Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse.
Perhaps repeating this line three times will help the type of people who have columns in the Washington Post on the euro zone crisis get some understanding of the issue. Today we get a lecture on southern country profligacy from Daniel M. Price. Yesterday, Post columnist Matt Miller told us how he misleads his daughter about the nature of the euro zone crisis and suggested that the rest of us be equally misleading with our own children.
The reality is that most of the countries currently facing debt troubles were not profligate prior to the crisis. While it may be reasonable to describe Greece as being profligate, the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years leading up to the crisis.
Italy, the closest Greece competitor among euro zone crisis countries, had relatively small budget deficits in the years before the crisis. Its debt to GDP ratio fell from 93.7 percent of GDP in 2001 to 87.3 percent of GDP in 2007. In other words, the deficits of these years were completely sustainable.
Spain ran budget surpluses in the years from 2005-2007. Its debt to GDP ratio fell from 50.3 percent in 2000 to 26.5 percent of GDP in 2007. There is no remotely plausibly story of government profligacy here.
In short, people who describe the euro zone crisis as a story of excessive government deficits are pushing an ideological agenda that has nothing to do with reality. The story of the current deficits of the non-Greece countries is the story of the collapse of housing bubbles that threw the euro zone economies into a severe downturn. The European Central Bank (ECB) has magnified the problem by maintaining relatively tight monetary policy in order to maintain very low inflation and also explicitly asserting that it would not act as a lender of last resort to the heavily indebted countries.
Blaming government profligacy may be useful to those who want to see cuts in social spending, but it is not a story that is based in reality. It conceals the incompetence/greed of the private sector bankers who fueled the bubble. It also ignores the recklessness of the ECB of clinging to its inflation obsession even in the midst of a crisis that threatens the survival of the euro and could cause millions of additional workers to lose their job.
Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse.
Perhaps repeating this line three times will help the type of people who have columns in the Washington Post on the euro zone crisis get some understanding of the issue. Today we get a lecture on southern country profligacy from Daniel M. Price. Yesterday, Post columnist Matt Miller told us how he misleads his daughter about the nature of the euro zone crisis and suggested that the rest of us be equally misleading with our own children.
The reality is that most of the countries currently facing debt troubles were not profligate prior to the crisis. While it may be reasonable to describe Greece as being profligate, the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years leading up to the crisis.
Italy, the closest Greece competitor among euro zone crisis countries, had relatively small budget deficits in the years before the crisis. Its debt to GDP ratio fell from 93.7 percent of GDP in 2001 to 87.3 percent of GDP in 2007. In other words, the deficits of these years were completely sustainable.
Spain ran budget surpluses in the years from 2005-2007. Its debt to GDP ratio fell from 50.3 percent in 2000 to 26.5 percent of GDP in 2007. There is no remotely plausibly story of government profligacy here.
In short, people who describe the euro zone crisis as a story of excessive government deficits are pushing an ideological agenda that has nothing to do with reality. The story of the current deficits of the non-Greece countries is the story of the collapse of housing bubbles that threw the euro zone economies into a severe downturn. The European Central Bank (ECB) has magnified the problem by maintaining relatively tight monetary policy in order to maintain very low inflation and also explicitly asserting that it would not act as a lender of last resort to the heavily indebted countries.
Blaming government profligacy may be useful to those who want to see cuts in social spending, but it is not a story that is based in reality. It conceals the incompetence/greed of the private sector bankers who fueled the bubble. It also ignores the recklessness of the ECB of clinging to its inflation obsession even in the midst of a crisis that threatens the survival of the euro and could cause millions of additional workers to lose their job.
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A NYT article on President Obama’s latest program to help underwater homeowners included the assertion:
“an increasing number of economists worry that depressed housing prices and underwater borrowers are holding back a broader recovery.”
Actually, the United States does not have depressed housing prices. According to the Case Schiller national house price index, inflation adjusted house prices are still more than 9 percent above their 1996 level. The problem was that the country had a housing bubble that is now mostly deflated. The problem in the economy is not a depressed housing market.
