The affirmative action policy that major media outlets have for deficit hawks is widely recognized. Arguments that would never appear in a serious media outlet based on their merits, fill the pages of newspapers and fill the airspace of leading television and radio news shows. In keeping with this spirit, USA Today gave us a column from Evan Feinberg, a policy analyst at the Charles Koch Institute.
The main thesis of the column is that the United States government is like a subprime borrower who is about see interest rates rise and throw the country into bankruptcy. Here’s the key paragraph:
“Say by 2015 rates rise to 3.5 percent. Our projected debt of $20 trillion will cost Americans $700 billion in annual interest payments. At 5 percent — still a low number in historical terms — we’ll pay $1 trillion. And if rates return to 1990 levels, we’ll have to pay more than $1.5 trillion in interest before we can even begin paying down our actual debt.”
Wow, are we all really scared?
There a couple of big problems with Feinberg’s story. First, much of our debt is long-term debt. We issue bonds that have durations of 10 years, 15 years, and even 30 years. The interest rate we pay on these bonds is not affected by increases in market interest rates in future years. In fact, if we want to make the deficit hawk cultists happy, when interest rates rise we can even buy back these bonds back at sharp discounts, thereby reducing our debt burden.
Second, much of the debt in his story is held by the Social Security, Medicare, and federal employee retirement trust funds. Higher interest payments on the bonds held by these funds is a burden to the general budget, but improves the finances of these trust funds.
While Feinberg presumably thinks he has discovered something new, the Congressional Budget Office actually anticipated that interest rates would rise in future years when the economy recovers. They incorporated this fact into their projections (Table 1-3). CBO has our net interest payments rising to $282 billion by 2015, approximately 1.5 percent of GDP. This is a bit less than half as much as the interest burden that the country faced in the early 90s.
It is also worth noting that much of the publicly held federal debt is currently held by the Federal Reserve Board. The interest on this debt is rebated to the Treasury. Last year, the Federal Reserve Board rebated almost $80 billion to the Treasury. If the Fed continues to hold this debt, it can continue to rebate $80 billion a year to the Treasury. (It can rely on higher reserve requirements to limit the amount of money in circulation and prevent inflation, if that is a problem.)
This would mean, based on the CBO numbers, we would be looking at a net interest burden in 2015 of roughly $200 billion or 1.2 percent of GDP. That is only a bit more than one-third of the early 90s burden.
Yes, this is just like the situation of subprime borrowers. (Nevermind that our debt is in dollars, and we print dollars.)
You can see why USA Today and the rest of the media need to have an affirmative action policy for deficit hawks.
The affirmative action policy that major media outlets have for deficit hawks is widely recognized. Arguments that would never appear in a serious media outlet based on their merits, fill the pages of newspapers and fill the airspace of leading television and radio news shows. In keeping with this spirit, USA Today gave us a column from Evan Feinberg, a policy analyst at the Charles Koch Institute.
The main thesis of the column is that the United States government is like a subprime borrower who is about see interest rates rise and throw the country into bankruptcy. Here’s the key paragraph:
“Say by 2015 rates rise to 3.5 percent. Our projected debt of $20 trillion will cost Americans $700 billion in annual interest payments. At 5 percent — still a low number in historical terms — we’ll pay $1 trillion. And if rates return to 1990 levels, we’ll have to pay more than $1.5 trillion in interest before we can even begin paying down our actual debt.”
Wow, are we all really scared?
There a couple of big problems with Feinberg’s story. First, much of our debt is long-term debt. We issue bonds that have durations of 10 years, 15 years, and even 30 years. The interest rate we pay on these bonds is not affected by increases in market interest rates in future years. In fact, if we want to make the deficit hawk cultists happy, when interest rates rise we can even buy back these bonds back at sharp discounts, thereby reducing our debt burden.
Second, much of the debt in his story is held by the Social Security, Medicare, and federal employee retirement trust funds. Higher interest payments on the bonds held by these funds is a burden to the general budget, but improves the finances of these trust funds.
While Feinberg presumably thinks he has discovered something new, the Congressional Budget Office actually anticipated that interest rates would rise in future years when the economy recovers. They incorporated this fact into their projections (Table 1-3). CBO has our net interest payments rising to $282 billion by 2015, approximately 1.5 percent of GDP. This is a bit less than half as much as the interest burden that the country faced in the early 90s.
It is also worth noting that much of the publicly held federal debt is currently held by the Federal Reserve Board. The interest on this debt is rebated to the Treasury. Last year, the Federal Reserve Board rebated almost $80 billion to the Treasury. If the Fed continues to hold this debt, it can continue to rebate $80 billion a year to the Treasury. (It can rely on higher reserve requirements to limit the amount of money in circulation and prevent inflation, if that is a problem.)
