I have no idea if Bill Gates has any land where he may have taken out flood insurance that was provided by the federal government, but let's suppose that he did. If there was a flood, should he be able to collect on his insurance? After all, he certainly doesn't need the money.

This probably seems like a nutty question. After all, he paid for the insurance, why shouldn't he be able to collect on it like anyone else?

While that seems pretty straightforward, for some reason the same question apparently causes people great pain when applied to Social Security. Today Floyd Norris labors over the fact that rich people will collect Social Security benefits. Of course, they collect much less relative to what they paid in than poor people, so the structure of the program is progressive. But, they do get something back, so even Bill Gates and Warren Buffet will be able to pocket around $2,400 a month.

The reality is that the genuinely affluent get very little money from Social Security because they are few of these people. The discussion about cutting benefits for "affluent" retirees is aimed at people like school teachers and firefighters who may have had incomes in the range of $50,000 to $70,000. Such incomes don't fit the usual definition of "affluent," but folks use different logic when it comes to Social Security.

Morning Edition told listeners that consumers are not spending because they are worried about their jobs. While they undoubtedly are worried about their jobs, they are spending nonetheless. The savings rate for the 3rd quarter was 5.3 percent, well below the post-war average, which is close to 8.0 percent. This level of consumption is a falloff from the peak housing bubble years when the saving rate fell to near zero, but it is still higher than we should expect when house prices fully adjust.

The point is important because it is ridiculous to expect increased consumer spending to lead a recovery. Households, especially those near retirement, must rebuild their wealth after seeing close to $6 trillion in housing wealth disappear. Those who bemoan the lack of consumption apparently still have not recognized the housing bubble and its impact on the economy.

That seems to be the argument in a Washington Post column by David M. Smirk. I'm not kidding, here is the essence of the argument laid out in the 3rd and 4th paragraph of the piece:

"A more compelling theory [than inadequate stimulus] is that global assets remain overvalued. Specifically, the price of real estate debt and sovereign debt on bank balance sheets, propped up by government actions, remains too high. The economy can't gain traction until these prices reflect realistic valuations.

Asset prices are important because America has never had a recovery without residential housing leading the way. Real estate values are still high by historic standards. The value of all real estate is roughly $18 trillion, with mortgage debt about $10 trillion. The ratio of mortgage debt to GDP value is 56 percent. In the 1960s and 1970s, the ratio was 29 percent. In the late 1990s it was only 38 percent."

Smirk is right that real estate is still over-valued, but it is hard to understand how a decline in real estate prices will boost the economy. What matters for a residential housing lead recovery is the need for residential housing. This results from excess demand for housing. We have record levels of vacant housing in the country right now. We will have to see quite a drop in housing prices in order to fully absorb the existing supply.

This gets back to the mortgage debt part of the story which has nothing to do with current real estate values, but rather with their past values. Of course the mortgage debt to GDP ratio is too high, that is what happens when you have a housing bubble. People borrow against inflated housing values. Unfortunately, the Washington Post did not have room for columns from people making this point in the years from 2002-2006 when the housing bubble was growing.

It is not clear how Smirk thinks that a drop in housing prices helps this picture. This will worsen the debt burden of homeowners, leaving them with less wealth thereby further reducing consumption. The decline in house prices must happen (we can't sustain bubble-inflated prices indefinitely), but it makes the immediate economic situation worse, not better.

In the real world, this recovery cannot be led by housing construction because this is not the traditional sort of recession. The normal recession comes about because the Fed raises interest rates to slow the economy. This leads to a plunge in housing construction creating pent-up demand. When the Fed decides to take its foot off the brakes and get the economy going again it just lowers interest rates, triggers the pent-up demand for housing and the economy takes off.

This recession was the result of the collapse of a housing bubble which led to a huge excess supply of housing. Interest rates are also just about as low as they can possibly be, taking away the option of further declines by simple Fed actions.

Apparently Smirk and the Post failed to notice the difference between this recession and prior downturns. Therefore we get this attack on Obama and Paul Krugman that is incoherent in just about every way.

That is what the NYT is asking readers to believe when it told them that a rally in Asian markets on Friday was due to the Fed's decision on Wednesday to engage in another round of quantitative easing. Usually, analysts think of markets as forward looking, anticipating events. The NYT is asking us to believe that the Asian markets are still rising in response to a widely anticipated move by the Fed that was announced two days earlier.

