Greg Sargent catches PolitiFact being out to lunch big time. On one of the Sunday talk shows House Majority Leader Eric Cantor said the deficit is growing. Politifact examined the claim and rated it “half true.” Its logic was that even though the deficit has been falling sharply over the last 4 years, and is projected to fall more over the next two years, it is projected to rise later in the decade.
This one is a real mind bender. After all, the rapid pace of deficit reduction has been a big factor in slowing GDP and job growth according to the Congressional Budget Office and other independent analysts. That is a very important fact in understanding the economy today. It is seriously misleading to turn this reality on its head because of projections that the deficit will start rising in 3 years.
This would be like saying that people coping with sub-zero temperatures in the middle of January, without heat in their homes, should be worried about dealing with high temperatures because forecasters project that April and May will be warmer. The immediate and near future problem is obviously the sub-zero temperatures, no sane person would worry about the comfortably cool temperatures three months in the future.
Greg Sargent catches PolitiFact being out to lunch big time. On one of the Sunday talk shows House Majority Leader Eric Cantor said the deficit is growing. Politifact examined the claim and rated it “half true.” Its logic was that even though the deficit has been falling sharply over the last 4 years, and is projected to fall more over the next two years, it is projected to rise later in the decade.
This one is a real mind bender. After all, the rapid pace of deficit reduction has been a big factor in slowing GDP and job growth according to the Congressional Budget Office and other independent analysts. That is a very important fact in understanding the economy today. It is seriously misleading to turn this reality on its head because of projections that the deficit will start rising in 3 years.
This would be like saying that people coping with sub-zero temperatures in the middle of January, without heat in their homes, should be worried about dealing with high temperatures because forecasters project that April and May will be warmer. The immediate and near future problem is obviously the sub-zero temperatures, no sane person would worry about the comfortably cool temperatures three months in the future.
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That little tidbit would have been useful information to include in an article on Chicago Mayor Rahm Emanuel’s plans to cut public employee pensions. The piece reports that retired workers receive:
“average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.”
These payments will in most cases be the vast majority of retirees’ income since workers who spent their entire careers working for the city will not be receiving Social Security benefits. It also would have been worth noting that the actual payments (rather than schedules for long-term employees) average just over $37,000 a year under the city’s main retirement fund.
That little tidbit would have been useful information to include in an article on Chicago Mayor Rahm Emanuel’s plans to cut public employee pensions. The piece reports that retired workers receive:
“average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.”
These payments will in most cases be the vast majority of retirees’ income since workers who spent their entire careers working for the city will not be receiving Social Security benefits. It also would have been worth noting that the actual payments (rather than schedules for long-term employees) average just over $37,000 a year under the city’s main retirement fund.
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President Obama is going to announce a plan whose main goal appears to be subsidizing mortgage backed securities. Unfortunately the readers of the Washington Post article on the piece probably would not realize this fact.
The article simply repeats the Obama administration’s assertion that government backing is needed for 30-year mortgages to exist, which it asserted are the backbone of home ownership.
“Traveling to Phoenix on Tuesday, Obama is planning to call for a new system, built in part on government backing, that will enable wide access to 30-year mortgages, which are a rarity in other countries. That will require, officials said, some form of government guarantee that means lenders will be reimbursed by taxpayers in the event of a housing catastrophe like the one that occurred several years ago.”
In fact, government backing is not necessary for 30-year mortgages, as is shown by the existence of the 30-year jumbo mortgages which are too large to be eligible for government guarantees. The interest rate on these mortgages is typically 0.25-0.50 percentage points higher than the interest rate on conforming loans that can be purchased by Fannie Mae and Freddie Mac.
So the story here is not really about the existence of 30-year mortgages, but rather the price. The program being pushed by President Obama effectively subsidizes mortgage interest rates by subsidizing mortgage backed securities. If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.
Under the Obama administration’s proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages. It is also not clear that a 30-year mortgage is always the best financing instrument.
Alan Greenspan famously noted that many homeowners lose money by taking a 30-year mortgage when a shorter-term mortgage would often involve lower fees. (Unfortunately he did this at a time when the housing bubble was taking off and homeowners were increasingly diving into adjustment rate mortgages, often with teaser rates.) This is especially likely to be the case for lower income homebuyers who move more frequently. In such cases, the government will be costing homeowners money by encouraging them to take out a 30-year mortgage.
It would have been appropriate to include the views of an expert who could have made these points to readers.
President Obama is going to announce a plan whose main goal appears to be subsidizing mortgage backed securities. Unfortunately the readers of the Washington Post article on the piece probably would not realize this fact.
