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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Some folks have pointed out to me that the housing cost calculator that David Leonhardt has in the Upshot section of the NYT looks a lot like the one that CEPR developed years ago to try to warn people about the housing bubble. Yes, it does, and if memory serves me correctly David had asked me about it when he originally designed another version a few years back. Anyhow, glad to see the idea has caught on.

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Actually, he probably doesn't, but that would be the logic of his complaint (taken from Gene Steuerle) that "dead men" have established priorities for federal spending. After all, dead men made the decision to borrow the money that constitutes the debt, which thereby obligates the country to pay back the interest and principal.

But Samuelson's complaint is not about the interest and principal being paid back to rich people like Peter Peterson, Samuelson is upset about the money being paid out to ordinary workers (mostly retirees) for Social Security, Medicare, and Medicaid.

"In 1990, Social Security, Medicare and Medicaid (health insurance for the poor) totaled 6.7 percent of national income, or gross domestic product. By 2010, they were 10 percent of GDP. Using plausible assumptions, the Congressional Budget Office estimates this spending (including the Affordable Care Act) at 15.2 percent of GDP by 2038."

There are several immediate problems with Samuelson's complaint.

First, if we are counting the spending on the Affordable Care Act, it is hardly a story of "dead men." The folks who made this into law are almost all still alive, and the person who pushed it through Congress, Nancy Pelosi, is not a man. In other words, this spending reflects priorities of people who very recently represented public opinion.

The second problem is that including Social Security in the arithmetic simply confuses the issue. Almost all of the rise in spending over this period is due to rising payments for health care programs, not Social Security. In 1990, the government was spending 4.3 percent of GDP on Social Security (it had spent as much as 4.9 percent in the early 1980s). It is projected to spend 6.2 percentage points of GDP on Social Security in 2038.

Furthermore, taxes were raised explicitly to pay for this increase. While Samuelson may think it's reasonable to tax people for Social Security and then use the money to pay for the military or other purposes, most of the public does not share his perspective. According to Steuerle, people will be paying slightly more money in Social Security taxes than they receive in benefits, so there doesn't seem much basis for his complaint about "giveaway politics."

The real story here is health care and there is a real giveaway, but not to the folks in Samuelson's rifle scope. The United States pays more than twice as much per person for its health care than people in other wealthy countries. It has nothing to show for this additional spending in outcomes. If we spent the same amount per person as Germany, Canada, the U.K., or any other wealthy country, the government would be looking at large budget surpluses for the rest of the century.

The additional costs are due to fact that our doctors get paid twice as much as doctors elsewhere, we pay twice as much for drugs and medical equipment, and we have an insurance system that drains away almost 20 percent of spending on needless administrative costs. Unfortunately these groups are so powerful that the excessive costs they impose on the government and the country rarely even come up in public debate. (Increasing trade in physician services is not even on the agenda in current trade agreements and a main goal is increasing the cost of prescription drugs.)

In short, there is a very simple story here that Samuelson is grossly misrepresenting by including Social Security in the discussion. We are being badly ripped off by our health care system. And, the beneficiaries are so powerful they mostly prevent the ripoff from even being discussed. Instead, we get people like Samuelson who want us to beat up seniors.

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I'm back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner's new book:

"This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s."

Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.

Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.

There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.

And, in direct contradiction of Samuelson's assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.

In short, Samuelson's central lesson lacks any evidence or logic to support it.

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I am out of here. I'll be back on Thursday, May 22. Remember, until then don't believe anything you read in the newspaper.

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In a mostly useful article on the problems facing the euro zone economy, Neil Irwin again raises the prospect that a shock could turn the inflation rate negative.

"The lowflation, as people have taken to calling it, is particularly dangerous in that it could easily turn into outright deflation, or falling prices, should one nasty shock come along. For example, if tension between Ukraine and Russia boils over into a full-scale war, it could easily tip the European economy back into recession and send prices tumbling."

