0.3 percent of GDP over its 75 year projection period. This is equal to $2.7 trillion. And, even in Washington, $2.7 trillion is not "tens of trillions."
The next sentence is: "With the same legislation that cut more than half a trillion dollars in Medicare spending, the Democrats created a nearly $1 trillion health-care entitlement." Okay, this is not an inaccuracy, but Mr. Ryan the deficit hawk has now managed to attack the Democrats for cutting Medicare three times and we have just started the third paragraph.
5 and 6) Ryan then tells us: "The Obama administration's own chief actuary has explained that in addition to the dubious assumptions on provider cuts and other claims of savings, the health-care law's Medicare cuts cannot be used to both reduce Medicare's unfunded obligations and pay for a new entitlement."
The chief actuary is a non-political position. The current chief actuary, Richard S. Foster, was not appointed by Obama.
The accounting used by the Obama administration with the Medicare savings is the standard accounting used for trust funds for decades.
7) Ryan begins the fourth paragraph: "Put simply, Medicare is on course to collapse." No, the trustees report released last week implies that it has a relatively minor shortfall. The trustees could be wrong, but if their projections prove accurate, then Medicare is actually in fine shape.
8) In the middle of the paragraph we get: "Exacerbating our unsustainable trajectory, health spending explodes under the Democrats' health plan -- raiding Medicare, expanding Medicaid and creating two entitlements without any clue of how to finance the ones we have now." Actually, CBO and the trustees showed health spending growing less rapidly than they had been without the plan. And, note that we have our fourth "raid" of Medicare.
9) The paragraph concludes: "the CBO warned last month of a devastating debt crisis within two decades." Actually, CBO bears part of the blame on this. It made a mistake in its projections which it subsequently corrected.
10) The fifth paragraph begins: "We do not have a choice as to whether Medicare will change from its current structure." No, if the trustees projections are correct, then we do not have to change Medicare's structure beyond the changes in current law.
11 and 12) Later in the paragrpah Ryan tells us: "the Democrats' political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would "end Medicare as we know it."
The main attacker of Ryan is Paul Krugman. Krugman is very far from being part of the "Democrats' political machine." In fact, he is almost certainly the prime embodiment of the "professional left" recently criticized by White House spokesperson Robert Gibbs.
Of course Ryan's plan would end Medicare as we know it. It replaces a Medicare system that pays directly for health care with a voucher system. The voucher is explicitly designed not to keep pace with health care costs. Ryan describes the rate of increase in the size of the voucher as "a blended rate of the CPI and the medical care component of the CPI." In other words, something less than the rate of increase in health care costs. It is also means-tested, so that individuals with incomes above $80,000 would see their voucher cut in half (we might see a lot of people earning $79,999 under the Ryan plan) and those with incomes over $200,000 would not get the voucher.
13 and 14) In the next paragraph Ryan boasts that his Medicare cuts (raids?) would maintain the program's solvency: "while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman."
Of course the current projections already show that the program will be there for younger generations, so they don't need Mr. Ryan's plan, if the projections are correct. And there is absolutely nothing that ensures that Mr. Ryan's Medicare voucher will provide seniors with the same coverage that he enjoys as a member of Congress.
15) The next paragraph reads:
"Far from the claims of "radicalism," this proposal is based on a key reform from the National Bipartisan Commission on the Future of Medicare, chaired by then-Sen. John Breaux (D-La.). That commission in 1999 recommended "modeling a system on the one Members of Congress use to obtain health care coverage for themselves and their families."
Ryan's Medicare plan is a voucher system like the Congressional health care system is a voucher system in the same way that a Yugo and a BMW are both cars, but there is absolutely nothing about Ryan's proposal that ensures Medicare beneficiaries the same quality of care as members of Congress.
16) Ryan then describes his Medicare voucher:
"The Medicare payment would grow every year, with additional support for those who have low incomes and higher health costs, and less government support for high-income beneficiaries."
Actually, the payment is explicitly designed to fall behind the rate of medical care cost inflation. Rather than those with lower incomes getting more, those with higher incomes (above $80,000 a year) would fall further behind inflation.
