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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NPR used the phrase "massive" stimulus in describing the Fed's quantitative easing policy in its top of the hour news segment on Morning Edition. It is arguable whether the stimulus is "massive." There is certainly a plausible argument that the stimulus is too small since unemployment remains high and inflation is running below the Fed's 2.0 percent target. NPR could have saved time and increased accuracy by just referring to the program as "stimulus."

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Ross Douthat raises an interesting issue in his column on Obamacare. Douthat suggests that Obamacare may not succeed elsewhere in the same way as it did in Massachusetts because people don't feel as warmly inclined toward the government in other states.

There are several pieces of Douthat's story that aren't quite right. First, this is private insurance, not government insurance. It's not clear how people think they would be making a strike against the government by not buying private insurance, but we can skip that one.

Douthat also follows the pack in buying the young invincible story. The key to the success of Obamacare is getting healthy people to sign up. It doesn't matter what age they are. In fact, the program gets three times as much money out of every healthy senior as it does from a healthy twenty five-year-old. In fact, the gap is likely to be even larger since young people are more likely to get a subsidy since their income is on average lower. 

But it is at least possible that we will see the adverse selection story that Douthat raises, although the outcome will not be quite what he envisions. Under Obamacare each state is effectively its own pool.

Clearly there are other states where people are likely to act like the people in Massachusetts and sign up for health insurance. But there could also be states, let's call them Texas, where many healthy people may decide that as a matter of principle they will not sign up for Obamacare.

This would give us the classic death spiral. If fewer healthy people sign up for insurance then the cost of the insurance will rise. This will lead more relatively healthy people to opt not to sign up. That would further raise the cost of insurance, leading more people to drop insurance. The end game is that Obamacare in these states could end up as a shell. The costs could be so high that almost no one takes advantage of the exchanges and instead just pays the penalty.

This would create a striking gap between the states where Obamacare worked and the exchanges were running well and Texas, where a large share of the population would not have insurance. We have already seen a split along these lines with the refusal of Texas and other states controlled by Republicans to expand Medicaid with federal funds, as provided for under the ACA. However the collapse of the exchanges would affect a much larger and more politically influential segment of the population. This would directly affect the security of middle class workers.

It's not clear that the people of Texas would be happy with the outcome of their individual decisions if the collapse of the exchanges really was the outcome. Tens of millions of workers in the non-Texas states would enjoy security in their health insurance. If they lost their jobs or had some other adverse set of events they would still be able to buy a reasonably priced insurance plan. That would not be the case in Texas.

That outcome would be unfortunate for the people of Texas, but it might lead to an interesting political dynamic.

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The Washington Post had a major article on how the drug company Genentech has managed to create a substantial market for its drug Lucentis, at a price of $2,000 per injection, even though it manufactures another drug Aventis, which is just as effective and sells for $50 an injection. Both are used to prevent blindness. A number of studies have shown them to be equally effective. The article explains how Genentech has been able to maintain a market for a drug that costs 40 times as much as its equivalent competitor, most importantly by not seeking approval from the Food and Drug Administration for the use of Aventis as a treatment to prevent blindness.

While the article is fascinating, it would have been helpful to include the views of an economist who could have pointed out that this is exactly the sort of corruption that economic theory predicts would result from the granting of patent monopolies by the government. Government granted monopolies would lead to distortions in any case, but they are likely to be especially large with a product like prescription drugs, where there are enormous asymmetries of information. The drug companies know much more about their drugs than patients or even their doctors.

It would be reasonable to discuss more efficient mechanisms for financing prescription drug research, such as direct public funding (we already spend $30 billion a year on biomedical research through the National Institutes of Health). Unfortunately the drug companies so completely dominate the political process news outlets like the Post never even mention alternatives to patent monopolies. However, they do occasionally document some of the predictable corruption, as is the case here.

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No one expects Thomas Friedman to base his columns on evidence, but he strayed even farther than usual today. The piece is a complaint that the United States is not prepared to deal with "a huge technological transformation in the middle of a recession." The data won't support that one. 

The usual measure of technological progress is productivity growth. That has been lagging in this upturn, averaging close to 1.0 percent for the last three years.

 

productivity

We know that Thomas Friedman has lots of stories from his cab drivers and other people that he talks to, but most of us might opt to rely on the data from the Bureau of Labor Statistics instead.

