Morning Edition committed one of the seven deadly sins of economic reporting when it told listeners that Europe is hurt and we are helped because oil is priced in dollars and the dollar is rising. (The biggest sin is reporting large budget numbers without any context -- which will result in an unpleasant afterlife for most budget reporters.) It actually doesn't matter that oil is priced in dollars, as some simple arithmetic quickly shows.

Let's imagine that oil is priced in wheat. Assume the price of a barrel of oil is 20 bushels of wheat. That would translate into roughly $130 a barrel. Now suppose the dollar rises in value against the euro by 25 percent, so that instead of a euro being worth $1.35, it is only worth $1.08. If the price of oil is unchanged in wheat and the price of wheat in unchanged in dollar terms, people in the United States will now be able to buy oil for 25 percent fewer dollars than before, or roughly $104 a barrel. This means we have to give up fewer dollars to get a barrel of oil.

However is Europe hurt in this story? Under the assumptions of a constant dollar price of wheat and a constant wheat price of oil, people living in the euro zone would be paying the same number of euros for a barrel of oil as before. (It would be priced at just over 96 euros a barrel in both cases.)

Now suppose we changed everything and said that instead of being priced in wheat oil really is priced in dollars and the dollar price fell from $130 a barrel to $104 a barrel and the dollar rose by 25 percent against the euro. How is this switch from wheat pricing to dollar pricing any different from the standpoint of people living in the euro zone?

If you answered not at all, you get a free tank of gas. (Bring your copy of BTP to your favorite gas station.)

There is a very minor point that the transactions generally (but not always) take place in dollars. This means that for one millisecond it is necessary for euro zone residents and others to get dollars to buy their oil. This trivially increases the demand for dollars. (You only need the dollar for the millisecond when the transaction occurs.) Also, there is no law that requires oil to be sold for dollars. If a Russian oil company feels like contracting for oil with euro zone customers where the payment takes place in euros, there is nothing to stop them and such transactions do sometimes take place.

Long and short, a higher valued dollar means cheaper oil for people living in the United States. It doesn't matter that oil is priced in dollars.

David Leonhardt and Amanda Cox had an interesting Upshot piece about new research showing that heavier babies do better in school. One implication is that many of the induced births that doctors have performed in recent decades have actually been counterproductive from the standpoint of the health of the child. (Obviously the health of the mother must also be considered.)

This is an interesting finding, although I'll leave it to medical professionals to assess the strength of the evidence here. But it does raise an interesting issue from the standpoint of GDP accounting and measurements of living standards.

Let's assume that this finding is accurate and that many of the c-sections and other methods to hasten child birth have actually been a net negative from the standpoint of the child's health and neutral with respect to the mother's health. All of these procedures get counted in GDP as part of the economy's output. This means that we were counting services that were making us worse off as part of GDP. If we didn't have these procedures, other things equal, our GDP would be lower.

This issue arises in health care all the time for the simple reason that most of us are not in a position to assess the best medical treatment and must rely on the wisdom of our doctors and the medical profession. This differs from something like clothes, where we might think we are the best judges of the clothes that we should wear. (Okay, can the snide comments about my wardrobe.) At the end of the day what we value is our health, not the number of tests, procedures, and drugs we get. 

This is why I have always thought that for purposes like constructing cost-of-living indexes, we are best off just pulling out the money we spend on health care and measuring the price increases of non-health care consumption against the income we have left over after paying for health care expenses. This would treat spending on health care like a tax. If we want to then incorporate changes in our health into our assessment of living standards then we look directly at outcome measures (e.g. life expectancy, morbidity rates, self-rated health conditions), not the volume of health services we are consuming.

Yes, Robert Samuelson is warning about debt again. Apparently the sharp drop in interest rates around the world leads him to believe that investors are about to lose confidence in the ability of countries to repay their debt.

It's great that we have Samuelson to give us these warnings, otherwise people might think that low interest rates (i.e. high bond prices) meant the markets were telling us that there is not enough debt. After all, high prices usually means demand exceeds supply.