This would mean, based on the CBO numbers, we would be looking at a net interest burden in 2015 of roughly $200 billion or 1.2 percent of GDP. That is only a bit more than one-third of the early 90s burden.
Yes, this is just like the situation of subprime borrowers. (Nevermind that our debt is in dollars, and we print dollars.)
You can see why USA Today and the rest of the media need to have an affirmative action policy for deficit hawks.
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The Washington Post gave a careful account of Federal Reserve Board Chairman Ben Bernanke’s testimony to Congress:
“Federal Reserve Chairman Ben Bernanke delivered a stark warning to lawmakers in a high-profile speech Tuesday, saying that the U.S. economy is at risk if they bungle negotiations over the looming austerity crisis.
“Bernanke’s remarks are notable less for their substance than for their tone and timing. In his most prominent public speech in almost three months, Bernanke made clear that he sees grave risks should the bargaining over the ‘fiscal cliff’ — a phrase he coined — lead to either steep, immediate fiscal austerity or prolonged, confidence-rattling brinksmanship. And he suggested that 2013 could be a good year for the U.S. economy if lawmakers reach a deal quickly and amicably. …
“And the nation’s future prospects may be shaped in part by whether policymakers act in ways that instill confidence in the stability of U.S. policy.
“The economy is already bearing the weight of that anxiety, Bernanke said, and ‘such uncertainties will only be increased by discord and delay. In contrast, cooperation and creativity to deliver fiscal clarity . . . could help make the new year a very good one for the American economy.'”
It would probably be worth reminding readers that as a Federal Reserve Board governor and later President Bush’s chief economic adviser, Mr. Bernanke completely missed the rise of the $8 trillion housing bubble, the largest asset bubble in the history of the world. When its collapse first started to create stress in financial markets, he publicly stated that he expected the problems to be restricted to the subprime market. When Bears Stearns collapsed in March of 2008 he testified to Congress that he didn’t see another Bear Stearns out there.
It might be useful to give readers this background on Bernanke’s track record when reporting his current statements on the economy.
The Washington Post gave a careful account of Federal Reserve Board Chairman Ben Bernanke’s testimony to Congress:
“Federal Reserve Chairman Ben Bernanke delivered a stark warning to lawmakers in a high-profile speech Tuesday, saying that the U.S. economy is at risk if they bungle negotiations over the looming austerity crisis.
“Bernanke’s remarks are notable less for their substance than for their tone and timing. In his most prominent public speech in almost three months, Bernanke made clear that he sees grave risks should the bargaining over the ‘fiscal cliff’ — a phrase he coined — lead to either steep, immediate fiscal austerity or prolonged, confidence-rattling brinksmanship. And he suggested that 2013 could be a good year for the U.S. economy if lawmakers reach a deal quickly and amicably. …
“And the nation’s future prospects may be shaped in part by whether policymakers act in ways that instill confidence in the stability of U.S. policy.
“The economy is already bearing the weight of that anxiety, Bernanke said, and ‘such uncertainties will only be increased by discord and delay. In contrast, cooperation and creativity to deliver fiscal clarity . . . could help make the new year a very good one for the American economy.'”
It would probably be worth reminding readers that as a Federal Reserve Board governor and later President Bush’s chief economic adviser, Mr. Bernanke completely missed the rise of the $8 trillion housing bubble, the largest asset bubble in the history of the world. When its collapse first started to create stress in financial markets, he publicly stated that he expected the problems to be restricted to the subprime market. When Bears Stearns collapsed in March of 2008 he testified to Congress that he didn’t see another Bear Stearns out there.
It might be useful to give readers this background on Bernanke’s track record when reporting his current statements on the economy.
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Unfortunately it is in an otherwise useful column by Thomas Edsall on evolving political attitudes. The second to the last sentence tells reader that:
“Nonetheless, the overarching division remains, and the battle lines are drawn over how to distribute the costs of the looming fiscal crisis.”
But those wondering about the nature of the costly fiscal crisis to which Edsall is referring would follow the link to a Wall Street Journal piece on the fiscal showdown over the end of the Bush tax cuts and the sequester of spending that are scheduled to occurr at the end of the year. This crisis is one of excessive deficit reduction, it is resolved by smaller tax increases and smaller cuts in spending.
In other words, the crisis is that we are taking too much money away from people, which will hurt the economy. The crisis will be resolved by taking less money away from people. It is the opposite of a “costly fiscal crisis.” Instead, we will be faced with a costly economic crisis if the tax increases and spending cuts are allowed to take effect.
Unfortunately it is in an otherwise useful column by Thomas Edsall on evolving political attitudes. The second to the last sentence tells reader that:
“Nonetheless, the overarching division remains, and the battle lines are drawn over how to distribute the costs of the looming fiscal crisis.”
