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 highlighting the latest Beat the Press posts.

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In an otherwise interesting article on bloated CEO paychecks, the NYT almost entirely neglected the role of corporate directors. The directors are the people who determine CEO pay. It is their job first and foremost to hold down CEO pay in the interest of protecting shareholders.

As a practical matter, the directors rarely serve as an effective check on pay because they often owe their position as a director to the CEOs. They tend to view their directorships as a sort of sinecure, giving them hundreds of thousands of dollars a year for attending a small number of board meetings. Many directors serve on multiple boards, sometimes racking up over $1 million a year in the process.

This was the motivation for CEPR's Director Watch and its partner project with the Huffington Post, Pay Pals. Corporate directors are generally prominent public figures. (This is the reason they are selected.) These people fail the shareholders and really the whole country when they do not impose restraint on CEO pay.

How often at board meetings do they ask if they could get a comparably talented CEO from Europe or Japan, or even China, at a lower cost? Most likely this question is never raised, which means that corporate directors are not doing their job -- they are ripping off the shareholders in taking excessive pay while allowing the CEOs to write their own blank checks. 

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Expressing concern over deflation (i.e. the inflation rate turning negative) is the way in which people tell you that they have no clue about economics and just repeat what they heard others say. The inflation indexes we use are an aggregation of millions of different price changes. There is a substantial amount of dispersion around the overall inflation number. This means that when the inflation rate is near zero, there are many goods and services whose prices are already falling.

This means that the WSJ discussion of the risks of deflation in the euro zone is rather silly. It tells readers:

"Mr. Draghi said Saturday that he sees no evidence of a broad-based decline in consumer prices, known as deflation, and that there is no sign people are delaying spending in hopes that prices will fall."

With the euro zone inflation rate at 0.5 percent there are undoubtedly large numbers of goods and services for which prices are declining now. (People may not recognize these price declines since the inflation data use quality adjusted prices. This means that if the price of a computer increases by 5 percent, but its measured rate of quality improvement is 10 percent, then the government statistics will show a 5 percent decline in prices.) If the rate of inflation were to turn negative and become deflation, it simply means that the percentage of items with falling prices has increased.

While a lower inflation rate is worse than a higher inflation rate in the context of a badly depressed economy (it raises real interest rates and makes wage and price adjustments more difficult), there is no consequence to crossing zero. People who understand economics know that deflation doesn't matter. People who whine about deflation are trying to tell you they don't understand economics.



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That's what readers of this NYT piece must have been asking. It reported:

"It [the I.M.F.] has urged Tokyo to make structural reforms to bolster its labor market, by, for instance, bringing women into the work force."

This seems strange since the OECD reports that the employment to population ratio for prime age women in Japan (25-54) was 71.5 percent in the third quarter of 2013, the most recent data available. By comparison it was 69.4 percent in the United States.



From comments below and other comments I have received, I realize I need to clarify my point. From all the data I have seen and accounts I have heard, Japan continues to be a very sexist society and women almost certainly face more discrimination than in the United States. I was simply saying that their problem is not bringing women into the workforce. On that score the country has done remarkably well. The employment to population ratio for prime age women rose from 67.6 percent in 2007, before the recession, to 71.5 percent in the most recent quarter. By contrast, in the United States it fell from 72.5 percent to 69.4 percent over the same period. Based on these data , getting women into the labor force is one thing that Japan seems to be doing well.


Note: numbers were corrected to show employment to population ratios for prime age women.



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The folks on the right don't seem to think that they should have to be evaluated by the same standards as everyone else. Hence we find George Osborne, the U.K. finance minister, boasting in the WSJ about his country's economic performance now that its economy is finally beginning to grow again.

For people who missed it, the conservative coalition in the U.K. thought it was smart to cut spending and raise taxes in 2010 even though its economy was very far from full employment. These measures had the effect that fans of economics everywhere predicted, they threw the economy back into recession.

After two and a half years of austerity, the government is reversing course and lo and behold the sun rose this morning the economy is growing again. (Yes, economies do generally grow.) In the wild and wacky world of right-wing economics, this somehow vindicates the conservative policies of the prior two and half years.

The piece makes many boasts that properly deserve ridicule, but I will just pick my favorite. Here's Osborne on investment in the U.K.:

"Investment spending has grown by 8.8% over the past year, compared with 2.2% in the U.S. That bodes well for U.K. productivity."

That's impressive, in 2013 investment growth in the U.K. was far higher than in the U.S. But suppose we don't look at one year in isolation but instead look at the whole period since the downturn began. Here's the story.

 UK-US-investment 8490 image001

                            Source: OECD.

