The NYT had another piece complaining that state and local pension funds are using overly optimistic assumptions on returns. The complaint is that the funds assume an 8 percent (nominal) average annual rate based on the historic returns on the mix of assets held by these funds, rather than a 6 percent rate which would be closer to the average risk-free rate on long-term U.S. Treasury debt.

At one point the piece presents us with the good news that:

"The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will not repair the present crisis."

Actually, the opposite is the case. Because the crisis sent stock prices plummeting, the ratio of stock prices to trend earnings ratio is much lower than it had been previously. As a result, it is much more reasonable to now to assume 8 percent average returns going forward than it was before the crisis. State and local pension funds do face substantial shortfalls, but calculations based on a 6 percent rate of return on assets would exaggerate the size of this shortfall.

In a chart accompanying an article on the financial reform bill approved by the House-Senate Conference Committee the Washington Post told readers that:

"Ahead of the crisis, there was no agency in the government responsible for monitoring the financial system as a whole and looking for potential threats to its health."

This is not true. There was an agency that had responsibility for the monitoring the financial system as a whole and looking for potential threats to its health. It is called the "Federal Reserve Board." This is a main purpose of the Fed and it has fulfilled this role on several occasions, most notably when it intervened to halt the stock market crash in 1987 and to arrange the orderly unraveling of the Long-Term Capital Hedge Fund in 1998.

This point is important, because the problem that led to this crisis was not a lack of regulatory authority as this assertion implies. Alan Greenspan and Ben Bernanke had all the power they needed to rein in the housing bubble before it grew large enough to threaten the health of the economy. They chose to not use this authority either because they did not recognize the bubble or did not consider it a serious problem.

There is absolutely no reason to believe that if we had the newly created "Financial Services Oversight Council" in place in the years 2002-2007, when the housing bubble was inflating, that anything would have been different. Greenspan and Bernanke both repeatedly insisted that everything was fine in the housing market and the financial system more generally.

There were very few dissenting voices to the Greenspan-Bernanke position. Those in authority (and newspapers like the Washington Post) had no problem ignoring these dissenting voices. If there had been a Financial Services Oversight Council in the years when the bubble was inflating it almost certainly would have been staffed entirely by people who shared the Greenspan-Bernanke view. There is no reason whatsoever to believe that it would have done anything to avert the current economic crisis.

In keeping with the policy of fact-free reporting at the Post, David Ignatius touts the economic successes of the last year and proclaims: "much of the necessary repair work has been done, with one nagging exception -- the lack of a credible long-term plan to control the deficit."

Wow, no one told him about 9.7 percent unemployment.

Morning Edition had a useful piece about efforts to stimulate the economy with budget deficits and the attempt to rein in these deficits. It compared this deficit reduction to President Roosevelt's effort to balance the budget in 1937 which led to a second recession.

While the piece included some discussion of the size of current deficits, it would have been useful to note the size of the hole in private sector spending that the government is trying to fill. The collapse of the housing bubble led to a falloff in residential construction of more than $500 billion annually. The collapse of the bubble in non-residential real estate led to a drop of more than $100 billion in construction in this sector. And, the loss of housing bubble wealth led to decline of more than $500 billion in wealth driven consumption. The total loss of private sector demand is more than $1 trillion a year. This is gap that must be filled by stimulus from the government sector.

The Washington Post reported on the Senate's refusal to extend unemployment benefits. At one point it referred to plans to change the tax treatment of income earned by managers of hedge funds, private equity funds, and real estate funds as a "new tax."

Currently, much of the income of these managers is taxed as capital gains even though it is paid in exchange for work. As a result, many of the richest people in the country are paying a 15 percent tax on their earnings (if they cash them out -- there is no tax paid on money left in the fund), instead of the 35 percent rate that high earners would otherwise pay (39.6 percent after the end of the year). The proposed change in the tax code would treat some of their earnings as labor income subject to ordinary taxes. It is not clear that change should be described as a new tax.

The article also discusses the additional debt that would incurred if the unemployment extension bill was approved by Congress. It tells readers that the proposal would have increased deficits over the course of the decade by $33 billion. It would have been helpful to note that this is equal to approximately 0.02 percent of projected GDP over this period.

