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Washington Post Discovers Worksharing Print
Thursday, 24 April 2014 05:25

It's a bit late, but who said the Washington Post can't learn? It ran a nice piece on worksharing, pointing out the impact that reducing work hours can have in preventing unemployment. Those of us who have been working on worksharing for the last five years might be a bit frustrated with the delay, but if even the Washington Post can learn, there is hope for America.

NYT Reports Food Industry Claims People Would Not Buy Genetically Modified Foods If Given a Choice Print
Thursday, 24 April 2014 05:01

According to a NYT piece, the food industry claims that people would not buy food if they knew it contained genetically modified organisms. The piece discussed a law passed by Vermont's legislature that would require foods that contained genetically modified organisms to be labeled. It told readers:

"Big food manufacturers and the biotech industry that produces the seeds for genetically engineered crops contend that mandatory labeling of products containing ingredients derived from those crops — also known as genetically modified organisms, or G.M.O.s — will be tantamount to putting a skull-and-crossbones on them."

Its striking that the industry apparently believes that it has to conceal information from the public in order to sell its products. Economists usually favor making information available to consumers so that they can make better choices.

Problems of Patent Financed Drug Research #43,783, Ignoring Non-Patentable Treatments Print
Wednesday, 23 April 2014 15:16

In principle we might think that researchers should be examining the most promising options for treating disease. But the patent system only provides incentives to pursue treatments that are expected to lead to a patentable drug. Therefore we may see many potentially effective treatments ignored, as appears to be the case with the cancer treatment featured in this Pro Publica piece.

The American Middle Class Is Doing Much Worse Than the NYT Says Print
Wednesday, 23 April 2014 13:10

The NYT had a very interesting piece in its Upshot section that showed the trends in after-tax per capita income at each decile cutoff in the United States, alongside the trends in several other wealthy countries. It showed that the United States was at or near the top at every decile cutoff in 1980. However, it had fallen back sharply in the bottom five deciles. It ranked first in per capita income for the top five deciles with the gap between the United States and other countries growing further up the income ladder. In short, the rich are getting much richer in the United States and they are doing so in a way that is out of line with the patterns in other wealthy countries.

While this is not a pretty picture to those who would like to see everyone benefiting from growth, the actual story is even worse than shown in the NYT piece. Most of the countries in the analysis have seen a sharp reduction in the length of the average work year since 1980, the United States has not. For example, in France the length of the average work year was shortened by 17.6 percent between 1980 and 2012, the most recent year for which data is available. In Canada the reduction in the length of the average work year was 6.4 percent over this period, in the Netherlands it was 9.6 percent, and in Finland 11.1 percent. By comparison, the average work year shrank by just 1.3 percent in the United States.

This shrinking of the average work year corresponds to the increase in vacation time in other countries, with workers in many countries now enjoying 5-6 weeks a year of paid vacation. Workers in other wealthy countries can also count on paid sick days and paid family leave when they have children or a sick family member in need of care.

These guarantees and additional leisure translate into real improvements in living standards in which workers in the United States largely did not share. In 1980 workers in the United States worked somewhat less than the average for OECD countries. In 2012, they worked somewhat more. 

The NYT piece emphasized that low and moderate income workers in other countries now typically have more after-tax income than their counterparts in the United States. However they also have an institutional structure that allow them to better manage the demands of work and family. And, they enjoy more leisure.

Phantom Bubbles at FiveThirtyEight Print
Wednesday, 23 April 2014 04:38

FiveThirtyEight looks at the bubble horizon and concludes stocks and housing are safe, but we should be worried about bonds. The analysis here is seriously misguided.

First as a sidebar, contrary to what you read at FiveThirtyEight, real house prices are somewhat above, not below, their long-term trend levels. That doesn't mean we have a housing bubble, but anyone anticipating a future rise in nationwide house prices in excess of inflation is likely to be disappointed.

But the more important point is that the concern about a bubble in bonds is largely illusory. The piece constructs a case for a bond bubble that just is not there.

First, I was surprised to read that the size of the U.S. bond market is almost $40 trillion, which the piece rightly points out is considerably larger than the $28 trillion stock market or the $20 trillion housing market. When I checked the source for this number I discovered that the figure referred to the total size of the debt market, not just longer term debt that we would typically refer to as "bonds." The FiveThirtyEight figure includes 90-day T-notes and money market funds.

This is not just a question of semantics. Longer term debt (with a duration of five years or more) has large fluctuations in value in response to a change in interest rates. The price of shorter debt will also vary, but the size of the changes is trivial by comparison. This means that if we are worried about a bubble inflating bond prices, we should really only be looking at longer term debt. The size of this market would be roughly half as large, or less than $20 trillion. That's still big, but a considerably smaller basis for concern than the piece implies.

