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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David Leonhardt had a column discussing overuse of expensive medical care in the NYT today. Remarkably, this discussion did not mention the effect of patents in complicated decisions on treatment and raising costs.

Patents are essential to this discussion for two reasons. First, drugs and medical tests that are very expensive are generally expensive because of government granted patent monopolies, not their inherent cost. For example, a new generation of cancer drugs that can cost tens of thousands per year would be relatively cheap in the absence of patent protection. These drugs were expensive to develop, but once they have been developed, the production is cheap. By forcing patients to pay the high patent protected price, an otherwise simple decision (use the cheap drug) can instead be made very complicated.

The other reason why patents play such an important role in this discussion is that they give a party (the patent holder) a huge stake in misrepresenting the issues. Because drug companies or makes of medical equipment stand to make patent rents on the use of their product, they have an enormous incentive to promote its use even in cases where it may not be appropriate. This can lead to overuse and misuse, especially since the patent holder has the most information on their product. They may conceal evidence that it is less beneficial than claimed or even that it is harmful.

This column is the sort of place where it would be expected that readers would find a serious discussion of the role of patents in complicating decisions on appropriate care. It is disappointing that this issue is not addressed.

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California has done some really really stupid things (like a tax credit for first time homebuyers), but the NYT did the state and its readers a disservice in going after California's pension fund liabilities. The basic story is that if you assume a 4.14 nominal rate of return on pension fund assets, then the state's pension liabilities look really really bad.

The big question that readers should ask is, so what?

There have been few people who have been more critical of assuming exaggerated market returns than me, but 4.14 percent nominal? Anyone want to take a bet that California's pension funds will do better than this?

Look, the market has plummeted from its prior levels. This is good news for future returns. Lower price to earnings ratios open the door for higher future returns. The logic is simple: you are paying much less for each dollar of profits. For this reason, the assumption of 4.14 percent average nominal returns (that gives us just over 2.0 percent real, assuming a 2.0 percent inflation rate) is ridiculously low.

Suppose we assume that pension liabilities grow at the nominal rate of 5 percent a year. If we sum the liabilities over 40 years, using a 4.14 percent discount rate gives a 70 percent higher cost than using a 7.0 percent discount rate. Stocks have historically provided a real return of 7 percentage points above the inflation rate, so assuming a nominal return of 7.0 percent for the mixed portfolio is hardly unreasonable.

In short, the story of outsized pension liabilities in this article is driven largely by a ridiculous assumptions about pension returns. There is no reason whatsoever that the state of California should use this 4.14 percent discount rate in assessing its pension liabilities. This calculation would lead it to exaggerate its pension liabilities and therefore raise taxes or cut pensions and/or other spending unnecessarily.

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Okay, it's not quite that bad, but when someone who pretends to be serious wants his readers to celebrate the fact that: "the average American worker is nearly 10 times more productive than the average Chinese worker," it's getting pretty silly. (Actually it's probably closer than 7-8 times, but this is David Brooks we're talking about.)

People in the United States are used to comparing their living standards to countries like Canada and Germany, not China. While China is a rapidly developing country, it is still a relatively poor country in a process of catching up. It's more than a bit silly to tell people in the United States that our productivity is many times higher than that of a poor peasant agricultural worker in central China.

Brooks seems fascinated by the fact that our income is on average projected to rise. This is true and always has been true and it is true for almost every other country in the world. Incomes rise, incomes rise, incomes rise. Let's say that a few thousand more times so that no columnist will ever again write it up as though it is news.

This is the normal state for economies. Incomes rise through time because people become more educated, we get more and better capital, and our technology improves. The real issue is the rate at which incomes rise. For most people in the United States the rate of increase in income or living standards (this can also be the result of more leisure) has been extremely slow in the last three decades. Projections show that rising health care costs will eat up much of the projected gains in income over the next three decades. This is the sort of issue that serious people would look at.