That is a question that the NYT should have asked in an article reporting on Fannie Mae's new plans to punish people who walk away from a mortgage that they could still pay. The article notes several problems that Fannie Mae will encounter in trying to impose its announced penalties on strategic defaulters, but only mentions in passing that the company many not even be in business for 7 years.

This matters in the current context, since one of the sanctions is that Fannie Mae will refuse to buy a mortgage by anyone who had strategically defaulted for 7 years. This could have a big impact on a person's ability to get a loan if Freddie Mac adopts the same policy and the two companies still dominate the secondary market 7 years from now. However, if the companies are shut down, as many people advocate (perhaps more will now), then this sanction will be meaningless.

In this context it probably is also worth noting that the top executives of both Fannie Mae and Freddie Mac earn $6 million a year (more than 30 times the pay of the Treasury Secretary). These publicly owned companies have repeatedly upped their estimates of losses from the collapse of the housing bubble.

The article is also far too generous in its explanation of Fannie Mae's collapse, telling readers: "during the housing boom Fannie overreached and bought many loans of buyers who were ill-equipped to pay them." Actually, Fannie Mae and Freddie Mac, both completely missed the housing bubble. Even though housing is all these companies do, they could not see the $8 trillion bubble in the market. They did not alter their loan buying behavior at all (actually they became less cautious) as house prices grew ever more out of line with fundamentals. It was easy for anyone, other than the highly paid executives who ran the companies, to see that they would face serious problems when the bubble burst.

In discussing the case for extending unemployment benefits a Post editorial tells readers that: "it is possible -- in theory, anyway -- for Congress to be both compassionate and prudent." This makes a great "who's on first," moment.

There is a reason that we have 15 million people unemployed. The people running economic policy -- people with names like Alan Greenspan, Ben Bernanke, Jack Snow, Hank Paulson, Robert Rubin -- thought that an $8 trillion housing bubble was really cool. The Washington Post mostly parroted the words of wisdoms coming from these and other people who expressed the same view. It completely ignored those who warned that the housing bubble would burst and wreak havoc on the economy when it did. (David Lereah, the former chief economist for the National Association of Realtors and the author of the book, Why the Housing Boom Will Not Bust and How You Can Profit From It, was the Post's most widely cited expert on the housing market leading up to the collapse of the bubble.)

Now the boom has burst and wrecked the economy. Remarkably, not one person who was responsible for the policy that brought about this disaster seems to be out of work. However, millions of factory workers, retail clerks, and school teachers have lost their jobs. These people are unemployed not because their lacked the necessary skills. Nor do they lack the desire to work -- they had been working until the economy collapsed.

Tens of millions of people are unemployed or underemployed because people with names like Greenspan and Bernanke do not know how to run the economy. And the Post wants to show them compassion by extending unemployment benefits.

One of the important untrue items circulating in policy debates in Washington is that we can have substantial budget savings if we cut Social Security and Medicare benefits for "wealthier seniors." Peter Peterson, the billionaire Wall Street investment banker regularly announces that he doesn't need his Social Security when highlighting his efforts to reduce the budget deficit.

In fact, everyone in the policy debate knows that there are very few people like Peter Peterson among Social Security and Medicare beneficiaries and it would not matter one iota if we took away their benefits completely. The billionaires or even millionaires are such a small share of the senior population, that it would barely affect the finances of these programs even if we could find a simple way to take back all their benefits (we can't).

This is why it is incredibly dishonest when the Washington Post puts forth its case in an editorial for cutting Social Security and Medicare benefits for "wealthier seniors," a change that the paper describes as making the programs "more progressive." Invariably what the Post and others mean when they use this line is cutting benefits for people with incomes of $50,000 or $60,000 a year. While these incomes would put a senior household way above the $29,700 median for the over 65 population, these incomes would not fit anyone's definition of wealthy. By contrast, President Obama put the cutoff at $250,000 when setting an income floor on people for raising taxes.

While income distribution is highly unequal, there is not much inequality in the distribution of Social Security and Medicare benefits. This means that very little money can be obtained by cutting benefits for the small number of genuinely wealthy elderly. The only way to save large amounts of money from these programs is by cutting benefits for large numbers of people, including people who are not wealthy.

Everyone in the debate knows this, but since cutting benefits for middle-income families who paid for these benefits with their taxes is not popular, we get nonsense lines about cutting benefits for "wealthier seniors" to make the program "more progressive."