Thankfully Jeff Bezos and the Washington Post give us Robert Samuelson to tell us to ignore textbook economics, don't get any ideas about boosting the economy by building up infrastructure and other public investments.

"Can we avoid a global debt trap and regain faster economic growth rates that foster stability and human well-being? Whatever debt’s virtues as a first response to deep slumps, it has its limits. We cannot promote prosperity simply by piling new debts atop the old. We need to build a stronger economic foundation."

Instead we should just be really worried because Robert Samuelson apparently has no clue what is going on.

 

Addendum:

It is perhaps worth reminding folks that interest payments in many cases are quite low at present, even though debt might be high. For example, even though Japan has a debt to GDP ratio of close 250 percent, its interest payments are less than 0.8 percent of GDP. In the U.S. interest payments on publicly held debt are a bit over 1.0 percent of GDP, well below the levels hit in the early 1990s. While many people raise the alarm that interest rates might rise and suddenly increase this burden, they ignore the fact that if interest rates rise, the market value of debt falls. In other words, if the interest rate on long-term debt issued by Japan were to jump to 2.0 percent from the current level of around 0.6 percent, the price of its debt would fall. Depending on the exact issue price and maturity, the drop could easily be more than 50 percent. This would go a long way toward making the current debt burdens appear much less dramatic. In short, there isn't much of a scare story here.

Some of the ideas of elite pundit types are truly amazing. Roger Cohen's NYT column today was about the fact that China's influence in Asia is rising at the expense of the United States. He tells readers:

"A new Chinese assertiveness in the South China Sea and elsewhere is palpable. By contrast, the United States seems less focused on the region since former Secretary of State Hillary Clinton left office."

The reality is that China has a larger economy than the United States. Its economy is already about 4 percent larger (adding in Hong Kong) and in five years it will be more than 25 percent larger and the gap is projected to continue to grow rapidly. Cohen apparently thinks that the personal interests of the secretary of state can overcome these differences in relative size.

Incredibly, among the specific policies that ranks high on his list for restoring U.S. influence in Asia is the Trans-Pacific Partnership (TPP), which Cohen describes as an ambitious free-trade agreement for the region. He blames President Obama for his "underwhelming" commitment to the pact.

In fact the TPP is very far from being a free trade deal. It's mostly about imposing a business friendly regulatory structure on the parties to the agreement. High on the list are a series of measures that would strengthen patent monopolies and related protections, especially in the case of prescription drugs. Of course protectionism is the opposite of free trade. It means higher prices to consumers and slower growth. But apparently to Cohen, forcing consumers throughout the region (and the United States) to pay higher prices for Pfizer's drugs is the key to restoring U.S. influence in Asia.

We all know that the Wall Street types find it hard to get by without a helping hand from the government (like the bailouts), but many people don't realize all the different ways in which the financial industry manages to siphon away income from the productive economy. Floyd Norris has an interesting piece about a lawsuit coming before the Supreme Court in which an employer (Edison International) is being sued by its workers for deliberately picking a 401(k) plan with high administrative costs.

There is a procedural issue which the court must decide about how far back in time plaintiffs can go for bringing a suit. However there is also an important substantive issue. The workers are claiming that the company deliberately chose a higher cost plan, with the fees coming out of workers' accounts, because the fund manager gave Edison a kickback.

There is a considerable amount of money at stake with this issue. Norris puts the gap in costs at roughly one-third of a percentage point. If this were applied to the more $8 trillion currently held in 401(k) type accounts, it would come to more than $25 billion a year. This is effectively money taken away from workers and given to the financial industry. This is a bit more than 30 percent of what the government is projected to spend on food stamps this year.

The NYT had an interesting piece about growing opposition to Germany's creationist economics. The piece reports that France and Italy are leading the opposition to German's insistence that austerity is the key to economic growth, in the face of massive amounts of evidence showing that the euro zone needs stimulus to boost growth. 

At one point the piece points to worries over "the prospect of falling into a deflationary trap." It is difficult to see what anyone would be worried about. The euro zone already has an inflation rate that is far too low. The latest data show inflation to be 0.4 percent over the last year, well below its 2.0 percent target, which is itself almost certainly too low to allow for effective monetary policy given the severity of the downturn.

