It is well-known that the Washington Post is obsessed with the budget deficit and that it feels little need to restrict this obsession to the opinion pages (hence its nickname, "Fox on 15th Street"). It once again ran an editorial in its news section as it told readers about the country's "rocketing debt."

The editorial then asked:

"Why can’t America’s leaders, at the helm of such a wealthy country, find a solution that both puts the nation on a long-term path to financial security and preserves the vast array of vital services government provides?"

Of course the obvious answer is that there is no obvious reason that the country should be worried right now about writing down numbers on paper that show the nation will be on a "long-term path to financial security and preserves the vast array of vital services government provides."

The immediate problem facing the country are the tens of millions of workers who are unemployed or underemployed due to economic mismanagement by people like Alan Greenspan and Ben Bernanke. The question that all reasonable people should be asking is why America's leaders can't find a solution that will put these people back to work? After all, Keynes showed us how to restore an economy to full employment more than 70 years ago. The only reason that the country currently faces a large budget deficit and rising debt to GDP ratio is the economic downturn caused by the collapse of the housing bubble.

It is also worth reminding readers that the horror stories of exploding health care costs are entirely the result of the broken health care system in the United States. We spend more than twice as much per person on health care in the United States than in other wealthy countries. If we had the same per person health care costs as in other countries then we would be looking at enormous budget surpluses, not deficits. That is why serious people focus on the problem of health care costs, not budget deficits.

The piece also includes the assertion that:

"Economists say high debt levels can increase the risk of financial crises."

To make this more accurate the statement should say that:

"Economists who failed to see the last economic crisis say high debt levels can increase the risk of financial crises."

At least it thinks that this is a reasonable position deserving some of the paper's scarce column space. The Post printed a column today by Michael W. Hodin warning about the "inexorable" aging of the population. At one point Hodin asks:

"What if we reimagined and redefined what it means to age? What if, in light of our longer lifespans, 'middle age' were 55 to 75?"

While the piece implies that aging poses some radically new problem for the world, the fact is that populations have been aging for well over a hundred years due to both increases in life expectancy and also declining birth rates. In other words, this is just a continuation of a long trend, not a departure from it.

Furthermore, just as aging of the population in the past has been associated with a rise in the standard of living there is no reason to believe that this will not be the case in the future. If economies can sustain a 2.0 percent rate of productivity growth (slightly less than the average in the U.S. over the last 60 years) then output per worker hour will be almost 120 percent higher in 2050 than it is today.

This increase in productivity would swamp the effect of even the most rapid growth of a population of aged dependent. For example, if we have 3 workers for every retiree today and expect to have 2 workers for every retiree in 2050 (roughly the projected numbers), if retirees have a standard of living that is 75 percent as high as workers then workers and retirees would be still be able to enjoy standards of living that are close to twice their current level in this story. This does not even count the savings from the lower share of young dependents that would be the result of lower birth rates.

The piece also mistakenly implies that fiscal crises facing several European countries and state governments in the United States are due to the aging of the population. Actually, we had a huge economic crisis as a result of the collapse of housing bubbles in the United States and Europe. The resulting downturn is the cause of these fiscal crises. Mr. Hodin was apparently unaware of the economic crisis.

That would have been worth mentioning in a piece that reported that profit growth is expected to slow in the first quarter of 2012 and may stagnate for the year as a whole. With profits already near post-war highs as a share of income, they can't grow any more rapidly than GDP unless the profit share goes still higher. Since it is unreasonable to expect the share of GDP going to profits to continue to rise indefinitely, a slowdown in profit growth was virtually inevitable.

Many pundits have been telling us that the reason that workers are not getting jobs is that employers cannot find workers with the skills needed for the positions available. I have regularly ridiculed this position, since if it were true we would see sharply rising wages in some sectors as employers competed for the limited group of workers who have the necessary skills. Of course we don't see any major sector of the labor market with rapidly rising wages.

However, I must now reconsider this view. David Brooks presented compelling evidence that employers cannot find workers with the necessary skills in his column today. In this column he criticizes Obama for attacking the budget proposed by Paul Ryan (and endorsed by the House Republicans and Governor Romney), which, according to the Congressional Budget Office (CBO), would eliminate the federal government except for health care programs, Social Security, and defense by 2050.

Brooks focuses on the more near-term story. He tells readers:

"In 2013, according to Veronique de Rugy of George Mason University, the Ryan budget would be about 5 percent smaller than the Obama budget, and it would grow a percent or two more slowly each year. After 10 years, government would be smaller under Ryan, but, as Daniel Mitchell of the Cato Institute complains, it would still take up a larger share of national output than when Bill Clinton left office."