Of course, the Post has never felt the need to be constrained by the truth in pushing its agenda. In arguing the case for NAFTA a few years ago, the lead editorial told readers that Mexico's GDP had quadrupled between 1988 and 2006. According to the IMF its GDP had risen by 83 percent. Oh well.

That is the question that reporters should have asked when Fannie Mae announced a new policy of going after deficiency judgments against homeowners who strategically default on mortgages. Usually banks do not pursue deficiency judgments because whatever they are able to collect will not cover the expenses involved. Fannie Mae is apparently planning to pursue these legal actions even when it will lose it money.

Since Fannie Mae is already receiving over a hundred billion dollars from the government to cover its losses, this means that it will require even more taxpayer dollars than would otherwise need in order to engage in this punitive activity against defaulting homeowners. It also announced that it would increase the period in which it excludes a defaulting homeowner from qualifying for another mortgage from 5 to 7 years, if it determines that they had strategically defaulted.

This decision also appears to be based on a desire to punish defaulters, not profit maximization. This would mean that Fannie would be turning down the opportunity to buy otherwise profitable mortgages, further increasing its losses. As the Washington Post would say in other contexts (e.g. discussions of extending unemployment benefits), Fannie's actions will add to government deficits that are already at record levels.

It is also worth reminding readers that the losses at Fannie and Freddie were effectively subsidies to banks. They paid banks more for mortgages than they were worth.

 

[Addendum: Just to emphasize a point in the original note, banks typically do not pursue deficiency judgments because they don't believe that they will collect enough money to cover the costs. The suggestion in this article is that Fannie Mae intends to depart from the normal practice, not because they think they will recover more money, but rather to punish people who strategically default. This means that Fannie will be costing taxpayers more money, not less, because Fannie's executives (who get paid $6 million a year) decided it was important to punish strategic defaulters.]

The New York Times reported on efforts by New York state legislators and a bloc of representatives who it describes as "centrists" to remove or weaken a provision of the financial reform bill that would require the large banks to spin off their derivative trading operations into separate divisions which would not be protected by federal deposit insurance.

It is not clear why these representatives should be characterized as "centrist." There is no obvious political philosophy that corresponds to the view that the government should subsidize these banks by providing free insurance for its derivative trading operations. What unites these representatives as a group is their ties to the financial industry. It would be more accurate to describe them by their support from the financial industry than an imagined political philosophy.

The NYT ran a piece on a study showing an improving economic picture in Africa titled: "Report Optimistic on Africa Economies." The article notes a number of measures by which Africa has been doing better in the last decade than it had in prior decades.

The article is accompanied by a chart that shows growth rates by continent over the last decade. The chart shows that Africa had an average annual growth rate of 4.9 percent. It would have been useful to point out that Africa's population growth averaged 2.3 percent over this period. This means that it per capita GDP growth averaged just 2.6 percent.

While this is a much better growth rate than Africa saw in the prior two decades, it is only slightly faster than the 2.0 percent rate of per capita GDP growth seen in the United States over the period from 1960 to 2009. This means that even in this period of relative prosperity, Africa is making almost no progress in catching up with the developed world.

Most people involved in discussions of housing policy think its good when housing becomes more affordable. The Washington Post apparently believes that it is good when housing becomes less affordable. At least that is what readers of an article discussing Canada's housing market would have to assume.

The piece touts the fact that, in contrast to the United States, the Canadian market has "already has rebounded beyond pre-crisis levels." According to the Teranet-National Bank House Price Index, nominal house prices in Canada have almost doubled over the last decade. Since overall inflation has been roughly 30 percent over this period, this means that housing has now risen by more than 50 percent relative to the other prices and more than 40 percent relative to wages. As a result, it is far more difficult for Canadians who do not own homes to buy them today than was true a decade ago.

It is not clear why anyone would view this as a desirable outcome. It involves a massive transfer from the young people who do not own homes to those who already do.

It is also not clear that this situation is sustainable. It is likely that current house prices are supported in part by an expectation of future price increases. If prices continue to increase in excess of inflation, then housing will get even more unaffordable. The result is likely to be at some point that there is a glut of supply and inadequate demand leading to house price declines. The experience of declining house prices will reverse the expectation that house prices will continue to rise, thereby leading a much greater fall in demand and further declines in prices. The end result is likely to be much lower house prices and a painful process of adjustment for Canada.

