The Washington Post, along with most other news outlets, reported without comment that the United States Postal Service (USPS) lost $15.9 billion last year. Some comment would have been appropriate since almost 70 percent of this shortfall is due to a payment of $11.9 billion to the postal workers’ retiree health fund.
This is noteworthy because Congress has required that the Postal Service prefund its retirement fund at a level that has no match in the private sector. It also mandated that it build up to its targeted prefunding level in just 10 years making the burden much greater. In addition, the USPS is required to invest these funds, as well as its pension, exclusively in government bonds. In contrast, private sector competitors like UPS invest largely in equities which provide a much higher return on average. The result is to place an enormous burden on the Postal Service putting it at a serious competitive disadvantage. (Here’s more on this one.)
Congress has put the Postal Service in an impossible situation. It has imposed restrictions, like the requirement that all assets in its pension and retiree health fund be invested in government bonds,that substantially raise its costs relative to competitors. It has also prohibited USPS from getting into new lines of business that take advantage of its resources in order to protect private sector companies from competition. However it still expects the USPS to be run at a profit.
Clearly the Post Service would face difficulties in any case as technology has led to a shift away from first class mail, the system’s main source of revenue. However the restrictions that Congress imposes makes it impossible for USPS to adjust to changing economic conditions.
The Washington Post, along with most other news outlets, reported without comment that the United States Postal Service (USPS) lost $15.9 billion last year. Some comment would have been appropriate since almost 70 percent of this shortfall is due to a payment of $11.9 billion to the postal workers’ retiree health fund.
This is noteworthy because Congress has required that the Postal Service prefund its retirement fund at a level that has no match in the private sector. It also mandated that it build up to its targeted prefunding level in just 10 years making the burden much greater. In addition, the USPS is required to invest these funds, as well as its pension, exclusively in government bonds. In contrast, private sector competitors like UPS invest largely in equities which provide a much higher return on average. The result is to place an enormous burden on the Postal Service putting it at a serious competitive disadvantage. (Here’s more on this one.)
Congress has put the Postal Service in an impossible situation. It has imposed restrictions, like the requirement that all assets in its pension and retiree health fund be invested in government bonds,that substantially raise its costs relative to competitors. It has also prohibited USPS from getting into new lines of business that take advantage of its resources in order to protect private sector companies from competition. However it still expects the USPS to be run at a profit.
Clearly the Post Service would face difficulties in any case as technology has led to a shift away from first class mail, the system’s main source of revenue. However the restrictions that Congress imposes makes it impossible for USPS to adjust to changing economic conditions.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Okay all of you liberals who thought that the deficits were due to too little tax revenue and all you economists who pointed out that the large deficits were due to a collapsed economy, you’re wrong. The United States has a spending problem the NYT said so.
A NYT article on President Obama’s speech on the budget told readers:
“New deficit projections will define the scope of the nation’s spending problem.”
See, it’s a spending problem!
Addendum:
I see from readers’ comments that the NYT has apparently fixed the spending problem in subsequent edits. It still tells readers:
“the budget office once again emphasized that the deficit will rise later in the decade, beginning in 2016, and continue do to so as the population ages and health care prices rise.”
While Social Security is projected to rise modestly as a share of GDP and health care costs a bit more so, the largest reason for the projected rise in deficits from 2013 to 2023 is higher interest payments from the government. Net interest is projected to rise from 1.4 percent of GDP this year to 3.3 percent of GDP in 2023. This projected 1.9 percentage point increase in interest payments is by far the largest component driving the projected increase in the deficit over the decade.
In fact, the actual increase is somewhat larger since the amount of money that the Federal Reserve Board refunds from its holdings of government bonds is projected to drop from 0.5 percent of GDP at present to 0.2 percent of GDP in 2023. This drop of 0.3 percentage points of GDP, added to the 1.9 percentage point rise in net interest implies that higher interest costs will add 2.2 percentage points to the deficit in 2023.
This would have been worth mentioning both because it tells readers why deficits are rising and also because the rise in interest rates is a matter of policy. The CBO projections assume that the Fed will decide to raise interest rates. It is not something that just happens by itself.
(Morning Edition committed the same sin.)
Okay all of you liberals who thought that the deficits were due to too little tax revenue and all you economists who pointed out that the large deficits were due to a collapsed economy, you’re wrong. The United States has a spending problem the NYT said so.
A NYT article on President Obama’s speech on the budget told readers:
“New deficit projections will define the scope of the nation’s spending problem.”