Yeah in 2023 the budget will be larger than the last Clinton budget, what could Obama possibly be complaining about?

Okay, now if David Brooks knew arithmetic, he would be able to look at the CBO projections and see that in 2023, it projects that spending on items other than interest, health care spending, and Social Security is projected to be equal to 6.75 percent of GDP in 2023. He would also look back and see that this spending was equal to roughly 9.3 percent of spending in 2000.

Currently, military spending (excluding the war in Afghanistan) is approximately 4.0 percent of GDP. If Representative Ryan left military spending at this level, as he has suggested in his criticisms of President Obama's proposed cuts, his 2023 budget would leave an amount equal to 2.75 percent of GDP for everything else. If he allowed the defense budget to fall back to 3.0 percent of GDP, its 2000 level and also the low point for the last 60 years, he would leave 3.75 percent of GDP for everything else.

Since President Clinton's 2000 budget allotted 6.3 percent of GDP for this everything else category (e.g. roads and bridges, education, medical research, the Justice Department and the federal prison system, and the national park system) the Ryan-Romney budget implies a cut of between 40 and 56 percent in most categories of government spending. If David Brooks knew arithmetic, he would realize that cuts of this magnitude are a big deal and that Obama is absolutely right to make a big issue of them.

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            Source: Congressional Budget Office and author's calculations, see text.

Unfortunately, the NYT is unable to find columnists who know arithmetic. Therefore, they have to print David Brooks making silly assertions about the Ryan budget and President Obama's criticisms of it.

The Washington Post is always willing to accommodate those who want to make a big issue out of budget deficits. In that spirit it ran a column today by Robert Pozen and Theresa Hamacher warning readers about "public-pension pitfalls."

The piece begins by decrying the fact that almost 80 percent of state and local government employees are still covered by traditional defined benefit pensions even as these pensions are rapidly disappearing from the private sector. This may seem a bizarre complaint to most people.

After all, few workers have been able to accumulate enough in 401(k)s to guarantee themselves any sort of security in retirement. In 2009, the financial wealth for the median household between the ages of 55-64 was only around $50,000, including all 401(k) assets.

Most public sector workers will have some pension income to support them in addition to just being dependent on Social Security. This might be considered a source of security that we would like to see brought back for private sector workers rather than eliminated for public sector workers. Of course this is the Washington Post.

It is also important to remember that close to a third of state and local employees are not covered by Social Security so their public pension will be their only regular source of retirement income. Somehow, Pozen and Hamacher forgot to mention this fact in their piece.

Next we are told that the unfunded liabilities of these plans are $600 billion. This is supposed to sound very scary, since $600 billion is a big number. To make sense of big numbers we need a context.

The planning period for a pension fund is typically 30 years. Over the next 30 years, GDP is projected to be over $400 trillion in today's dollars. This means that the unfunded liability is equal to about 0.15 percent of projected GDP over this period. To make another comparison, relative to the size of the economy it is equal to a bit more than 3 percent of what we are currently spending on the military. Are you scared yet?

The NYT deserves credit for correcting an item in an article on the impact of the mandate in Massachusetts that I commented on last week. The piece had repeated the assertion of a person interviewed for the piece that it would cost him $1,200 a month to get the health insurance for himself and his daughter required by the mandate. The on-line exchange shows that the cheapest policy for these two people would be $685 a month. The correction noted this fact.

Okay folks, this is getting really stupid at this point. The headline of the AP article in the Washington Post on the latest unemployment claims number tells readers:

"weekly US unemployment claims fall to 357,000, a 4-year low, as job market strengthens."

Before anyone gets too excited, they should be reminded that claims for two weeks ago had originally been reported as 348,000, and last week's originally reported number had been only slightly higher at 359,000. The upward revision of the weekly unemployment claims numbers has been so consistent that it is virtually certain that this 357,000 number will be revised higher with next week's report.

It remains to be seen whether it will still be a 4-year low when the data is revised next week. A bit more caution would have been appropriate in assessing this release.

Do trees really need to die for this stuff? See below.

The NYT did some really serious he said/she said budget reporting in a front page article on the House Republican budget proposed by Representative Paul Ryan, which also has been endorsed by Governor Romney. The article reports what both Democrats and Republicans say about the Ryan budget without making any effort to verify the extent to which the statements are true. In several cases, this could be quite easily done.

For example, the article tells readers in reference to the Ryan budget and the budget proposed by Mitt Romney:

"Both budgets, the Obama campaign asserts, would cut taxes sharply for the wealthy; gut public education, medical research, and other government programs; and increase the burden on the elderly to pay for their own health care."

