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U.K. Conservatives Redefine Success Downward Print
Friday, 11 April 2014 15:58

The folks on the right don't seem to think that they should have to be evaluated by the same standards as everyone else. Hence we find George Osborne, the U.K. finance minister, boasting in the WSJ about his country's economic performance now that its economy is finally beginning to grow again.

For people who missed it, the conservative coalition in the U.K. thought it was smart to cut spending and raise taxes in 2010 even though its economy was very far from full employment. These measures had the effect that fans of economics everywhere predicted, they threw the economy back into recession.

After two and a half years of austerity, the government is reversing course and lo and behold the sun rose this morning the economy is growing again. (Yes, economies do generally grow.) In the wild and wacky world of right-wing economics, this somehow vindicates the conservative policies of the prior two and half years.

The piece makes many boasts that properly deserve ridicule, but I will just pick my favorite. Here's Osborne on investment in the U.K.:

"Investment spending has grown by 8.8% over the past year, compared with 2.2% in the U.S. That bodes well for U.K. productivity."

That's impressive, in 2013 investment growth in the U.K. was far higher than in the U.S. But suppose we don't look at one year in isolation but instead look at the whole period since the downturn began. Here's the story.

 UK-US-investment 8490 image001

                            Source: OECD.

The figure shows us that when investment was growing at a a near double digit pace in the United States in 2011 and 2012, it was just inching upward under Osborne's austerity policies in the U.K. It picks up slightly in 2013, but even including the OECD's growth forecast for 2014, investment in the U.K. is still projected to be below its pre-recession level. By contrast, it will be almost 10 percent above its pre-recession level in the United States. 

The U.K. performance would not be the sort of thing that you would generally boast about, but given the affirmative action policies for conservatives at the WSJ and elsewhere in the media, apparently Osborne expects to get away with it. 

 

Note -- typos correctd, thanks to Robert Salzberg and CE.

 
Catherine Rampell Is Right: Medicare Is a Steal, but for Whom? Print
Thursday, 10 April 2014 23:20

Catherine Rampell used her column today to defend an earlier column complaining that baby boomers are taking from young people through Social Security and Medicare. She acknowledges that most baby boomers will not come out ahead on Social Security (actually they come out somewhat behind in the source she cites) but then tells readers:

"Medicare, on the other hand, is pretty much a steal no matter when you turned 65."

This is true, but it's hard to argue that it is the beneficiaries who are doing the stealing. We pay more than twice as much per person on average for our health care as people in other wealthy countries. We have little or nothing to show for this extra spending in terms of outcomes. For example, every other wealthy country has longer life expectancies than we do. It therefore is hard to argue that seniors are the beneficiaries of the exorbitant spending on Medicare.

On the other hand, we know who does benefit. The Centers for Medicare and Medicaid Services released data this week showing that a small number of doctors account for a grossly disproportionate share of Medicare's payments to doctors, with many collecting more than $1 million a year from the system. The top earner, a big campaign contributor, pocketed more than $20 million in a single year.

Doctors in the United States earn more than twice as much on average as their counterparts in other wealthy countries. We also pay more than twice as much for our prescription drugs and for medical equipment. If one were to look for people stealing from Medicare, these and other health care providers would be the obvious candidates.

It is also worth noting that the well-being of people of Rampell's generation (her explicit concern in the piece) will depend far more on stopping and reversing the pattern of upward redistribution of income that we have been seeing since 1980. If this is not reversed then millennials will see little of the 50 percent growth in real compensation over the next three decades that is projected by the Social Security trustees. If millennials are able to secure wage gains that track the economy's productivity growth then their gains in compensation will be an order of magnitude larger than any possible tax increases associated with Social Security and Medicare. 

 


 

 
David Brooks Doesn't Believe We Should Jail People for Stealing (At Least on Wall Street) Print
Thursday, 10 April 2014 22:35

Everyone thought David Brooks was a conservative. But in today's column on high frequency trading and the fact that it has often been used to support front-running in which traders effectively engage in inside trading, Brooks tells readers:

"You can’t tame the desire for money with sermons. You can only counteract greed with some superior love, like the love of knowledge.

"Third, if market-rigging is defeated, it won’t be by government regulators. It will be through a market innovation"

So there you have it. According to Brooks, if people are stealing on Wall Street we shouldn't look to try to have regulations and punishment, we should go after them with love. It will be interesting to see if Brooks shows the same attitude towards people's whose greed leads them to steal cars or burglarize houses.

 
Two Pinocchios for the President? Print
Thursday, 10 April 2014 06:12

Glenn Kessler, the Washington Post fact checker, gave President Obama two Pinocchios for saying that women earn on average just 77 cents for every dollar that men earn. Kessler makes some valid points as to why this number overstates the gap. First it is an annual number that doesn't take account of the fact that women are more likely to work part-time and part-year. It is also true that women typically have less work experience because they take time out of the paid labor force.