Lower inflation will make matters worse, but nothing happens when the number turns negative. In other words, whatever concerns people have about a future of negative inflation they should already have now about a current inflation rate that is far too low.

 

We all know how hard is to get rich these days, so it's understandable that Arthur Brooks wants to give the young men and women making fortunes in the "sharing economy" a hand. (He even dubs it the "helping industry," which apparently is to distinguish it from sectors like health care and education.) Anyhow, the gist of his piece is that companies like Airbnb are actually about helping people -- allowing people with unused rooms to make a bit of extra money, while people from out of town get to find a room at a lower cost than a traditional hotel. He is upset that governments around the country are trying to apply the same regulations to his friends in the helping industry as they do their competition in the hotel industry, taxi industry, or other sectors where the helpers compete.

First, we all understand that the Airbnb billionaires just want to help people (Brooks assures us that getting rich was beside the point), but sometimes the government does get in the way. Let's take a simple example that even conservative types might understand. The Hepatitis C drug Sovaldi is being sold in the United States for $84,000 for a 3-month course of treatment. This high price is due to a government granted patent monopoly. Indian producers can profitably sell generic Sovaldi for $1,000 a treatment.

Suppose I set up a helping industry company that bought up generic Sovaldi in large quantities in India and sold it to patients in the United States for $10,000 a treatment. Brooks would undoubtedly defend Baker's Cheap Drugs Inc., since we are just allowing people to get needed health care at an affordable price. And, we are creating jobs in India for people working in the drug industry. Why would big bad government interfere?

Okay, we all know the story about needing patents to provide an incentive for research (which happens not to be true). But the key point is that there are all sorts of situations in which the government doesn't just let "helpers" go about their business because third parties get hurt in important ways.

News reporting should not be a he said, she said affair when it comes to factual matters. In principle, reporters have the time to determine the truth, readers do not.

For this reason, it was disappointing to read in an otherwise good NYT article on the push for higher wages at Walmart:

"Retail workers ages 25 to 54 who work full time for at least three consecutive months make an average of $38,376 a year, slightly more than full-time workers in nonretail jobs, the group [the National Retail Federation] said."

This was the effort by the retailers to claim that they actually pay good wages. The problem with letting this claim appear with no context is that readers have no idea what percent of the industry's workers are classified as "full-time" and work for more than three months at the same store. The classification of full-time is central here.

The report does shed some additional light on this issue. It tells readers that 23.3 percent of the workers in the industry are between the ages of 16-24. It estimates that 30.5 percent are part-time and 32.2 percent are classified as unstable, meaning that they aren't employed for three consecutive months. While there is substantial overlap in these three categories, it is also important to realize that employees over age 55 are not included in the industry group's $38,376 average annual wage either. In other words, this average is among workers who comprise a minority, and likely a relatively small minority, of industry employees. It would have been helpful if the NYT article had pointed this fact out to readers.

That is a fact that would have been worth mentioning in a Washington Post article on plans by Fannie Mae and Freddie Mac to lower the down payment requirements on the mortgages they purchase. The delinquency rate, which closely follows the default rate, is several times higher for people who put 5 percent or less down on a house than for people who put 20 percent or more down.

Contrary to what some folks seem to believe, getting moderate income people into a home that they subsequently lose to foreclosure or a distressed sale is not an effective way for them to build wealth, even if it does help build the wealth of the banks.

Steven Pearlstein is usually pretty astute in his comments on the economy, but not today. In his complaint about Yellen's lose monetary policy he tells readers:

"With stock and bond prices back around record levels, however, and the recession long since ended, output, employment and business lending are above where they were at the height of the bubble. That is why the Fed has been winding down the extraordinary measures it took during the recession of buying up vast quantities of Treasury and home-mortgage bonds."

Umm, no, this is just about 100 percent wrong. The Fed is not targeting the stock market, it's not even particularly targeting the bond market, although lower interest rates (interest rates and bond prices are inversely related) do help the economy. And the fact that employment and business lending are above pre-recession levels has almost nothing to do with the time of day.