A NYT article on President Obama’s latest program to help underwater homeowners included the assertion:
“an increasing number of economists worry that depressed housing prices and underwater borrowers are holding back a broader recovery.”
Actually, the United States does not have depressed housing prices. According to the Case Schiller national house price index, inflation adjusted house prices are still more than 9 percent above their 1996 level. The problem was that the country had a housing bubble that is now mostly deflated. The problem in the economy is not a depressed housing market.
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This important fact should have been noted in an article on a public sector strike in the U.K. against plans to cut workers’ wages and benefits. The article includes some discussion of the effectiveness of the U.K. austerity plan and notes that interest rates on U.K. debt are now lower in Germany. An important difference between the U.K. and Germany is that the U.K. has a bank that can buy its debt in a crisis. The European Central Bank insists that it will not play this role for Germany and other euro zone countries.
This important fact should have been noted in an article on a public sector strike in the U.K. against plans to cut workers’ wages and benefits. The article includes some discussion of the effectiveness of the U.K. austerity plan and notes that interest rates on U.K. debt are now lower in Germany. An important difference between the U.K. and Germany is that the U.K. has a bank that can buy its debt in a crisis. The European Central Bank insists that it will not play this role for Germany and other euro zone countries.
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The Post ran an article [sorry, it won’t allow linking] with the headline: “big banks got $13 billion in undisclosed Fed loans.” Actually, the article refers to a Bloomberg investigative piece by Bob Ivry and colleagues that found that Fed loans at below market interest rates amounted to a subsidy of $13 billion to the country’s largest banks. This $13 billion was effectively a gift from the taxpayers to J.P. Morgan, Goldman Sachs, and other large banks. It was not a loan as the Post headline implies.
The Post ran an article [sorry, it won’t allow linking] with the headline: “big banks got $13 billion in undisclosed Fed loans.” Actually, the article refers to a Bloomberg investigative piece by Bob Ivry and colleagues that found that Fed loans at below market interest rates amounted to a subsidy of $13 billion to the country’s largest banks. This $13 billion was effectively a gift from the taxpayers to J.P. Morgan, Goldman Sachs, and other large banks. It was not a loan as the Post headline implies.
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NYT columnist Bill Keller decries a political process in which the consensus of mainstream economists is not according the respect it deserves. He failed to note one obvious reason why these experts’ views might not be getting much respect: almost none of the experts noticed the huge housing bubbles whose collapse led to severe recessions in the United States and Europe.
In this case, the process of credentialing ensured that evidence would be ignored rather than examined. Those who raised concerns about the bubbles were dismissed as cranks. Even after the collapse, the economists who managed to overlook the largest asset bubbles in the history of the world have suffered almost no consequences in terms of their employment or professional standing. Clearly the economics profession does not have a structure where performance is rewarded and failure is punished. Given this fact, it is certainly understandable that the pubic would be suspicious of pronouncements by economists.
It is also worth noting that Keller’s takeaway about the profession’s consensus of what needs to be done is in fact wrong, or at least seriously misleading. He says that there is a need to reduce “entitlements.” In fact, there is no obvious need to reduce Social Security. Its cost is projected to increase only modestly in coming decades as a share of GDP and is fully paid by its designated tax through the year 2038. Even after that date, the tax is projected to cover more than 80 percent of scheduled benefits through the rest of the century.
The real story is Medicare and Medicaid, the cost of which is in turn driven by the broken U.S. health care system. If the United States paid the same amount per person for health care as people in other wealthy countries we would be looking at long-term budget surpluses, not deficits. It is misleading to describe the problem of a broken health care system as a problem of “entitlements.”
This is especially important because it conceals the main choice in containing Medicare and Medicaid costs. On the one hand, we can look to reduce the quality of care provided by these programs, as advocated by politicians of both parties. Alternatively, we can look to reduce the waste and excessive fees charged by providers.
There are enormous distribution implications to how this issue is resolved. However most people will not even be aware of these issues if the media hides them under the problem of “entitlements.”
NYT columnist Bill Keller decries a political process in which the consensus of mainstream economists is not according the respect it deserves. He failed to note one obvious reason why these experts’ views might not be getting much respect: almost none of the experts noticed the huge housing bubbles whose collapse led to severe recessions in the United States and Europe.