See, it’s a spending problem!
Addendum:
I see from readers’ comments that the NYT has apparently fixed the spending problem in subsequent edits. It still tells readers:
“the budget office once again emphasized that the deficit will rise later in the decade, beginning in 2016, and continue do to so as the population ages and health care prices rise.”
While Social Security is projected to rise modestly as a share of GDP and health care costs a bit more so, the largest reason for the projected rise in deficits from 2013 to 2023 is higher interest payments from the government. Net interest is projected to rise from 1.4 percent of GDP this year to 3.3 percent of GDP in 2023. This projected 1.9 percentage point increase in interest payments is by far the largest component driving the projected increase in the deficit over the decade.
In fact, the actual increase is somewhat larger since the amount of money that the Federal Reserve Board refunds from its holdings of government bonds is projected to drop from 0.5 percent of GDP at present to 0.2 percent of GDP in 2023. This drop of 0.3 percentage points of GDP, added to the 1.9 percentage point rise in net interest implies that higher interest costs will add 2.2 percentage points to the deficit in 2023.
This would have been worth mentioning both because it tells readers why deficits are rising and also because the rise in interest rates is a matter of policy. The CBO projections assume that the Fed will decide to raise interest rates. It is not something that just happens by itself.
(Morning Edition committed the same sin.)
Read More Leer más Join the discussion Participa en la discusión
On Sunday Thomas Friedman told us that one in three people in China is a blogger, today he tells us that the country has a:
“gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated.”
This would be news to China. The country adopted its one child policy back in the 1970s leading to sharp drop in birth rates. Since that was more than 30 years ago, it means that China actually has a relatively small share of its population under the age of 30. Friedman seems to show some recognition of this fact later in this column when he notes:
“‘India today has 560 million young people under the age of 25 and 225 million between the ages of 10 and 19,’ explained Shashi Tharoor, India’s minister of state for human resource development. ‘So for the next 40 years we should have a youthful working-age population’ at a time when China and the broad industrialized world is aging. According to Tharoor, the average age in China today is around 38, whereas in India it’s around 28. In 20 years, that gap will be much larger.”
Of course if Friedman had thought about the implication of Tharoor’s comment he would realize that it means that China doesn’t have a youth bulge. But that would mean reading through his column and thinking about it for a few minutes. (Friedman’s claim that India somehow benefits from its huge population growth is whacky — at least if you care about the living standards of people in India.)
On Sunday Thomas Friedman told us that one in three people in China is a blogger, today he tells us that the country has a:
“gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated.”
This would be news to China. The country adopted its one child policy back in the 1970s leading to sharp drop in birth rates. Since that was more than 30 years ago, it means that China actually has a relatively small share of its population under the age of 30. Friedman seems to show some recognition of this fact later in this column when he notes:
“‘India today has 560 million young people under the age of 25 and 225 million between the ages of 10 and 19,’ explained Shashi Tharoor, India’s minister of state for human resource development. ‘So for the next 40 years we should have a youthful working-age population’ at a time when China and the broad industrialized world is aging. According to Tharoor, the average age in China today is around 38, whereas in India it’s around 28. In 20 years, that gap will be much larger.”
Of course if Friedman had thought about the implication of Tharoor’s comment he would realize that it means that China doesn’t have a youth bulge. But that would mean reading through his column and thinking about it for a few minutes. (Friedman’s claim that India somehow benefits from its huge population growth is whacky — at least if you care about the living standards of people in India.)
Read More Leer más Join the discussion Participa en la discusión
Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed’s decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.
Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed’s decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.
Read More Leer más Join the discussion Participa en la discusión
One of the arguments that the Wall Street boys put forward to preserve their too big to fail subsidy from the government is that if we broke up the behemoth banks then big corporations would turn to foreign banks for many of their financial needs. The Post presents this assertion as a serious argument in a Neil Irwin column reporting on a paper arguing the case for big banks.
It is difficult to understand why anyone should give a damn if corporations get financial services from overseas. We import clothes and steel, what’s the problem if we import financial services? Maybe the Wall Street whizes just need a lecture on how free trade benefits everyone. Their argument that we should be concerned that we are importing financial services is probably less compelling than the argument that we should be concerned that we are importing clothes. (Do we really want to be like Ireland or Iceland with hugely out-sized banks that we are stuck bailing out?) Maybe if we can teach the Wall Street boys intro economics we will finally be able to break up too big to fail banks.
