Is There Anyone in the World Who Is Demonstrably Less Competent Than Alan Greenspan to Pass Judgment on Financial Reform?

March 30, 2011

30 Marzo 2011

The Financial Times featured a column from former Federal Reserve Board Chairman Alan Greenspan arguing that the reforms in the Dodd-Frank bill will make financial markets less stable. Just in case you have forgotten, we have 25 million people who are unemployed, under-employed or have given up looking for work altogether because Alan Greenspan did not understand financial markets and the economy. Perhaps the FT will have a column offering advice on disaster management from Michael Brown.

Leonhardt Gets it Right on the Fed

By Dean BakerDean Baker

March 30, 2011

30 Marzo 2011

David Leonhardt has a nice column making the point that the Fed faces a lot of pressure to keep inflation under control, but it does not have the same lobby pushing it on unemployment.

Downsized Products Don't Escape the Consumer Price Index

By Dean BakerDean Baker

March 29, 2011

29 Marzo 2011

The NYT had an interesting article on the downsizing of food products by manufacturers in order to conceal price increases. It is worth noting that these price increases would be picked up by the Bureau of Labor Statistics (BLS) in constructing the consumer price index (CPI). The BLS price checkers carefully assess the quantities in products and if these change, they adjust the price charged accordingly.

In Reforming Social Security the Problem is Not How Good the Country Is, the Problem is How Good the Political System Is

By Dean BakerDean Baker

March 29, 2011

29 Marzo 2011

Ezra Klein criticizes Social Security supporters for being reluctant to have Social Security reform taken up by Congress at the moment. He argues that Social Security and the retirement system more generally could be restructured to better serve the bulk of the country's workers. Klein notes the fears of Social Security supporters that this could open the door to serious cuts and then responds to these fears, "this country is better than that." Of course that is true, but also irrelevant. Social Security enjoys overwhelming support from the public. Polls repeatedly show that people across the political spectrum strongly support the program and would even be willing to pay higher taxes to protect the program, but the public as a whole will not directly decide the program's fate. Congress and the president will decide the future of the program. These politicians live in a world where a willingness to cut Social Security is routinely referred to as a sign of seriousness. Those who do not support cuts are taunted as being unrealistic and weak. Politicians who want to protect the program can expect much less campaign funding from business groups and ridicule from the media.

Mark McKinnon Plays "How Many Things Can You Get Wrong About Social Security in One Column"

By Dean BakerDean Baker

March 29, 2011

29 Marzo 2011

The hottest sport these days in Washington is seeing how many incorrect or misleading statements about Social Security you can get in one column. All the major media outlets are fully on board, anxious to convey any misinformation that reflects badly on the program. And there are plenty of deep-pocketed funders like Wall Street investment banker Peter Peterson who are happy to finance the effort. Hence we are seeing a plethora of pieces decrying the high-living seniors who are getting fat on their Social Security checks. The latest contestent to enter the fray is Republican political strategist Mark McKinnon with a column in the Daily Beast. Let's play along. Mckinnon starts by warning that the United States could end up like Greece or Portugal, abandoned by the credit markets and forced to beg international organizations to buy our debt. Very nice -- this one always gets lot of points with political pundits. Of course it is not true. The United States has its own currency, that means it can never be like Greece or Portugal.

Robert Samuelson's Troubled TARP Arithmetic

By Dean BakerDean Baker

March 28, 2011

28 Marzo 2011

We know that arithmetic is not the strong suit of the Washington Post and Robert Samuelson drives this point home again today with his discussion of the TARP. Samuelson tells us that TARP is now projected to cost just $19 billion and that the final cost may actually be lower. He also tells us that the alternative to TARP, bank nationalization would have been far more costly. And, he said that without TARP the unemployment rate "would be 11 percent or 14 percent; it certainly wouldn’t be 8.9 percent." Okay, let's take these in turn. First, the idea that the TARP cost almost nothing is based on some very shoddy accounting. Samuelson apparently does not understand the idea of money carrying an opportunity cost. Suppose the government lent me $1 trillion for 10 years at 1 percent annual interest. In the Robert Samuelson world, the government is earning a $100 billion profit on this investment ($10 billion a year for 10 years). Economists familiar with opportunity costs would instead see this as a huge loss to the government, since it is giving me an enormous loan at an interest rate that is several percentage points below the market rate. We saw how this worked with the TARP when Warren Buffett reported earning twice the money on his investment in Goldman Sachs which was half of the size of the investment from Treasury. Buffett got the market rate of return on his investment, the difference was a subsidy from taxpayers to the shareholders and executives of Goldman. The same story was true with the other TARP loans, as well as the even larger amount of money lent through the Fed as well as the guarantees provided by the FDIC.

Waiting for Superman to Stop Cheating

By Dean BakerDean Baker

March 28, 2011

28 Marzo 2011

USA Today ran a carefully researched article that strongly suggests that much of the rise in school test scores under school chancellor Michelle Rhee was due to teachers’ cheating. Teachers had a substantial incentive to cheat since they would get an $8,000 bonus if their students improved beyond set levels. This is the sort of serious investigative journalism that is rarely seen anymore.