Friedman is also a bit behind the times in telling us about the loss of middle skilled jobs. That might have been a story for the 1980s, but the data have not supported Friedman's story for at least a decade.

Friedman also feels the need to lecture liberals, saying they:

"need to think more seriously about how we incentivize and unleash risk-takers to start new companies that create growth, wealth and good jobs. To have more employees, we need more employers."

Of course many people on the left have given lots of thought to exactly this issue. Putting a tax on financial speculation and breaking up the big banks would reduce the amount of resources diverted to unproductive activity in the financial sector. Developing a more efficient alternative to patent monopolies to support pharmaceutical research would free up hundreds of billions of dollars a year. And of course the main agenda item at the moment simply has to be to stimulate the economy to end the $1 trillion needless waste of potential GDP.

The problem is not a lack of thinking on the part of the left. The problem is that Friedman is too lazy to pay attention to what people on the left are saying.

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I'm not kidding. That was in a front page "news" story on the November jobs report. The piece told readers:

"Some economists are forecasting growth as high as 3 percent next year. New data released Friday showing robust hiring in November suggested that the private sector already is gaining momentum.

"The only thing that has to happen is that lawmakers have to do nothing,' said Mark Zandi, chief economist at Moody’s Analytics. 'It’s a pretty low bar.'"

According to the Congressional Budget Office the economy is currently operating at a level of output that is approximately 6 percent below its potential. The rate of growth of potential GDP is in the range of 2.2-2.4 percent annually. This means that if the economy sustains the 3.0 percent growth rate that has the Post so excited, it will close this gap at the rate of 0.6-0.8 percentage points a year. That means it will take between 7.5-10.0 years to close the gap, if the Congress follows Zandi's prescription.

It probably would have been worth including the views of an economist who would have pointed out that this path would imply the loss of between $4.0 trillion and $5.5 trillion in potential output, an amount that is between 100 and 140 times the size of the proposed cuts to SNAP that has been filling public debates. The overwhelming majority of this lost potential output is coming out of the pockets of low and moderate income workers.

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Neil Irwin seems to miss the major issues on too big to fail in his discussion of Treasury Secretary Jack Lew's remarks proclaiming too big to fail (TBTF) to be sort of over. The most obvious issue is simply whether the markets believe TBTF is over.

This is a question of whether they think Jack Lew or his successors will simply wave good bye if J.P. Morgan, Goldman Sachs, or one of the other megabanks goes under. If they don't believe that the government will just let one of these banks sink then they will still be willing to lend money to them at a below market rate since they are counting on the government to back up their loans.

This below market interest rate amounts to a massive subsidy to the top executives and shareholders of these banks. Bloomberg news estimated the size of this subsidy at $83 billion a year, more than the cost of the food stamp program. Insofar as Lew's efforts to create doubts about a government rescue are successful, the size of this subsidy would shrink toward zero. However as long as the markets do not take him seriously (my bet is they don't), the big banks will still be getting a massive subsidy.

This is one of the reasons why President Obama's recent comments on inequality were seriously misplaced. He said the government cannot stand on the sidelines as the distribution of income becomes much more unequal. Of course government is not standing on the sidelines; it is actively working to increase inequality through measures like the TBTF subsidy.

The other point that Irwin gets wrong is implying that the economic crisis in some way hinged on getting the TBTF issue right. The economy's current weakness is attributable to a lack of a source of demand to replace the demand generated by the housing bubble. Investment and consumption are both at normal levels relative to the size of the economy; there is no evidence that the residue of the financial crisis is holding them back. 

The issue going forward will be whether we have people at the Fed and other regulatory agencies who take bubbles seriously. We clearly did not in the past and since no one faced any career consequences as a result of this gargantuan failure, there is not much reason to believe that lessons have been learned. 

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Ezra Klein highlights the most important feature of Obamacare. People who have insurance now will be assured that they can still buy it if they lose it for some reason. This will make a huge difference to the bulk of the population who do already have insurance. They can now change jobs or even quit and still be assured of being able to get insurance at a reasonable price.

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Couldn't resist this one. No the WaPo columnist isn't complaining about too much money going to big banks. He is once again complaining about money going to seniors, or more specifically the idea pushed by Senators Tom Harkin and Elizabeth Warren that we might want to increase the money going to seniors.

