Morgan Stanley Director Erskine Bowles and Alan Simpson Still Want to Cut Social Security and Medicare

April 29, 2013

29 Abril 2013

The Washington Post gave Erskine Bowles and Alan Simpson another opportunity to push their case for deficit reduction, which includes plans for cutting Social Security and raising the age of eligibility for Medicare. The Post does not mention Mr. Bowles affiliation with Morgan Stanley. This could have something to do with his persistent refusal to ever include a Wall Street speculation tax in his deficit reduction plans.

Many other countries, including the UK have long had such taxes. Much of the European Union is likely to impose a tax of 0.1 percent on stock trades and 0.01 percent on derivatives. The Joint Tax Committee of Congress has projected that the 0.03 percent tax proposed by Senator Tom Harkin and Representative Peter DeFazio would raise almost $40 billion annually. Counting interest savings, this tax alone would meet almost 20 percent of the arbitrary $2.5 trillion deficit reduction target picked by Bowles and Simpson.

It is also important to note that Bowles and Simpson’s claim about using the chained CPI for the annual Social Security cost-of-living adjustment seems deliberately misleading. They tell readers:

“The plan also includes a shift to the chained consumer price index to provide more accurate indexation of provisions throughout the budget.”

While the chained CPI is arguably a better measure of the rate of inflation seen by the population as a whole, there is no evidence that it provides a better measure of the rate of inflation seen by the elderly. In fact the experimental elderly index constructed by the Bureau of Labor Statistics (BLS) shows that the current measure of inflation understates the rate of inflation seen by the elderly.

If Bowles and Simpson were actually interested in accuracy (as opposed to cutting Social Security benefits), they would propose having the BLS construct a full elderly CPI. They have consistently backed away from this idea, which could lead to higher Social Security benefits.

The Washington Post gave Erskine Bowles and Alan Simpson another opportunity to push their case for deficit reduction, which includes plans for cutting Social Security and raising the age of eligibility for Medicare. The Post does not mention Mr. Bowles affiliation with Morgan Stanley. This could have something to do with his persistent refusal to ever include a Wall Street speculation tax in his deficit reduction plans.

Many other countries, including the UK have long had such taxes. Much of the European Union is likely to impose a tax of 0.1 percent on stock trades and 0.01 percent on derivatives. The Joint Tax Committee of Congress has projected that the 0.03 percent tax proposed by Senator Tom Harkin and Representative Peter DeFazio would raise almost $40 billion annually. Counting interest savings, this tax alone would meet almost 20 percent of the arbitrary $2.5 trillion deficit reduction target picked by Bowles and Simpson.

It is also important to note that Bowles and Simpson’s claim about using the chained CPI for the annual Social Security cost-of-living adjustment seems deliberately misleading. They tell readers:

“The plan also includes a shift to the chained consumer price index to provide more accurate indexation of provisions throughout the budget.”

While the chained CPI is arguably a better measure of the rate of inflation seen by the population as a whole, there is no evidence that it provides a better measure of the rate of inflation seen by the elderly. In fact the experimental elderly index constructed by the Bureau of Labor Statistics (BLS) shows that the current measure of inflation understates the rate of inflation seen by the elderly.

If Bowles and Simpson were actually interested in accuracy (as opposed to cutting Social Security benefits), they would propose having the BLS construct a full elderly CPI. They have consistently backed away from this idea, which could lead to higher Social Security benefits.

George Will is Outraged Because Amazon Will Be Taxed Like a Mom and Pop Grocery Store

By Dean BakerDean Baker

April 29, 2013

29 Abril 2013

Yes, he is. In his column today he expresses his anger over a bill that would apply the same sales tax to Internet sales that people pay now when they go to their corner store. He scoffs;

“In a burst of the bipartisanship we are told to revere, a coalition of Republican and Democratic senators rose above party differences last week to affirm class solidarity. They moved toward a tax increase of at least $22 billion to benefit the political class at the state and local levels.”

Let’s see, that political class would be people like Rick Perry, the governor of Texas, and Jerry Brown, the governor of California. The class solidarity here is less than obvious. It’s certainly less visible than George Will’s class solidarity with rich people, including those who make their money by gaming the tax code instead of doing anything productive, as is the issue here.

Addendum:

The sales tax is regressive. It would be great to see it replaced with income taxes. It’s not going to happen whether or not we tax Internet sales. Taxing Internet sales makes the sales tax less regressive because low income people buy less of their stuff on the Internet than high income people. This is simple — whine away, but the story is really really simple. If you want to make the tax system less regressive and you want to make the economy more efficient (why would we subsidize Internet sales at the expense of brick and mortar stores?), then you support having Internet sales subject to state sales taxes.