This is not just something that "the Obama campaign asserts," it happens to be true. Both plans call for sharp reductions in the tax rates paid by high income earners. Both have explicitly ruled out eliminating the tax breaks that most directly affect high income taxpayers: the special lower tax rate on capital gains and dividend income.

In terms of the cuts to public education, medical research and other government programs, it is possible to go to the Congressional Budget Office's analysis of the Ryan budget, which was done under his direction. This analysis shows that all discretionary spending (the category which includes these items), plus non-health mandatory spending, is projected to shrink to 3.75 percent of GDP by 2050.

This 3.75 percent of GDP includes defense spending. Currently defense spending is close to 4.0 percent of GDP, not including the cost of the war in Afghanistan. It has never been below 3.0 percent of GDP since the start of the Cold War. In other words, it is an objective fact that the Ryan plan would:

"gut public education, medical research, and other government programs; and increase the burden on the elderly to pay for their own health care,"

not just something that the Obama campaign asserts. The NYT should have pointed this out to readers. The NYT's reporters have the time to examine CBO's analysis of the Ryan budget, most readers do not.

At one point the article also wrongly refers to "parts of the [budget] plan intended to spur economic growth." It is not clear that any parts of the budget plan are "intended" to spur growth. There are parts of the plan, such as the tax cuts for the wealthy, which Romney and Ryan claim are intended to spur growth, but the NYT has no idea whether this is really the intent of these cuts.

It is entirely possible that the reason that Romney and Ryan propose cuts in tax rates for the wealthy is to give more money to wealthy people, many of whom are supporting their political efforts. Since there is no evidence that these tax cuts will actually lead to more growth, it is at least as plausible that the intention is to give money to the wealthy (something we know that tax cuts will do), as it is that they are intended to promote growth.

A major Washington Post article reporting on the situation of depressed areas of former West Germany implied that Germans would have to sacrifice more in order to finance a larger bailout of Greece, Spain and other heavily indebted countries. This is not true.

The major problem facing the euro zone countries right now is a lack of demand, not a lack of supply. In other words, increased resources for the indebted countries do not have to come at the expense of Germany's living standard. The European Central Bank (ECB) can simply support increased demand, as it is now doing to some extent with its $1 trillion special lending facility. This would actually leave the people in the depressed regions of western Germany better off, not worse off.

Unfortunately, rather than trying to boost demand enough to restore full employment, the ECB is producing silly propaganda cartoons about the "inflation monster," which tries to scare viewers into believing that there is a realistic fear of hyper-inflation in Europe. Of course the real problem facing Europe right now is the depression monster, which is leaving millions of people out of work, but the folks running the ECB lack the competence to recognize this fact.

Eduardo Porter had an interesting column in the NYT discussing the future of manufacturing jobs in the U.S. economy and the role of trade. While the piece makes several valid points, it seriously underplays the importance of manufacturing jobs. Remarkably, it also does not discuss the trade deficit and the dollar.

The piece is correct in saying that there is nothing intrinsically good about manufacturing jobs and that it makes little difference to manufacturing workers whether they lose their jobs to trade or productivity growth. Nonetheless, it is still true that manufacturing remains a source of relatively high-paying jobs for workers without college degrees. This may be the result of a historical legacy and higher than average unionization rates, but it is still the reality.

The issue of trade is also important, because the loss of jobs as a result of the trade deficit creates a situation that is in the long-run unsustainable. If the economy returns to full employment we would have a trade deficit of close to 5 percent of GDP (@$750 billion a year). A trade deficit of this size logically implies negative national savings of the same magnitude. That means that we must have either negative private savings (i.e. households and firms have negative savings) and/or a government budget deficit that is equal to $750 billion a year.

Of course the main factor in determining the size of the trade deficit is the value of the dollar. If the dollar is over-valued by 15 percent, it means that our exports will cost roughly 15 percent more for people in other countries while imports will cost roughly 15 percent less for people living in the United States. There is no policy or set of policies that can have anywhere near as much impact on trade as the value of the dollar.

This is why a discussion of the value of the dollar should be front and center in any discussion of trade. If the dollar were to fall by 10-15 percent, and bring trade back into balance, it would generate close to 5 million new manufacturing jobs in the United States. This would have an enormous impact on the labor market for less-educated workers.

The article also includes a comparison of jobs that are subject to international competition and jobs that are not. This is highly misleading.