It is striking that the Post either views this situation as good or somehow cannot recognize the problem of a housing bubble even after the collapse of one just devastated the U.S. economy.

 

The Wall Street Journal reported on efforts by Arkansas Senator Blanche Lincoln to secure a provision in the financial reform bill that will aid an Arkansas bank owned by the Walton family (yes, the Wal-Mart gang). The provision would exempt banks with assets of less than $15 billion from meeting a more stringent capital requirement, replacing the $10 billion cutoff in the bills approved by the House and Senate.

The article cites Lincoln's rationale for this change. She claimed that the tighter capital rules "...would hinder their [banks] ability to generate lending for consumers and businesses at a time when access to credit is already difficult to come by."

In fact, there is little evidence that capital constraints on banks are affecting the ability of consumers or businesses to raise capital at present, as Lincoln implied. There are many banks that did not over-leverage themselves during the run-up of the housing bubble. These banks now have plenty capital to lend. However, there is no evidence that they are taking advantage of the weakness of their competitors by stepping up lending. This implies that capital constraints are not a major factor in the current downturn.

This is worth noting since the media have often been willing to accept, at face value, the rationales given by Blue Dog Democrats such as Lincoln for actions that seem like old-fashioned pork-barrel politics. As another example, last week the Washington Post reported on Indiana Senator Evan Bayh's efforts to save the fund manager's tax subsidy. It asserted that he was motivated by a concern about helping growing businesses, as opposed to the more obvious explanation - that he simply wanted to help wealthy people who supported his political ambitions.

While this WSJ article explores the obvious political motivation for Lincoln's actions, it does not note that her rationale makes no sense. The media should subject the pork pushed for wealthy supporters by Blue Dog Democrats to every bit as much scrutiny as they do the measures promoted for the benefit of other constituencies.

David Leonhardt had a thoughtful piece about the Fed's decision to accept higher rates of unemployment rather than engage in more aggressive quantitative easing to boost the economy. At one point he asserts that:

"There is a direct analogy between the budget deficit and the Fed’s
asset holdings. Neither is sustainable. Congress needs to
demonstrate that it has a plan for reducing the deficit over the long
haul so that investors will be confident enough to continue lending
the United States money at low rates.

The Fed, meanwhile, has to show it has a strategy for selling the
trillions of dollars of assets it bought during the crisis — without
damaging the value of private investors’ holdings and without, at
some point, igniting inflation."

It is not clear that why continued holding of assets is unsustainable. Japan's central bank has been holding vast amounts of the government's debt for more than a decade and yet it is still in the situation of fighting deflation. In the context of sustained economic weakness there is no obvious way that holding government assets will lead to inflation.

Furthermore, even if the economy was to rebound, the Fed has other mechanisms for preventing inflation, such as raising reserve requirements, which can allow it to continue to hold assets without causing inflation. This is an important point because it means that the debt accrued in the midst of a severe downturn need not impose a substantial interest burden on the government in future years. The interest on government bonds held by the Fed is rebated to the Treasury, creating no net cost to the government. There is no obvious reason why the Fed can't hold a substantial amount of the debt accrued during the downturn indefinitely while using other mechanisms to stave off inflation.

That is the question that readers of the WSJ are asking. The Journal told readers that:

"The deficit is lingering at nearly 10% of the gross domestic product. Even under the president's assumptions on declining health-care spending and a freeze on non-security domestic spending, the deficit would not drop to what Mr. Orszag has called sustainable levels over the next decade without a sharper policy response."

Of course the reason that the deficit is lingering at near 10 percent of GDP is that the unemployment rate is lingering at near 10 percent of the labor force. This has depressed tax collections and increased payouts for unemployment insurance and other benefits.

Deficits are projected to rise relative to the size of the economy precisely because the budgets do not assume that health care costs decline. Rather, the projections assume that cost growth will continue to outstrip the growth of the economy. If health care costs were contained then the projected shortfalls would be easily manageable.

The Washington Post, which has famously fumed about the fact that union auto workers earn $57,000 a year, devoted a major front page story to an Indiana ironing board factory that benefits from a tariff on Chinese ironing boards that can be as high as 157 percent. The article includes several statements from economists about the unnecessarily high prices that consumers pay for ironing boards and the resulting economic distortions.