The article simply repeats the Obama administration’s assertion that government backing is needed for 30-year mortgages to exist, which it asserted are the backbone of home ownership.
“Traveling to Phoenix on Tuesday, Obama is planning to call for a new system, built in part on government backing, that will enable wide access to 30-year mortgages, which are a rarity in other countries. That will require, officials said, some form of government guarantee that means lenders will be reimbursed by taxpayers in the event of a housing catastrophe like the one that occurred several years ago.”
In fact, government backing is not necessary for 30-year mortgages, as is shown by the existence of the 30-year jumbo mortgages which are too large to be eligible for government guarantees. The interest rate on these mortgages is typically 0.25-0.50 percentage points higher than the interest rate on conforming loans that can be purchased by Fannie Mae and Freddie Mac.
So the story here is not really about the existence of 30-year mortgages, but rather the price. The program being pushed by President Obama effectively subsidizes mortgage interest rates by subsidizing mortgage backed securities. If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.
Under the Obama administration’s proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages. It is also not clear that a 30-year mortgage is always the best financing instrument.
Alan Greenspan famously noted that many homeowners lose money by taking a 30-year mortgage when a shorter-term mortgage would often involve lower fees. (Unfortunately he did this at a time when the housing bubble was taking off and homeowners were increasingly diving into adjustment rate mortgages, often with teaser rates.) This is especially likely to be the case for lower income homebuyers who move more frequently. In such cases, the government will be costing homeowners money by encouraging them to take out a 30-year mortgage.
It would have been appropriate to include the views of an expert who could have made these points to readers.
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Sorry, I misread the piece, it was “schools vs. nursing homes.” In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids’ education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?
The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers’ wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.
There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.
Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.
Samuelson doesn’t seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.
The other parts of Samuelson’s piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.
Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut.
In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.
Samuelson’s trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy’s output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.
The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.
Sorry, I misread the piece, it was “schools vs. nursing homes.” In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids’ education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?
The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers’ wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.
There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.
Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.
Samuelson doesn’t seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.
The other parts of Samuelson’s piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.
Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut.
In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.
Samuelson’s trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy’s output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.
The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.
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The NYT ran a column by former Los Angeles Mayor Richard Riordan and Tim Rutten which purports to present a plan to “avert the pension crisis.” The piece hugely exaggerates the funding problem faced by pensions because of a simple logical error in its assessment of discount rates.
At one point it tells readers:
“America’s state and municipal pensions concede that they are underfunded by more than $1 trillion. If a more realistic expectation of returns on investment is pegged at 5 percent, then that collective liability climbs to $2.7 trillion. Moody’s further estimates that the median state has financed only 48 percent of its future pension liabilities.”
The $1 trillion figure is based on return assumptions that are derived from rates of projected economic and profit growth from authoritative sources like the Congressional Budget Office and the Office of Management and Budget. In spite of Moody’s assessment (yes, that is the credit rating agency that rated trillions of dollars of mortgage backed securities as investment grade), the pension funds are making realistic assumptions in reaching this figure. (Here is a fuller discussion of the issue.)
It is easy to see the source of Riordan and Rutten’s confusion on returns. They write:
“California’s giant state pension fund, the world’s sixth largest, continues to assume it will earn 7.75 percent on its investments, even though its actual returns have been less than half that for a decade. Los Angeles continues to project similar annual yields on its investments, when the actual average returns are closer to 5 percent. As a consequence, the city’s unfunded pension obligations probably will grow to around $15 billion over the next four years.”
Their problem is basing future return assumptions on returns in the last decade or a slightly longer past. The key issue here is the return on the stocks in which pensions typically keep close to 70 percent of their assets. Rather than being an indication of future returns, sharp movements in the market (either up or down) will push future returns in the opposite direction.
The logic is simple. Stocks represent a claim to corporate profits. While these vary from year to year, they do not change very much over the long-term as a share of GDP. This means that we can think of shares of stock as providing an amount of profits that grows roughly in step with the economy.
If there is a sharp run-up in the stock market, as was the case in the 1990s, then pension funds and other stock holders must pay lots of money for each dollar of corporate profits. (The ratio of stock prices to trend earnings rose to more than 30 in the 1990s stock bubble.) In this case, their future returns will be low.
On the other hand if stock prices fall, then the price of a dollar of corporate earnings is lower. This means that pension funds can anticipate higher future earnings. Therefore Riordan and Rutten have things completely backward when they imply that pension funds should expect lower returns in the future because stock prices fell in the recent past. (If the recent run-up continues, then return assumptions may have to be re-examined, but this would also mean that pension fund assets are higher.)