These and other factors (some of which go in the other direction) would be important items to take into account in a full examination of gender inequality. But has President Obama really committed a two-Pinocchio offense by using a number straight out of Census data without these additional qualifications?

Context is always great, but unfortunately President Obama's use of the Census pay gap number hardly stands out as an out of context statement by a politician. My favorite in that category was the $1 million spent on a museum of the Woodstock music festival that Senator McCain used as one of his main props in his 2008 presidential campaign. Does anyone think McCain's complaint about government waste and excesses would have packed the same punch if he told audiences the government had spent 0.00003 percent of its budget on a Woodstock museum? (On this score, why do the Post and other newspapers continue to express budget items exclusively in billions and trillions of dollars when everyone knows these numbers are meaningless to almost their entire readership?)

Unfortunately, making comparisons that don't convey the full context is a practice that extends beyond politics into the policy world. A couple of years ago, Pew Research Center issued a widely cited study that purported to show growing disparities in wealth between the old and the young over the last quarter century. The study neglected to mention the fact that one of the main contributors to the growth in an age related wealth gap was a switch from defined benefit to defined contribution pensions and the rapid disappearance of retiree health insurance.

In the Pew analysis, a defined benefit pension plan (which most middle class workers would have had in 1984, the base year for the analysis) does not count as wealth, while a defined contribution plan does. Also, workers with retiree health benefits would need to save less to provide for their health care expenses in retirement. These benefits also would have been a form of uncounted wealth in 1984 that would have been available to most middle class workers.

Wealth is also a dubious measure of the well-being of young people. A 30-year old Harvard MBA who has negative net wealth of $150,000 due to student loan debt should not be considered to be in difficult economic straights. What will determine the well-being of young people is the state of the labor market they will face over their working career, whether they have $10,000  more or less in assets by the time they are age 35 will be barely noticeable in comparison.

Anyhow, if we applied the Kessler Pinocchio standard to this Pew study, it would likely score at least a three, if not a four. It is unfortunate that we routinely have facts and numbers given to us out of context, but President Obama, in using standard Census data in referring to the gender pay gap, hardly ranks as one of the bigger offenders in this town.

 
Krugman, Greider, and the Continuing Saga of Sustained Secular Stagnation Print
Wednesday, 09 April 2014 12:50

Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment's thought. (Just to be clear, I consider both Krugman and Greider friends, so I don't have a particular ax to grind in this story.)

Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation's currency falls and the values of the surplus nations' currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.

But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.

As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today's economy.

It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman's secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the dot.com bubble and the Y2K scare. That doesn't seem like a very plausible counter-factual.

In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.

(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it's hard to see why not. Aftar all, it's not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)

 
Casey Mulligan Argues Insurance Deductibles Should Rise by 40 Percent in 2015 (corrected version) Print
Wednesday, 09 April 2014 07:48

Casey Mulligan has once again left me baffled by the economic analysis in his Economix blogpost. If I'm understanding him correctly he is saying that the deductibles for insurance provided through the exchanges in 2015 should be allowed to rise by 40 percent, based on a rise of this amount in the average premium of non-employer provided insurance policies in 2014 compared with 2013. This is based on the provision of the law that deductibles and other adjustable payments should rise in step with medical inflation.

However as Mulligan points out at length, the 40 percent rise in the cost of the average premium in 2014 was not due to medical inflation but rather due to the fact that policies being issued in 2014 under the provisions of the ACA were more comprehensive than the policies being issued in 2013. Since the insurers priced these benefits into the premiums they charged in 2014, and this was also priced into the original schedule of deductibles and subsidies, why would we expect these costs to rise by 40 percent in 2015 relative to 2014.

Based on this logic, the Department of Health and Human Services has set the target increase for a variety of indexed measures in the ACA at 4.2 percent, its calculation of the overall rate of increase in per capita health care costs. It's not clear where Mulligan sees a problem here. Perhaps he is a better lawyer than me and believes the law requires that these targted payments in future years should rise based on the one time increase in 2014, but it is certainly hard to see any economic logic behind this view. In other words, if there is a scandal in having the targeted payments in the ACA rise in step with health care costs, it's hard to see what it is.

 

Addendum: An earlier version wrongly said that Mullligan was referring to insurance prices.

 
Third Way Proposes to Tax Workers to Subsidize Wall Street Print
Tuesday, 08 April 2014 05:50

For those who have been worried about the plight of the poor boys and girls who work in the financial sector, Jonathan Cowan and Jim Kessler, respectively the president and vice-president of Third Way, have a plan to help. In a NYT column yesterday, headlined "Capitalize Workers!," Cowan and Kessler proposed a supplemental retirement system which would require employers to put 50 cents an hour into a retirement fund for all of their workers. Cowan and Kessler tell us that this should lead to an accumulation of $160,000 for a worker who works full-time from ages 22 to 67, leading to an annuity of $790 a month. What's not to like?