The recession began almost 7 years ago. Economies typically grow. This means that we would expect that in 2014 we would expect that employment and lending would be much higher than they were in the fall of 2007. The Fed is not looking to get back to pre-recession levels, it is looking to get back to the economy's potential level of output.

And, we have large amounts of data showing that we are still very far from the potential level of output. The share of the prime age population (ages 25-54) that is employed is still down by more than 3.0 percentage points from pre-recession level. The share of the workforce that would like full-time jobs but can only get part-time employment is more than 40 percent above pre-recession levels. And the weakness of the labor market is still preventing most workers from seeing real wage growth which would allow them to share in the benefits of economic growth. Also, there is zero evidence of any inflationary pressure in the economy.

For these reasons, which Yellen and other people at the Fed talk about all the time, the Fed is keeping its foot on the accelerator rather the brake. This has nothing to do with Pearlstein's fantasies about a "Yellen put" supporting the stock market.

 

That is what the NYT told readers, but because of the way it told them, most readers probably did not realize it. The paper had an article on Maine's gubernatorial race in which it reported that Paul LePage, the incumbent Republican governor, boasts of creating 22,000 private sector jobs during his term of office.

It is not possible to know whether this is a good or bad performance without knowing the size of Maine's labor force. While most readers would probably not know this statistic offhand, NYT reporters should have the time to look it up. The Bureau of Labor Statistics reports that in January of 2011 there were 490,000 private sector jobs in Maine. This means that the number of private sector jobs has increased by 4.5 percent during Mr. LePage's term in office.

By comparison, the number of jobs in the country as a whole increased by just under 6.0 percent over this period. This means that Maine has seriously lagged the rest of the country in private sector job creation.

While there may be factors that would slow Maine's job growth that are beyond the control of the governor, on its face, his job creation record is something he should be apologizing for, not boasting about. Unfortunately, most NYT readers would not recognize this fact.

It is really bizarre how folks find it so difficult to mention the trade deficit as the obvious source of weak demand in the economy. This is not a debatable point. We have a trade deficit of around $500 billion a year or roughly 3.0 percent of GDP. This is money that is creating demand elsewhere, not in the United States.

If we are going to maintain something like full employment then we need to make up this $500 billion in lost demand with higher than normal expenditures from another sector, which means either government spending, investment, residential construction, or consumption. This is all simple GDP accounting, the stuff everyone learns in intro economics. This is about an accounting identity, it is not a theory that can be debated. It is by definition true.

In the last decade we made up the shortfall in demand with consumption driven by ephemeral housing equity created by the housing bubble and by a boom in housing construction. In the late 1990s, when the deficit first exploded, the gap was filled by demand generated by the stock bubble. 

Now, with no bubbles in the economy, we are facing a $500 billion shortfall in demand due to the trade deficit. But no one seems able to talk about it.

Today's culprit is Matt O'Brien. In a mostly good piece about the death of inflation (we'll have to talk about the claims of overstated inflation later) O'Brien explains the cause:

"Well, it's the crisis, stupid. Households can't or won't borrow, even though interest rates are zero, because they're still trying to pay down their old debts. That means growth is weak, and price pressure is too."

This one doesn't work because households are in fact borrowing. Consumption is actually quite high as a share of disposable income or GDP (pick your denominator). It's not quite as high as it was at the peak of the housing or stock bubbles, when it was being spurred by trillions of dollars of ephemeral wealth, but it is far higher than at any point in the post war period until the end of the 1990s.

In other words, it makes zero sense to blame the ongoing weakness of the economy on weak consumption. It just ain't so. While investment is not booming, it is actually above its 2005 level as a share of GDP, which means it is not especially weak either. We can say we need larger government budget deficits (fine by me), but the deficit is also not especially low by post-war standards. 

The obvious culprit in the story is the unmentionable trade deficit. In the standard textbook story, rich countries like the United States (and Europe and Japan) are supposed to be running trade surpluses with fast growing developing countries like China and India. The idea is that capital should be flowing to the countries that can use it better. 

