Economists usually believe that companies try to make as much money as possible. This is why readers of an NYT article on plans to reduce Medicare payments for drugs might have been surprised to see the comment:
“Some have speculated that other consumers could end up paying for the cost savings if drug makers raise their prices to account for the lost revenue. ‘That money has to come from somewhere,’ said Douglas Holtz-Eakin.”
This statement implies that drug companies have a group of customers from whom they could now be making more money, but for some reason are choosing not to. This is not consistent with how economists think the economy works. It is difficult to imagine that Pfizer, Merck or any of the other big drug companies are voluntarily choosing to forgo profits. If it is possible for drug companies to get more money by raising prices, then it would be expected that they would have already raised prices.
The piece also includes speculation on why the Medicare drug benefit cost less than had been projected. The main reason is that drug costs in general have risen much less rapidly than had been projected.
Economists usually believe that companies try to make as much money as possible. This is why readers of an NYT article on plans to reduce Medicare payments for drugs might have been surprised to see the comment:
“Some have speculated that other consumers could end up paying for the cost savings if drug makers raise their prices to account for the lost revenue. ‘That money has to come from somewhere,’ said Douglas Holtz-Eakin.”
This statement implies that drug companies have a group of customers from whom they could now be making more money, but for some reason are choosing not to. This is not consistent with how economists think the economy works. It is difficult to imagine that Pfizer, Merck or any of the other big drug companies are voluntarily choosing to forgo profits. If it is possible for drug companies to get more money by raising prices, then it would be expected that they would have already raised prices.
The piece also includes speculation on why the Medicare drug benefit cost less than had been projected. The main reason is that drug costs in general have risen much less rapidly than had been projected.
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Allan Sloan used his column today to explain a simple but often overlooked point, when interest rates rise, bond prices fall. This means that if long-term interest rates rise substantially in a few years, as the Congressional Budget Office predicts, then the bonds issued at very low interest rates today will be selling at large discounts.
The implication of this fact is that in 2015 or 2016, the Treasury would be able to purchase back much of the debt issued today at substantial discounts. This would allow it to drastically reduce the government’s debt at no cost. For example, if it bought back debt with a face value of $4 trillion at an average discount of 20 percent, it could instantly eliminate $800 billion in debt, reducing the debt to GDP ratio by almost 5 percentage points.
This step would be pointless from either an economic or financial standpoint since it would not change the interest burden facing the country, but it should make many of the deficit cultists happy. Since these cultists, who largely control the economic debate in the United States, assign some mystical power to specific debt to GDP ratios, they should be pacified by the knowledge that we can buy bonds back at a discount to keep the debt burden under their magic number. This route is much simpler than raising taxes or cutting spending.
Allan Sloan used his column today to explain a simple but often overlooked point, when interest rates rise, bond prices fall. This means that if long-term interest rates rise substantially in a few years, as the Congressional Budget Office predicts, then the bonds issued at very low interest rates today will be selling at large discounts.
The implication of this fact is that in 2015 or 2016, the Treasury would be able to purchase back much of the debt issued today at substantial discounts. This would allow it to drastically reduce the government’s debt at no cost. For example, if it bought back debt with a face value of $4 trillion at an average discount of 20 percent, it could instantly eliminate $800 billion in debt, reducing the debt to GDP ratio by almost 5 percentage points.
This step would be pointless from either an economic or financial standpoint since it would not change the interest burden facing the country, but it should make many of the deficit cultists happy. Since these cultists, who largely control the economic debate in the United States, assign some mystical power to specific debt to GDP ratios, they should be pacified by the knowledge that we can buy bonds back at a discount to keep the debt burden under their magic number. This route is much simpler than raising taxes or cutting spending.
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For some reason the NYT keeps using the official German unemployment rate in its coverage of Germany’s economy rather than the OECD harmonized rate. The official German rate includes workers who are involuntarily working part-time. By contrast, the OECD essentially uses the same methodology as the United States.