The figure shows us that when investment was growing at a a near double digit pace in the United States in 2011 and 2012, it was just inching upward under Osborne's austerity policies in the U.K. It picks up slightly in 2013, but even including the OECD's growth forecast for 2014, investment in the U.K. is still projected to be below its pre-recession level. By contrast, it will be almost 10 percent above its pre-recession level in the United States. 

The U.K. performance would not be the sort of thing that you would generally boast about, but given the affirmative action policies for conservatives at the WSJ and elsewhere in the media, apparently Osborne expects to get away with it. 


Note -- typos correctd, thanks to Robert Salzberg and CE.

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Catherine Rampell used her column today to defend an earlier column complaining that baby boomers are taking from young people through Social Security and Medicare. She acknowledges that most baby boomers will not come out ahead on Social Security (actually they come out somewhat behind in the source she cites) but then tells readers:

"Medicare, on the other hand, is pretty much a steal no matter when you turned 65."

This is true, but it's hard to argue that it is the beneficiaries who are doing the stealing. We pay more than twice as much per person on average for our health care as people in other wealthy countries. We have little or nothing to show for this extra spending in terms of outcomes. For example, every other wealthy country has longer life expectancies than we do. It therefore is hard to argue that seniors are the beneficiaries of the exorbitant spending on Medicare.

On the other hand, we know who does benefit. The Centers for Medicare and Medicaid Services released data this week showing that a small number of doctors account for a grossly disproportionate share of Medicare's payments to doctors, with many collecting more than $1 million a year from the system. The top earner, a big campaign contributor, pocketed more than $20 million in a single year.

Doctors in the United States earn more than twice as much on average as their counterparts in other wealthy countries. We also pay more than twice as much for our prescription drugs and for medical equipment. If one were to look for people stealing from Medicare, these and other health care providers would be the obvious candidates.

It is also worth noting that the well-being of people of Rampell's generation (her explicit concern in the piece) will depend far more on stopping and reversing the pattern of upward redistribution of income that we have been seeing since 1980. If this is not reversed then millennials will see little of the 50 percent growth in real compensation over the next three decades that is projected by the Social Security trustees. If millennials are able to secure wage gains that track the economy's productivity growth then their gains in compensation will be an order of magnitude larger than any possible tax increases associated with Social Security and Medicare. 



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Everyone thought David Brooks was a conservative. But in today's column on high frequency trading and the fact that it has often been used to support front-running in which traders effectively engage in inside trading, Brooks tells readers:

"You can’t tame the desire for money with sermons. You can only counteract greed with some superior love, like the love of knowledge.

"Third, if market-rigging is defeated, it won’t be by government regulators. It will be through a market innovation"

So there you have it. According to Brooks, if people are stealing on Wall Street we shouldn't look to try to have regulations and punishment, we should go after them with love. It will be interesting to see if Brooks shows the same attitude towards people's whose greed leads them to steal cars or burglarize houses.

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Glenn Kessler, the Washington Post fact checker, gave President Obama two Pinocchios for saying that women earn on average just 77 cents for every dollar that men earn. Kessler makes some valid points as to why this number overstates the gap. First it is an annual number that doesn't take account of the fact that women are more likely to work part-time and part-year. It is also true that women typically have less work experience because they take time out of the paid labor force.

These and other factors (some of which go in the other direction) would be important items to take into account in a full examination of gender inequality. But has President Obama really committed a two-Pinocchio offense by using a number straight out of Census data without these additional qualifications?

Context is always great, but unfortunately President Obama's use of the Census pay gap number hardly stands out as an out of context statement by a politician. My favorite in that category was the $1 million spent on a museum of the Woodstock music festival that Senator McCain used as one of his main props in his 2008 presidential campaign. Does anyone think McCain's complaint about government waste and excesses would have packed the same punch if he told audiences the government had spent 0.00003 percent of its budget on a Woodstock museum? (On this score, why do the Post and other newspapers continue to express budget items exclusively in billions and trillions of dollars when everyone knows these numbers are meaningless to almost their entire readership?)

Unfortunately, making comparisons that don't convey the full context is a practice that extends beyond politics into the policy world. A couple of years ago, Pew Research Center issued a widely cited study that purported to show growing disparities in wealth between the old and the young over the last quarter century. The study neglected to mention the fact that one of the main contributors to the growth in an age related wealth gap was a switch from defined benefit to defined contribution pensions and the rapid disappearance of retiree health insurance.

