April 2012, John Schmitt and Janelle Jones

Relative to any of the most common benchmarks – the cost of living, the wages of the average worker, or average productivity levels – the current federal minimum wage of $7.25 per hour is well below its historical value. These usual reference points, howe

Paul Krugman has reproduced an OECD chart that was featured in  a recent post by Jared Bernstein. The graph of interest (below) contrasts the share of older and younger people in OECD countries that have the equivalent of a four-year college degree or mor

Dan Beeton
NACLA Report on the Americas, Spring 2012

This could well have been the want ad Esquire used to attract a writer for its story titled, “War Against Youth.” This lengthy piece is the best compendium of warped logic and misplaced facts on this topic since the Peter Peterson financed film, IOUSA.

The whole story is given away in the first paragraph:

“In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.”

That sounds really awful. Thankfully it is not true, as readers could find by looking at the chart that accompanies the article. This is a ratio of wealth, not income.

This is a huge difference. Wealth adds up a household’s total assets. This means the value of their home, their 401(k) and other savings, their checking account and car. The calculation then subtracts liabilities: mortgage debt, car loans, credit card debt, and student loans. This is very different from income, which for most people means their wages and for older people their Social Security.

If the writer, the editor, the fact checker or anyone at Esquire had a clue, they would have caught this mistaken first paragraph and killed the piece. As their chart shows, the median net worth for households over age 65 was $170,494. That merits repeating a couple more times. The median net worth for households over age 65 was $170,494. The median net worth for households over age 65 was $170,494.

Again, net worth refers to total assets minus liabilities. This means that if we add up the home equity of the typical household over age 65, their 401(k) and all other savings, the value of their car and any other possessions they might have, it comes to just over $170,000. This is a bit more than the price of the median home.

In other words, if the typical household over age 65 took all of their wealth, they would have enough money to pay off their mortgage. After that they would be entirely dependent for their living expenses on their Social Security benefit, which averages a bit more than $1,200 a month.

To take another comparison, the lifetime accumulation of wealth of the typical household over age 65 would be approximately equal to what the CEO of Goldman Sachs earns in two days. A top hedge fund manager, who makes $3-4 billion a year, can pocket this much money in ten minutes. Yet, Esquire tells us that it is the high living retirees getting by on their $1,200 a month Social Security checks who are responsible for the questionable future facing the young.

Following a request from HRRW, USAID yesterday released information on the amount of relief and reconstruction funds that have gone to local partners in Haiti. The info, available here, is a positive step towards transparency and provides the only official information on the level of local contracting by USAID in Haiti. As can be seen in figure 1, about $9.5 million has gone to local organizations and firms since the earthquake. An additional $18.3 million has been awarded to Haitian-American firms, according to USAID data.

Figure I

Firm Name	Sector	Amount
GHESKIO	Health	$       3,589,938
St. Damien Hospital	Health	$       1,081,000
Hopital Adventiste d'Haiti	Health	$         990,000
La Fondation Héritage pour Haïti (Transparency International)	Non-Profit	$         800,000
Mérové-Pierre - Cabinet d'Experts-Comptables (MPA)	Auditing	$         740,208
L'Hôpital de la Communauté Haïtienne	Health	$         400,000
Hopital l'Ofatma	Health	$         400,000
Experts Conseils & Associates	Auditing	$         393,890
Jurimedia	Non-Profit	$         300,000
Inter-American Institute for Cooperation on Agriculture	Non-Profit	$         250,000
The American Chamber of Commerce in Haiti	Non-Profit	$         238,420
PAGS Cabinet d'Experts-Comptables	Auditing	$         145,000
ECCOMAR	Construction	$           63,000
National Transport Service (Natrans)	Transportation	$           60,000
TOTAL	TOTAL	$      9,451,45

Source: USAID

Although ascertaining the total spending by USAID in Haiti since the earthquake is not an easy feat, the $9.5 million that has gone to local firms represents a small fraction of total spending by USAID. In fiscal years 2010 and 2011, USAID reported spending over $700 million on humanitarian programs (not counting funding through USAID/OTI, which is included in Figure II). Additionally, the most recent data compiled by HRRW reveals nearly $400 million in contracts that have been awarded since the earthquake. As can be seen in figure II, only 0.02 percent of these contracts have gone directly to local firms, while over 75 percent have gone to firms located in the Beltway (DC, Maryland, Virginia). The largest of these beltway contractors is Chemonics International, which has received $173.7 million from USAID since the earthquake. The company came under criticism in recent weeks regarding the temporary parliament building that was constructed under a Chemonics contract. Haitian lawmakers told GlobalPost that the building was nothing more than a “shell”, and that it would cost the government as much to finish it as USAID had spent on building it. The building remains vacant four months after it was inaugurated by USAID and Haitian officials.

