Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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According to the Congressional Budget Office the economy is currently operating at a level of output that is 6 percent (@ $1 trillion) below its potential. This lost output represents income that would primarily go to currently unemployed or underemployed workers, a disproportionate share of whom are young. If the economy were near full employment, lower paid workers, who are also disproportionately young, could expect to see higher wages.

If Congress was prepared to spend more money on infrastructure, education and other areas it could return the economy to full employment. Many people might think that the decision to maintain high levels of unemployment, with the enormous cost implied, is the biggest budget problem facing the country. But the Post told them otherwise, using a front page news article to tell readers:

"The deal makes no effort to solve the nation’s biggest budget problem: a social safety net strained by an aging population."

Most newspapers might reserve such editorializing for the opinion pages, but not Jeff Bezos' Washington Post.

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Fareed Zakaria misses the story big-time when he tells readers that the super rich have gotten richer in the United States because, "globalization and technology help superstars." This is not inherently true, it is only true when the government rigs the deck to accomplish this result.

For example, globalization could be used to promote competition in the CEO market so that U.S. corporations take advantage of the much lower paid CEOs in Europe and Asia to save tens of millions of dollars a year in wasted CEO pay. However because the corporate governance structure in the United States essentially allows CEOs to pick the corporate boards that decide their fate, corporations do not take advantage of this opportunity provided by globalization.

As another example, many huge fortunes earned in drugs and the high tech sector depend on strong government patent monopolies. It would be easy to devise systems that produced as much or more technological progress that did not redistribute so much income upward to those at the top. Many of the huge fortunes in the financial sector are attributable to the under-taxation of this sector and the large number of regulatory and tax loopholes that the government leaves in place to allow for fortunes to be made by the very rich.

It is very convenient for the wealthy to have the public believe that their riches came about through forces like globalization, as opposed to government rigging. It leads to views like those expressed by Zakaria:

"We don’t have all the answers, but if you’re looking for the policy that would likely have the biggest effect on increasing social mobility and reducing inequality, let’s shift the attention from the rich and the middle class and focus on the forgotten poor."

This is known as "Loser Liberalism."

Note: linked added.

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The NYT apparently hasn't gotten the word. Kaiser Family Foundation did an analysis showing that the age composition of the insurance pool in the exchanges will have little impact on costs. The issue is the health mix. If the exchanges fail to attract older healthy people it will cause as much of a problem as if it fails to attract young healthy people. (On a per person basis the loss is larger, since healthy old people pay three times as much for insurance.)

Unfortunately the NYT has not gotten the word. It again told readers that:

"That requirement, often called an individual mandate, is needed to guarantee that insurers attract young healthy people to help offset the costs of covering older Americans who require more medical care, insurers say."

The relevant adjective is "healthy," young really doesn't matter.

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Ben Bernanke has definitely done some things right in dealing with the downturn, most importantly having the Fed act more aggressively than many other central banks in trying to boost the economy. However his record has far more blemishes than Neil Irwin notes in his 'how history will judge' piece.

First of all, Ben Bernanke was less of an innocent bystander than Irwin implies. While he had been a Princeton academic before becoming Fed chair, that was not immediately before becoming Fed chair. He had been a member of the board of governors of the Federal Reserve from 2002 to 2005. In 2005 he became the head of President Bush's Council of Economic Advisers. It was during this period that the housing bubble was growing to ever more dangerous levels, fueled by mass produced junk mortgages. The latter were being packaged in mortgage-backed securities and sold around the world. Bernanke was right there in the middle of this and apparently thought everything was just fine.

Irwin also downplays the extent to which Bernanke failed to appreciate the disaster even as it was unfolding. Bernanke apparently failed to recognize that the loss of more than $1 trillion in annual demand from the collapse of the housing bubble could not be easily replaced from other sources. He also totally missed the depths of the financial crisis.

For example, after Bear Stearns collapsed in March of 2008, he testified to Congress that he didn't see another Bear Stearns out there. Of course there were plenty more Bear Stearns out there with names like Lehman, AIG, Fannie Mae, Freddie Mac, Goldman Sachs etc. The whole gang would have gone belly up by the end of the year were it not for massive intervention by the government. (At the time of the Bear Stearns comment, the media were too polite to note that Bernanke had not seen the last Bear Stearns.)

The claim that Bernanke could not have rescued Lehman because they lacked the legal authority is also dubious. Bernanke did many things in the crisis with questionable legal authority. Suppose that the Fed and Treasury had rescued Lehman, who would have taken them to court? This one might fool little kids and Washington Post reporters, it is not the sort of thing that adults need to take seriously.