It's not clear what he is talking about here. If a war between Russia and Ukraine threw the European economy into a recession it would be just as bad news for the countries of the region if the inflation rate were now 2.0 percent instead of 0.5 percent. The problem would be a new recession in an area that is already suffering from very high unemployment. The decline in the inflation rate from a low positive to a low negative is a non-issue.

The inflation rate is already lower than would be desired, any further fall makes matters worse, but crossing zero means nothing except for numerologists. Accelerating deflation could be a problem, but we have seen exactly zero instances of this phenomenon in the last 70 years in wealthy countries.

It is worth noting that many economists if they are honest in their beliefs (I know, absurd proposition) must already think that the euro zone inflation rate is negative. The Boskin Commission, which was warmly received by the leading lights in the economics profession, claimed that the consumer price index in the United States overstated inflation by 1.1 percentage points annually. Most of the problems they identified are still present and likely to be worse with European price measurements than in the United States.

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A front page Washington Post article fundamentally misrepresented the main impact of the Johnson-Crapo bill that would privatize Fannie Mae and Freddie Mac. The article told readers that the bill:

"would dismantle the companies in a bid to shift the risks of mortgage lending from the taxpayers to the private sector."

Actually, the government would still be on the hook for 90 percent of the value of privately issued mortgage backed securities (MBS). As a result of the perverse incentives created by the system envisioned under the bill, this would likely mean more risk to the taxpayers rather than less. Private investment banks would stand to profit from securitizing bad mortgages. Unlike the years of the housing bubble, when investors stood to lose 100 percent of what they paid for a MBS, investment banks could tell their customers that in a worst case scenario they would only lose 10 percent of their investment with the government picking up the rest of the tab.

For this reason it is hard to see Johnson-Crapo as a "bid to shift the risks of mortgage lending" to the private sector. The most obvious way to accomplish such a shift would be to simply get the government out of the business.

The most obvious effect of Johnson-Crapo is to shift the profits that Fannie and Freddie are now earning to the financial industry. Presumably the bill's proponents recognize this fact.

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There are 8 million people who are getting health insurance through the exchanges now. This number will continue to grow throughout the year as people experience "life events" that allow them to sign up for the exchanges after the end of the open enrollment period. (Life events include losing insurance due to job loss, a death in the family, and divorce. Job loss is the most common item in this group with close to 4 million workers changing jobs every month.)

The fact that the exchanges are now up and running means that millions of people will have direct knowledge of Obamacare rather than just hearing the media and politicians talk about it. While this direct knowledge is likely to influence their view of the program, this possibility is never taken into consideration in the discussion of public attitudes toward Obamacare in the Post's "The Fix" column.

It is likely that many people would be opposed to the idea of a government-run insurance program that pays for most of the health care costs of people over age 65. However, Medicare is a hugely popular program even among Tea Party conservatives. People's direct experience with Obamacare will likely have more impact on their attitudes toward the program than what they are being told about the program by the media.

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In its coverage of Fed Chair Janet Yellen's testimony before the Joint Economic Committee, the NYT told readers:

"Ms. Yellen, in a similar exchange with Representative Richard Hanna, a New York Republican, strongly defended the Fed’s commitment to control inflation. She said the high inflation of the 1970s had been a formative experience for the entirety of the Fed’s leadership, and they were determined to keep inflation below the 2 percent annual pace the Fed has described as its target."

This statement implies that the Yellen is treating 2.0 inflation as a ceiling rather than an average. If so, this would be a marked departure from past statements of Fed policy and imply a considerably more hawkish stance of the Fed toward inflation. With inflation running below 2.0 percent for the last five years the Fed could allow the inflation rate to rise above 2.0 percent for a period of time and still maintain a 2.0 percent average.