More importantly, the room for losses in this market is not nearly as large as it was in the case of the stock or housing bubbles. The stock market lost more than half of its value from its 2000 peak to its 2002 trough. House prices lost more than one third of their real value from the 2006 peak to the 2011 trough. By contrast, it is difficult to envision a scenario where the bond market loses even 10 percent of its value.



The Future of Health Care Costs: What Does History Tell Us? Print
Tuesday, 22 April 2014 20:30

Eduardo Porter has an interesting column reporting the assessment of various experts on the prospective path of health care costs. Near the beginning he quotes a NYT reporter:

"Changes in the way doctors and hospitals are paid — how much and by whom — have begun to curb the steady rise of health care costs in the New York region, ... Costs are still going up faster than overall inflation, but the annual rate of increase is the lowest in 21 years."

Porter then goes on to tell us that the quote appeared in a column written by a long retired colleague in 1993.

Of course any hopes in 1993 that health care costs would be well-contained over the next two decades were mistaken, but things have turned out better than expected. A set of cost projections from the Health Care Financing Administration (the forerunner of the Centers for Medicare and Medicaid Services [CMS]) tells us the consensus view at the time.

These projections showed health care costing 19.8 percent of GDP in 2015 and 26.2 percent in 2040. The most recent projections from CMS show health care spending at 18.4 percent of GDP in 2015 and rising to 19.9 percent of GDP in 2022. The difference between the 1993 projection for 2015 and the most recent projection would come to more than $250 billion in 2015. If we assume a linear growth path between 2015 and 2040, the 1993 projections would imply that health care spending would be 21.6 percent of GDP in 2022, 1.7 percentage points higher than the most recent projections.

This difference is even more striking when considering the size of the projected changes over this period. Health care costs were already close to 13 percent of GDP in 1993. This means that the projection for 2015 implied an increase in costs of 6.8 percentage points. The most recent projections indicate the growth will be just 5.4 percentage points, a difference of more than 20 percent. 

In short, the history of the last two decades indicates there was some basis for optimism about the future course of health care spending in 1993. It has risen substantially less rapidly than had been predicted at the time. For what it's worth, life expectancy has actually increased somewhat more rapidly than projected, indicating that the lower than projected spending did not lead to worse health outcomes. On the other hand, the gains in life expectancy have not been evenly shared with those at the top end of the income distribution getting most of the increase and those at the bottom seeing little or no gain. 


Note: A number was corrected and material added. 

Paradise Lost: Fred Hiatt and Bowles-Simpson Print
Tuesday, 22 April 2014 05:19

As many have noted, the Very Serious People in Washington have a peculiar love affair with the Bowles-Simpson commission, or more accurately the report produced by the two co-chairs of the commission. (The report is often referred to as a report of the commission. This is not true since it did not have the support of the necessary majority of commission members.) There is no one in Washington who is more Serious, than Washington Post editorial page editor Fred Hiatt.

Hiatt once again expressed his disappointment that President Obama did not embrace the co-chairs' report.

"At home, the fateful moment came in 2011 when Obama cold-shouldered the bipartisan panel he had appointed to right the nation’s finances for the long term. That, too, was a decision in keeping with the polls.

"The Simpson-Bowles commission had called for higher taxes and slower growth in Medicare and Social Security spending."

Hiatt is either unfamiliar with the commission's by-laws that required that a report have the support of 12 of the 16 commission members or simply decided to mislead readers. The point is that in reality Obama did not "cold-shoulder" the commission, since the commission did not produce a report, contrary to what Hiatt asserts.

However the substance is even more fun. Hiatt tells readers:

"Instead of chaining themselves to 20th-century arguments and interest groups, Democrats could have begun to shape — and realistically promise to pay for — a 21st-century progressive program focusing on early education and other avenues to opportunity. They could have resources for family policies that really would help address the wage gap."

Okay, never mind that we don't have family policies that can address the wage gap. (Maybe teach the families of corporate directors to tell them not to take bribes to let CEOs get outlandish pay?) The more striking point is that Hiatt is criticizing President Obama for not cutting Medicare, but in fact Medicare spending is now projected to be less than what it would have been with the Bowles-Simpson cuts.

In 2020, the last year for their budget proposal, Bowles and Simpson projected that we would spend $1,461 billion on Medicare and other health care programs. The latest projections from the Congressional Budget Office show us spending $1,417 billion in 2020 on health care programs.