It is worth noting that explanations for movements in financial markets is always guess work. The markets do not tell anyone why they moved in the way they did. The movements are the result of millions of individual decisions, some carrying much more weight than others. In some cases it may be evident why a particular movement took place (e.g. a high inflation number leading to a drop in bond prices), but in many cases the explanations are an analyst's interpretation, which may well be wrong.

The NYT seems very concerned that the dollar will fall if the budget deficit is not reduced. Usually economists believe that a large budget deficit will increase the value of the dollar. The logic is that higher budget deficits are believed to cause higher interest rates, which makes holding bonds and other dollar denominated assets more attractive. This is how a budget deficit can cause a trade deficit.

The mechanics of this process are somewhat dubious in that there is very little relationship between budget deficits and trade deficits. (In 2000, when the country was running a huge budget surplus, we also had a large and rapidly growing trade deficit.) However, there is a relevant accounting identity which is always true. The trade surplus is equal net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.

This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

A drop in the value of the dollar is the main mechanism for adjusting the trade deficit. This decline is exactly what would be expected in a system of floating exchange rates. However, the people who are concerned about the decline in the dollar, and also want the U.S. government to reduce its budget deficit, must want to see the level of output in the United States to fall and its unemployment rate to rise. That is the only plausible way that the accounting identities can be kept in balance.

The NYT should have pointed out to readers that the people concerned about the decline in the value of the budget deficit lowering the value of the dollar apparently want to see an increase in the unemployment rate in the United States.

This article also includes inappropriate adjectives, like "huge" before "budget deficit" and "expensive" before "entitlement programs." Such adjectives should be left to the opinion page. This would be a more accurate and shorter article without them.

It would seem pretty obvious that politicians respond to the concerns of interest groups. A successful politician manages to garner the support of enough powerful interest groups to get the money and votes to put himself or herself in office. They don't have to pass tests in political philosophy.

Therefore it is peculiar that a NYT article would refer to the "the core philosophical disagreements" between Republicans and Democrats. It is not clear what this means since there is little evidence that either side is guided by philosophy rather than political expediency. Philosophy does not win elections.

That would have been a reasonable question for the Post to ask him after he said:

"We should not allow any tax increases, period, because it's going to slow the economy down ...If you want to get this deficit down, you need two things: economic growth and spending cuts."

While tax increases in a depressed economy so would firing government workers or other forms of spending cuts. Both actions take money out of people's pockets at a time when the economy desperately needs demand.

Representative Ryan should know this fact, but the quote printed by the Post implies that he doesn't. Since Mr. Ryan is in line to be head of the House Budget Committee this is the sort of gaffe that should draw huge attention. It is about five orders of magnitude more important than the sort of comments (e.g. then Senator Obama's reference to "bitter" working class whites in the campaign) that tend to draw attention in the media.

Peter Orszag, President Obama's former budget director, seems determined to cut Social Security. Like most people involved in this quest he is prepared to leave the facts behind and is quick to resort to name calling.

He begins his column by telling readers:

"The budget deficit figured prominently in much of the discussion surrounding yesterday’s election."

This is partly true since the media tend to prominently feature the views of people who discuss the budget deficit in all contexts, but it is absolutely false insofar as the implication is that the deficit was an important factor in the Democrats' defeat. All the polls show that high unemployment was the major factor in the Democrats' loss; the deficit was at most a minor issue. 

Orszag goes on to tell readers that progressives should be happy to see Social Security reform on the agenda since:

"the key issue progressives had been concerned about — individual accounts within Social Security — has been definitively won in their favor (for now)."

It might have been helpful if Orszag had used names, since I don't know any progressives who have this as their "key issue." The progressives who are most visible on this issue have been concerned about a Social Security benefit that is already small by international standards being made still smaller.

This issue of accounts divides progressives, since many support some form of government managed saving accounts as a supplement to Social Security. If Social Security is cut and, as a separate matter accounts are established to supplement Social Security income, it is logically identical to an outcome in which a portion of Social Security is explicitly replaced by private accounts. It is not clear whether Orszag is simply confused here or is deliberately trying to mislead readers.