Instead, Brooks touts our growing population -- hey we should be like Congo or Ethiopia, they even faster population growth. It's hard to know what planet Brooks lives on, but on this one, population growth is not a measure of prosperity. In fact, in a world where there is a desperate need to limit greenhouse gas emissions, population is decidedly unhealthy.

Well, Brooks did warn serious people to not read his column. They would be well advised to take this advice.

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I don't ordinarily use BTP for addressing items that mention me or my work, but I'll make an exception in the hope of getting a good exchange going. Brad DeLong was good enough to begin a review of my book False Profits on his blog. After graciously giving me credit for recognizing the housing bubble and the dangers it posed, Brad goes on:

"But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

Okay, let's go point by point.

  1. "Its argument about how excessively-low interest rates caused the housing bubble is exaggerated."

    That doesn't sound like my book. I argued that the weak economy caused by the crash of the stock bubble demanded stimulatory policy. Low interest rates were the right policy -- we needed them to recover from the stock bubble. However, this did create an environment that was conducive to the growth of bubbles. If the Fed had kept the Federal Funds rate at 5.0 percent I feel pretty confident in saying that we would not have had a housing bubble -- very high unemployment, but no housing bubble.

  2. "I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity."

    Let's see, my policy prescription was to have every last staffer at the Fed devoting all of his/her time to documenting the evidence for the bubble and the dangers it would cause to the economy. I would have had Alan Greenspan use his congressional testimonies and other public speaking engagements to warn of the risks of the bubble. This doesn't mean mumbling "irrational exuberance," it means carefully showing with charts and graphs how house prices have followed an unprecedented and unsustainable path. He also should have warned explicitly what would have happened to the banks that had made big bets on the bubble when it burst.

    In addition, they should have made full use of their regulatory power (including working with other regulators) to crack down on the issuance and securitization of junk mortgages. The "who could have known" line is crap. These loans were being issued by the million, there is no way Greenspan could not have known about them.

    Would this have worked? Brad for some reason is very confident it would not have. It certainly would have been nice if the Fed had tried (what was more important?), then we would both know for sure.

    As a last resort I would have raised interest rates. I hate to throw people out of work (except Wall Street bankers and economists), but it would have been better to preemptively burst the bubble rather than let it run its course and be where we are today.

  3. "It overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

    There is a pretty direct line from the falloff in residential construction due to the overbuilding caused by the bubble, the falloff in non-residential construction due to the overbuilding caused by the bubble, and the falloff in consumption as a result of the lost housing bubble wealth and where the economy is today. I don't see much obvious room for a financial crisis in this explanation. The crisis may have brought the downturn on more quickly, but it seems that the basic problem is the loss of the demand generated by the bubble.

    I have a strong ally in this argument: Spain. Spain did not have a financial crisis, but it now has 19 percent unemployment, the highest in the EU. The explanation is that Spain had a really huge housing bubble. It is not easy to find new sources of demand to replace 8-10 percentage points of GDP.

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A front page Washington Post article told readers that:

"The number of people looking for jobs rose by more than 200,000 last month compared with February, according to the Economic Policy Institute -- and that's a good sign, economists say. It means that Americans are seeing more jobs being created and that they're optimistic about their prospects."

Umm, actually no. This increase in the size of the labor force is too small to be statistically significant. It is not uncommon for there to be big jumps in the size of the labor force for no obvious reason. For example, the labor force was reported as rising by 543,000 people in September of 2002, a time when the economy was still shedding jobs and by 554,000 jobs in April of 2009, when employment was still plummeting. There is no reason to think that the modest job growth shown for March would have any notably effect on job seeking.

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In the middle of an article telling readers about Alan Greenspan's (yes, the guy who couldn't see an $8 trillion housing bubble) assessment of the economy, the NYT refers to the "paradox" that the Labor Department reported that the economy created 162,000 jobs in March but the unemployment rate remained fixed at 9.7 percent.