It is worth noting that the Washington Post has never once reported on the distortions created by the system of financing prescription drug research through government patent monopolies. As a result of these patent monopolies, drugs that could be profitably sold as generics for $4 a prescription are instead sold as brand name drugs for prices that can be tens or even hundreds of times higher. The mark-up on branded drugs can be equivalent to tariffs of several thousand percent.

The distortions created by patent monopolies are increased as a result of the asymmetric information in the sector. The manufacturer knows far more about its drugs than patients or doctors. This allows the manufacturer to mislead patients and doctors about the safety and effectiveness of drugs. There are more efficient ways to support research into the development of new drugs. (The government already spends $30 billion a year on bio-medical research through the National Institutes of Health.)

Given its interest in ironing boards, and the relative impact on the public's well-being of prescription drugs and ironing boards, it might be reasonable to expect that Post would at least once consider the distortions created by patent monopolies in the prescription drug industry.

Marketplace radio passed along to listeners the oil industry assertion that it was spending $300 million a month on the wages of workers on offshore drilling rigs that have been idled by President Obama's moratorium on new deep water drilling. The Washington Post reports that the ban has idled 33 deep-water drilling rigs.

If the average worker on a rig earns $100,000 a year, the industry's claim about lost wages would imply that it was employing 36,000 workers, or more than 1,000 on each idled rig. This seems implausibly high, and should cause reporters to question the industry's claim rather than just report it as being true. (The industry has an incentive to exaggerate the impact of the moratorium on workers since it helps to advance its agenda of ending the moratorium.)

In his NYT column today Ross Douthat picked up on a line of attack initiated by Tyler Cowen last week: that the push for stimulus is asking politicians to take big risks based on a theory. To paraphrase a former president, this depends on what your definition of "theory" is.

We always take actions based on our expectation of how the world will respond. This expectation can be called a theory, since we have a whole set of postulates about how the universe behaves. If fire fighters hook up a hose to a fire hydrant, it is because they have the expectation that when the hose is connected, that water will run through it and that the water will quench the fire. We can follow Tyler Cowen and Ross Douthat and call the belief that motivates the fire fighters' actions a theory, but it is a theory that is grounded in considerable evidence.

Presumably Douthat and Cowen don't object to the fire fighters hooking up hoses to fire hydrants to put out fires; their concern is that the evidence for stimulus is weaker than the evidence that hoses connected to hydrants put out fires. To my mind, the evidence for the effectiveness of stimulus is roughly comparable to the evidence for the effectiveness of fire hoses hooked up to hydrants in putting out fires, but this would be a very long story.

It might be more interesting to note what passes for contradicting evidence in current debates. A few weeks ago, the NYT published a short piece by Edward Glaeser that showed no correlation between the amount of stimulus spending awarded by state and the change in the unemployment rate from January of 2009 and March of 2010. This piece of evidence against stimulus was promptly cited by David Brooks in his column the following week.

Should Glaeser's finding have left supporters of stimulus disappointed? Well, if we look to Glaeser's source, we would see that he was looking only at the $61.4 billion in stimulus spending on infrastructure projects that had been received by the states by the end of March of 2010, not the entire stimulus package.

There are several reasons why we would not have expected to find much of an effect in this analysis, first and foremost, its size. This money was awarded over a 13 month period over which GDP would have been almost $16 trillion. This means that Glaeser was looking for differences in the change in unemployment rates by state based on spending that was less than 0.4 percent of GDP over this period.

We would expect spending equal to 0.4 percent of GDP to increase GDP by roughly 0.6 percent of GDP, once the full multipler effects are felt (although not all within one state -- more later). According to the assumptions used by the Obama administration in laying out its stimulus plan, this would be expected to increase total employment by roughly 600,000 workers (some demand is met by increased hours per worker), or by just over 0.4 percentage points. Of course, this is the average gain in employment due to this spending, Glaeser was looking for differences in the change in unemployment based on differences in spending.

This would be difficult to detect even in a very stable economy. Picking up the impact of such a relatively small amount of spending over a period in which the unemployment rate rose from 7.7 percent to 9.9 percent would be virtually impossible even if the data were perfect, but they are not.

First, the measure of spending is money received by state, not money actually spent. Some states may spend money as soon as they get it from the federal government or possibly even beforehand, if they know it is coming. Other states may still be in the process of taking bids on contracts for some of this money even after they have received it. This means that there would be no close relationship between money received and the jobs created by the stimulus.