Irwin also glosses over the basic story of the Fed/Treasury bailouts of Wall Street. The bailouts were designed to keep the Wall Street boys living high at the expense of the rest of the country. While it was desirable to prevent a full scale collapse, this could have been done by imposing strict conditions on bailout money that would have ensured the financial system would be fundamentally restructured. This would have meant telling Goldman Sachs, Morgan Stanley, and the rest that if they want to stay alive they will have to agree to become fundamentally different institutions (e.g. smaller, more narrowly focused on normal banking activities etc.). Since these banks were on their death bed, they would have little choice. (Btw, the idea that we risked a second Great Depression from a complete collapse is also a fairy tale for the kids. We know how to get out of a depression: spend money.)

Instead of trying to ensure that bailout money came with strict conditions, for example by calling Congress' attention to the fact that he was keeping banks on life support and that Congress could impose conditions on these handouts, Bernanke did the opposite. He helped sell the TARP as an emergency no questions asked bailout. He hyped the case by warning Congress that the commercial paper market (a cash lifeline for even healthy businesses) was shutting down. He didn't bother to mention that the Fed had the power to single-handedly keep the commercial paper market in business. He waited until the weekend after the TARP passed to announce the creation of a special lending facility for this purpose. This act of deception should feature prominently in any discussion of Bernanke's tenure. 

Bizarrely, Irwin comments on the evidence of bubble's developing in the QE low interest rate environment:

"some markets — for farmland in middle America, emerging market bonds — have even flirted with bubble territory, helped along by Bernanke’s money printing."

He left housing off the list for some reason. In the spring of this year house prices were roughly 10 percent about their trend levels. While this is not terribly frightening, they were rising at a double digit annual rate. Furthermore, in many markets prices were rising at 20-30 percent annual rates. There were serious grounds for concern about a new housing bubble.

Interestingly, Bernanke's June taper talk appears to have taken the air out of this bubble. It sent mortgage interest rates up by more than a percentage point. That caused many investors to flee the market, leading to a sharp deceleration in the rate of price appreciation. This may not have been Bernanke's intention, but it was an important and desirable outcome of the taper talk. Of course it would have been hoped by now that the Fed would be prepared to use other tools than interest rates to try to stem the growth of asset bubbles.

These are all important features of Bernanke's tenure that readers should know. Let's hope history does a better job than Irwin.


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The NYT had a great piece about how drug manufacturers contribute money to charities that help people meet co-payments on drugs. The way the deal works is that a drug company will charge a very high price, let's say $50,000 a year, for a drug that may be of limited value compared to lower cost competitors. To discourage its use insurers require a 20 percent co-payment, which would mean patients have to cough up $10,00 a year.

This sort of co-payment would keep most people from using the drug. In order to prevent this outcome, the drug company gives money to its favored charities, which in turn make the patient's co-payment. This gives the patient no reason to go with a cheaper drug. The drug company in this story nets $40,000 instead of $50,000, but they still come out way ahead on a drug that probably costs less than 1 percent of this amount to produce.This is exactly the sort of arrangement that one would expect when the government grants patent monopolies and other forms of protection that prevent market competition. 


Some comments noted that the drug highlighted in the piece, H.P. Acthar Gel is not protected by a patent. This is true, it has a different form of government monopoly, data exclusivity. This will last into 2017, hence the ridiculously high price.

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Thomas Edsall does a very nice job of making a distinction between a political agenda focused on providing basic needs for the poor (known in these parts as "loser liberalism") and an agenda focused on structuring the economy so that growth benefits everyone rather than just those at the top. This point is a central, if often overlooked, theme of political debate. (See also my new book with Jared Bernstein on Full Employment. While getting to full employment is a policy decision, leaving tens of millions unemployed or underemployed is also a policy decision. Those fiscally conservative budgets don't come from the gods.)

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If you didn't hear about a new report from the Kaiser Family Foundation making this point, then you should be upset about a news outlet near you. There have been numerous reports about the need to get young healthy people into the insurance pools in order to keep costs down. The argument was that if too few young people signed up for insurance, then costs would rise. Insurers would then be forced to raise their premiums to maintain profit margins. This would then lead more people to opt out of buying insurance, which then lead to further premium hikes. Eventually only very sick people would end up in the pools and would have to pay very high prices for insurance.

