The Fiscal Cliff, It’s Just Like the Holocaust

October 16, 2012

16 Octubre 2012

Yes, that is absurd and even offensive, but since the NYT is going in for gross exaggeration to scare its readers about the budget, I thought I would play along. A NYT piece on the budget deficit told readers that:

“But even if Democrats and the financial markets go along with the delay [a decision to put off any longer term plans on taxes and spending if Romney wins the election], the months before Mr. Romney’s swearing-in could be as crucial to his presidency as the transition period was for Mr. Obama four years ago, when the economic crisis led him to draft a big stimulus package while President George W. Bush still occupied the White House.”

This is wrong. The economy was losing 700,000 jobs a month in the period between the election and when President Obama took office. His decision to push a stimulus, which in the context should not be called “big,” kept several million more people from losing their job. His decision shortly after the passage of the stimulus to “pivot to deficit reduction,” has likely ensured that millions of people will be needlessly unemployed for much of a decade.

It is difficult to imagine the set of events in a transition to a Romney administration that could have anywhere near the same consequence.

Yes, that is absurd and even offensive, but since the NYT is going in for gross exaggeration to scare its readers about the budget, I thought I would play along. A NYT piece on the budget deficit told readers that:

“But even if Democrats and the financial markets go along with the delay [a decision to put off any longer term plans on taxes and spending if Romney wins the election], the months before Mr. Romney’s swearing-in could be as crucial to his presidency as the transition period was for Mr. Obama four years ago, when the economic crisis led him to draft a big stimulus package while President George W. Bush still occupied the White House.”

This is wrong. The economy was losing 700,000 jobs a month in the period between the election and when President Obama took office. His decision to push a stimulus, which in the context should not be called “big,” kept several million more people from losing their job. His decision shortly after the passage of the stimulus to “pivot to deficit reduction,” has likely ensured that millions of people will be needlessly unemployed for much of a decade.

It is difficult to imagine the set of events in a transition to a Romney administration that could have anywhere near the same consequence.

Thomas Edsall’s Productivity Fears

By Dean BakerDean Baker

October 15, 2012

15 Octubre 2012

In his NYT blog, Thomas Edsall took off from a recent paper by Northwestern University economist Robert Gordon and warned that we may see a future of very slow economic growth. While Gordon is a good economist, with many useful insights (including in this paper), it is worth throwing in a few words of caution. First, economists’ ability to predict trends in productivity is virtually zero. There were two major shifts in productivity trends in the post-World War II period: the slowdown that began in 1973 and the speedup that began in 1995. Almost no one saw either shift coming even as the shifts were occurring, much less 3 or 5 years ahead of time. Forty years later there is still no agreement within the economics profession on the causes of the slowdown in 1973. Given this history, it is reasonable to view any projections of productivity growth for the next hundred years and beyond with more than a little skepticism. With this caution, let me suggest some reasons that Gordon may be overly pessimistic. There are good reasons for believing that we could have large gains in living standards, even if these may not always be picked up in our GDP or productivity measures. To start with an easy one, we spend more than 17 percent of GDP on health care, more than twice as much per person as the average for other wealthy countries. Yet, we have nothing obvious to show for it in the way of outcomes. This suggests two obvious paths for gains. First, we can look to get our costs more in line with those of other wealthy countries. This would free up an enormous amount of resources for other uses. If the political system is too corrupt to allow for increased efficiency in the health care sector, we can look to take advantage of the more efficient systems elsewhere through increased trade. We could also look to have the sort of improvements in lifestyle and diet that would bring our life expectancies up to those of other wealthy country. We are currently more than 5 years behind Japan, the leader among major countries. If we could get even with Japan, somewhere over the course of the century, this extra 5 years, beyond the current path of increase, would be worth more than $250,000 per person by standard measures. A relatively simple way in which we could have an increase in living standards that would not be picked up GDP or productivity measures is by reducing the standard workweek to four days from five. If we assume that people spend an average of 1 hour on their round-trip commute, this would be an increase in pay per-hour spent working/commuting of more than 2 percent. If we also could stagger workdays and reduce congestion, the gains would be correspondingly larger.

Tax Deductible Speeding Tickets?

By Dean BakerDean Baker

October 13, 2012

13 Octubre 2012

I wouldn’t try taking the deduction, but apparently banks and other corporate crooks are often able to deduct the settlements in civil actions from their taxes. Good piece in the Post calling attention to this issue.