Second, we would not expect there to be a one to one relationship between stimulus per state and declines in the unemployment rate for two reasons. First, much of the money will support jobs that go outside of the state. Suppose New York City spends lots of money improving its infrastructure, thereby creating a large number of jobs. Many of the people hired will no doubt live in New Jersey and Connecticut. Glaeser's methodology would find little evidence that this spending lowered unemployment since the effect would be diffused throughout the three states. This would be the case with many states with metropolitan areas that overlap state boundaries.

This problem would be even more important with the indirect employment created by the respending of income. While some of this money may be spent on services provided in the local economy (e.g. hair cuts and restaurants), much of it will be spent on goods that were manufactured all over the world, making it even harder to detect any relationship between stimulus spending per state and changes in the unemployment rate.

A second reason why there could be little relationship between changes in unemployment rate by state and stimulus spending is that the unemployment rate measures people who are looking for work, not jobs. This number may actually rise when there are more jobs created. People often drop out of the labor force in a period of high unemployment because they feel it is futile to look for work. This means that they are not counted as being unemployed. When they start to see jobs being created, they begin to look for work again, raising the unemployment rate.

This effect is well-known. That is why economists who are seriously looking for a relationship between employment and stimulus spending would look at jobs created by state rather than changes in the unemployment rate. This would also help to get around the state spillover effect since we would look at which state the employer is in, as opposed to the state where the worker lives.

Finally, Glaeser's time periods do not coincide. He looking at spending that was allocated from mid-February 2009 until the end of March 2010. He compared this to the change in the unemployment rate from January 2009 to March of 2010. While the endpoints are reasonably close (the March data is compiled based on a survey conducted in the middle of the month), the start points do not match and it matters.

The unemployment rate rose from 7.7 percent to 8.2 percent between January 2009 and February 2009, an increase of 0.5 percentage points. Presumably we would not expect the state by state distribution of this rise in unemployment to be affected by a stimulus package that was not even approved until the following month. This one-month increase in the unemployment rate was larger than the expected effect of the stimulus.

In short, it would have been astounding if Glaeser's methodology had found a relationship between stimulus spending and changes in the unemployment rate by state, even if the stimulus was working exactly as predicted. Yet, this little exercise is taken as serious evidence against the effectiveness of the stimulus.

Getting back to the Douthat/Cowen complaint that the belief in stimulus is only a theory, it would not be difficult to create equally flimsy evidence showing the ineffectiveness of fire hoses in putting out fires. Fortunately, this evidence would not be taken seriously by anyone with fire fighting responsibility. The main difference between the theories of fighting unemployment with stimulus and fighting fires with water pumped through fire hoses is what is accepted as evidence against the theory. This takes us to the sociology of the economics profession, which is a very bad neighborhood.

What is a mild-mannered politician concerned about getting re-elected supposed to do? Well, there are theories about this as well. Most of them show that politicians do very badly in their quest for re-election in periods of high unemployment. So, it is not clear that the proponents of stimulus are asking politicians to take too great a risk when they suggest hooking up the fire hose and trying more stimulus.

The Post is always anxious to tell readers about the need to reduce the deficit, it's endlessly repeated editorial line. Of course this is the opposite of what the polling data show.

For example, a poll conducted by Pew on June 3-6 asked respondents which economic issue concerned them most. Forty one percent said jobs, only 23 percent said the deficit. A NBC/Wall Street Journal poll from early May found that by 35 percent to 20 percent people thought economic growth and job creation should be the first economic priority. Only 20 percent ranked the deficit first.

A Fox News poll, also done in early May, found that by a margin of 47 percent to 15 percent people thought the economy and jobs was a more important priority than the deficit and government spending. An early April NYT/CBS poll found that 23 percent of respondents listed the economy as the top priority, while 22 percent listed jobs. Only 11 percent listed the deficit.

So, the polls don't seem to support the Post's claim that the public is more worried about the deficit than jobs.

Thanks to Ben Somberg for calling this one to my attention and supplying the polling data.

The vast majority of state and local pension funds are underfunded. The NYT, and especially Mary Williams Walsh, have done excellent work over the years trying to call attention to this underfunding. However, today's article on the topic definitely goes overboard.