17 and 18) The penultimate paragraph begins: "If we act now, we can avoid disruptions for current seniors while advancing patient-centered reforms so Medicare will be strengthened for future beneficiaries. The alternative is the European-style death spiral of the welfare state: kick the can down the road as our debt explodes."
Again, the latest projections from the Medicare actuaries imply that there is no great urgency to "act now." The "European-style death spiral" might be useful political ad hominem, but it has no meaning. Some European countries, like Greece and Italy, do face severe budget problems, however some of the countries with the most expansive welfare states, like Denmark and Sweden, have much lower debt burdens than the United States.
19) Ryan continues: "Under an ever-expansive, all-consuming central government, costs will be contained with Washington's heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors' care."
Actually no one has raised the issue of rationing in any context. President Obama's plan will limit the procedures for which the government will pay, as is currently the case with Medicare. However, there is nothing that President Obama has put forward that would do anything to prevent people from getting whatever care they are willing to pay for. Apparently the word "rationing" scores well in focus groups, which is why Ryan and other Republicans use it frequently in their attacks.
20) The second to the last sentence in the last paragraph tells readers: "Ironically, if Democrats succeed in demagoguing to death efforts to save Medicare, that political victory will hasten the program's end." Of course, the Medicare trustees projections are correct, the program is nowhere near death, so we don't need Mr. Ryan's voucher plan to save Medicare.
Ryan concludes by telling readers that his proposal is "my sincere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met -- mathematically and politically -- and to challenge those who disagree with my proposal to offer their own."
In the forgiving spirit of Friday the 13th, I will not count the reference to sincerity as an inaccuracy. The 20 inaccuracies and 4 references to raiding Medicare can speak for themselves. Of course to the seniors who would be unable to afford decent health care if Mr. Ryan's plan became law, his sincerity won't make any difference.
But, I am happy to offer my own test of Mr. Ryan's sincerity. How about giving Medicare beneficiaries the option to buy into the more efficient health care systems in Europe, Japan, and Canada. The beneficiaries and the taxpayers will split the savings. This leaves the current system intact for those who like it, while offering seniors who opt to go elsewhere for their health care the opportunity to pocket tens of thousands of dollars while saving taxpayers money as well. What's wrong with giving people a choice, Mr. Ryan?Add a comment
The NYT has a front page article on the enormous success in identifying biological markers for the development of Alzheimer's that resulted from a collaborative effort in which all data was made freely available. The article reports the assessment of the leading participants that this departure from normal practice allowed for much greater progress than would have otherwise been possible.
It would be useful if in this or other articles the NYT explored the implications of this experience for bio-medical research more generally. It suggests that if research was freely shared that scientists may be far more successful in developing new drugs and other treatments for medical conditions. An open system of research would require the elimination of patent protection, but this would also mean that drugs could sell at their competitive market price rather than at prices that are several hundred to several thousand percent above the free market price.Add a comment
The Post had a piece on the expiration of the Bush tax cuts which reported an analysis by the Joint Committee on Taxation on the incidence by income group. The article noted that the analysis showed that 97 percent of tax filers reporting small business income would not pay higher taxes under the tax plan put forward by President Obama. However, it reported that 50 percent of small business income goes to taxpayers who would see an increase in their taxes.
It would have been worth noting that in most of these cases the tax increase would be trivial. For people with incomes between $200,000 and $500,000 the average tax increase would be $409 as shown in the chart accompanying the article. It is difficult to believe that a tax increase of this magnitude would affect business decisions to any noticeable extent.Add a comment
In discussing the Fed's recent to decision to reinvest the money it earns from mortgage backed securities back into long-term government debt the New York Times presented at length the views of Carl Walsh, an economics professor at the University of California, Santa Cruz. He warned that if banks suddenly withdrew the $1 trillion in reserves that they held at the Fed it could generate inflation.
While this is in principle possible, it would have been worth noting the mechanism through which inflation would be generated. The banks would have to lend out the money to firms who invest it, thereby increasing employment. This would lead to more jobs, higher wages, and then higher demand, which would allow firms to be able to raise prices.
This process takes time. The Fed would have ample opportunity to raise interest rates and slow growth before inflation got too high. Most people would probably be willing to take the risk that the economy might jump back to full employment too quickly.Add a comment
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.Add a comment
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.
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.Add a comment