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate

By Dean BakerDean Baker

October 13, 2012

13 Octubre 2012

After having provoked a debate that subsequently involved Nick Rowe, Brad DeLong and Paul Krugman, I will assert blog owners’ privilege and throw out some summary thoughts. First, we all seem to agree that in a situation where the economy is clearly operating well below its potential, governments can run deficits to boost employment and output. I believe we all agree that in principle the government can also use these deficits to increase future output through productive investment in either physical or human capital. This would make future generations better off on net as a result of deficits today, since the economy will be larger than it would be without the deficits. I would also add, without necessarily implicating anyone else, that simply by increasing output and employment the government is likely to make society better off in the future for two reasons. First, by keeping people employed we will keep them attached to the labor force and reduce the number of hard core unemployed who would be difficult to re-employ in subsequent years, possibly leaving us with a higher rate of unemployment (and lower output) long into the future. The other reason that short-term increases in employment can have long-term effects is that by keeping families intact, children are likely to have better upbringings and do better in school. This means that the next generation will on average will have happier more productive lives because we used deficits to keep their parents employed today. Okay, but even if deficits today don’t reduce output tomorrow, Nick Rowe argues that by increasing the wealth of some members of the current generation (those who hold the bonds used to finance the deficit), we can still be reducing the wealth of members of future generations. The argument here is that if we get back to full employment at some point in the future (this is a full employment argument), the people who hold the bonds will be able to pull resources away from young people who are entering the labor force and were not involved in the decision to run deficits today. There is some validity to this point, but it is extremely limited. First, it is important to remember that most of the holders of current debt will be people who have children and/or will bequest some of their wealth to their children or charitable organizations. While children may not benefit one to one from the consumption of their parents, surely they benefit in part. Insofar as people with or without children save some of the wealth from the bonds and subsequently will it to children or charitable organizations, today’s deficit will not crowd out any consumption of future generations. Finally, much of the tax burden of paying the debt service on the debt issued today will be borne by members of the current generation. In that sense it is an issue of intra-generational distribution, not intergenerational distribution. In short, we can talk about some burden on future generations as a result of debt issued today, if it goes to unproductive uses, but the size of this burden is clearly a fraction of the debt and likely to be a very small fraction in my book. Furthermore, debt is far from the only mechanism through which the government imposes inter-generational burdens of this type.

Ryan on Medicare: More Mind Reading at the NYT

By Dean BakerDean Baker

October 12, 2012

12 Octubre 2012

Is everyone in the news business a frustrated mind reader? Given their often demonstrated tendency to tell us what politicians think, we might believe this to be the case.

The NYT was doing some mind reading in its coverage of the vice presidential debate when it told readers:

“Mr. Ryan believes competition will drive down the cost of health care, keeping the voucher’s value up to date.”

(“Up to date” in this context means large enough to cover the cost of a Medicare equivalent policy.) Of course the NYT gives no explanation of how it knows what Ryan “believes” about the effectiveness of competition in keeping costs down. The very next sentence in the article reports the assessment of the Congressional Budget Office:

“The Congressional Budget Office projected that over time, the value of the voucher would erode, shifting the extra costs to seniors.”

So does Ryan have access to information that the Congressional Budget Office does not have? Does he have a different way to interpret the data? After all, we have more than a half century of experience with the private insurance market, including experiments with including private insurers in Medicare. This experience has shown that private insurers raise, not lower, costs.

In the absence of any evidence otherwise, we might reasonably conclude that Representative Ryan wants to cut the cost of Medicare in order to maintain lower tax rates. We might also conclude that Ryan wants to give money to insurers who would profit enormously from the voucher system that he has proposed. The insurance industry is a major contributor to the Republican party.

It would of course be irresponsible for the NYT to report as a fact that Ryan is pushing his voucher plan as a way to redistribute tax dollars to the insurance industry. It is similarly irresponsible to report as a fact that he believes that his voucher plan will reduce costs.

Is everyone in the news business a frustrated mind reader? Given their often demonstrated tendency to tell us what politicians think, we might believe this to be the case.

The NYT was doing some mind reading in its coverage of the vice presidential debate when it told readers:

“Mr. Ryan believes competition will drive down the cost of health care, keeping the voucher’s value up to date.”

(“Up to date” in this context means large enough to cover the cost of a Medicare equivalent policy.) Of course the NYT gives no explanation of how it knows what Ryan “believes” about the effectiveness of competition in keeping costs down. The very next sentence in the article reports the assessment of the Congressional Budget Office:

“The Congressional Budget Office projected that over time, the value of the voucher would erode, shifting the extra costs to seniors.”