In the Pew analysis, a defined benefit pension plan (which most middle class workers would have had in 1984, the base year for the analysis) does not count as wealth, while a defined contribution plan does. Also, workers with retiree health benefits would need to save less to provide for their health care expenses in retirement. These benefits also would have been a form of uncounted wealth in 1984 that would have been available to most middle class workers.

Wealth is also a dubious measure of the well-being of young people. A 30-year old Harvard MBA who has negative net wealth of $150,000 due to student loan debt should not be considered to be in difficult economic straights. What will determine the well-being of young people is the state of the labor market they will face over their working career, whether they have $10,000  more or less in assets by the time they are age 35 will be barely noticeable in comparison.

Anyhow, if we applied the Kessler Pinocchio standard to this Pew study, it would likely score at least a three, if not a four. It is unfortunate that we routinely have facts and numbers given to us out of context, but President Obama, in using standard Census data in referring to the gender pay gap, hardly ranks as one of the bigger offenders in this town.

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Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment's thought. (Just to be clear, I consider both Krugman and Greider friends, so I don't have a particular ax to grind in this story.)

Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation's currency falls and the values of the surplus nations' currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.

But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.

As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today's economy.

It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman's secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the bubble and the Y2K scare. That doesn't seem like a very plausible counter-factual.

In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.

(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it's hard to see why not. Aftar all, it's not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)

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Casey Mulligan has once again left me baffled by the economic analysis in his Economix blogpost. If I'm understanding him correctly he is saying that the deductibles for insurance provided through the exchanges in 2015 should be allowed to rise by 40 percent, based on a rise of this amount in the average premium of non-employer provided insurance policies in 2014 compared with 2013. This is based on the provision of the law that deductibles and other adjustable payments should rise in step with medical inflation.

However as Mulligan points out at length, the 40 percent rise in the cost of the average premium in 2014 was not due to medical inflation but rather due to the fact that policies being issued in 2014 under the provisions of the ACA were more comprehensive than the policies being issued in 2013. Since the insurers priced these benefits into the premiums they charged in 2014, and this was also priced into the original schedule of deductibles and subsidies, why would we expect these costs to rise by 40 percent in 2015 relative to 2014.

Based on this logic, the Department of Health and Human Services has set the target increase for a variety of indexed measures in the ACA at 4.2 percent, its calculation of the overall rate of increase in per capita health care costs. It's not clear where Mulligan sees a problem here. Perhaps he is a better lawyer than me and believes the law requires that these targted payments in future years should rise based on the one time increase in 2014, but it is certainly hard to see any economic logic behind this view. In other words, if there is a scandal in having the targeted payments in the ACA rise in step with health care costs, it's hard to see what it is.


Addendum: An earlier version wrongly said that Mullligan was referring to insurance prices.

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For those who have been worried about the plight of the poor boys and girls who work in the financial sector, Jonathan Cowan and Jim Kessler, respectively the president and vice-president of Third Way, have a plan to help. In a NYT column yesterday, headlined "Capitalize Workers!," Cowan and Kessler proposed a supplemental retirement system which would require employers to put 50 cents an hour into a retirement fund for all of their workers. Cowan and Kessler tell us that this should lead to an accumulation of $160,000 for a worker who works full-time from ages 22 to 67, leading to an annuity of $790 a month. What's not to like?

First, we should give Cowan and Kessler credit for effective recycling. Mandated savings plans like this are not exactly new, so getting this plan published in the NYT as a remarkable new idea to address inequality is a pretty good feat.

Getting to the substance, the requirement that employers pay 50 cents an hour for their workers' retirement is a nice little trick for the kiddies, but all the adults in the room know that this money will come out of workers' wages.(The assumption that employer side payments on wages are in the long-run deducted from wages is almost universally accepted among economists.) This deduction would actually be a substantial hit to low wage workers. Cowan and Kessler's proposal would effectively amount to a 5 percent tax on the wages of someone earning $10 an hour. That is not exactly trivial -- the Social Security trustees project that we could fully fund the program for the next 75 years with a tax increase that is a bit more than half this size. 

The next issue is the $160k accumulation that Cowan and Kessler project. They qualify this comment by saying:

"if stocks and bonds enjoy the same average rates of return as they did over the last 45 years."

That is a huge "if." Given current price to earnings ratios in the stock market and growth projections for the economy, it is almost inconceivable that stocks and bonds will enjoy the same average returns in the future as they did over the last 45 years. With the ratio of stock prices to trend earnings now approaching 20 to 1, we should anticipate real returns in the stock market going forward to average roughly 5 percent. If we assume real returns on bonds of 3.0 percent (this is probably a bit high), then a portfolio that is invested half in stock and half in bonds should produce a real return on 4.0 percent, before deducting fees.

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