That story did reasonably well describe the world in the 1990s until the East Asian financial crisis. The botched bailout (brought to you by the I.M.F. and the U.S Treasury Department) reversed these flows in a big way, setting the stage for the global imbalances were see today.  

It should be possible for reporters to talk about the trade and deficit and its causes. What's the problem here, will the NSA throw people in jail for jeopardizing national security?

The movie Kill the Messenger has brought to new attention to charges that the CIA was involved in drug smuggling in the 1980s. The central allegation is that the CIA at least looked the other way, as its allies in arming the Contras trying to overthrow the Nicaraguan government smuggled large amounts of cocaine into the United States. Jeff Leen, the Post's assistant managing editor for investigations, took up the issue in the Post's Outlook section today.

Leen is essentially dismissive of the charges, at one point telling readers:

"The first thing I looked for was the amount of cocaine that the story said 'the CIA’s army' had brought into the country and funneled into the crack trade. It turned out to be relatively small: a ton in 1981, 100 kilos a week by the mid-1980s, nowhere near enough to flood the country with crack."

For those not familiar with the price of cocaine in the mid-1980s, the Office of National Drug Control Policy reported (Figure 1) that the price for major wholesalers was around $100 a gram, while the price for users was between $200-$300 gram. (Prices did fall sharply toward the end of the decade.) This means that the flow of 100 kilos a week would have had a wholesale value of around $10 million and a retail value between $20-$30 million. That amounts to over $500 million a year at the wholesale level and between $1.0-$1.5 billion at the retail level.

 

Addendum:

I will give some additional context for the "relatively small" drug trade. relative to today's economy, the cocaine would be worth between $4.0-$6 billion a year at the retail level. It is also enough to supply 100,000 users with a gram of cocaine a week. 

Correction:

The text has been corrected -- thanks ltr.

The Post is really angry that people are talking about the rich getting everything at the expense of everyone else. It demands in the headline of an article, "stop with the fiction of a binary economy." 

Actually, nothing in the article really gives us much reason to question the reality of the binary economy that many economists have written about. For example, it tells readers:

"The jobless rate in the center of the United States from North Dakota to Texas is less than 5 percent and has been well below the national rate for five years."

Yes, and this means what? Wages are rising in North Dakota, with a labor force of 470,000 (just over 0.3 percent of the national labor force), but not much in Texas. Furthermore, the country had a 4.0 percent unemployment rate as a year-round average in 2000. This meant that many states were around 3.0 percent.

Then we get this bizarre discussion:

"But the top two income quintiles saw annual gains of a percent to a percent and a half until 2008.

"That isn’t what it was in the 20th century, but we tend to forget that the 20th century also saw much higher inflation. And we forgot that just as income growth has slowed, the costs of many basic goods and services also dropped. In 1950, food represented 32 percent of a family’s budget, according to federal statistics; today, it accounts for less than 15 percent. Energy use has seen similar declines, along with clothing and basic necessities. Health care costs more, but that in part is because we are living longer. Education eats up more costs, but many more people are going to college."

by Eileen Appelbaum

Gretchen Morgenson had a great column in Sunday’s New York Times that pulls back the veil of secrecy surrounding pension fund investments in private equity. PE firm Carlyle recently agreed to pay $115 million to settle charges that it had engaged in illegal activities. Shockingly, neither Carlyle nor the firm’s executives and shareholders will pay a penny of this amount. Instead, it’s the pension funds and other limited partners in this PE fund that are on the hook for paying the fine. As Morgenson points out:

Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states. Five New York City and state pensions are among them.

The retirees — and people who are currently working but have accrued benefits in those pension funds — probably don’t know that they are responsible for these costs. It would be very hard for them to find out: Their legal obligations are detailed in private equity documents that are confidential and off limits to pensioners and others interested in seeing them.