The next item on Orszag's list of reasons for early cuts is:

"acting now would allow changes to take effect more gradually, cushioning the blow."

It is important to understand this argument, since it is unlikely that many who do understand it would endorse it. Given the 75-year planning horizon, if we cut benefits for people who are retiring in the near future, then we will have to raise taxes and/or cut benefits less for people who are working/retiring in later years. In other words, if we squeeze some money out of the current cohort of near retirees, we will have to get less money out of people in 2050 and 2060.

Is this a good idea? Well, we know that the vast majority of near retirees will have almost nothing other than Social Security to support themselves in retirement. The reason is that the people who always talk about budget deficits were too ignorant of the economy to recognize the dangers of an $8 trillion housing bubble. Since these people were controlling economic policy, middle class workers saw much of the wealth they had accumulated as home equity or in their 401(k) disappear. In other words, the deficit hawks who want "changes to take effect more gradually" want to kick again the people whose wealth was destroyed due to the incredible economic mismanagement of these deficit hawks.

By contrast, the Social Security projections show that workers and retirees will on average be about 40 percent richer in 2040 than they are today and about 70 percent richer by 2060. Why exactly is it important to cut benefits from retirees in 2015 or 2020 who will have very little income, so that their far richer children and grandchildren end up with an income 50 years from now that is only 69 percent higher net of taxes rather than say 70 percent? Orszag obviously feels this redistribution from the relatively wealthy to the relatively poor is important, but he certainly doesn't explain why.  

Orszag concludes by referring to "the left's strident opposition to any serious discussion of Social Security reform." So, the people who disagree with Orszag are "strident." The name-calling might be more warranted if Orszag had a better argument.


Bring out the scientists, we have uncovered evidence that Freudian slips are contagious. BTP readers will recall NYT columnist David Brooks' wonderful Freudian slip from last week in which he noted that President Obama took office in the middle of a "fiscal crisis." Of course, Brooks meant to say "financial crisis," although in his columns he has certainly helped build up the notion that the country faces a fiscal crisis.

Today, the Washington Post committed a similar mistake. In an article headlined "economic concerns overshadow all others," the Post told readers that:

"But one issue is on their minds like no other this year: the economy. Nearly 40 percent of voters in a recent Washington Post poll rated the nation's fiscal situation as their top concern in the days leading to the election, a far higher proportion than those concerned about immigration, health care, Afghanistan, taxes, the deficit or dysfunction in Washington. (emphasis added)"

There is no doubt that the Post meant to say "economic situation" as indicated by the inclusion of the deficit as an issue that mattered less. The Post has worked tirelessly in the last two years to hype concerns about the deficit in both its opinion and news pages. It constantly raises the concern and rarely provides readers with any context that would allow them to meaningfully assess the size and nature of the problem.

In this case, we get to see the obsession in plain view. Both the reporter and the copy-editor somehow could not recognize this obviously wrong assertion.

His latest column tells us that he had:

" a scary thought .... What if — for all the hype about China, India and globalization — they’re actually underhyped? What if these sleeping giants are just finishing a 20-year process of getting the basic technological and educational infrastructure in place to become innovation hubs and that we haven’t seen anything yet?"

It's difficult to know what in this story Friedman finds scary. The piece raises the prospect of these countries providing better and lower cost financial and technical services than those we currently receive from Wall Street and Silicon Valley.

It is not clear what Friedman's problem is with getting lower cost services. This is the way trade is supposed to benefit economies. Of course, those who work on Wall Street and in Silicon Valley will be hurt, just as steel and auto workers have been hurt by low-cost competition, but the vast majority of the country does not work on Wall Street or in Silicon Valley. 

If there is a point to Friedman's piece, it is very difficult to understand what it could be.


In an article that reported on the Commerce Department's release of consumption data from September, the Washington Post told readers that: "consumer spending was stuck in the doldrums." Actually, the report showed a very high rate of spending relative to income. The saving rate fell from 5.6 percent in August to 5.3 percent in September. Historically the saving rate has averaged more than 8.0 percent, so consumers are currently spending at a high level relative to their income.

Many prominent economists, including many with Nobel prizes, believe that Europe's economy, like the world economy, is desperately in need of more demand. Fortunately, the NYT is there to set them right.