Whether or not a job is subject to international competition is a matter of policy, not an intrinsic feature of the job. The fact that manufactured goods are widely traded is the result of long set of trade agreements over the last three decades that were deliberately designed to make it as easy as possible for U.S. firms to hire low-cost labor in the developing world and ship their production back to the United States.

Our trade negotiators could have instead devoted their energies to make it as easier as possible for foreign students to train to U.S. standards as doctors, dentists, lawyers, economists or other professionals. There are tens of millions of very bright people in China, India, Mexico and elsewhere in the developing world who would be very happy to train to U.S. standards in these professions, including becoming proficient in English, and work in the United States for less than $100,000 a year.

We do actually bring large numbers of foreign workers into the country in some occupations, but they tend to be low-paying ones. Immigrant workers are enormously important in farm work, restaurant and hotel work and residential construction. They would be equally dominant among physicians, dentists and lawyers if they faced as few barriers as they do to working in these low-paying occupations.

The savings to U.S. consumers from this sort of expanded trade in professional services would be hundreds of billions of dollars annually in the form of lower health care costs, reduced university tuition and savings on all other products in which the cost of highly paid professionals is a major input. The reason that trade agreements did not take this route is that U.S. professionals have much more political power than manufacturing workers. As a result, they have been able to maintain barriers that largely protect them from competition with their counterparts in the developing and developed world. (U.S. professionals also make more than their counterparts in Europe.)

As the old story goes in explaining the difference between autoworkers and economists; autoworkers are smart enough to know that they need protection, but lack the power to get it. Economists are too dumb to know that they need protection, abut are powerful enough to get it. This explains much of the story of wage differentials in the U.S. labor market. 

The NYT did some serious head said/she said reporting when it concluded an article reporting on President Obama's criticism of the tax cuts for the rich in the Republican budget:

"In theory, tax writers could focus on tax breaks that primarily help the rich, like the deduction for charitable giving, or end the biggest tax breaks only for upper income earners. But Democrats say such selective changes to the tax code would never recoup such large cuts to income tax rates."

It is not just Democrats who say that taking back a selective group of tax breaks for the rich will not offset a big cut in tax rates. It happens to be true.

The one tax break that could be offsetting, the lower tax rate for dividends and capital gains, has been declared off-limits by the Republicans. The amount of taxes at issue for the remaining tax breaks would not come close to offsetting a reduction in the top marginal tax rate of more than 15 percentage points for the top 1 percent of the income distribution. The NYT should have made that clear to readers. 

That's undoubtedly what NYT readers were asking after reading a piece saying that banks are fleeing federal regulators in order to avoid the excessive burden. The piece begins by telling us about Monadnock Community Bank, a small community bank in New Hampshire.

According to the piece, William Pierce, the president of Monadnock, is planning to sell the bank to credit union so that it can avoid the burdensome regulation of the Office of the Comptroller of the Currency (OCC). As an example, the piece tells us that the OCC required the bank to review its procedures for dealing with delinquent mortgages, even though it has only had two foreclosures in the last four years. This review is supposed to require the time of 3 of the banks 18 employees.

Okay, let's see what our friend, Mr. Arithmetic, says about this. According to the piece, Monadnock has $82 million in assets. Let's say that half of this, or $41 million, is in residential mortgages. The average home price nationwide is a bit over $200,000 (considerably higher in the Northeast). If the average mortgage has a loan-to-value ratio of 75 percent, that implies a value of $150,000. That means that the bank should have about 270 mortgages on its books.

Apparently the bank is careful with its loans, since it only had two foreclosures in the last four years, but let's say that nonetheless an incredibly high percentage of the loans are still delinquent. If 10 percent of the mortgages were delinquent, then this would mean that Monadnock has 27 delinquent loans.

How long will it take 3 employees to review how these 27 delinquencies? If it took 2 hours for each mortgage (which seems extreme, unless the record-keeping is a mess), we get a total of 54 hours, or roughly two days work for each employee. In short, if Mr. Pierce's claim about the burden of this regulation is true, it speaks more to the quality of his staff and his supervision than the burden of the regulation.

As a practical matter, presumably the bank has some list of procedures on handling delinquent mortgages. This would probably have to be reviewed and updated. This process should probably not require a great deal of time for one worker, although the bank would likely have other workers read and edit the revised version.

The piece should have made an effort to evaluate the claim that new regulations are imposing an excessive burden on Monadnock and similar banks, rather than just presenting them to readers as though they are true. Readers are likely to be very sympathetic to a small community bank. Putting the unexamined claims of Mr. Pierce at the beginning of the piece gives considerable credence to the claims of an excessive regulatory burden.