So does Ryan have access to information that the Congressional Budget Office does not have? Does he have a different way to interpret the data? After all, we have more than a half century of experience with the private insurance market, including experiments with including private insurers in Medicare. This experience has shown that private insurers raise, not lower, costs.

In the absence of any evidence otherwise, we might reasonably conclude that Representative Ryan wants to cut the cost of Medicare in order to maintain lower tax rates. We might also conclude that Ryan wants to give money to insurers who would profit enormously from the voucher system that he has proposed. The insurance industry is a major contributor to the Republican party.

It would of course be irresponsible for the NYT to report as a fact that Ryan is pushing his voucher plan as a way to redistribute tax dollars to the insurance industry. It is similarly irresponsible to report as a fact that he believes that his voucher plan will reduce costs.

Martha Raddatz on Social Security: What Would You Do About the United States' Imperialistic Foreign Policy?

By Dean BakerDean Baker

October 12, 2012

12 Octubre 2012

During the vice-presidential debate Martha Raddatz used her position as debate moderator to ask the candidates about the impending bankruptcies of Social Security and Medicare. It was incredibly irresponsible to use such a loaded term to refer to the financial problems facing these programs.

Both Social Security and Medicare are projected to face shortfalls over their 75-year planning horizon, however these shortfalls are not accurately described as “bankruptcy.” This phrase undoubtedly leads many people to believe that there is a prospect that the programs would go out of business.

Polls consistently show that a majority of young people believe that they stand to get nothing back from Social Security when they retire. That is of course not true unless Congress were to vote to eliminate the program. Under the latest projections they would stand to get a larger benefit than current retirees even if nothing is ever done to change the program’s finances. It is unlikely that listeners would understand this to be the case based on Raddatz’s comment.

It is also unlikely that viewers would have realized that the changes put in place by the Affordable Care Act extended the date when Medicare is first projected to face a shortfall from 2016 to 2024 and reduced the projected shortfall over the program’s 75-year planning period by more than two thirds. The remaining gap could be filled by a tax increase that is less than 2 percent of projected wage growth over the next 30 years.

It is the job of the moderator to try to provide their audience with information and to draw out the candidates’ views. It is incredibly irresponsible to use this platform to push their personal agenda for the country’s two most important social programs.

During the vice-presidential debate Martha Raddatz used her position as debate moderator to ask the candidates about the impending bankruptcies of Social Security and Medicare. It was incredibly irresponsible to use such a loaded term to refer to the financial problems facing these programs.

Both Social Security and Medicare are projected to face shortfalls over their 75-year planning horizon, however these shortfalls are not accurately described as “bankruptcy.” This phrase undoubtedly leads many people to believe that there is a prospect that the programs would go out of business.

Polls consistently show that a majority of young people believe that they stand to get nothing back from Social Security when they retire. That is of course not true unless Congress were to vote to eliminate the program. Under the latest projections they would stand to get a larger benefit than current retirees even if nothing is ever done to change the program’s finances. It is unlikely that listeners would understand this to be the case based on Raddatz’s comment.

It is also unlikely that viewers would have realized that the changes put in place by the Affordable Care Act extended the date when Medicare is first projected to face a shortfall from 2016 to 2024 and reduced the projected shortfall over the program’s 75-year planning period by more than two thirds. The remaining gap could be filled by a tax increase that is less than 2 percent of projected wage growth over the next 30 years.

It is the job of the moderator to try to provide their audience with information and to draw out the candidates’ views. It is incredibly irresponsible to use this platform to push their personal agenda for the country’s two most important social programs.

The Washington Post Doesn't Know that the Trade Deficit Is Affected by Imports

By Dean BakerDean Baker

October 12, 2012

12 Octubre 2012

This is what readers of an article on the U.S. trade situation would conclude. The article notes the large U.S. trade deficit, but then focuses exclusively on the role of increased exports in reducing the deficit. In fact, in order to get the deficit down to a more sustainable level we will almost certainly need both higher exports and lower imports.

Incredibly, the article never once mentioned the value of the dollar. This is by far the most important determinant of both our exports and our trade deficit. If the dollar were to fall by 20 percent against other currencies, as a first approximation it will reduce the price of U.S. exports by 20 percent relative to the price of goods produced elsewhere. All economists agree that lower prices increase demand. It is bizarre that the piece never discusses the over-valuation of the dollar which is the cause of the trade deficit.

The piece was somewhat misleading when it told readers:

“Last year, U.S. exports totaled $2.1 trillion, a 14 percent rise from 2010. That activity accounted for many millions of jobs and about 14 percent of the nation’s economic output.”