Therefore the NYT badly misled readers when it reported that Germany’s unemployment rate is 7.4 percent. The OECD harmonized unemployment rate in Germany is 5.3 percent.
For some reason the NYT keeps using the official German unemployment rate in its coverage of Germany’s economy rather than the OECD harmonized rate. The official German rate includes workers who are involuntarily working part-time. By contrast, the OECD essentially uses the same methodology as the United States.
Therefore the NYT badly misled readers when it reported that Germany’s unemployment rate is 7.4 percent. The OECD harmonized unemployment rate in Germany is 5.3 percent.
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That’s what readers of this NYT piece hyping a European-U.S. trade agreement should be asking. It begins by telling readers:
“President Obama’s call for a free-trade agreement between the United States and the European Union has unleashed a wave of optimism on both sides that a breakthrough can be achieved that would lift trans-Atlantic fortunes, not just economically but politically.’
Really? How much of an economic boost should be anticipated from this deal? Will it make up for the impact of the sequester and the end of the payroll tax cut?
That’s not very likely. We don’t know what a final deal will look like, but a couple of months ago David Ignatius was touting the prospect of a deal in a Washington Post column. He cited a study that projected that the complete elimination of all tariff barriers would raise GDP in the U.S. by about 0.9 percent.
Note that this 0.9 boost to GDP is a one-time gain and not an increase to the growth rate. The provisions in these deals are typically phased in over a period of years and it also takes the economy time to adjust to a reduction in tariff rates. If we assume that the effects of an agreement are seen over ten years, we would expect to see an increase in the growth rate of 0.09 percentage points, if the projections from this model prove accurate. Of course since we are unlikely to see the complete elimination of tariff barriers, the actual impact on growth will almost certainly be less than 0.09 percentage points annually.
The point is that this deal is not a serious way to boost the economy in the sense of providing an alternative to stimulus. The deal may well be beneficial to the economies of both the U.S. and the EU, however portraying it as a way to move these economies back to full employment badly misleads readers.
This piece uses the term “free-trade” to describe the proposed pact five times. Many of the provisions of the pact will likely have nothing to do with reducing barriers to trade and some, such as increased patent and copyright protection, may actually increase them. It would therefore be more accurate to simply refer to the pact as a “trade agreement.”
That’s what readers of this NYT piece hyping a European-U.S. trade agreement should be asking. It begins by telling readers:
“President Obama’s call for a free-trade agreement between the United States and the European Union has unleashed a wave of optimism on both sides that a breakthrough can be achieved that would lift trans-Atlantic fortunes, not just economically but politically.’
Really? How much of an economic boost should be anticipated from this deal? Will it make up for the impact of the sequester and the end of the payroll tax cut?
That’s not very likely. We don’t know what a final deal will look like, but a couple of months ago David Ignatius was touting the prospect of a deal in a Washington Post column. He cited a study that projected that the complete elimination of all tariff barriers would raise GDP in the U.S. by about 0.9 percent.
Note that this 0.9 boost to GDP is a one-time gain and not an increase to the growth rate. The provisions in these deals are typically phased in over a period of years and it also takes the economy time to adjust to a reduction in tariff rates. If we assume that the effects of an agreement are seen over ten years, we would expect to see an increase in the growth rate of 0.09 percentage points, if the projections from this model prove accurate. Of course since we are unlikely to see the complete elimination of tariff barriers, the actual impact on growth will almost certainly be less than 0.09 percentage points annually.
The point is that this deal is not a serious way to boost the economy in the sense of providing an alternative to stimulus. The deal may well be beneficial to the economies of both the U.S. and the EU, however portraying it as a way to move these economies back to full employment badly misleads readers.
This piece uses the term “free-trade” to describe the proposed pact five times. Many of the provisions of the pact will likely have nothing to do with reducing barriers to trade and some, such as increased patent and copyright protection, may actually increase them. It would therefore be more accurate to simply refer to the pact as a “trade agreement.”