But those wondering about the nature of the costly fiscal crisis to which Edsall is referring would follow the link to a Wall Street Journal piece on the fiscal showdown over the end of the Bush tax cuts and the sequester of spending that are scheduled to occurr at the end of the year. This crisis is one of excessive deficit reduction, it is resolved by smaller tax increases and smaller cuts in spending.
In other words, the crisis is that we are taking too much money away from people, which will hurt the economy. The crisis will be resolved by taking less money away from people. It is the opposite of a “costly fiscal crisis.” Instead, we will be faced with a costly economic crisis if the tax increases and spending cuts are allowed to take effect.
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That is what readers of his column on the budget standoff undoubtedly concluded when they read his line:
“It’s a pity, because the outlines of the needed deal are clear.”
He then lists a number of items which would not obviously be in most people’s outlines, such as reduction in the top tax rate from 39.6 percent to 30.0 percent, and “sizable cuts in Social Security and Medicare.” The latter might be viewed as especially surprising since an overwhelming majority of people across the political spectrum are opposed to cuts in Social Security and Medicare.
As a policy matter, with the vast majority of retirees just scraping by now, the idea of imposing further hardship would not seem to make a lot of sense. According to the Pew Research Center, the median near retiree household will not even have enough wealth to pay off their mortgage (their median wealth is just $162,000 compared to a median house price of more than $180,000).
This means that if a typical household used all of their wealth, including all their retirement accounts and selling their car, they would still have a small mortgage left over and would be entirely dependent on a Social Security check that averages just over $1,200 a month for their income. While highly touted in media outlets like the Washington Post, the number of affluent elderly (incomes over $100,000) are few and far between. Cutting their benefits would have little impact on the finances of Social Security and Medicare or the federal budget.
Given these facts, how could it be so clear to Samuelson that the outlines of the needed deal include sizable cuts in Social Security and Medicare? I gave my answer.
That is what readers of his column on the budget standoff undoubtedly concluded when they read his line:
“It’s a pity, because the outlines of the needed deal are clear.”
He then lists a number of items which would not obviously be in most people’s outlines, such as reduction in the top tax rate from 39.6 percent to 30.0 percent, and “sizable cuts in Social Security and Medicare.” The latter might be viewed as especially surprising since an overwhelming majority of people across the political spectrum are opposed to cuts in Social Security and Medicare.
As a policy matter, with the vast majority of retirees just scraping by now, the idea of imposing further hardship would not seem to make a lot of sense. According to the Pew Research Center, the median near retiree household will not even have enough wealth to pay off their mortgage (their median wealth is just $162,000 compared to a median house price of more than $180,000).
This means that if a typical household used all of their wealth, including all their retirement accounts and selling their car, they would still have a small mortgage left over and would be entirely dependent on a Social Security check that averages just over $1,200 a month for their income. While highly touted in media outlets like the Washington Post, the number of affluent elderly (incomes over $100,000) are few and far between. Cutting their benefits would have little impact on the finances of Social Security and Medicare or the federal budget.
Given these facts, how could it be so clear to Samuelson that the outlines of the needed deal include sizable cuts in Social Security and Medicare? I gave my answer.
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After warning readers of the dire consequences of waiting until after January 1 to reach a deal on taxes and spending, the Post told readers that the markets don’t seem to share its concerns. This was a good honest assessment of what to date seems to be largely a non-response to the dire warnings emanating from Washington policy circles about THE FISCAL CLIFF!!!!!!!!
After warning readers of the dire consequences of waiting until after January 1 to reach a deal on taxes and spending, the Post told readers that the markets don’t seem to share its concerns. This was a good honest assessment of what to date seems to be largely a non-response to the dire warnings emanating from Washington policy circles about THE FISCAL CLIFF!!!!!!!!
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The paper has a huge front page story showing the hit to the economy from each of the components of the showdown (e.g. the specific tax cuts that are ending and the various spending cuts). The problem is that what the article shows as the hit to the economy is the hit if nothing is done all year, it has zero, nothing, nada, to do with the impact of letting the December 31st deadline pass, with the tax increases and spending cuts reversed early in 2013. It is unlikely that many USA Today readers will recognize this fact and therefore will be badly misled by this front page article. (Given this fact, it is difficult to see why USA Today would devote so much space to this graph.)
The Republicans are working hard to try to build up fears around this deadline because they know that President Obama will be in a much better negotiating position after the end of the year. The USA Today piece fits with this agenda.
The paper has a huge front page story showing the hit to the economy from each of the components of the showdown (e.g. the specific tax cuts that are ending and the various spending cuts). The problem is that what the article shows as the hit to the economy is the hit if nothing is done all year, it has zero, nothing, nada, to do with the impact of letting the December 31st deadline pass, with the tax increases and spending cuts reversed early in 2013. It is unlikely that many USA Today readers will recognize this fact and therefore will be badly misled by this front page article. (Given this fact, it is difficult to see why USA Today would devote so much space to this graph.)