Yes, he is. In his column today he expresses his anger over a bill that would apply the same sales tax to Internet sales that people pay now when they go to their corner store. He scoffs;

“In a burst of the bipartisanship we are told to revere, a coalition of Republican and Democratic senators rose above party differences last week to affirm class solidarity. They moved toward a tax increase of at least $22 billion to benefit the political class at the state and local levels.”

Let’s see, that political class would be people like Rick Perry, the governor of Texas, and Jerry Brown, the governor of California. The class solidarity here is less than obvious. It’s certainly less visible than George Will’s class solidarity with rich people, including those who make their money by gaming the tax code instead of doing anything productive, as is the issue here.

Addendum:

The sales tax is regressive. It would be great to see it replaced with income taxes. It’s not going to happen whether or not we tax Internet sales. Taxing Internet sales makes the sales tax less regressive because low income people buy less of their stuff on the Internet than high income people. This is simple — whine away, but the story is really really simple. If you want to make the tax system less regressive and you want to make the economy more efficient (why would we subsidize Internet sales at the expense of brick and mortar stores?), then you support having Internet sales subject to state sales taxes.

A Second American Century Led by People Who Can't Do Arithmetic?

By Dean BakerDean Baker

April 28, 2013

28 Abril 2013

That’s what Richard Haass is promising in his Washington Post Outlook piece. He tells readers that the United States is still the world’s largest economy and will be for long into the future.

“This country boasts the world’s largest economy; its annual GDP of almost $16 trillion is nearly one-fourth of global output. Compare this figure with $7 trillion for China and $6 trillion for Japan. Per capita GDP in the United States is close to $50,000, somewhere between six and nine times that of China.”

The problem with the comparison with China is that it relies on market exchange rates. These fluctuate widely and are in part determined politically. (According to Haass’s measure, China could make itself 25 percent richer relative to the U.S. tomorrow if it opted to dump $2 trillion in dollar holdings.)

If the question is what can the economies actually produce then the right measure is purchasing power parity. Haass apparently has also neglected the fact that China now controls Hong Kong, which is not counted in its GDP measure. Turning to the IMF’s data on purchasing power parity GDP we find that the United States has a bit more than three years left as Number 1:

Country	2011	2012	2013	2014	2015	2016	2017	2018
China	11,305.769	12,405.670	13,623.255	15,039.001	16,647.491	18,442.890	20,440.875	22,641.047
Hong Kong SAR	357.726	369.379	386.558	411.548	438.187	467.253	498.588	532.098
United States	15,075.675	15,684.750	16,237.746	17,049.027	18,012.185	19,020.509	20,077.908	21,101.368

Source: International Monetary Fund.

Taking year-round averages, the United States is still slightly ahead of the combined projection for China and Hong Kong for 2016, but almost 5 percent lower for 2017. The projection therefore implies that China’s GDP will surpass U.S. GDP sometime in August of 2016. This means that if being number one in this category matters to you, better do your partying now. (Actually, according to some estimates the time for partying may already be over since China’s GDP may already have surpassed the GDP of the United States.)

The comparisons in this piece to West Europe are silly. The main reason that per capita income in the United States is higher than in Western Europe is that the average worker puts in about 20 percent more hours a year. In Western Europe 4-6 weeks a year of vacation is standard (guaranteed in law), as is paid parental leave and paid sick days. In some countries the standard workweek is also well below 40 hours.

Measured on a per hour basis there is little difference in output, although the European Central Bank is working hard to increase the gap with its current policies. Perhaps people in the United States feel better because they work longer hours, but that is not usually considered evidence of a stronger economy.

That’s what Richard Haass is promising in his Washington Post Outlook piece. He tells readers that the United States is still the world’s largest economy and will be for long into the future.

“This country boasts the world’s largest economy; its annual GDP of almost $16 trillion is nearly one-fourth of global output. Compare this figure with $7 trillion for China and $6 trillion for Japan. Per capita GDP in the United States is close to $50,000, somewhere between six and nine times that of China.”

The problem with the comparison with China is that it relies on market exchange rates. These fluctuate widely and are in part determined politically. (According to Haass’s measure, China could make itself 25 percent richer relative to the U.S. tomorrow if it opted to dump $2 trillion in dollar holdings.)

If the question is what can the economies actually produce then the right measure is purchasing power parity. Haass apparently has also neglected the fact that China now controls Hong Kong, which is not counted in its GDP measure. Turning to the IMF’s data on purchasing power parity GDP we find that the United States has a bit more than three years left as Number 1:

Country	2011	2012	2013	2014	2015	2016	2017	2018
China	11,305.769	12,405.670	13,623.255	15,039.001	16,647.491	18,442.890	20,440.875	22,641.047
Hong Kong SAR	357.726	369.379	386.558	411.548	438.187	467.253	498.588	532.098
United States	15,075.675	15,684.750	16,237.746	17,049.027	18,012.185	19,020.509	20,077.908	21,101.368

Source: International Monetary Fund.