This is hardly a paradox. The labor force is growing at the rate of about 125,000 workers a month. This means that March's job growth was just a little faster than what is needed to keep the unemployment rate from rising. There was no reason that anyone should have expected a decline in the unemployment rate. In fact, the number of people reported as being employed in the household survey used to measure the unemployment rate has grown far more rapidly than the number of workers on payrolls as measured in the establishment survey. Given the data reported in the establishment survey, it is surprising that the unemployment rate has not been rising the last four months.

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Thomas Friedman has refrained from discussing economics in his columns for some time and the world was happy. But, now he's back with a vengeance. He begins his column with today's "fun fact":

"Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less, .... That is about 40 million jobs. That means the established firms created no new net jobs during that period.”

The rest of the column is devoting to touting the importance of new firms, which Friedman tells us are started disproportionately by high IQ foreigners. He therefore emphasizes the need to have a more open door for high IQ immigrants.

Making the U.S. more open to highly educated (I don't think we will be admitting foreigners based on IQ test results) immigrants is undoubtedly good policy. It would be great if doctors, lawyers, economists and other highly educated professionals got to enjoy the same sort of competition with low-paid workers in the developing world that manufacturing workers, dishwashers and custodians currently face. However, Friedman's conclusion about the special importance of new firms is utter nonsense.

The claim that most net new jobs came from new firms conceals the fact that existing firms added tens of millions of jobs in this 25-year period. Of course existing firms also lost tens of millions of jobs. We can say that the net job creation for existing firms was zero, but if we did not have an environment that was conducive for the job adders to grow (how many jobs did Microsoft, Apple, and Intel create after their first 5 years of existence?), then existing firms would have lost tens of millions more jobs.

The notion that anything meaningful can be learned by lumping the job adders with the job losers to say that existing firms created no net jobs is too painful for words. Suppose we looked at the 50 states and found that 10 had net job creation while the other 40 had no job growth. Friedman's methodology would tell us that we should ignore the 40 states with no job growth because jobs are only created in the dynamic 10. (Oh no, I probably gave Friedman the topic for his next column.)

Please, please someone take away Thomas Friedman's license to write on economics before he kills logic again.

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This is the question that everyone should be asking, not just of Greenspan, but of every economist in the country. The NYT has nice column by Michael Burry on the topic. Add a comment
The NYT had an excellent piece on how private equity funds (e.g. Peter Peterson's Blackstone Group) ripoff state and local governments by charging them large management fees. A standard arrangement will give the equity fund managers 2.0 percent of the funds under management and 20 percent of the profit. The article notes several cases where these investments have turned out poorly for pension funds and cites academic studies that show private equity funds, net of fees, provide on average no better return than broad stock indexes. Add a comment

When people talk about plans to "help" homeowners they must (yes, I said "must") ask two simple questions:

  1. Are the homeowners being "helped" paying less in mortgage and other housing costs than they would to rent a comparable unit: and
  2. Are the homeowners likely to end up with equity in their homes?

Neither of these questions get asked in this discussion of the merits of the Obama administration's plans to "help" homeowners.
This means that the NYT wasted readers time and killed trees for no good reason.

The point should be really straightforward. We help homeowners when we actually put money in their pocket. If homeowners are paying more in housing costs than they would to rent the same unit, then we have not put money in their pocket, we have put money in the banks' pockets. This is a policy to help banks, not homeowners.

That can be offset if there is reason to believe that the homeowner will eventually end up with equity in their home. Do we have any reason to believe that this will be the case? Well, that would depend on things like current ratios of sale price to rents and vacancy rates. These issues are not discussed anywhere in this piece or indeed in the overwhelming majority of pieces that discuss mechanisms to help homeowners.

In markets where prices are still bubble-inflated, giving people money to stay in their homes as owners is giving money to banks. In other markets, the owners could actually benefit. However, it is impossible to discuss the issue seriously without being able to distinguish between these situations.

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