The take-away is that there are pension funds that definitely face problems, but this is almost always the result of politicians refusing to make required contributions. This is not a general problem. Many funds did make overly optimistic return assumptions in the 1990s and the last decade when price to earnings ratios were far above historic averages, however their current return assumptions are very much in line with economic realities.
Addendum:
Some quick responses to points raised below.
First, pension funds hold a lot private equity (too much for my liking in many cases) so they would come pretty close to the story where they pick up new companies quickly in their holdings. So they should do better than the performance of just the S&P or even publicly traded companies as a group.
On the question of liquidity — they are not 100 percent in stock. They will have short-term assets providing very low returns and also an inflow of money from current participants. It should very rarely, if ever, be the case that funds would have to sell stock at depressed prices to meet current obligations.
As far as Rithloz’s charts, I’m not sure of his data source. (I’m not a subscriber to the service that made the charts.) I can say that the Fed’s data shows a somewhat higher ratio of stock prices to nominal GDP than does Ritholz. (Here’s my paper giving sources.) We look at roughly a 100 year period and find current ratios are roughly in line with the long-term average. Most other analysts who have looked at long-term stock returns, most notably Ibbotson, have come up with similar numbers. (btw, we always use trend earnings, so it doesn’t matter whether the current profit share is inflated.
The NYT ran a column by former Los Angeles Mayor Richard Riordan and Tim Rutten which purports to present a plan to “avert the pension crisis.” The piece hugely exaggerates the funding problem faced by pensions because of a simple logical error in its assessment of discount rates.
At one point it tells readers:
“America’s state and municipal pensions concede that they are underfunded by more than $1 trillion. If a more realistic expectation of returns on investment is pegged at 5 percent, then that collective liability climbs to $2.7 trillion. Moody’s further estimates that the median state has financed only 48 percent of its future pension liabilities.”
The $1 trillion figure is based on return assumptions that are derived from rates of projected economic and profit growth from authoritative sources like the Congressional Budget Office and the Office of Management and Budget. In spite of Moody’s assessment (yes, that is the credit rating agency that rated trillions of dollars of mortgage backed securities as investment grade), the pension funds are making realistic assumptions in reaching this figure. (Here is a fuller discussion of the issue.)
It is easy to see the source of Riordan and Rutten’s confusion on returns. They write:
“California’s giant state pension fund, the world’s sixth largest, continues to assume it will earn 7.75 percent on its investments, even though its actual returns have been less than half that for a decade. Los Angeles continues to project similar annual yields on its investments, when the actual average returns are closer to 5 percent. As a consequence, the city’s unfunded pension obligations probably will grow to around $15 billion over the next four years.”
Their problem is basing future return assumptions on returns in the last decade or a slightly longer past. The key issue here is the return on the stocks in which pensions typically keep close to 70 percent of their assets. Rather than being an indication of future returns, sharp movements in the market (either up or down) will push future returns in the opposite direction.
The logic is simple. Stocks represent a claim to corporate profits. While these vary from year to year, they do not change very much over the long-term as a share of GDP. This means that we can think of shares of stock as providing an amount of profits that grows roughly in step with the economy.
If there is a sharp run-up in the stock market, as was the case in the 1990s, then pension funds and other stock holders must pay lots of money for each dollar of corporate profits. (The ratio of stock prices to trend earnings rose to more than 30 in the 1990s stock bubble.) In this case, their future returns will be low.
On the other hand if stock prices fall, then the price of a dollar of corporate earnings is lower. This means that pension funds can anticipate higher future earnings. Therefore Riordan and Rutten have things completely backward when they imply that pension funds should expect lower returns in the future because stock prices fell in the recent past. (If the recent run-up continues, then return assumptions may have to be re-examined, but this would also mean that pension fund assets are higher.)
The take-away is that there are pension funds that definitely face problems, but this is almost always the result of politicians refusing to make required contributions. This is not a general problem. Many funds did make overly optimistic return assumptions in the 1990s and the last decade when price to earnings ratios were far above historic averages, however their current return assumptions are very much in line with economic realities.
Addendum:
Some quick responses to points raised below.
First, pension funds hold a lot private equity (too much for my liking in many cases) so they would come pretty close to the story where they pick up new companies quickly in their holdings. So they should do better than the performance of just the S&P or even publicly traded companies as a group.
On the question of liquidity — they are not 100 percent in stock. They will have short-term assets providing very low returns and also an inflow of money from current participants. It should very rarely, if ever, be the case that funds would have to sell stock at depressed prices to meet current obligations.
As far as Rithloz’s charts, I’m not sure of his data source. (I’m not a subscriber to the service that made the charts.) I can say that the Fed’s data shows a somewhat higher ratio of stock prices to nominal GDP than does Ritholz. (Here’s my paper giving sources.) We look at roughly a 100 year period and find current ratios are roughly in line with the long-term average. Most other analysts who have looked at long-term stock returns, most notably Ibbotson, have come up with similar numbers. (btw, we always use trend earnings, so it doesn’t matter whether the current profit share is inflated.
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I have been harshly critical of budget reporting in the media for being uninformative to readers. I think the NYT is trying to help me make my point. It ran an article telling readers about GOP plans to have a $40 billion cut in food stamp spending.
Okay how much money is that? Will all of us taxpayers see big savings if we cut back food stamps by this amount?
Well, if we go to the Center for Economic and Policy Research’s new super neat budget calculator we would see that $40 billion is equal to 1.2 percent of projected spending this year.
But wait! If I’m not mistaken — yes, while it is not mentioned in this article, these cuts are actually for a 10-year appropriation, starting in 2014. According to the calculator that would be 0.086 percent of projected spending over this period. (Hey one year, ten years, who can keep track?) This means that the cuts may be a big deal for the people affected, but probably will not allow for many extra vacations for ordinary taxpayers.
Come on folks, these articles are supposed to be providing information to readers. This one did not.
I have been harshly critical of budget reporting in the media for being uninformative to readers. I think the NYT is trying to help me make my point. It ran an article telling readers about GOP plans to have a $40 billion cut in food stamp spending.
Okay how much money is that? Will all of us taxpayers see big savings if we cut back food stamps by this amount?
Well, if we go to the Center for Economic and Policy Research’s new super neat budget calculator we would see that $40 billion is equal to 1.2 percent of projected spending this year.
But wait! If I’m not mistaken — yes, while it is not mentioned in this article, these cuts are actually for a 10-year appropriation, starting in 2014. According to the calculator that would be 0.086 percent of projected spending over this period. (Hey one year, ten years, who can keep track?) This means that the cuts may be a big deal for the people affected, but probably will not allow for many extra vacations for ordinary taxpayers.
Come on folks, these articles are supposed to be providing information to readers. This one did not.
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Okay, I am not really writing this to make fun of my friend Paul Krugman for whom I have enormous respect. The point here is that reporters should be trying to express budget numbers in terms that are understandable to their audience.
Krugman was apparently misled by news accounts (like this one) reporting that the Republicans wanted to cut food stamps by $40 billion which did not point out that this cut was over ten years, not one year. I have been ranting about this point for a while. If reporters made a point of putting budget numbers in context, for example by expressing them as a share of the total budget, you would not get silly mistakes like this. (See CEPR’s super keen budget calculator so you can get these numbers right.)
If the standard budget reporting can mislead Paul Krugman about the budget then I think it’s fair to say it’s got serious problems. Who exactly is being informed by it?
Okay, I am not really writing this to make fun of my friend Paul Krugman for whom I have enormous respect. The point here is that reporters should be trying to express budget numbers in terms that are understandable to their audience.
Krugman was apparently misled by news accounts (like this one) reporting that the Republicans wanted to cut food stamps by $40 billion which did not point out that this cut was over ten years, not one year. I have been ranting about this point for a while. If reporters made a point of putting budget numbers in context, for example by expressing them as a share of the total budget, you would not get silly mistakes like this. (See CEPR’s super keen budget calculator so you can get these numbers right.)
If the standard budget reporting can mislead Paul Krugman about the budget then I think it’s fair to say it’s got serious problems. Who exactly is being informed by it?
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Steven Pearlstein had a strange piece in the Post today arguing that Janet Yellen would be a better Fed chair than Larry Summers because Summers is too closely tied to the Democratic Party and we need a chair who is politically independent. While a politically independent Fed chair might be desirable, the Fed’s biggest mistake over the last two decades has been its unwillingness to take steps to burst bubbles: the stock bubble in the 1990s and the housing bubble in the last decade. The country has paid an enormous price for this failure.
One possible explanation for this failure is simple incompetence. That would mean Alan Greenspan either didn’t recognize the bubbles or didn’t realize the impact that their collapse would have on the economy.
An alternative explanation is that Greenspan was aware of the risks posed by the bubbles, but knew that Wall Street was making vast amounts of money off both of them. (They were backing IPOs in the stock bubble and mortgage backed securities in the housing bubble.) Insofar as this is the case, then the real need for independence at the Fed is independence from Wall Street. We need a Fed chair who is prepared to take steps against a bubble even if means taking away a big money-maker from Wall Street.
On this score Yellen also would have a clear edge. Summers has received millions of dollars in consulting and speaking fees from Wall Street banks and hedge funds in the years when he was not in government. This raises questions about the extent to which he would be prepared to crack down on dangerous practices by the financial industry. While Yellen also did not advocate cracking down on the bubbles in her various public policy positions at the time, she does not have a history of receiving large payments from the financial industry.
Steven Pearlstein had a strange piece in the Post today arguing that Janet Yellen would be a better Fed chair than Larry Summers because Summers is too closely tied to the Democratic Party and we need a chair who is politically independent. While a politically independent Fed chair might be desirable, the Fed’s biggest mistake over the last two decades has been its unwillingness to take steps to burst bubbles: the stock bubble in the 1990s and the housing bubble in the last decade. The country has paid an enormous price for this failure.
One possible explanation for this failure is simple incompetence. That would mean Alan Greenspan either didn’t recognize the bubbles or didn’t realize the impact that their collapse would have on the economy.
An alternative explanation is that Greenspan was aware of the risks posed by the bubbles, but knew that Wall Street was making vast amounts of money off both of them. (They were backing IPOs in the stock bubble and mortgage backed securities in the housing bubble.) Insofar as this is the case, then the real need for independence at the Fed is independence from Wall Street. We need a Fed chair who is prepared to take steps against a bubble even if means taking away a big money-maker from Wall Street.
On this score Yellen also would have a clear edge. Summers has received millions of dollars in consulting and speaking fees from Wall Street banks and hedge funds in the years when he was not in government. This raises questions about the extent to which he would be prepared to crack down on dangerous practices by the financial industry. While Yellen also did not advocate cracking down on the bubbles in her various public policy positions at the time, she does not have a history of receiving large payments from the financial industry.
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The NYT has an article today on the enormous savings available to people who had major surgeries performed in Europe rather than the United States. The piece reports that the cost of hip replacement or knee replacement surgery in the United States are more than five times higher than they are in comparable quality facilities in Europe. (The gap would be even larger with facilities in Thailand and India.)
This shows the enormous potential gains from increased medical trade. In effect, our hospitals, doctors, and medical equipment makers benefit from tariffs on the order of 500 percent or more. If the Obama administration really is interesting in promoting growth through trade it would be difficult to imagine a sector with larger potential gains than trade in medical care.
The agreements would focus on setting clear liability rules, accreditation systems, and removing obstacles for insurers and government programs that prevent them taking advantage of lower cost medical services in other countries.
If the trade deals do not include major openings on medical trade then it would be a clear example of why these deals are in fact about selective protectionism rather than free trade. Past trade deals have been quite explicitly focused on putting U.S. manufacturing workers in direct competition with the low paid manufacturing workers in developing countries.
Anyone who believes in free trade would want U.S. doctors and other professionals subjected to the same sort of competition. Otherwise, they really only want to use trade to lower the wages of less educated workers to benefit the wealthy. (Low wages means cheap help.) It is dishonest to call that policy “free trade.”
The NYT has an article today on the enormous savings available to people who had major surgeries performed in Europe rather than the United States. The piece reports that the cost of hip replacement or knee replacement surgery in the United States are more than five times higher than they are in comparable quality facilities in Europe. (The gap would be even larger with facilities in Thailand and India.)
This shows the enormous potential gains from increased medical trade. In effect, our hospitals, doctors, and medical equipment makers benefit from tariffs on the order of 500 percent or more. If the Obama administration really is interesting in promoting growth through trade it would be difficult to imagine a sector with larger potential gains than trade in medical care.
The agreements would focus on setting clear liability rules, accreditation systems, and removing obstacles for insurers and government programs that prevent them taking advantage of lower cost medical services in other countries.
If the trade deals do not include major openings on medical trade then it would be a clear example of why these deals are in fact about selective protectionism rather than free trade. Past trade deals have been quite explicitly focused on putting U.S. manufacturing workers in direct competition with the low paid manufacturing workers in developing countries.
Anyone who believes in free trade would want U.S. doctors and other professionals subjected to the same sort of competition. Otherwise, they really only want to use trade to lower the wages of less educated workers to benefit the wealthy. (Low wages means cheap help.) It is dishonest to call that policy “free trade.”
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