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In his State of the Union Address last night President Obama told the country that unspecified economists say that we need to reduce the deficit over the next decade by $4 trillion from the levels projected in 2010. It would have been worth noting that almost all of the economists who say this completely missed the $8 trillion housing bubble whose collapse sank the economy. There is no reason to believe that their understanding of the economy has improved in the last 5 or 6 years.
It would be helpful to remind listeners that President Obama is apparently having his economic policy dictated by economists who do not seem to know how the economy works.
In his State of the Union Address last night President Obama told the country that unspecified economists say that we need to reduce the deficit over the next decade by $4 trillion from the levels projected in 2010. It would have been worth noting that almost all of the economists who say this completely missed the $8 trillion housing bubble whose collapse sank the economy. There is no reason to believe that their understanding of the economy has improved in the last 5 or 6 years.
It would be helpful to remind listeners that President Obama is apparently having his economic policy dictated by economists who do not seem to know how the economy works.
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Just as little kids like to believe in Santa Claus and the Tooth Fairy, Washington insiders like to believe that the Bowles Simpson commission issued a report. Of course the commission did not issue a report.
The commission’s by-laws state that a report would need the support of 14 of the 18 members of the commission. There was no report that met threshold and in fact no formal vote was ever taken on any report. The document in question should properly be referred to as the report of the co-chairs, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.
It might be painful to accept the truth, but there is no Santa Claus, Tooth Fairy or Bowles-Simpson Commission report.
Just as little kids like to believe in Santa Claus and the Tooth Fairy, Washington insiders like to believe that the Bowles Simpson commission issued a report. Of course the commission did not issue a report.
The commission’s by-laws state that a report would need the support of 14 of the 18 members of the commission. There was no report that met threshold and in fact no formal vote was ever taken on any report. The document in question should properly be referred to as the report of the co-chairs, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.
It might be painful to accept the truth, but there is no Santa Claus, Tooth Fairy or Bowles-Simpson Commission report.
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The NYT had an article that focused on efforts to get more immigrants with skills in science, technology, engineering, and mathematics (STEM). This effort would have the effect of lowering the wages of workers in these fields, thereby saving companies money. However the piece does not mention immigrant doctors, the area where the country could most obviously benefit from increased immigration.
Pay for doctors in the United States averages more than $250,000 a year, roughly twice the pay of physicians in Europe. If immigration could bring the pay of U.S. doctors down by an average of $100,000 it would save the country close to $100 billion annually on its health care bill and lead to hundreds of thousands of new jobs in other areas. It is striking that the media almost never note this fact in the context of its discussion of immigration.
This NYT piece was also striking in its discussion of the immigration of STEM workers since it did not include the views of anyone who represents workers in these fields. One of the central issues raised by workers is whether they will be able to have free mobility when they come into the country or whether they will be tied to specific employers. The current H1-B system ties workers to specific employers, which denies them the bargaining power they would have if they could move between employers. It is remarkable that this issue was not even raised in this piece.
The NYT had an article that focused on efforts to get more immigrants with skills in science, technology, engineering, and mathematics (STEM). This effort would have the effect of lowering the wages of workers in these fields, thereby saving companies money. However the piece does not mention immigrant doctors, the area where the country could most obviously benefit from increased immigration.
Pay for doctors in the United States averages more than $250,000 a year, roughly twice the pay of physicians in Europe. If immigration could bring the pay of U.S. doctors down by an average of $100,000 it would save the country close to $100 billion annually on its health care bill and lead to hundreds of thousands of new jobs in other areas. It is striking that the media almost never note this fact in the context of its discussion of immigration.
This NYT piece was also striking in its discussion of the immigration of STEM workers since it did not include the views of anyone who represents workers in these fields. One of the central issues raised by workers is whether they will be able to have free mobility when they come into the country or whether they will be tied to specific employers. The current H1-B system ties workers to specific employers, which denies them the bargaining power they would have if they could move between employers. It is remarkable that this issue was not even raised in this piece.
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David Brooks told us again today that he doesn’t like Social Security and Medicare. He does this frequently in his columns although usually while he ostensible makes some other point.