In this case, the process of credentialing ensured that evidence would be ignored rather than examined. Those who raised concerns about the bubbles were dismissed as cranks. Even after the collapse, the economists who managed to overlook the largest asset bubbles in the history of the world have suffered almost no consequences in terms of their employment or professional standing. Clearly the economics profession does not have a structure where performance is rewarded and failure is punished. Given this fact, it is certainly understandable that the pubic would be suspicious of pronouncements by economists.
It is also worth noting that Keller’s takeaway about the profession’s consensus of what needs to be done is in fact wrong, or at least seriously misleading. He says that there is a need to reduce “entitlements.” In fact, there is no obvious need to reduce Social Security. Its cost is projected to increase only modestly in coming decades as a share of GDP and is fully paid by its designated tax through the year 2038. Even after that date, the tax is projected to cover more than 80 percent of scheduled benefits through the rest of the century.
The real story is Medicare and Medicaid, the cost of which is in turn driven by the broken U.S. health care system. If the United States paid the same amount per person for health care as people in other wealthy countries we would be looking at long-term budget surpluses, not deficits. It is misleading to describe the problem of a broken health care system as a problem of “entitlements.”
This is especially important because it conceals the main choice in containing Medicare and Medicaid costs. On the one hand, we can look to reduce the quality of care provided by these programs, as advocated by politicians of both parties. Alternatively, we can look to reduce the waste and excessive fees charged by providers.
There are enormous distribution implications to how this issue is resolved. However most people will not even be aware of these issues if the media hides them under the problem of “entitlements.”
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The euro zone economies continue to operate well below their potential GDP, with large amounts of excess capacity and huge numbers of unemployed workers. In this context, the main impact of the austerity being demanded by Germany of countries across the euro zone will be a further reduction in growth and increase in unemployment. Slower growth will worsen budget deficits across the region.
This point should have been mentioned in a Washington Post article on the pursuit of austerity in euro zone countries. Many Post readers may not recognize that the predicted effect of these policies is to slow growth and raise unemployment.
The euro zone economies continue to operate well below their potential GDP, with large amounts of excess capacity and huge numbers of unemployed workers. In this context, the main impact of the austerity being demanded by Germany of countries across the euro zone will be a further reduction in growth and increase in unemployment. Slower growth will worsen budget deficits across the region.
This point should have been mentioned in a Washington Post article on the pursuit of austerity in euro zone countries. Many Post readers may not recognize that the predicted effect of these policies is to slow growth and raise unemployment.
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As we like to say here at Beat the Press, the long-term deficit problem is primarily health care, health care, and health care. Robert Samuelson gets this one 100 percent right in his column today.
He concludes that the way to contain costs is some sort of voucher system or a single-payer type universal Medicare program. It’s questionable whether a voucher system will actually contain costs, as opposed to reduce the quality of care (unless it involves buy-ins to other countries’ systems), but this is the direction the budget debate should take. The question is how we deal with health care costs; it is not a problem of an out of control budget more generally.
As we like to say here at Beat the Press, the long-term deficit problem is primarily health care, health care, and health care. Robert Samuelson gets this one 100 percent right in his column today.
He concludes that the way to contain costs is some sort of voucher system or a single-payer type universal Medicare program. It’s questionable whether a voucher system will actually contain costs, as opposed to reduce the quality of care (unless it involves buy-ins to other countries’ systems), but this is the direction the budget debate should take. The question is how we deal with health care costs; it is not a problem of an out of control budget more generally.
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Economists and people who believe in gravity think that firms hire when they see an increase in demand. The alternative is to turn away customers because a business does not have the necessary staff. Companies trying to make profits generally do not like to turn away customers.
Nonetheless, Republican Senator Jon Kyl said that the payroll tax cut did not lead businesses to hire workers. It is clear that workers did spend much of this tax cut. The savings rate in the last quarter was under 4.0 percent. If workers did not spend much of the tax cut, the implication is that the saving rate would have been under 3.0 percent in the absence of the tax cut. While this is higher than the near zero rate when the housing equity created by the bubble was driving consumption, it is far below the 8.0 percent pre-bubble average.