The Kaiser report shows that even if young people sign up at just 50 percent of the rate of the population as a whole, it would only raise costs by 2.4 percent. This is not enough to lead to the sort of death spiral that has been hyped in the media. The report concludes that Obamacare has much more to fear from a skewing of enrollees by health condition than by age, as has been frequently noted here in the friendly confines of Beat the Press.

Anyhow, given the hype that the death spiral stories have received, we should be reading about this new Kaiser report everywhere. Huffington Post picked up a Reuters report on the topic. Michelle Singletary, the WaPo's personal finance columnist, was also on top of the issue. Let's see how long it takes the rest to follow.

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That's what millions of listeners must be asking after hearing its reference to the budget deal in a top of the half hour news segment on Morning Edition (sorry, no link). The segment told listeners that the deal did little to reduce the deficit.

That is perhaps true, but how did NPR decide that this was the most important piece of information to give listeners in this short piece. It could have told listeners about its impact on much more important problems. For example, due to lack of demand we are losing $1 trillion a year in potential output according to the Congressional Budget Office. We are also down more than 8 million jobs from trend levels. It might have been appropriate to tell listeners that the budget does nothing to boost the economy and address the job shortfall.

NPR could have also told readers that the budget does little to address the problem of global warming which is likely to have devastating consequences for our children and grandchildren. However NPR instead chose to highlight the fact that the budget apparently did not meet its concerns for reducing the deficit even though by every objective measure the deficit is too small, not too large.

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My friend and co-author Jared Bernstein used his NYT blogpost to defend the Federal Housing Authority (FHA). I am mostly sympathetic to his case. The FHA has played a positive role in the recovery, helping to support the housing market when private funding had largely disappeared. However, I was struck by his reference to a study by Moody's Analytics which purportedly finds that house prices would have fallen by another 25 percent had the FHA not been there to support the market.

I didn't actually find the Moody's study on the FHA, but Jared did link to a paper from the Center for American Progress (CAP), which has the following paragraph:

"It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis."

It is difficult to envision this story. Mortgage interest rates would have doubled without the FHA? Let's see, the FHA was an important source of demand for mortgages. So we eliminate a big source of demand and then mortgage interest rates double? I wonder what economic theory they are using over at Moody's. (Anyone relying on Moody's for an assessment of the housing market should remember that it completely missed the collapse of the housing bubble.)

In the same vein, how do we get a 25 percent further drop in house prices? There were already investors entering the market in large numbers by the end of 2010 with private equity and hedge funds starting to buy up large amounts of housing. If they knew the FHA was leaving the market, is there some reason to believe that they would not have taken advantage of an even greater buying opportunity?

Perhaps Moody's modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn't take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that lasts for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.

I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA's great credit that it became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody's and the CAP report.


Typo corrected -- thanks Mark Brucker.

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That is what millions are asking after reading this piece on the prospects of the recent budget deal in the Senate. At one point the piece tells readers:

"Under the budget deal, spending on defense and nondefense programs would rise from the $967 billion slated for this fiscal year to $1.012 trillion, mitigating the impact of across-the-board spending cuts and allowing congressional lawmakers to draft detailed spending plans for the first time in several years. Spending in fiscal 2015, which begins Oct. 1, would rise from $995 billion to $1.014 trillion. Though total spending would rise $63 billion over 10 years, the measure would trim the deficit slightly."

Okay folks, can anyone make sense of this one? Let's see spending for fiscal 2015 would rise from $995 billion to $1.014 trillion, that's compared with the prior schedule. If we compare actual spending in 2015 with 2014 the increase in nominal dollars is $2 billion. If we assume 2.0 percent inflation, this would imply a drop in real terms of about 1.8 percent. If we assume 2.5 percent GDP growth, then spending would be falling as a share of GDP by around 4.3 percent.

Over the next ten years, with nominal GDP projected to grow more than 60 percent, the near freeze would imply a reduction in the affected areas of federal spending of close to 50 percent. Such cuts may be appropriate for military spending, where the need would presumably be proportionate to the threat posed by potential enemies. However it might be reasonable to expect that spending on research, transportation, and other components of discretionary spending would rise roughly in step with the economy, as they have historically. In this case, the current path of spending implies large cuts.

It's not likely many readers would have understood that the budget deal implies the continuation and extension of large cuts in domestic discretionary spending relative to its historic path. At the prompting of its public editor, Margaret Sullivan, the NYT committed itself to expressing numbers in a way that is meaningful to its readers. It's difficult to see any evidence of progress toward this end in this piece on the budget.

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