Here’s a roundup of the labor market research reports released this past week:

Center for American Progress

Insourcing: How Bringing Back Essential Federal Jobs Can Save Taxpayer Dollars and Improve Services
Pratap Chatterjee

Sharing the Pain and Gain in the Housing Market: How Fannie Mae and Freddie Mac Can Prevent Foreclosures and Protect Taxpayers by Combining Principal Reductions with “Shared Appreciation”
John Griffith and Jordan Eizenga

Center For Economic and Policy Research

Affording Health Care and Education on the Minimum Wage
John Schmitt and Marie-Eve Augier

Center on Budget and Policy Priorities

Draconian Republican Study Committee Budget Would Cut Federal Medicaid Funding Nearly in Half by 2022 Even More Extreme than the Ryan Block Grant
Edwin Park and Matt Broaddus

Cantor Proposal for 20 Percent Business Tax Deduction Would Provide Windfall for Wealthy, Not Create Jobs CBO Rated Similar Approach One of Least Effective Ways to Create Jobs
Chuck Marr

Cooper-LaTourette Budget Significantly to the Right of Simpson-Bowles Plan: Proposes Much Smaller Tax Increases, Smaller Defense Cuts, and Deeper Domestic Cuts than Original Simpson-Bowles
Robert Greenstein

Medicare in the Ryan Budget
Paul N. Van de Water

New Tax Cuts in Ryan Budget Would Give Millionaires $265,000 on Top of Bush Tax Cuts
Chuck Marr

Ryan Medicaid Block Grant Would Cut Medicaid by One-Third by 2022 and More after That
Edwin Park and Matt Broaddus

Dean Baker and Steven L. Dawson
The Washington Post, March 29, 2012

Are you upset about inequality? According to the logic in a Washington Post column by Brookings economist Ron Haskins, we can help remedy the situation by doubling the pay of neurosurgeons to roughly $1 million a year and doubling what we pay to the pharmaceutical industry for drugs each year to $600 billion. 

If you don't understand how increasing the income of rich doctors and highly profitable drug companies helps those at bottom, then you obviously don't understand economics. It's all very simple.

Haskins argues that those of us who are concerned about inequality have ignored the value of government benefits. These include benefits like Medicare and Medicaid, that disproportionately benefit low and middle income people. If we add in the value of these benefits, then Haskins tells us that there has actually been very strong income growth at the middle and bottom of the income ladder over the last three decades.

However the problem in this story is that the value of these benefits is measured by their cost. If, for example, we measured the value of these benefits by imputing the per person costs of health care in Canada, Germany, Denmark or any other wealthy country, then including the value of government benefits would not change the income inequality story at all.

The reason for the difference in health care costs between the U.S. and these other countries is not due to the fact that we get better care. In fact, low and moderate income people get far better care in all of these other countries than in the United States. The reason is simply that we pay providers far more than these other countries do. But, if our measure of the income of the poor includes the payments the government makes to doctors and drug companies on their behalf, the more we pay them, the more rapid the growth of the income of the poor.

So if we want to help the poor, we should just increase Medicare and Medicaid reimbursement rates for doctors and drug companies. Got it?

I can't argue with today's Post editorial on the Fed, primarily because I have no clue what they think they are saying. The Post comes out in favor the Fed's expansionary policy given the continued weakness of the labor market (yeh!). But it then warns:

"Still, these benefits [sustaining growth] come with risks attached. Among the biggest risks is that easy money from the Fed enables banks and firms to postpone necessary restructuring — and for Congress and the White House to postpone getting the federal government’s long-term fiscal situation under control."

Let's look at these separately. In terms of the banks, the Fed free money policy, and previously its special lending facilities, does more than just allow the banks to "postpone" restructuring. It allows them to avoid restructuring and continue to operate with an implicit too big to fail guarantee. 

Citigroup, Goldman Sachs, Morgan Stanley and most of the other big boys would have been bankrupt if the market was left to run its course. Instead the Fed stepped in and shoveled trillions of dollars of below market loans to these banks. This is what is known in other circles as "welfare."

The Post and other media outlets have given us the children's story that we made money on these loans. But this is just silliness. Using the Post's accounting, if the Fed gave me a 30-year mortgage at a 1.0 percent interest rate and I repaid the loan in full by 2042, the Washington Post would say that the government made money on this loan.

The reality is that at a time when the market demanded a huge risk premium to lend money to these banks, the Fed invited them in to borrow as much as they wanted at near zero rates. This both allowed them to get through the crisis and reinforced the idea that these banks carried the implicit "too big to fail" government guarantee.