The article is largely based on an analysis by Joshua Rauh, a finance professor at Northwestern University, that calculates the unfunded liabilities of pension funds by assuming that assets only get the same rate of return as U.S. Treasury bonds. By contrast, the standard method for calculating liabilities assumes that pension funds earn a real return of 5.0 percent annually, based on the mix of assets they generally hold.

While the article implies that the state's assumption is overly optimistic, in fact it is a very reasonable assumption, given the current ratio of stock prices to trend earnings. With the plunge in the stock market following the recession and the financial crisis, the ratio of price to trend earnings is now close to the historic average of 14.5 to 1. This makes it possible for stocks to provide close to their long-run average real rate of return of 7.0 percent. By contrast, assuming a 7.0 percent real return on stocks at their pre-crash price level (which pension funds did) was close to ridiculous.

This makes a huge difference in the assessment of the size of the shortfall. For example, the shortfall of Ohio, the state with the largest shortfall relative to the size of its budget, falls in Rauh's analysis from $217 billion to $75 billion. The shortfall of Illinios, which is highlighted in the article, falls from $219 billion to $85 billion.

These are still substantial shortfalls and should not be trivialized. However, they are not nearly as unmanageable as the numbers discussed in this article. For example, the shortfall in Illinois would be equal to roughly 13 percent of the gross state product (GSP). This shortfall could be met with a combination of tax increases and spending cuts equal to roughly 0.5 percent of the state's GSP over the next 30 years. This would involve a substantial, but not unprecedented, budget adjustment.

On the last day of 2009 (yes, coincidentally December 31st), the Washington Post departed from standard journalistic practice by running material produced by the "Fiscal Times" in its own news section. The Fiscal Times is a news service funded by billionaire investment banker Peter Peterson. Peterson has been working to gut Social Security and Medicare for at least two decades, starting and funding a wide variety of organizations that have this as their purpose.

The Fiscal Times is Peterson's latest creation in this line. He had his kid hire some of the journalists displaced by the collapse of the newspaper industry to put it together. While most newspapers would not publish as news material produced by an organization with such a clear agenda, the Washington Post apparently had few concerns along these lines.

Today the Post ran a piece from the Fiscal Times that glorified the efforts of two members of President Obama's deficit commission who are trying to push through a plan that is likely to involve substantial cuts to Social Security and Medicare, the country's most important social programs. The piece implied that the two members who accepted the view that it is necessary to reach an agreement on reducing the deficit in the current political environment are getting beyond ideology. In contrast, those who think it is important to protect social programs that virtually the entire working population will depend on in retirement are somehow being ideological.

It told readers that: "On the fiscal commission, Stern [Andy Stern, former head of the Service Employees Internation Union, one of members highlighted in the peice] is already looking for ways to break through the ideological camps on deficit-reduction." In fact, individuals who are not motivated by ideology would note that the country's projected long-term deficit problem is driven almost entirely by the broken U.S. health care system.

If per person health care costs were the same in the United States as in any other wealthy country, then the projections would show huge budget surpluses rather than deficits. It also should be possible for the people in the United States to take advantage of lower-cost health care systems elsewhere, even if the power of special interests like the insurance and pharmaceutical industry prevent reform here. This basic fact should feature prominently in any discussion of the long-term deficit that is not motivated by ideology. It is never mentioned in this piece.

The article also treats an assertion from Mr. Stern as a basic fact: "Now Stern argues that deficit reduction isn't simply a conservative issue. 'What I keep saying to the progressive community is that when the crisis hits, it's students, workers and poor people who pay the price.'"

Of course, the crisis has hit - the country is facing its worst downturn since the Great Depression. While students, workers, and poor people have paid the price, this is entirely the result of politics. The government quickly moved to rescue the major banks, using vast amounts of public money to save Citigroup, Goldman Sachs, Morgan Stanley and Bank of America from bankruptcy. At the same time, it has refused to spend enough money to boost the economy back to full employment levels of output or take serious steps to prevent people from being thrown out of their homes.

However, the decision to protect the wealthy rather than students, workers, and poor people was entirely a political decision. The banks were able to use their political power to ensure that they got the resources needed to prevent their collapse. On the other hand, those not interested in helping students, workers, and poor people began to highlight concerns about deficits in order to head off additional spending. It may always be the case that the wealthy will dominate the political process to the extent that they do today, but it is worth pointing out that it is politics, not economics, that determines who suffers in a crisis.


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