Today’s other point is that the country is less forward thinking in the past. A main piece of evidence in this regard is the money that we are spending on Medicare and Social Security.
“The federal government is a machine that takes money from future earners and spends it on health care for retirees. Entitlement spending hurts the young in two ways. It squeezes government investment programs that boost future growth. Second, the young will have to pay the money back.”
Both parts of this are of course wrong. Brooks assumes that the federal government would be able to collect the same tax revenue if it didn’t have Medicare as if it did. That is implausible. Medicare is an enormously popular program for which people are willing to tax themselves. It is not likely that if we nixed Medicare that we could raise the same tax revenue and simply use the money for something else. (We would at least have to change the name for the designated Medicare tax.)
It is also important to note that the excessive spending for Medicare is not due to the fact that seniors in the United States are getting such good care, but rather that we pay more than twice as much per person as people in other wealthy countries. If we paid the same as people in other wealthy countries then we would be looking at long-term budget surpluses, not deficits. In this sense it is not a question of transferring money from future earners to give to retirees, it is a question of taking money from future retirees to pay drug companies, doctors, and others in the health care industry.
It is also inaccurate to say “the young will have to pay the money back.” Of course the debt never literally has to be paid back, the government debt has grown in nominal terms almost every year in the last century. Even the interest will be paid from some future earners to other future earners so government debt ends up being a transfer within generations, not between generations.
The piece also includes a couple of other items about a lack of future orientation that are between bizarre and wrong. Brooks tells readers:
“Banks can lend money in two ways. They can lend to fund investments or they can lend to fund real estate purchases and other consumption. In 1982, banks were lending out 80 cents for investments for every $1 they were lending for consumption. By 2011, they lent only 30 cents to fund investments for every $1 of consumption.”
No data source is cited for this statistic, however if Brooks is just referring to bank lending (as opposed to all credit) then the obvious explanation would be the development of the junk bond market. Many mid-sized and even large firms that would have been dependent on bank loans for investment in 1982 (the middle of the recession — a year when housing was hugely depressed) can now borrow directly in capital markets without going to banks. It is not clear what this tells us about the country’s future orientation.
He then adds:
“Increasingly, companies have to spend their money on retirees, not future growth. Last week, for example, Ford announced that it was spending $5 billion to shore up its pension program. That’s an amount nearly equal to Ford’s investments in factories, equipment and innovation.”
This one is a real head-scratcher. Has Brooks missed the plunge in defined benefit pensions over the last three decades? How about the rapid disappearance of employee health care coverage? The trend here seems to be going rapidly in the other direction. Pensions are of course are part of workers’ compensation, just like pay. Companies are supposed to put aside money at the time pension liabilities are accrued, so a properly managed pension fund does not imply a drain on the future.
Of course the country does seem to have shortage of people with proper skills in finance, so many companies do have underfunded pensions. However this has little to do with preferring the present over the future, as opposed to a simple lack of skills in an important sector of the economy.
David Brooks told us again today that he doesn’t like Social Security and Medicare. He does this frequently in his columns although usually while he ostensible makes some other point.
Today’s other point is that the country is less forward thinking in the past. A main piece of evidence in this regard is the money that we are spending on Medicare and Social Security.
“The federal government is a machine that takes money from future earners and spends it on health care for retirees. Entitlement spending hurts the young in two ways. It squeezes government investment programs that boost future growth. Second, the young will have to pay the money back.”
Both parts of this are of course wrong. Brooks assumes that the federal government would be able to collect the same tax revenue if it didn’t have Medicare as if it did. That is implausible. Medicare is an enormously popular program for which people are willing to tax themselves. It is not likely that if we nixed Medicare that we could raise the same tax revenue and simply use the money for something else. (We would at least have to change the name for the designated Medicare tax.)
It is also important to note that the excessive spending for Medicare is not due to the fact that seniors in the United States are getting such good care, but rather that we pay more than twice as much per person as people in other wealthy countries. If we paid the same as people in other wealthy countries then we would be looking at long-term budget surpluses, not deficits. In this sense it is not a question of transferring money from future earners to give to retirees, it is a question of taking money from future retirees to pay drug companies, doctors, and others in the health care industry.