The NYT should have pointed out that Kyl was wrong; that he either doesn’t understand basic economics or was deliberately making assertions that he knew not to be true. Instead it just presented Kyl’s statements and responses by Democrats in he said/she said context. NYT reporters have the time to find the truth of such statements, most NYT readers do not.
Economists and people who believe in gravity think that firms hire when they see an increase in demand. The alternative is to turn away customers because a business does not have the necessary staff. Companies trying to make profits generally do not like to turn away customers.
Nonetheless, Republican Senator Jon Kyl said that the payroll tax cut did not lead businesses to hire workers. It is clear that workers did spend much of this tax cut. The savings rate in the last quarter was under 4.0 percent. If workers did not spend much of the tax cut, the implication is that the saving rate would have been under 3.0 percent in the absence of the tax cut. While this is higher than the near zero rate when the housing equity created by the bubble was driving consumption, it is far below the 8.0 percent pre-bubble average.
The NYT should have pointed out that Kyl was wrong; that he either doesn’t understand basic economics or was deliberately making assertions that he knew not to be true. Instead it just presented Kyl’s statements and responses by Democrats in he said/she said context. NYT reporters have the time to find the truth of such statements, most NYT readers do not.
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I know, everyone is saying that “George Will” and “confused by numbers” is repetitive, but it is nonetheless necessary to say in reference to his latest piece calling for privatization of the United States Postal Service (USPS). The point is supposed to be that the USPS is hopelessly inefficient compared to its private sector competitors and that if it were required to be run at a profit it would soon be out of business.
Actually, the data don’t really make this case. In 2006 Congress required the USPS to advance-fund retiree health benefits. While this may be advisable, this is not the normal practice among private businesses. Furthermore, it required that it build up the advance funding at a rapid pace (over 10 years), using health care cost growth assumptions that are way out of line with those used in the private sector.
The result was an added expense of roughly $5.5 billion a year that shifted the USPS from profits to losses in 2007 and 2008 and made its losses considerably larger in each of the last two years. Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years.
The USPS also suffers by virtue of the fact that it is required to invest its pension fund exclusively in government bonds. If it were allowed to invest in the same mix of assets as the heroic job creators in the private sector, the return on the fund would be 1-2 percentage points higher, saving the USPS roughly $1 to $2 billion in annual pension expenses.
These two changes, which would involve treating the government-run USPS in the same way as heroic job creators in the private sector, would restore the USPS to profitability over the course of a business cycle, even if they could not guarantee profitability even at the bottom of the worst downturn since the Great Depression. Apparently Will has not heard of the recession since it is not mentioned anywhere in his piece. (It’s hard to get news at the Washington Post.) The profitability of the USPS has always been highly cyclical.
It is reasonable to consider privatization of any government service, as well as the opposite. The decision should be made based on whether the private sector can accomplish the task more efficiently. The numbers are certainly not as clear cut as Will seems to believe.
In addition, the USPS carries a mandate to ensure that everyone in the country has access to low-cost mail service. It is obligated to deliver a letter from the most remote island in the Florida keys to Nome Alaska for the same cost as sending a letter across the street in Manhattan. We know that the letters can be delivered across the street in Manhattan at a lower cost, but no private delivery service will ship letters between small towns across the country for 44 cents. We may not care about this implicit subsidy to small town America, but anyone who talks about privatizing the USPS without dealing with the issue of guaranteed universal service is pushing an agenda, not discussing the issues involved with privatization.
I know, everyone is saying that “George Will” and “confused by numbers” is repetitive, but it is nonetheless necessary to say in reference to his latest piece calling for privatization of the United States Postal Service (USPS). The point is supposed to be that the USPS is hopelessly inefficient compared to its private sector competitors and that if it were required to be run at a profit it would soon be out of business.
Actually, the data don’t really make this case. In 2006 Congress required the USPS to advance-fund retiree health benefits. While this may be advisable, this is not the normal practice among private businesses. Furthermore, it required that it build up the advance funding at a rapid pace (over 10 years), using health care cost growth assumptions that are way out of line with those used in the private sector.