 

The NYT had a good piece reporting on the fact that public sector pension funds that have invested heavily in alternative investments (e.g. hedge funds, real estate funds and private equity funds) have done much worse than those that just held traditional investments (e.g. stocks and bonds). While the managers of these alternative investments did quite well collecting fees, the governments did not.

There is a simple way to avoid this problem. If the funds made compensation for the managers of these investments almost entirely contingent on their beating a conventional market basket, then the risk would be shared. If managers are not willing to accept such contracts it implies that they don't believe they will be able to beat the returns on conventional instruments. If the managers don't believe that they can beat conventional returns, then governments should not either.

In his column today, titled "the right's stealthy coup," E.J. Dionne discussed the takeover of the Republican Party by its extreme right-wing. For example, he noted that the Republican Supreme Court justices appear to be taking positions that even President Reagan's solicitor general considers absurd.

Dionne then shows how effective the right has been in their stealthy coup effort when he refers to "a vote on the deficit-reduction proposals offered by the commission headed by former Sen. Alan Simpson and Erskine Bowles, former chief of staff to Bill Clinton."

Of course there were no deficit-reduction proposals offered by the commission. The commission never issued any proposals. The by-laws of the commission clearly state:

"The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission."

There was no vote taken by December 1 on any plan. There was an informal poll of members on December 3, 2010. This poll found that 11 of the 18 commission members supported the proposal put forward by the commission co-chairs, Morgan Stanley Director Erskine Bowles and former Senator Alan Simpson.

This means that the proposals that Dionne refers to as coming from the commission are in fact just proposals from the co-chairs. They cannot accurately be called proposals from the commission.

Remarkably, the right is using public money to advance this deception. The commission's website inaccurately posted the report of the co-chairs as a report of the commission. Showing an extraordinary sense of irony, they titled the report, "the moment of truth."

National Public Radio told listeners that, "Like the U.S., Europe Wrestles With Health Care." If the wrestling in Europe is anything like the U.S., then we must be talking about professional wrestling. ("Hit him over the head with a chair!")

The per person cost of health care across Europe is far less than in the United States. According to the OECD, in 2009 (the most recent year for which it has comparable data), per capita health care expenditures in the United States were $7,960. In France, Germany, and the UK, the three countries featured in the piece, the costs were $3,978, $4,218, and $3,487 respectively.

In other words, costs in the U.S. were more than twice as high as in France and the U.K. and more than 80 percent higher than in Germany. While the rise in health care costs poses a problem in these countries, as it does in the United States, the impact is very different than what it is in the United States. NPR should have pointed out the huge difference in current costs instead of trying to imply that all countries face the same problem.

There is one other point in this piece that badly needs correcting. The piece quotes Arthur Daemmrich, a professor at Harvard Business School:

"In Britain, for example, a new bio-tech drug that extends a person's life on average one or two months, but costs $25,000, would not be reimbursed."

Actually, the drug does not "cost" $25,000. The British government gives a drug company a patent monopoly that allows it charge $25,000 because the government will arrest any competitors that try to sell the drug. The actual cost is more likely in the range of $5-$10.

This speaks to the incredible inefficiency associated with the patent system as a mechanism for financing drug research. However it is wrong to imply that it would be expensive to society to give patients these drugs. It would actually be very cheap.

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.

Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)

However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the "statistical discrepancy."

Appelbaum's post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.

There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.

The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.

The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.

This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.

Yes, that it is the way that the media reported the Labor Department's release of new unemployment claims yesterday. Strictly speaking, this is true. The 359,000 claims reported for last week is the lowest number in almost four years.

However, it is worth pointing out that last week's number was originally reported as 348,000. It was revised up this week to 364,000. There has been a very consistent trend with claims numbers be revised upward over the last couple of years. (I don't think this is a deliberately rigging; it just suggests a bias in the methodology.) This upward revision makes the "lowest in four years" line somewhat less meaningful.

That's what readers of today's Washington Post column by Michael Gerson must conclude. After all, he tells readers that President Obama has done nothing to reduce the cost of government health care programs. If he had heard of the Affordable Care Act, then he would know President Obama had actually done a great deal to control the costs of these programs, as shown in the Congressional Budget Office's (CBO) baseline budget projections which show spending if the cost control mechanisms in the ACA are left in place. These had the effect of reducing the projected 75-year shortfall in Medicare by more than 75 percent. 

It would also be worth reminding readers that Representative Ryan's Medicare plan is projected to hugely increase the cost of providing health care to seniors. CBO's projections imply that Representative Ryan's plan would increase the cost of providing Medicare equivalent policies to people over age 65 by $34 trillion over Medicare's 75-year planning period. 

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?


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