It is also inaccurate to say “the young will have to pay the money back.” Of course the debt never literally has to be paid back, the government debt has grown in nominal terms almost every year in the last century. Even the interest will be paid from some future earners to other future earners so government debt ends up being a transfer within generations, not between generations.
The piece also includes a couple of other items about a lack of future orientation that are between bizarre and wrong. Brooks tells readers:
“Banks can lend money in two ways. They can lend to fund investments or they can lend to fund real estate purchases and other consumption. In 1982, banks were lending out 80 cents for investments for every $1 they were lending for consumption. By 2011, they lent only 30 cents to fund investments for every $1 of consumption.”
No data source is cited for this statistic, however if Brooks is just referring to bank lending (as opposed to all credit) then the obvious explanation would be the development of the junk bond market. Many mid-sized and even large firms that would have been dependent on bank loans for investment in 1982 (the middle of the recession — a year when housing was hugely depressed) can now borrow directly in capital markets without going to banks. It is not clear what this tells us about the country’s future orientation.
He then adds:
“Increasingly, companies have to spend their money on retirees, not future growth. Last week, for example, Ford announced that it was spending $5 billion to shore up its pension program. That’s an amount nearly equal to Ford’s investments in factories, equipment and innovation.”
This one is a real head-scratcher. Has Brooks missed the plunge in defined benefit pensions over the last three decades? How about the rapid disappearance of employee health care coverage? The trend here seems to be going rapidly in the other direction. Pensions are of course are part of workers’ compensation, just like pay. Companies are supposed to put aside money at the time pension liabilities are accrued, so a properly managed pension fund does not imply a drain on the future.
Of course the country does seem to have shortage of people with proper skills in finance, so many companies do have underfunded pensions. However this has little to do with preferring the present over the future, as opposed to a simple lack of skills in an important sector of the economy.
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A NYT piece reported on concerns by the French government and others over the rising value of the euro. They were concerned that a higher valued euro would make French and other euro zone goods less competitive in world markets. In response the piece included two statements that are at best misleading.
It presented the views of Jens Weidmann, the head of Germany’s central bank, who said, “warned that an exchange rate policy aimed at weakening the euro would ‘in the end result in higher inflation.'”
The inflation rate in the euro zone has been below even its 2.0 percent target. While anything that increases in demand will lead to somewhat higher inflation, other things equal, it is implausible that modest declines in the euro will lead to serious problems of inflation in the euro zone economies.
After telling readers that “a number of ministers agreed Monday that intervention would be wrongheaded,” the piece then presented the view of Maria Fekter, the Austrian finance minister:
“’This is mainly decided by the market, …I find an artificial weakening unnecessary.’”
In fact exchange rates are not currently being decided by the market. Many countries, most notably China, are buying up large amounts of foreign currency. This has the effect of keeping down the value of their currencies against the dollar and the euro.
In a normal market situation we would expect that the wealthy countries would have trade surpluses with the developing world, which means that they are lending them capital. However due to the malfunctioning of the international financial system, the capital flows have gone sharply in the opposite direction over the last 15 years.
A NYT piece reported on concerns by the French government and others over the rising value of the euro. They were concerned that a higher valued euro would make French and other euro zone goods less competitive in world markets. In response the piece included two statements that are at best misleading.
It presented the views of Jens Weidmann, the head of Germany’s central bank, who said, “warned that an exchange rate policy aimed at weakening the euro would ‘in the end result in higher inflation.'”
The inflation rate in the euro zone has been below even its 2.0 percent target. While anything that increases in demand will lead to somewhat higher inflation, other things equal, it is implausible that modest declines in the euro will lead to serious problems of inflation in the euro zone economies.
After telling readers that “a number of ministers agreed Monday that intervention would be wrongheaded,” the piece then presented the view of Maria Fekter, the Austrian finance minister:
“’This is mainly decided by the market, …I find an artificial weakening unnecessary.’”