Greece vs. Zimbabwe: More on Krugman and Deficits

By Dean BakerDean Baker

March 27, 2011

27 Marzo 2011

Paul Krugman added another post on the potential impact of large deficits on the U.S. economy in which he argues that it doesn't matter that the U.S. can print its own currency; it still faces the same constraints from financial markets. I would argue that it matters a great deal for two reasons that I laid out in my previous post. The first reason is that at any point in time the Fed would have the option to intervene in bond markets and buy up debt, if private investors were demanding very high interest rates. This is important because the decision by the Fed to not buy debt would always be a policy choice, not an economic fact. There is a popular mythology in economic policy circles that in 1979 there was no alternative to putting Paul Volcker in as chair of the Federal Reserve Board to really tighten the screws and get inflation under control. At the time inflation was rising and the dollar was falling. Volcker sent rates through the roof, giving us the recessions of 1980 (destroying Carter's re-election chances) and then 1981-82. The latter recession was at the time the worst of the post-war era. Volcker is widely touted for making the tough call to throw millions of people out of work. (Somehow rich and powerful people are always credited with being "tough" when they inflict pain on ordinary workers and the poor. It seems that if they were really tough they would be inflicting pain on the rich.) Arguably Volcker made the right call even though it did impose enormous costs on the country.

Public Pensions and Arithmetic Problems at Fox on 15th (a.k.a. The Washington Post)

By Dean BakerDean Baker

March 26, 2011

26 Marzo 2011

The Post made yet another effort to attack public sector employees today in an editorial (this one is on its editorial page) that criticized the rate of return assumptions used by public pension plans. It tells readers that:

“Eighty-eight of the 126 largest public pension plans assume a rate of return exceeding 8 percent a year, according to the Wall Street Journal. By way of comparison, the S&P 500 achieved a compound average annual growth rate of 5.69 percent over the past 20 years.”

Okay, get your calculators out boys and girls. If I look up the value of the S&P 500 for March 1991 I get 375.22. The S&P closed yesterday at 1313.8. This gives a compounded annual rate of return of 6.46 percent.

But wait, we have to share a little secret with the folks who write editorials for the Washington Post: stocks pay dividends. Dividends are typically paid out quarterly and usually average 3-4 percent of the stock price. If we add in dividend yields, then we would get an average return over the last 20 years in the 9-10 percent range that is assumed by pension funds in their analysis.

Of course returns going forward will depend on the current ratio of stock prices to corporate earnings. This is around 15 today (measured against trend earnings) compared to about 20 in 1991, suggesting that the prospects going forward over the next 20 years are likely better than they were back in 1991.

It is especially ironic to see these misplaced warnings about excessive stock return assumptions in the Washington Post. This is a paper that for years featured the columns of James K. Glassman, the co-author of Dow 36,000. At the time, it had no room in the paper for those of us who tried to warn of the risks of the stock bubble.

The Post made yet another effort to attack public sector employees today in an editorial (this one is on its editorial page) that criticized the rate of return assumptions used by public pension plans. It tells readers that:

“Eighty-eight of the 126 largest public pension plans assume a rate of return exceeding 8 percent a year, according to the Wall Street Journal. By way of comparison, the S&P 500 achieved a compound average annual growth rate of 5.69 percent over the past 20 years.”

Okay, get your calculators out boys and girls. If I look up the value of the S&P 500 for March 1991 I get 375.22. The S&P closed yesterday at 1313.8. This gives a compounded annual rate of return of 6.46 percent.

But wait, we have to share a little secret with the folks who write editorials for the Washington Post: stocks pay dividends. Dividends are typically paid out quarterly and usually average 3-4 percent of the stock price. If we add in dividend yields, then we would get an average return over the last 20 years in the 9-10 percent range that is assumed by pension funds in their analysis.

Of course returns going forward will depend on the current ratio of stock prices to corporate earnings. This is around 15 today (measured against trend earnings) compared to about 20 in 1991, suggesting that the prospects going forward over the next 20 years are likely better than they were back in 1991.

It is especially ironic to see these misplaced warnings about excessive stock return assumptions in the Washington Post. This is a paper that for years featured the columns of James K. Glassman, the co-author of Dow 36,000. At the time, it had no room in the paper for those of us who tried to warn of the risks of the stock bubble.

Why is Gregory Mankiw's Hypothetical President Such an Ardent Protectionist?

By Dean BakerDean Baker

March 26, 2011

26 Marzo 2011

This is what readers of his column presenting a hypothetical presidential address to the country in 2026 must be wondering. In this speech, Mr. Mankiw's president explains to the country how the rising cost of Social Security, Medicare and Medicaid let to unsustainable deficits. Of course Mr. Mankiw's president knows that the real story is the explosive growth of the costs of Medicare and Medicaid. These were in turn driven by the soaring cost of private sector health care. If per person costs in the United States were the same as in other wealthy countries then the United States would be looking at a budget surplus, not a deficit. Given the basic facts, it is hard to understand why Mankiw's president did not propose a system that allowed the United States to take advantage of trade in medical services by letting Medicare beneficiaries buy into the more efficient health care systems in other countries. The tens of thousands of dollars in annual saving could be split between the beneficiaries, the host government and the U.S. government. The total savings to the U.S. government would reach hundreds of billions of dollars each year. If Mankiw's president were not such a protectionist then surely she would have pushed for such a policy long before this speech. Opening to trade certainly seems preferable to cutting off health insurance to middle income beneficiaries, as Mankiw's president proposed.