First, we should give Cowan and Kessler credit for effective recycling. Mandated savings plans like this are not exactly new, so getting this plan published in the NYT as a remarkable new idea to address inequality is a pretty good feat.

Getting to the substance, the requirement that employers pay 50 cents an hour for their workers' retirement is a nice little trick for the kiddies, but all the adults in the room know that this money will come out of workers' wages.(The assumption that employer side payments on wages are in the long-run deducted from wages is almost universally accepted among economists.) This deduction would actually be a substantial hit to low wage workers. Cowan and Kessler's proposal would effectively amount to a 5 percent tax on the wages of someone earning $10 an hour. That is not exactly trivial -- the Social Security trustees project that we could fully fund the program for the next 75 years with a tax increase that is a bit more than half this size. 

The next issue is the $160k accumulation that Cowan and Kessler project. They qualify this comment by saying:

"if stocks and bonds enjoy the same average rates of return as they did over the last 45 years."

That is a huge "if." Given current price to earnings ratios in the stock market and growth projections for the economy, it is almost inconceivable that stocks and bonds will enjoy the same average returns in the future as they did over the last 45 years. With the ratio of stock prices to trend earnings now approaching 20 to 1, we should anticipate real returns in the stock market going forward to average roughly 5 percent. If we assume real returns on bonds of 3.0 percent (this is probably a bit high), then a portfolio that is invested half in stock and half in bonds should produce a real return on 4.0 percent, before deducting fees.

Read more...

 

 
Michael Gerson Is Confused About Health Care Costs Print
Tuesday, 08 April 2014 04:03

In his Washington Post column Michael Gerson told readers that health care costs increased at the fastest rate in 10 years in the last quarter of 2013. His source lists the growth rate of expenditures (not costs) at 5.6 percent in the quarter. This follows very slow growth in the prior three quarters. By comparison, health care spending grew by 6.7 percent over the whole year in 2007. There may well have been quarters more recently in which the growth rate exceeded 5.7 percent (the quarterly data are erratic), but clearly the claim that the fourth quarter growth rate was a ten-year high is obviously not true.

 
Obamacare Increased Voluntary Part-Time Employment, Involuntary Is Down Print
Monday, 07 April 2014 19:59

Paul Solman seems determined to make me an optimist on the state of the economy, at least by comparison. Following the comments of Kristin Butcher, chair of Wellesley's economic department, his blogpost on the March jobs report dismisses the 192,000 job growth reported for March:

"That’s because, according to the survey of 60,000 households, roughly 170,000 more Americans of working age were added to the population in March, consistent with the number we add just about every month, and also consistent with the Census Bureau’s report that the U.S. population is growing at slightly more than 2 million people a year.But that would mean that the number of jobs added — 192,000 — just kept pace with the number of new people who needed them."

This comment misses the fact that not everyone works. The employment to population ratio (EPOP) is just below 60 percent. This means that for the EPOP to stay constant we need roughly 100,000 new jobs a month. In this context, the March numbers implied that we reduced the number of unemployed by roughly 90,000.

The other item on which I am more optimistic than Solman is part-time employment. He emphasized the rise in involuntary part-time as bad news. I looked to the rise in voluntary part-time as good news. While the number of people working part-time involuntarily did rise in March, it is still 240,000 (@ 3.0 percent) below the year ago level, and is fact well below the level for any month in 2013. These numbers are erratic and the March rise partly reverses a drop of 580,000 reported between December and February. In other words, there is no evidence in this series that the Affordable Care Act (ACA) is increasing the number of people involuntarily working part-time as the post suggests.

On the other hand, the number of people who are voluntarily working part-time increased by 230,000 in March and is 515,000 above its year ago level. One possible effect of the ACA would be to give workers the option to work part-time who previously may have had to work full-time to get health care insurance. Since workers can now get insurance through their exchanges rather than their jobs, many may choose to work fewer hours to spend more time with their families or doing other things. This is especially likely for parents of young children.

In short, the data to date would support the view that Obamacare is having a positive effect on the labor market by giving workers more choices. But we will need many more months of data before we can say this with any confidence.

 
Are Investors Less Confused About Real and Nominal Interest Rates Than They Were 40 Years Ago? Print
Monday, 07 April 2014 12:38

Brad DeLong picks up on Paul Krugman's column and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don't, but that they think they do.  He says:

"The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy."

"But they think they would be…"

I'm not sure about Brad's story here. While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?

The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:

"a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons."

It is remarkable that more than three decades later we don't have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.

However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?

 

 
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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.

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