We can argue over the cause of the slowdown in health care spending, but in any case we have actually achieved greater savings in this area than Bowles and Simpson had hoped to achieve with their cuts. In other words, if the point was to free up money for other programs, we got more than what Bowles-Simpson would have given us. It's therefore difficult to see what he is complaining about. Of course if the point was to inflict pain on middle income people then Hiatt's disappointment is more readily understandable.


The Economy Is Far Too Simple for Economists to Understand #47,654 Print
Monday, 21 April 2014 06:57

The Wall Street Journal noted that this recovery is about to pass the average duration for post-war recoveries with no recession clouds on the horizon. The piece also noted the weakness of the recovery and that the unemployment rate is higher now than at the same point in any prior post-war recovery. This weakness is treated as a source of mystery.

Of course arithmetic fans have no difficulty explaining the weakness. In the last business cycle the economy was being driven by the housing bubble. This led to record rates of housing construction (measured as a share of GDP) and record consumption, with the savings rate falling to near zero. Now that the bubble has burst housing has fallen to below normal levels due to the overbuilding of the bubble years and consumption is closer to normal levels, albeit still unusually high relative to income.

What did anyone think could fill the resulting gap in demand? The government sector could do it, but the balanced budget cultists will not let the government run large deficits. Investment is not going to spike to record highs in a weak economy. The trade deficit could close to fill the demand gap, but that would require a sharp fall in the dollar which we have not seen.

In short there is nothing surprising about the weakness of this recovery. The only aspect that is surprising is that economists seem surprised.

A Coordinated Refusal to Work Is Usually Called a "Strike," Even on Mount Everest Print
Monday, 21 April 2014 05:05

I'm just trying to help out National Public Radio. In their top of the hour news segment on Morning Edition (no link) they referred to the possibility that the Sherpas who place the ropes and assist climbers may collectively decide not to work to demand more compensation for the families of the Sherpas who died last week in an avalanche. The NYT correctly described this action as a possible strike, but NPR called it a "boycott."

Why Does the NYT Think that Doctors and Other Highly Educated Professionals Need Protection from Foreign Competition? Print
Monday, 21 April 2014 04:29

That is undoubtedly what many readers of the NYT's editorial on new trade agreements will be asking. The editorial made many useful points about the administration's approach to trade, notably criticizing the privileged role that business interests are playing in the negotiations. However it never raised the issue of the barriers that protect doctors and to a lesser extent other professionals from international competition.

Over the last quarter century, U.S. trade policy has been quite explicitly focused on putting U.S. manufacturing workers in direct competition with low-paid workers in Mexico, China, and elsewhere. The predicted and actual effect of trade in these circumstances is to reduce the wages of U.S. manufacturing workers. Furthermore, by reducing the number of jobs and lowering wages in a major sector of the U.S. economy, trade has put downward pressure on the wages of less-educated workers (those without college degrees) more generally.

There is nothing inevitable about this process, it is deliberate policy, not "globalization" as an abstract force. We can use trade agreements to open our economy to foreign doctors. Our doctors get paid more than twice as much as the average for doctors in other wealthy countries. The pay gap with doctors in developing countries is even larger.

There are hundreds of thousands of smart kids in countries like Mexico, India, and China who would be happy to train to U.S. standards and work as doctors in the United States for half the pay our doctors receive. Anyone who really believed in free trade, and not just using trade to redistribute income upward, should be arguing that trade agreements focus on eliminating the barriers that prevent foreign doctors from coming to the United States in the same way that they have focused on eliminating the barriers to importing manufactured goods.

To facilitate foreign investment and the importing of manufactured goods, past trade agreements did not just remove tariffs and quotas. In the case of deals like NAFTA, they totally rewrote countries' rules on investment, taxes, and regulation. Similar efforts will be needed to establish free trade for physicians. This will mean writing clear standards that foreign doctors can train to meet anywhere in the world. It would also mean that they have the opportunity to test to meet U.S. standards in their home countries (by U.S. certified testers). Those who met U.S. standards would then have the same right to practice wherever they want in the United States just like any doctor who grew up in New York or Los Angeles.

And, to ensure that this arrangement will benefit the developing countries as well, we should implement a tax structure on the earnings of foreign doctors with the money rebated to the home countries so that they can train two or three doctors for every one that comes to the United States. (Please read the last sentence as many times as necessary to understand it, in order to avoid writing silly comments about how this will hurt the quality of health care in developing countries.)

The potential savings to patients from bringing our doctors' wages down to world levels could exceed $1 trillion over the next decade. There is no excuse not to pursue this path except the power of the medical profession. It is unfortunate the NYT would not even mention the issue in an otherwise thoughtful editorial.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.