The result was an added expense of roughly $5.5 billion a year that shifted the USPS from profits to losses in 2007 and 2008 and made its losses considerably larger in each of the last two years. Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years.
The USPS also suffers by virtue of the fact that it is required to invest its pension fund exclusively in government bonds. If it were allowed to invest in the same mix of assets as the heroic job creators in the private sector, the return on the fund would be 1-2 percentage points higher, saving the USPS roughly $1 to $2 billion in annual pension expenses.
These two changes, which would involve treating the government-run USPS in the same way as heroic job creators in the private sector, would restore the USPS to profitability over the course of a business cycle, even if they could not guarantee profitability even at the bottom of the worst downturn since the Great Depression. Apparently Will has not heard of the recession since it is not mentioned anywhere in his piece. (It’s hard to get news at the Washington Post.) The profitability of the USPS has always been highly cyclical.
It is reasonable to consider privatization of any government service, as well as the opposite. The decision should be made based on whether the private sector can accomplish the task more efficiently. The numbers are certainly not as clear cut as Will seems to believe.
In addition, the USPS carries a mandate to ensure that everyone in the country has access to low-cost mail service. It is obligated to deliver a letter from the most remote island in the Florida keys to Nome Alaska for the same cost as sending a letter across the street in Manhattan. We know that the letters can be delivered across the street in Manhattan at a lower cost, but no private delivery service will ship letters between small towns across the country for 44 cents. We may not care about this implicit subsidy to small town America, but anyone who talks about privatizing the USPS without dealing with the issue of guaranteed universal service is pushing an agenda, not discussing the issues involved with privatization.
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The usually insightful Steven Pearlstein swallowed a big one today in pushing the line that the taxation of corporate profits when they are paid out as dividends amounts to “double taxation.” The problem with this story is that the corporation really is a distinct entity from the individual who receives dividends. In fact, according to the Supreme Court, they are actually distinct persons.
This is not a philosophical question; it is a very concrete economic one. No one is forced to organize a business as a corporation. Anyone can operate any business as a partnership. Partnerships do not pay a separate tax, the partners only pay tax on the profits as individuals.
In this sense, the corporate income tax is 100 percent a voluntary tax. It is paid only because people consider the benefits of corporate status to be worth more than the taxes that they must pay.
This removes any logical possibility of double taxation. The corporate income tax is effectively the fee that stockholders pay for the benefits of corporate status. By holding stock, they have voted with their feet to pay this tax. Their income, and the tax on it, should be treated as distinct from the corporate income. If individuals are not paying tax on their dividends and capital gains then it is not taxed.
[Stuart Levine offers well-taken correction below. Only closely held partnerships avoid taxation. Any partnership that had publicly traded share would be subject to taxation. Of course, this is still a choice made by owners of the partnership.]
The usually insightful Steven Pearlstein swallowed a big one today in pushing the line that the taxation of corporate profits when they are paid out as dividends amounts to “double taxation.” The problem with this story is that the corporation really is a distinct entity from the individual who receives dividends. In fact, according to the Supreme Court, they are actually distinct persons.
This is not a philosophical question; it is a very concrete economic one. No one is forced to organize a business as a corporation. Anyone can operate any business as a partnership. Partnerships do not pay a separate tax, the partners only pay tax on the profits as individuals.
In this sense, the corporate income tax is 100 percent a voluntary tax. It is paid only because people consider the benefits of corporate status to be worth more than the taxes that they must pay.
This removes any logical possibility of double taxation. The corporate income tax is effectively the fee that stockholders pay for the benefits of corporate status. By holding stock, they have voted with their feet to pay this tax. Their income, and the tax on it, should be treated as distinct from the corporate income. If individuals are not paying tax on their dividends and capital gains then it is not taxed.
[Stuart Levine offers well-taken correction below. Only closely held partnerships avoid taxation. Any partnership that had publicly traded share would be subject to taxation. Of course, this is still a choice made by owners of the partnership.]
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