Indeed, Morgenson only knows about this because in a rare coup, the New York Times was able to obtain a copy of an agreement that limited partners in a Carlyle fund signed. In general, the secrecy surrounding the agreements that pension funds and other limited partners sign has made it impossible to tally up the total fees and expenses PE firms charge pension funds and their other PE fund partners. Despite the fact that public employee pension funds provide almost a quarter of the capital committed to private equity, while private pension funds commit another 10 percent, the terms of these partnership agreements are kept secret from the workers and retirees whose money is at stake. This is especially egregious in light of the sunshine laws that in most states require transparency and accountability on the part of government agencies, including public pension funds. Yet, as Morgenson documents, the version of the Limited Partner Agreement with Carlyle that the New York Times obtained through a Freedom of Information request was heavily redacted – 108 of its 141 pages were either entirely or mostly blacked out.

In an otherwise excellent article that should be read by every worker and retiree whose retirement savings are in a pension fund, Morgenson makes two misstatements that need to be corrected. First, she uncritically repeats the PE industry’s false characterization of its own activities.

"Private equity firms now manage $3.5 trillion in assets. The firms overseeing these funds borrow money or raise it from investors to buy troubled or inefficient companies. Then they try to turn the companies around and sell at a profit."

That would have been useful background to be included in a NYT article on the European Union's plans for future emission targets. Many readers may not realize that the countries in the European Union are starting from a much lower emissions level than the United States. This means that reductions will be more costly to achieve.

Joe Nocera is anxious to credit shale oil with the recent plunge in oil prices, but our old friend Mr. Arithmetic sees things differently. In his column pronouncing the end of OPEC, Nocera credits the "shale revolution" in North America, which he credits with an additional 3 million barrels a day of production.

While this undoubtedly has put downward pressure on prices, it is not the major cause of price declines as can be easily seen from looking at the projections from before the economic collapse in 2008. The 2007 World Energy Outlook projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer than had been projected before the slump. This means production has actually grown less rapidly than projected. That is not a good explanation for declining prices.

Obviously the key is on the demand side. The story here is primarily that the collapse has led to less demand for energy than had been projected as world GDP is still far below the levels projected in 2007. It is likely that conservation and the switch to alternative energy sources also played a role in reducing the demand for oil, but clearly a less important one.

The point is that crowning fracking as the killer of OPEC doesn't make sense, because the numbers don't support it. And, we still don't have basic questions answered about the damage of fracking to the surrounding environment. (The frackers won't reveal the chemicals they use because they claim they are a trade secret. This makes it almost impossible to prove that fracking is responsible for contaminating ground water. The permission to pollute the area surrounding frack sites with impunity is yet another great departure from free market economics when it suits the interests of the rich and powerful.)

The plunge in oil prices is also not especially good news for folks who would rather not see the planet destroyed by global warming. A sane approach would be to impose a tax to offset the drop in prices with the revenue used to promote conservation and clean energy. But that one isn't likely to be on the political agenda any time soon.

That distinction would have improved the accuracy of a NYT article on the Republicans' economic plans. The piece noted that Senate Republicans have limited their economic agenda. It told readers that they no longer call for the repeal of the Affordable Care Act and have abandoned the "so-called Ryan Plan, a long-term budget to revamp Medicare and Medicaid and significantly reduce other domestic and military spending enough to balance the budget in 10 years, while sharply cutting taxes."

Actually the Ryan plan was not really a plan to balance the budget while sharply cutting taxes. Ryan instructed the Congressional Budget Office (CBO) to assume enough budget cuts from non-Social Security and non-Medicare spending to bring the budget into balance. He never proposed any specific cuts that would come anywhere close to meeting this target. In fact, he recently has been pushing for increases in spending in one of the areas that he previously had slated for cuts, the Earned Income Tax Credit.

There is a similar story on the tax side. Ryan instructed CBO to assume in its scoring that enough deductions would be eliminated to offset the revenue lost from his tax cuts, however he has never actively supported the elimination of any major tax break (e.g. the mortgage interest deduction or the deduction for employer-provided health insurance). In short, he had nothing resembling a real plan.

The piece also told readers:

"While most economists and business executives do not look to Congress for much, they do want a rewriting of the corporate tax code and a revamping of fast-growing entitlement benefit programs, even as they acknowledge that is virtually unachievable."