It told readers today that social democratic parties in Europe must come to grips with the "necessity" of givebacks by workers. It would be great if the NYT could lay out its economic theory more fully so that those of us less expert in economics could understand how less demand in the current economy will spur growth and employment.

This new economic theory will make exciting reading if the NYT would share it with readers.

That is what the NYT reported today, although it used somewhat different language. It told readers that:

"The group, which has a Dec. 1 deadline for recommending how to reduce the annual deficits swelling the federal debt, purposely has done little to date beyond five public hearings, and it has decided nothing lest any decisions leak and blow up in the flammable mix of a campaign year with control of Congress in the balance."

In a democracy, the purpose of elections is supposed to be to have voters determine issues like the future of Social Security and Medicare. According to this article, the members of this commission conspired to keep these issues outside of the election debate.

The article also tells readers that the co-chairs of the commission apparently misled the public in their prior statements. Both former Senator Alan Simpson and Erskine Bowles had given assurances that benefits would not be cut for current Social Security beneficiaries. According to this article, the commission is now considering changing the annual cost of living adjustment formula in a way that would reduce benefits. This reversal of a public commitment by the co-chairs should have been the main topic of a major news article.

That's a question that anyone who doesn't work on Wall Street may want to ask after hearing a segment on WAMU's "Power Breakfast" in which the anchor told listeners that failing to cut Social Security and Medicare may be "fiddling why Rome burns."

David Brooks, who made himself famous by turning the financial crisis into a "fiscal crisis," is back at game playing today. He outlines some of the main features of the Republicans' agenda assuming they get control of the House.

One of the items listed is the repeal of a provision in the health care reform bill that would require a business to file a 1099 every time they bought more than $600 of goods and services from an individual or business. While the Republicans will likely make this change, what Brooks doesn't tell readers is that Democrats would also. This was a provision that shoved into the lengthy bill that its proponents recognized as excessive almost immediately after it was passed. It would have already been repealed had the Republicans not blocked action in order to give themselves an election issue.

The other misleading item featured on Brooks' rather limited agenda for the Republicans is that they will take steps to make health care costs predictable for business. Brooks is revealing either his ignorance or his dishonesty with this one. He obviously is implying that the health care plan makes cost unpredictable for business. In fact, health care costs are already unpredictable for business.

Except in states where regulation prevents it, insurers can change what they charge businesses for health care as much as they feel like. While businesses can change insurers, this is time-consuming and the prices are very unpredictable (there are no price lists -- firms must go through an underwriting process). The Republicans have no plan that will make health care costs predictable for business. In fact, if they eliminate the insurance regulation in the health care reform bill then they will almost certainly be making costs less predictable.

The answer is that they would get significant cuts in revenue. The Washington Post, which is known for its problems with logic and economics, never made this point as it discussed the possibility of a mass exodus of physicians from the Medicare program. The Post uncritically presented complaints about Medicare's compensation schedule from Cecil B. Wilson, the president of the American Medical Association that Medicare does not pay them enough money. (The article was headlined: "Physicians Face Painful Decision on Medicare.")

While it is possible that any individual physician can make more money by taking patients from private insurers rather than Medicare patients, physicians in aggregate could only make up for the revenue lost by not seeing Medicare patients if there was a large pool of individuals with money or high-paying insurers who do not currently have access to doctors. Of course, people with money in the United States are already seeing doctors, so if physicians en masse turned away from Medicare then they would simply have fewer patients. (This may be the painful decision referred to in the headline.)

A Washington Post article discussing the risks associated with another round of quantitative easing raised the possibility that the Fed could lose its credibility if the program does not lead to the intended growth. It implies that the loss of credibility would be a major harm.

It is worth noting that the whole economic collapse came about because of the Fed's failure to notice and/or do anything about an $8 trillion housing bubble. Given this enormous failure, it is not clear how much credibility it currently enjoys among people who follow the economy.

The article also raises the risk that a precipitous fall in the dollar, "could be disastrous." It is difficult to see a scenario in which even the steepest falls in the dollar would be disastrous for the United States. U.S. exporters would suddenly become hyper-competitive (we still export $1 trillion a year in goods and services), while domestically produced goods would drive imports from the shelves. This scenario would likely be disastrous for our trading partners, which is why they would almost certainly intervene in currency markets to prevent the dollar from having a steep and sudden tumble.