One of the arguments that the Wall Street boys put forward to preserve their too big to fail subsidy from the government is that if we broke up the behemoth banks then big corporations would turn to foreign banks for many of their financial needs. The Post presents this assertion as a serious argument in a Neil Irwin column reporting on a paper arguing the case for big banks.
It is difficult to understand why anyone should give a damn if corporations get financial services from overseas. We import clothes and steel, what’s the problem if we import financial services? Maybe the Wall Street whizes just need a lecture on how free trade benefits everyone. Their argument that we should be concerned that we are importing financial services is probably less compelling than the argument that we should be concerned that we are importing clothes. (Do we really want to be like Ireland or Iceland with hugely out-sized banks that we are stuck bailing out?) Maybe if we can teach the Wall Street boys intro economics we will finally be able to break up too big to fail banks.
Read More Leer más Join the discussion Participa en la discusión
No, I am not kidding. Steven Davidoff has a DealBook column touting the fact that Hostess Twinkies are likely to survive as a product, even though the company that makes them has gone bankrupt. The Twinkie brand, along with other iconic brands owned by the company, will be sold off in bankruptcy to other companies who expect to be able to profitably market them. Of course there is no guarantee that they will restart the old factories and rehire the Hostess workers, likely leaving them out in the cold.
There are two major issues here. First, in the United States firms can in general fire workers at will. This means that if they can find workers elsewhere in or outside the country who will work for less, then they can dump their current workforce and hire lower cost labor. This happens all the time. Most other wealthy countries require some sort of severance payment to longer term workers, but the United States does not.
Bankruptcy only changes the picture in this respect in cases where you have union contracts, which was the situation with Hostess. Bankruptcy voids these contracts allowing the company to change terms of employment and discharge workers in ways that would have prohibited under the union contract.
The other issue with bankruptcy is that it eliminates the company’s pension obligations. While pensions are guaranteed by the government, the guarantee is not 100 percent. This means that a bankrupt company can leave many workers with sharply reduced pensions. In principle the pension is supposed to be a privileged creditor, standing at the front of the line to get the proceeds from the sale of Twinkies and other brands. However, it doesn’t always work out this way. It remains to be seen what the situation will be with Hostess.
No, I am not kidding. Steven Davidoff has a DealBook column touting the fact that Hostess Twinkies are likely to survive as a product, even though the company that makes them has gone bankrupt. The Twinkie brand, along with other iconic brands owned by the company, will be sold off in bankruptcy to other companies who expect to be able to profitably market them. Of course there is no guarantee that they will restart the old factories and rehire the Hostess workers, likely leaving them out in the cold.
There are two major issues here. First, in the United States firms can in general fire workers at will. This means that if they can find workers elsewhere in or outside the country who will work for less, then they can dump their current workforce and hire lower cost labor. This happens all the time. Most other wealthy countries require some sort of severance payment to longer term workers, but the United States does not.
Bankruptcy only changes the picture in this respect in cases where you have union contracts, which was the situation with Hostess. Bankruptcy voids these contracts allowing the company to change terms of employment and discharge workers in ways that would have prohibited under the union contract.
The other issue with bankruptcy is that it eliminates the company’s pension obligations. While pensions are guaranteed by the government, the guarantee is not 100 percent. This means that a bankrupt company can leave many workers with sharply reduced pensions. In principle the pension is supposed to be a privileged creditor, standing at the front of the line to get the proceeds from the sale of Twinkies and other brands. However, it doesn’t always work out this way. It remains to be seen what the situation will be with Hostess.
Read More Leer más Join the discussion Participa en la discusión
The Huffington Post reported on a recent paper published by the St. Louis Federal Reserve Bank that produced evidence showing that patents impede innovation and growth. Maybe other news outlets will be allowed to talk about such isssues one day.
The Huffington Post reported on a recent paper published by the St. Louis Federal Reserve Bank that produced evidence showing that patents impede innovation and growth. Maybe other news outlets will be allowed to talk about such isssues one day.
Read More Leer más Join the discussion Participa en la discusión
It’s so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post‘s coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.
Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.
The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.
It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer).
The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.
It’s so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post‘s coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.
Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.
The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.
It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer).
The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.
Read More Leer más Join the discussion Participa en la discusión
The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.
Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:
“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”
Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.
As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.
In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.
The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.
Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:
“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”
Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.
As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.
In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.
Read More Leer más Join the discussion Participa en la discusión