If the Fed now views 2.0 percent inflation as a ceiling, it means that it would have to act earlier and more strongly to slow economic growth and prevent the unemployment rate from falling. The implication would be that many more workers would remain unemployed or underemployed and that tens of millions would have less bargaining power to boost their wages. This Fed policy would be helping to foster the upward redistribution of income we have been seeing over the last three decades.

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Thomas Friedman wants to "go big, get crazy" when it comes to energy policy in order to both deal with Vladimir Putin and global warming. The idea is that if the United States can drastically reduce its demand for foreign oil it would put downward pressure on world prices and thereby hurt Russia's economy. His way of reducing demand for foreign oil is a combination of promoting clean energy and allowing increased oil drilling and fracking, "but only at the highest environmental standards." He also would allow the XL pipeline, but a quid pro quo would be a revenue neutral carbon tax.

There are a few problems in Friedman's story. First, it's hard to see why the frackers would take it. The main limit on fracking at the moment is not regulation but low gas prices. In real terms, natural gas prices are less than half of their pre-recession levels and less than a third of their 2008 peaks. In states like Pennsylvania, where they have a drill everywhere policy, production is dropping because new sites are not profitable.

If we put new regulations on fracking, for example making the industry subject to the Safe Drinking Water Act and thereby forcing it to disclose the chemicals it uses, that would likely mean less fracking rather than more. That means both that the industry is not likely to buy it and that his policy would go the wrong way in terms of increasing U.S. production.

The same applies to his proposal for a carbon tax coupled with approving the XL pipeline. The tar sands oil that would go through the pipeline would be especially hard hit by a carbon tax. That would likely make it unprofitable, a point that Friedman himself notes. For this reason the industry is unlikely to see the XL pipeline as much of quid pro quo for a carbon tax. In short, it doesn't seem like he has much of the basis for a deal here.

His description of the Europeans, and in particular the Germans, is also inconsistent with his description of his "big" and "crazy" plan. Friedman tells readers:

"Europe’s response has been more hand-wringing about Putin than neck-wringing of Putin. They talk softly and carry a big baguette."

Actually Europe and in particular Germany have done a great deal to reduce their use of fossil fuels over the last two decades. Germany's energy intensity of production (energy use per dollar of GDP) has fallen by 30 percent over the last two decades to a level about half of the U.S. level. Almost a quarter of its energy comes from clean sources and this share is increasing by 2 percentage points a year. 

In short, Europe has been doing a great deal to reduce its demand for fossil fuels. It certainly could do more, but if the United States had been following the European path over the last two decades, the price of fossil fuels would certainly be much lower than it is today. Of course, a big part of the story is that Europeans are more likely to carry a big baguette than to drive a big SUV.

 

Addendum:

A friend reminded me of one of Thomas Friedman's great energy plans from the past, this time with China as a partner. The piece is here and my comment here.

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Paul Krugman outlines his story of secular stagnation in a blog post this morning. The odd part of the story is that the trade deficit is nowhere in sight. The punchline is that a slower rate of labor force growth should lead to a reduction in demand. The simple arithmetic is that if the rate of labor force growth slows by 1.0 percentage point, then this would be expected to reduce investment by 3.0 percentage points of GDP.

This is a story of a demand gap that could be hard to fill, but how does that compare to a trade deficit that peaked at just shy of 6.0 percent of GDP in 2005 and is still close to 3.0 percent of GDP today? Why are we not supposed to be worried about this cause of a shortfall in demand?

Back in the days before the United States began running persistent trade deficits, the standard theory held that rich countries like the United States should be running trade surpluses. The argument was that capital was plentiful in rich countries, therefore they should be exporting it to poor countries where capital is scarce. This would lead to both a better return on capital and also allow developing countries to grow more rapidly.

We have seen the opposite story in the United States, especially after the run-up in the dollar following the East Asian financial crisis. This has contributed in a big way to the "secular stagnation" problem, but for some reason there continues to be a reluctance to talk about it. (No, being the reserve currency does not mean we have to run a trade deficit.)

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