Exports do not necessarily lead to jobs. For example, if GM moves a car assembly plant from Ohio to Mexico, we are not getting more jobs because part that used to go to Ohio are now exported to Mexico for assembly there. While exports do create jobs, many exports are intermediate goods like the car parts in this story and do not result in additional jobs in the United States.

This is what readers of an article on the U.S. trade situation would conclude. The article notes the large U.S. trade deficit, but then focuses exclusively on the role of increased exports in reducing the deficit. In fact, in order to get the deficit down to a more sustainable level we will almost certainly need both higher exports and lower imports.

Incredibly, the article never once mentioned the value of the dollar. This is by far the most important determinant of both our exports and our trade deficit. If the dollar were to fall by 20 percent against other currencies, as a first approximation it will reduce the price of U.S. exports by 20 percent relative to the price of goods produced elsewhere. All economists agree that lower prices increase demand. It is bizarre that the piece never discusses the over-valuation of the dollar which is the cause of the trade deficit.

The piece was somewhat misleading when it told readers:

“Last year, U.S. exports totaled $2.1 trillion, a 14 percent rise from 2010. That activity accounted for many millions of jobs and about 14 percent of the nation’s economic output.”

Exports do not necessarily lead to jobs. For example, if GM moves a car assembly plant from Ohio to Mexico, we are not getting more jobs because part that used to go to Ohio are now exported to Mexico for assembly there. While exports do create jobs, many exports are intermediate goods like the car parts in this story and do not result in additional jobs in the United States.

Brad DeLong Beats Me to Responding to Nick Rowe

By Dean BakerDean Baker

October 12, 2012

12 Octubre 2012

I saw that Nick Rowe was unhappy that I was saying that the government debt is not a burden to future generations since they will also own the debt as an asset. I had planned to write a response, but I see that Brad DeLong got there first. I would agree with pretty much everything Brad said. The burden of the debt only exists if there is reason to believe that debt is somehow displacing investment in private capital, which is certainly not true at present.

I would probably argue the case even more strongly. In a depressed economy like we have today, there is reason to believe that the deficit, by boosting demand, is actually increasing investment, thereby making future generations wealthier. There is also the issue of human capital, that by keeping workers employed and keeping families intact, it is improving the productive capacities of the labor force in the future.

Perhaps most importantly, it is essential that people understand that the measure of the burden of the debt in future generations is not the size of the debt, but the extent to which we believe the debt has reduced output in the future compared to a counter-factual where we did not run the debt. If the debt did not reduce the economies’ future productive capabilities (or even raised them) then there is no burden of the debt. In any case, how well we are treating our children is measured first and foremost by the health and the economy and the society we pass on to them, not the amount of government debt.

It is also important to add that government borrowing (if it does divert capital from private investment) is just one way in which we can reduce the economy’s productive capacities in the future. Suppose we don’t borrow but instead sell off government assets like park land or highways which are then turned into toll roads. The sale of assets (including oil leases on government property) has roughly the same effect as government borrowing.

This also applies to other ways in which the government can raise money which may not be thought of as asset sales, but have a similar impact on future output. Foremost in this category is patent and copyright protection. In these cases the government is effectively paying people for innovations and creative work by promising to give patent and copyright holders a monopoly in certain markets in the future. This is using the government’s power to allow copyright and patent holders to collect a tax on specific products. In this sense, it has a similar impact on future generations’ well-being as if the government borrowed several trillion dollars to pay innovators and creative workers and then allowed their products to be sold in a free market.

Other factors not related to the debt also can make future generations poorer in important ways. If we get other countries or people angry at us so that we have to spend more on defense to keep the country safe, then we will have imposed a large burden on future generations. If we impose harsh penalties for minor offenses so that millions of people will be tied up in the penal system, then we are also imposing a large burden on future generations.

These and a long list of other policies (did I mention the environment and global warming?) all can impose substantial burdens on future generations in ways that are not at all captured by the debt. Therefore the debt does not in any way present a measure of the burden that we are imposing on future generations.

In fact, the debt we have today does not even give us a good measure of the debt. Suppose that we issue $4 trillion in 30-year bonds at 2.75 percent interest. If interest rates return to more normal level (say 6.0 percent on 30-year bonds) in 3 years we would be able to buy the bonds back for around $2.2 trillion, eliminating $1.8 trillion on debt. This would not change our interest burden one iota, but those who worship the debt as a measure of inter-generational equity would then be able to go to the alter in their basement and offer thanks for having reduced our debt to GDP ratio by more than 10 percentage points of GDP.