Harkin proposed a bill, which Warren has now endorsed, which will base the annual cost of living adjustment on a price index that more closely tracks the consumption patterns of seniors than the current index. It would also raise benefits by an average of about $70 a month.

This makes Lane unhappy since he thinks seniors are doing just fine. Ironically he cites a study showing that the share of 70-year olds who won't be able to replace 75 percent of the income will rise from 25 percent for those born between 1940-1944 to 30 percent from 1970-1974.

This actually is a low bar for two reasons. First weak wage growth over this period means that 75 percent of working income is much less relative to the economy's average productivity for this later age cohort. The other reason is that at age 70 the later born cohort will have on average have about 2.5 more years of life expectancy (12.6 year versus 10.2 years). This means that they will likely have more wealth and will more likely still be working.

The real value of Social Security benefits do increase through time and therefore are projected to be a considerably larger share of retirees' income in future decades. This shows the importance of Social Security, but hardly describes a scenario of a thriving population of wealthy seniors.

But getting back to the issue of the size of this transfer that Lane terms "vast." The increase in benefits of $70 a month would cost around $50 billion a year. We don't know exactly how much the elderly CPI will differ from the currently used index, but if we lift the numbers in the other direction that the Congressional Budget Office estimates for the chained CPI, the additional expense will be around $10 billion a year over the next decade, bringing the total cost to $60 billion, a bit less than 0.4 percent of GDP.    

By comparison, Bloomberg News estimated the size of the implicit taxpayer subsidy to the big banks at $83 billion a year, a bit more than 0.5 percent of GDP. For some reason the vast subsidy to the big banks, and implicitly their top executives and shareholders, doesn't draw the same attention in the Washington Post's pages (news and opinion) as money going to seniors. 

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The Washington Post should have found someone who would have pointed out President Obama's misrepresentation when it quoted him saying:

“Government can’t stand on the sidelines in our efforts [to reduce inequality and increase mobility], because government is us. It can and should reflect our deepest values and commitments.”

Of course government has not been on sidelines, it has pursued policies that increase inequality. There are a long list that fall into this category including the bank bailouts of 2008-2010, too big to fail insurance for large banks, stronger and longer patent and copyright protection, and a trade policy that puts less educated workers in direct competition with low paid workers in the developing world, while largely protecting the most highly paid professionals, like doctors, from the same sort of competition.

However the biggest way in which the government has promoted inequality is by running budgets that lead to large scale unemployment and underemployment. Just as the decision to deliberately use fiscal policy to stimulate the economy and create jobs is a policy choice so is the decision to run smaller budget deficits, thereby reducing growth and employment. The government is currently following the latter policy denying work to millions of people. Also, since the bargaining power of workers in the bottom third of the labor market depends hugely on the level of unemployment, the high unemployment policy is also reducing their wages.

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The NYT had a piece discussing the situation with Chicago's underfunded pensions. It could have used some additional context.

First it would have been useful to point out how the pensions became badly underfunded. The problem goes back to the late 1990s when Chicago, like many other state and local governments, largely stopped contributing to their pensions because they thought the run-up in the stock market made it unnecessary. They made projections, with the blessing of bond-rating agencies like Moody's and Standard and Poor's, that essentially assumed that the stock bubble would grow ever larger for decades in the future.

After the bubble burst, Chicago continued to make contributions at the same levels. This was a conscious decision by the city's political leaders, most importantly its mayor Richard M. Daley. Any city that goes a decade without making required contributions to its pensions will have a seriously underfunded pension system. This is the legacy of Mayor Daley, who remarkably is still a respected figure in public life.

While the shortfall is substantial it would be helpful to put in the context of the size of the city and its projected revenue. Its pension shortfalls are in the neighborhood of $28 billion. This is equal to approximately 0.5 percent of its projected income over the next three decades and 15 percent of projected revenue. This is far from trivial, but also not a crushing burden for a city with an otherwise healthy economy. 

The article also highlights the decision of a federal judge to allow Detroit to declare bankruptcy. Given its much healthier finances it is unlikely that Chicago's current mayor, Rahm Emanuel, would opt to go the bankruptcy route.

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