It is not clear how it determined the views of most economists and business executives. While there probably is little disagreement that the corporate tax code is a mess, it is not clear that most economists and business executives see an urgency to "revamping fast-growing entitlement programs." The real news here is that the sharp slowdown in health care cost growth in recent years has caused projected growth of Medicare and Medicaid spending to fall sharply. In fact, the projections have fallen more as a result of the slower pace of health care cost growth than would have been accomplished by many austerity plans, like the one put forward by Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission.

This slowdown in health care cost growth has removed the urgency for doing anything to change Medicare and Medicaid. Given the very limited assets of most workers near retirement age, there are few economists who view it as realistic to have any substantial cuts for Social Security any time soon. So it is simply not true that there is some widespread consensus around overhauling these programs.

 

David Brooks has a tough job. He is supposed to present an intellectually respectable case for a political party that denies human caused global warming and has questions about evolution and the shape of the earth. This is why he must depart from the truth in laying out the path forward for the economy in his column this morning.

He gives us four items to move the economy forward, but we don't have to get beyond the first one to realize that he is not serious. Brooks tells us:

"If you get outside the partisan boxes, there’s a completely obvious agenda to create more middle-class, satisfying jobs. The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling, considering how much support there is from both parties."

Really? There is bipartisan support for having the federal government borrow money (i.e. run larger deficits) to build up the infrastructure? Is Paul Ryan calling for this? Ted Cruz? Marco Rubio? John Boehner? Who are the Republicans who are there demanding that the government run larger deficits to build up the infrastructure?

Brooks could do the country an enormous public service here by naming names. The reality is that President Obama has been unable to get any notable Republican support for even nickel and dime infrastructure projects. It probably wouldn't even matter if he agreed to restrict the spending to Republican congressional districts.

Then we get Brooks telling us:

"The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly."

There are two questions that come up here. First what is the definition of "affluent" and second what counts as "generosity."  When we were debating tax brackets in 2012 the Republicans insisted that you wouldn't be wealthy enough to pay higher taxes unless your income was above $400,000 a year. By contrast, President Obama put the cutoff at $250,000.

If we accept either of these definitions and think that the excessive generosity takes the form of Social Security and Medicare benefits, then we can stop right here. The money involved is too trivial to make any difference in the lives of working people. In order to have anything worth the trouble we would have redefine affluent to something like an income of $40,000 a year.

It's too bad that so many people in public life aren't old enough to remember all the way back to 2008. That is the only explanation for the rush to remove down payment minimums for a risk retention requirement on mortgages placed in mortgage backed securities.

This is the topic of an excellent column by Floyd Norris on how the banking and housing industry, with the support of some consumer groups, managed to remove any down payment requirements. The idea was that banks would have to keep a portion of the risk on all but the safest loans, thereby increasing the likelihood that they would not issue bad loans.

However the rules in the Dodd-Frank bill have been watered down so that even loans with no down payment could be put into mortgage pools even though they have more than four times the default risk of loans with 20 percent down payments. It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.

In fact, the only issue was whether they would pay somewhat higher interest rates in the form of mortgage insurance. This would add roughly 0.6-0.7 percentage points to the cost of a typical loan, reflecting the higher default risk. This issue has been hugely misrepresented by the banking industry and its allies so that they can freely return to the practices of the bubble years. 

 

For those who find it difficult to understand how drugs can be developed without patent protection, the Canadian government has an answer. It paid for the development of an Ebola vaccine. While the vaccine was reportedly 100 percent effective in tests with lab animals, the government did not pay for the testing in humans that would be necessary to market the drugs.

This provides a good example where a government agency was able to finance effective research. (There are many others.)  Unless we think that the government somehow cannot pay for useful clinical tests (apparently the argument is the tests are too expensive for the government, it can only afford to pay exorbitant prices for the drugs themselves), it is difficult to understand an argument against publicly funded research for drugs which would allow them all to be sold at generic prices. This would end the absurdity of people facing life threatening diseases who can't get needed drugs because patent monopolies make them unaffordable. 

 


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