In fact exchange rates are not currently being decided by the market. Many countries, most notably China, are buying up large amounts of foreign currency. This has the effect of keeping down the value of their currencies against the dollar and the euro.
In a normal market situation we would expect that the wealthy countries would have trade surpluses with the developing world, which means that they are lending them capital. However due to the malfunctioning of the international financial system, the capital flows have gone sharply in the opposite direction over the last 15 years.
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While a Washington Post piece gave extensive coverage to the Post’s favorite deficit hawks in a piece on the budget deficit, it did not include anyone who could present the basic economic facts to readers. The reason the deficit expanded from just a bit more than 1.0 percent of GDP in 2007 to more than 10 percent of GDP in 2009 and 2010 was that the economy plunged following the collapse of the housing bubble. The deficit was and is filling in a demand gap in the private sector as a result of this collapse.
The fact that deficit hawks would not allow the government to spend more money is keeping the economy from returning to full employment. As a result, close to 9 million people are out of work who would be employed if the economy were operating near its potential. This is forcing millions of children to grow up in families with one or both parents unemployed. It would have been helpful if the Post had presented the view of someone familiar with basic economics who could have reminded readers of these facts.
It also would have been helpful to include the views of someone who could have ridiculed the obsession with a debt to GDP number. When interest rates rise, as the Congressional Budget Office projects, the price of the long-term debt that we are issuing today (e.g. 10-year and 30-year bonds) will plummet. This means that the government could buy these bonds back at sharp discount rates eliminating trillions of dollars in debt. (For example, a 30-year bond issued with a 2.75 percent interest rate last year, would sell for less than 60 cents on the dollar in 2016 if the interest rate has risen to 6.0 percent. This would mean that if we bought back 30-year bonds with a face value of $2 trillion, it would only cost us $1.2 trillion. This would instantly eliminate $800 billion in debt, lowering our debt to GDP ratio by roughly 5 percentage points.)
This move would be completely pointless since it would not change our interest burden at all. But since Washington budget wonks seem to think the debt to GDP ratio is hugely important, it would be a very simple and costless way to make them all very happy. It would have been useful for the Post to note this so that its readers would realize that the budget debate in Washington is pretty much complete nonsense from an economic standpoint.
While a Washington Post piece gave extensive coverage to the Post’s favorite deficit hawks in a piece on the budget deficit, it did not include anyone who could present the basic economic facts to readers. The reason the deficit expanded from just a bit more than 1.0 percent of GDP in 2007 to more than 10 percent of GDP in 2009 and 2010 was that the economy plunged following the collapse of the housing bubble. The deficit was and is filling in a demand gap in the private sector as a result of this collapse.
The fact that deficit hawks would not allow the government to spend more money is keeping the economy from returning to full employment. As a result, close to 9 million people are out of work who would be employed if the economy were operating near its potential. This is forcing millions of children to grow up in families with one or both parents unemployed. It would have been helpful if the Post had presented the view of someone familiar with basic economics who could have reminded readers of these facts.
It also would have been helpful to include the views of someone who could have ridiculed the obsession with a debt to GDP number. When interest rates rise, as the Congressional Budget Office projects, the price of the long-term debt that we are issuing today (e.g. 10-year and 30-year bonds) will plummet. This means that the government could buy these bonds back at sharp discount rates eliminating trillions of dollars in debt. (For example, a 30-year bond issued with a 2.75 percent interest rate last year, would sell for less than 60 cents on the dollar in 2016 if the interest rate has risen to 6.0 percent. This would mean that if we bought back 30-year bonds with a face value of $2 trillion, it would only cost us $1.2 trillion. This would instantly eliminate $800 billion in debt, lowering our debt to GDP ratio by roughly 5 percentage points.)
This move would be completely pointless since it would not change our interest burden at all. But since Washington budget wonks seem to think the debt to GDP ratio is hugely important, it would be a very simple and costless way to make them all very happy. It would have been useful for the Post to note this so that its readers would realize that the budget debate in Washington is pretty much complete nonsense from an economic standpoint.
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