The Republicans are working hard to try to build up fears around this deadline because they know that President Obama will be in a much better negotiating position after the end of the year. The USA Today piece fits with this agenda.
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It seems that WonkBlog is picking up some of the Washington Post’s bad habits. The Post was a strong supporter of NAFTA when the trade agreement was being debated, virtually closing its news and opinion pages to critics of the deal. In the almost two decades since NAFTA passed the Post has run numerous pieces touting the benefits of the agreement for both Mexico and the United States.
The praise has been especially off the mark in the case of Mexico. In spite of having the lowest per capita growth of any country in Latin America over the last decade, the Post has routinely run pieces highlighting the boom in Mexico and the country’s growing middle class (e.g. see here and here). The Post even claimed in a 2007 editorial that Mexico’s GDP had quadrupled since 1988. (The actual growth number was 83 percent.)
WonkBlog has a piece that cites a new paper and claims that NAFTA has been good for all involved, showing GDP and wage gains for Canada, Mexico, and the U.S. While this is in fact the conclusion of the study, it would have been worth including some qualifying remarks.
For example, the study explicitly assumes that there is only one type of labor. (The bottom of page 26 explains that in the modeling exercise there is “one wage per
country.”) This simplifying assumption can be useful for some purposes, but if the question is whether NAFTA might have hurt less-educated workers (e.g. autoworkers and steelworkers) to the benefit of more highly educated workers (e.g. doctors and lawyers), it cannot be answered with a model where there is one type of labor.
This upward redistribution is exactly what fans of the Stolper-Samuelson theorem would expect from a trade agreement like NAFTA. Therefore this model can not be used to tell us whether NAFTA would have had one of the negative effects predicted by economic theory.
The other big item missing from this model is the impact of stronger patent and copyright protections. NAFTA required Mexico to develop a U.S. style patent system which substantially raised the cost of prescription drugs and other products in Mexico. This model makes no effort to measure the impact of this increased protectionism on the Mexican economy directly, or indirectly on the other two economies. Insofar as this interference with the free market led to higher prices and increased distortions, it would be expected to slow growth, but obviously that effect cannot be picked up in this model.
In short, the model highlighted in this post can be useful for some purposes but it cannot possibly provide a basis for telling us whether NAFTA was on net good or bad for the United States, Mexico, and Canada.
Correction:
An earlier verison referred to “Wongblog.”
It seems that WonkBlog is picking up some of the Washington Post’s bad habits. The Post was a strong supporter of NAFTA when the trade agreement was being debated, virtually closing its news and opinion pages to critics of the deal. In the almost two decades since NAFTA passed the Post has run numerous pieces touting the benefits of the agreement for both Mexico and the United States.
The praise has been especially off the mark in the case of Mexico. In spite of having the lowest per capita growth of any country in Latin America over the last decade, the Post has routinely run pieces highlighting the boom in Mexico and the country’s growing middle class (e.g. see here and here). The Post even claimed in a 2007 editorial that Mexico’s GDP had quadrupled since 1988. (The actual growth number was 83 percent.)
WonkBlog has a piece that cites a new paper and claims that NAFTA has been good for all involved, showing GDP and wage gains for Canada, Mexico, and the U.S. While this is in fact the conclusion of the study, it would have been worth including some qualifying remarks.
For example, the study explicitly assumes that there is only one type of labor. (The bottom of page 26 explains that in the modeling exercise there is “one wage per
country.”) This simplifying assumption can be useful for some purposes, but if the question is whether NAFTA might have hurt less-educated workers (e.g. autoworkers and steelworkers) to the benefit of more highly educated workers (e.g. doctors and lawyers), it cannot be answered with a model where there is one type of labor.
This upward redistribution is exactly what fans of the Stolper-Samuelson theorem would expect from a trade agreement like NAFTA. Therefore this model can not be used to tell us whether NAFTA would have had one of the negative effects predicted by economic theory.
The other big item missing from this model is the impact of stronger patent and copyright protections. NAFTA required Mexico to develop a U.S. style patent system which substantially raised the cost of prescription drugs and other products in Mexico. This model makes no effort to measure the impact of this increased protectionism on the Mexican economy directly, or indirectly on the other two economies. Insofar as this interference with the free market led to higher prices and increased distortions, it would be expected to slow growth, but obviously that effect cannot be picked up in this model.
In short, the model highlighted in this post can be useful for some purposes but it cannot possibly provide a basis for telling us whether NAFTA was on net good or bad for the United States, Mexico, and Canada.
Correction:
An earlier verison referred to “Wongblog.”
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