On Friday, Morning Edition featured a debate on trade between former Bush administration economist Mathew Slaughter and Thea Lee, an economist with the AFL-CIO. [Disclosure: Ms. Lee is a personal friend.] The discussion allowed Mr. Slaughter to have the last word, in which he proclaimed:

"One is most of the research to date that Thea cites has concluded that it's technology innovations of many kinds, that tend to favor demand for skilled workers that has put pressure on the wages of so many Americans.

So from a policy perspective, a question is, well, what do we want to do about that? Do you want to get rid of the computers that we've created over the past 30 or 40 years?"

Actually the economic research does not provide a compelling case that technology, rather than trade, has been the major factor driving inequality. The biggest rise in inequality between college and non-college educated workers occurred in the 80s, before the explosion of computerization and the uptick in productivity growth. In the 00s, there was no increase in the college-non-college pay gap. The only real gainers in that decade were workers with advance degree. This pattern in inequality is difficult to reconcile with a technology story.

This is not a joke (at least not on my part). David Broder, the longtime columnist and reporter at a formerly respectable newspaper, quite explicitly suggested that fighting a war with Iran could be an effective way to boost the economy. Ignoring the idea that anyone should undertake war as an economic policy, Broder's economics is also a visit to loon tune land.

Broder tells readers:

"Can Obama harness the forces that might spur new growth? This is the key question for the next two years.

What are those forces? Essentially, there are two. One is the power of the business cycle, the tidal force that throughout history has dictated when the economy expands and when it contracts.

Economists struggle to analyze this, but they almost inevitably conclude that it cannot be rushed and almost resists political command. As the saying goes, the market will go where it is going to go.

In this regard, Obama has no advantage over any other pol. Even in analyzing the tidal force correctly, he cannot control it.

What else might affect the economy? The answer is obvious, but its implications are frightening. War and peace influence the economy."

Sorry Mr. Broder, outside of Fox on 15th the world does not work this way. War affects the economy the same way that other government spending affects the economy. It does not have some mystical impact as Broder seems to think.

If spending on war can provide jobs and lift the economy then so can spending on roads, weatherizing homes, or educating our kids. Yes, that's right, all the forms of stimulus spending that Broder derided so much because they add to the deficit will increase GDP and generate jobs just like the war that Broder is advocating (which will also add to the deficit).

So, we have two routes to prosperity. We can either build up our physical infrastructure and improve the skills and education of our workers or we can go kill Iranians. Broder has made it clear where he stands.



The Washington Post (a.k.a. "Fox on 15th Street) clearly is on the opposite side of the Rally to Restore Sanity. In addition to David Broder's call for a war to stimulate the economy, Fred Hiatt, the paper's editorial page editor, demanded that President Obama lie to the American people.

In an article calling on President Obama to show leadership, Hiatt lists at the top of things that Obama would do if he were acting as a leader:

"He would tell Democrats that Social Security will go broke without reform." Of course this is not true. According to the Congressional Budget Office the program is fully solvent for the next 29 years with no changes whatsoever and with changes no larger than were put in place by the Greenspan commission in 1983 it can be kept solvent in the 22nd century.

Hiatt also complained that Obama has demonized business. This apparently stems from the difficulty of getting information in distant downturn Washington. Hiatt is apparently unaware of the fact that even as unemployment remains at near double-digit levels, corporate profits have returned to their pre-recession peak. In other words, business is doing just great under President Obama's leadership, even he has occasionally said some nasty things about them.

The column also included the bizarre assertion that: "unchecked, deficits will depress Americans' standard of living deficits threaten the country's standard of living." Of course by far the biggest threat to Americans' standard of living is the near double-digit unemployment that the country is now experiencing. The deficits being run today impose zero burden on the country since they harness resources that would otherwise be idle.

Over the long-term, the deficit problem is simply the problem of a broken U.S. health care system as every policy analyst knows. For some reason the Washington Post is determined to hide this simple fact. 

Come on folks, we had the second largest inventory build-up in history. Pull that out and final demand grew at just a 0.6 percent annual rate.

Does anyone thing that inventories will continue to grow at this rate? This means that instead of adding to growth inventories will subtract from an economy that has almost no forward momentum. This is all GDP accounting 101. This should be the headline on the 3rd quarter numbers.

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