Taking year-round averages, the United States is still slightly ahead of the combined projection for China and Hong Kong for 2016, but almost 5 percent lower for 2017. The projection therefore implies that China’s GDP will surpass U.S. GDP sometime in August of 2016. This means that if being number one in this category matters to you, better do your partying now. (Actually, according to some estimates the time for partying may already be over since China’s GDP may already have surpassed the GDP of the United States.)

The comparisons in this piece to West Europe are silly. The main reason that per capita income in the United States is higher than in Western Europe is that the average worker puts in about 20 percent more hours a year. In Western Europe 4-6 weeks a year of vacation is standard (guaranteed in law), as is paid parental leave and paid sick days. In some countries the standard workweek is also well below 40 hours.

Measured on a per hour basis there is little difference in output, although the European Central Bank is working hard to increase the gap with its current policies. Perhaps people in the United States feel better because they work longer hours, but that is not usually considered evidence of a stronger economy.

Washington Post Editorial Condemns Austerity in Europe!

By Dean BakerDean Baker

April 28, 2013

28 Abril 2013

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again.

I could nit-pick and point out that the editorial doesn’t get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again.

I could nit-pick and point out that the editorial doesn’t get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.

Excel Errors, Debt, and Stimulus: Is Our Politicians Learning?

By Dean BakerDean Baker

April 28, 2013

28 Abril 2013

That’s the question we ask this week in honor of the commemoration of the George W. Bush Library. According to Politico the answer appears to be “yes.”

Politico tells us that the Democrats in Congress who argue that there is no urgency to deal with the debt and that instead the focus of policy should be boosting the economy and getting the unemployment rate down are now increasingly occupying the center stage in the Democratic Party:

“These Democrats and their intellectual allies once occupied the political fringes, pushed aside by more moderate members who supported both immediate spending cuts and long-term entitlement reforms along with higher taxes.

But aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.”

The article then goes on to note the famous Reinhart & Rogoff spreadsheet error that was exposed by researchers at the University of Massachusetts, which destroyed the paper that provided the intellectual foundation for the debt crisis story. It’s still too early to reach any definitive judgment, but this can be one of those rare instances where new evidence actually changes policy. If so, it will be a big deal.

That’s the question we ask this week in honor of the commemoration of the George W. Bush Library. According to Politico the answer appears to be “yes.”

Politico tells us that the Democrats in Congress who argue that there is no urgency to deal with the debt and that instead the focus of policy should be boosting the economy and getting the unemployment rate down are now increasingly occupying the center stage in the Democratic Party:

“These Democrats and their intellectual allies once occupied the political fringes, pushed aside by more moderate members who supported both immediate spending cuts and long-term entitlement reforms along with higher taxes.

But aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.”

The article then goes on to note the famous Reinhart & Rogoff spreadsheet error that was exposed by researchers at the University of Massachusetts, which destroyed the paper that provided the intellectual foundation for the debt crisis story. It’s still too early to reach any definitive judgment, but this can be one of those rare instances where new evidence actually changes policy. If so, it will be a big deal.

Interest Burdens and Debt

By Dean BakerDean Baker

April 27, 2013

27 Abril 2013

Since the NYT is doing Reinhart and Rogoff 24-7, I suppose BTP should follow suit. One point that some of us keep making that continually disappears into the ether (as opposed to eliciting a response from our Harvard duo or their accomplices) is that rather than being high, the interest burden of the debt is near post-war lows. It is currently less than 1.5 percent of GDP. In fact, it is less than 1.0 percent of GDP if we subtract the $80 billion that the Fed refunds to the Treasury from the assets it is holding. This means that rather than being an extraordinary burden right now, the debt is actually a very low burden. Insofar as this point draws a response, it is generally that interest rates will rise in the future as the economy recovers. That may well be true, but we will have contracted large amounts of debt at very low interest rates. This means that even in a story where the Fed does raise interest rates as the economy recovers, the interest burden will just be rising back to levels we have seen before. In fact, in the Congressional Budget Office's projections we will not get back to the early 1990s interest burden of more than 3.0 percent of GDP until 2021. It is also worth remembering that this interest burden did not prevent the United States from having strong growth through the decade of the 1990s. Again, the interest burden can be lowered by more than half of a percentage point of GDP if the Fed continues to hold assets, refunding the interest to the Treasury. This would require an alternative mechanism for restricting the money supply, specifically raising reserve requirements. While there are reasons for not wanting to go this route, given the large potential savings to the government (@ $80-$100 billion a year), it is an option for budget savings that Congress certainly should be considering.

Government Granted Patent Monopolies Lead to Corruption #42,347

By Dean BakerDean Baker

April 27, 2013

27 Abril 2013

When the government grants drug companies patent monopolies that allow them to sell drugs at hundreds or even thousands of times the free market price it gives them an enormous incentive to do things like pay off doctors to prescribe drugs. Everyone who has ever taken an intro economics class understands that fact.

Unfortunately our leading economists do not seem aware of how protectionism in the prescription drug industry leads to corruption that can both raise costs and jeopardize the public’s health. That’s probably because they are too busy finding reasons why we can’t take steps to bring the economy back to full employment.

When the government grants drug companies patent monopolies that allow them to sell drugs at hundreds or even thousands of times the free market price it gives them an enormous incentive to do things like pay off doctors to prescribe drugs. Everyone who has ever taken an intro economics class understands that fact.

Unfortunately our leading economists do not seem aware of how protectionism in the prescription drug industry leads to corruption that can both raise costs and jeopardize the public’s health. That’s probably because they are too busy finding reasons why we can’t take steps to bring the economy back to full employment.

Reinhart and Rogoff Are Not Being Straight

By Dean BakerDean Baker

April 26, 2013

26 Abril 2013

Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn. This portrayal is disingenuous in the extreme. Reinhart and Rogoff surely are aware of how their work has been used. They have also encouraged this use in public writings and talks. While it is unfortunate that they have "received hate-filled, even threatening, e-mail messages," as one who works in the lower-paid corners of policy debates, let me say, welcome to the club. This column is careful to halfway walk back the main claim of their famous paper, telling us: "Our view has always been that causality [between high debt levels and slow growth] runs in both directions, and that there is no rule that applies across all times and places." It is good to hear the reference to causation from slow growth to high debt and that "no rule applies across all times and places." However it is worth noting that Reinhart and Rogoff never felt the need to use their access to the NYT's opinion pages to correct all the politicians who used their paper to argue the exact opposite: that their paper implied that countries with high debt levels could anticipate long periods of slow growth.

Mervyn King Led the UK Economy to Its Worst Downturn Ever

By Dean BakerDean Baker

April 26, 2013

26 Abril 2013

David Ignatius used his Washington Post column yesterday to give a glowing tribute to Mervyn King, the outgoing governor of the Bank Of England. The whole piece is a paean to King’s wisdom that concludes by telling readers that King is:

“the only person I’ve ever seen who could intellectually intimidate former Treasury secretary Larry Summers. King couldn’t fix the British economy, but he did understand it.”

While silencing Larry Summers is certainly commendable, the claim that King understands the economy is highly questionable. It was not just his job to fix the British economy, it was his job to prevent it from breaking in the first place.

King was running the Bank of England as the housing bubble grew to ever more dangerous levels. It should have been clear to King that this asset bubble would burst at some point and that it would have severe consequences for the UK economy. However he took no measures to rein it in, apparently oblivious to the dangers. As a result, the UK is now experiencing a downturn that is more severe than the Great Depression. That fact probably deserves some mention in a balanced assessment of King’s record.

[Typos corrected from an earlier version.]

David Ignatius used his Washington Post column yesterday to give a glowing tribute to Mervyn King, the outgoing governor of the Bank Of England. The whole piece is a paean to King’s wisdom that concludes by telling readers that King is:

“the only person I’ve ever seen who could intellectually intimidate former Treasury secretary Larry Summers. King couldn’t fix the British economy, but he did understand it.”

While silencing Larry Summers is certainly commendable, the claim that King understands the economy is highly questionable. It was not just his job to fix the British economy, it was his job to prevent it from breaking in the first place.

King was running the Bank of England as the housing bubble grew to ever more dangerous levels. It should have been clear to King that this asset bubble would burst at some point and that it would have severe consequences for the UK economy. However he took no measures to rein it in, apparently oblivious to the dangers. As a result, the UK is now experiencing a downturn that is more severe than the Great Depression. That fact probably deserves some mention in a balanced assessment of King’s record.

[Typos corrected from an earlier version.]

Did Janet Yellen Argue With Greenspan for Higher or Lower Interest Rates?

By Dean BakerDean Baker

April 25, 2013

25 Abril 2013

There are often shades of grey in interpreting people's views, but the NYT seems to be giving us assessments of Federal Reserve Board Vice Chairman Janet Yellen's views that are 180 degrees apart. An article today on Dr. Yellen's prospects of being chosen to replace Ben Bernanke as chair tells readers: "In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed’s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank’s primary mission. "But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing." Okay, this is pretty clear, Yellen is on the side of promoting growth at the risk of somewhat higher inflation. This seems hard to reconcile with a piece the NYT wrote three years ago: