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Fareed Zakaria Is Really Mad About Public Pensions! Print
Thursday, 14 June 2012 16:27

We would probably all be mad if we were as confused as Mr. Zakaria. Fortunately, the problem is with his arithmetic, not with the public pensions.

Zakaria seems to have convinced himself that public pension obligations are going to turn state and local governments into future Greeces, but that is not what the numbers show. His column contains one inaccuracy after another.

For example, he tells readers:

"The numbers are staggering. In California, total pension liabilities--the money the state is legally required to pay its public-sector retirees--are 30 times its annual budget deficit. Annual pension costs rose by 2,000% from 1999 to 2009. In Illinois, they are already 15% of general revenue and growing. Ohio's pension liabilities are now 35% of the state's entire GDP."

If we go to the Public Plans database of Boston College's Retirement Center, we find a very different story. The database shows the liabilities of California's two make plans to be $322.2 billion and $196.3 billion for a total of $518.5 billion. If we look at Governor Brown's proposed budget for the coming fiscal year it shows revenue and transfers of $95.7 billion. That means the ratio of the funds' liabilities to revenues is less than 6 to 1, not Zakaria's 30 to 1. [RS corrects me on this point. Zakaria made the comparison to the budget deficit, not the budget. This deficit was originally projected at $16 billion, of course as the state gets the deficit down then Zakaria's ratio will get larger. The point is not clear, but Zakaria is correct.] And, the database shows that the funds are together more than 75 percent funded. (This is somewhat below the 80 percent level that actuaries usually consider acceptable.)

The 2000 percent rise in pension costs from 1999 to 2009 was due to the fact that the pensions were viewed as over-funded in the stock bubble days, which meant that the state had to pay in very little to maintain proper funding. Did Zakaria somehow miss the stock bubble.



Matt Miller is Worried That Bill Gates' Kids Will Go Hungry Print
Thursday, 14 June 2012 07:03

The most striking development in the United States over the last three decades is the massive upward redistribution of income. So, what do we hear about when we go to the Washington Post oped pages? Naturally, we get columns telling us that old people are going to condemn the country's youth to poverty.

The effort to divert class anger into generational resentment is a huge industry in Washington. Just by himself, Wall Street investment banker Peter Peterson has invested $1 billion in this drive and there are many other wealthy people who also consider it a good use of their funds. 

This is the context for Matt Miller's column today in which he tells us "young Americans get the shaft." That is of course true, but it takes some really bad logic and/or arithmetic to think that the reason is the $1,100 monthly Social Security checks received by their parents or grandparents.

In fact, if Miller had access to data, like Survey of Consumer Finance released by the Fed this week, he would know that most seniors have little other than their Social Security to live on. The cohorts that are now on the edge of retirement have seen defined benefit pensions largely disappear. They saw weak wage growth during their lifetime and therefore had little to money save.

Insofar as they were able to put money aside, they lost much of their savings when an over-valued stock market corrected to more normal levels and the housing bubble burst. Most people would probably put more blame on the Wall Street crew who managed to get incredibly wealthy through this whole process (e.g. Robert Rubin at Citigroup or Richard Fuld at Lehman), but Miller wants us to focus our wrath on seniors getting their Social Security checks.



NPR Tells Us That Harvard Boys Who Completely Missed the Bubble Think That Housing Is Looking Up Print
Thursday, 14 June 2012 04:16

In Washington the definition of an expert is someone who can be wrong all the time and still be an expert. The folks at the Joint Center for Housing Studies at Harvard are clearly experts.

The Joint Center gained notoriety in the last decade for completely missing the bubble, dismissing those of us who tried to warn that homebuyers in the years 2002-2007 were taking serious risks. Here are a couple of choice comments [thanks to Ben Zipperer].

"So that leads us to the conclusion that while double digit price appreciation is a thing of the past, that it can't be sustained, that what we're looking for at least in the next few years is a much flattened price appreciation over time. Over the long run however, we tend to be relatively bullish in terms of prices because we still have a growing population. And in many markets there continues to be constraints on supply. So a rough, rocky patch, lots of rain and clouds and maybe thunderstorms, but we don't think the sky will fall on the housing sector." - Nicholas Retsinas, July 18, 2006.

"2007 doesn't look very good form the housing market's point of view. I do think we may be near the bottom. The good news for example is inventories have started to stabilize, but at a high number. So I think we're near the bottom but I think we're going to be at the bottom for a while and if history is any guide, then it looks like this housing market downturn will probably last well into 2007, and it won't be toward the last quarter, maybe 2008 before we see signs of it turning around." - Nicholas Retsinas, December 26, 2006.

Given that the Harvard Center completely missed the largest decline in the U.S. housing market ever, they would naturally be the people you would contact to discuss the bottom of the housing market. In this case the Harvard boys happen to be right, sort of like a stopped clock will be right twice a day.

Romney Has Claims About the Economy, the Post Does Not Know If He Has a Theory Print
Thursday, 14 June 2012 05:07

In discussing presumptive Republican presidential nominee Mitt Romney's statements on the economy, the Post told readers:

"Romney’s theory is that keeping tax rates low would spur investment in new businesses, thereby increasing economic growth and perhaps tax revenue itself. He believes that rolling back regulations would reduce the cost of doing business and make the United States more competitive."

It is not clear that Romney has a "theory" about the economy, nor does the Post know what he really believes. Romney has said that he wants to have lower tax rates on the wealthy and corporations. This will put more money in the pockets of the wealthy, the Post does not know if he actually believes this will help the economy.

The quote that follows this assertion indicate that Romney does not believe what he is saying, since is obviously not true.

“The president’s team indicated that if we passed their stimulus of $787 billion, borrowed, that they’d hold unemployment below 8 percent. We’ve gone 40 straight months with unemployment above 8 percent.

.... If you look at his record over the last 31 / 2 years, you will conclude, as I have, that it is the most anti-investment, anti-business, anti-jobs series of policies in modern American history.”

The comment about 8 percent unemployment refers to a memo printed in early January of 2009 that badly underestimated the severity of the downturn. The memo estimated that the stimulus requested by President Obama would create between 3-4 million jobs. In order to get the necessary Republican support in the Senate, President Obama agreed to a less effective stimulus, which the Congressional Budget Office has estimated created betwen 2-3 million jobs.

The main mistake in this memo was in its projections for the economy, not its assessment of the effectiveness of the stimulus. Presumably Mr. Romney knows this.

The second claim, that President Obama has pursued the most anti-investment, anti-business, anti-jobs policies in modern American history is absurd on its face. Profits are at their highest share of GDP is almost 50 years. 

Since Romney must know that these assertions are not true, they cannot reflect what he actually believes. In such cases, rather than trying to penetrate Mr. Romney's thoughts for readers the Post would be better advised to just report what he says.

Labor's Share Has Declined Across Europe Print
Wednesday, 13 June 2012 05:17

Harold Meyerson has a good column on the impact of the decline in unionization on the middle class. However he makes a mistake in saying the the labor share of income has only declined in the United States and crisis countries in the euro zone. Actually, if we go back to 1980, the labor share of income has declined pretty much everywhere in Europe, although there are differences across countries. In many countries the decline in labor shares has been larger than in the United States. (Meyerson's comparison of 2001 and 2011 is misleading because 2001 was a cyclical peak for labor share in the U.S.)

Meyerson also blames the reduction in wages for ordinary workers on globalization. This is somewhat misleading. We could have designed trade policies that focused on opening up the most highly paid professions (e.g. doctors, lawyers, economists) to more international competition. This would have driven down wages in these professions and led to higher living standards for ordinary workers since the services they provide would cost less.

Instead policymakers have adopted policies that were designed to put manufacturing workers in direct competition with low-paid workers in the developing world. These policies would lower their wages, making doctors, lawyers, and economists richer in addition to owners of capital.

Germans Flunk Economics 101 Print
Wednesday, 13 June 2012 04:36

Hans-Werner Sinn, the president of the Ifo Institute and the director of the Center for Economic Studies at the University of Munich, compellingly argued that the euro cannot survive in an oped in the NYT this morning. That probably was not his intention. But as one of the respected economic voices in Germany, he showed how completely oblivious that country's economic policy makers are to the steps that would actually be needed to address the euro crisis.

Mr. Sinn lays out how much money Germany has committed to the bailout of Greece, telling readers that Germans have taken on an enormous burden already to keep Greece afloat. He effectively is asking readers how much more can Germany be expected to give?

Of course that is not the relevant question. Germany will have to allow the European Central Bank to guarantee the debts of the debt-burdened countries. This will allow them to pay much lower interest rates on their debt, which will make the burdens sustainable.

The other step that Germany must take is to allow a higher inflation rate, propelled by more rapid wage growth, in order to allow peripheral countries to regain competitiveness. If there is not a change in relative prices between Germany and the peripheral countries then it will be impossible for them to reduce their trade imbalance, which is the central cause of their problem.

The appropriate analogy here is with putting water into a leaky bucket. Mr. Sinn is telling us how much water Germany has put into the leaky bucket of Greece. However it refuses to go along with measures that would patch the holes in the bucket. In fact, it doesn't appear as though patching the holes is even on the agenda.

If Sinn's views reflect the attitudes of German policymakers then the euro is doomed. Putting more water in the leaky bucket will not do the trick.

The Stock Bubble Created the Budget Surplus: Not Bill Clinton's Tax and Spending Policies Print
Tuesday, 12 June 2012 05:22

Bruce Bartlett is a decent person and an honest economist. A former Reagan and Bush I administration official, he now regularly berates Republican politicians for making nonsensical assertions about the economy. However in his NYT blogpost today he may go a bit overboard in telling readers:

"The projected surplus was primarily the result of two factors. First was a big tax increase in 1993 that every Republican in Congress voted against, saying that it would tank the economy. This belief was wrong. The economy boomed in 1994, growing 4.1 percent that year and strongly throughout the Clinton administration.

The second major contributor to budget surpluses that emerged in 1998 was tough budget controls that were part of the 1990 and 1993 budget deals."

This leaves out the main cause of the budget surpluses at the end of the decade, the stock bubble.

This point can be easily seen from examining the Congressional Budget Office (CBO) projections from May of 1996 for the 2000 fiscal year. At that time, the Clinton tax increases were all passed into law, so these were fully incorporated into the budget projects. So were the spending restraints.

So what did CBO tell us? Its projections show that in the spending constraint scenario (discretionary spending would only rise in step with inflation) the deficit would be equal to 2.7 percent of GDP in 2000 (Summary Table 3). Instead we had a budget surplus of 2.4 percent of GDP (Table 1-1), a shift of 5.1 percentage points.

In today's economy this would be equivalent to an unexpected drop in the annual deficit of $780 billion. This shift $780 billion drop was not due to policy changes but rather to the extra growth and tax collections spurred by the stock bubble. 

On the tax side, we see that CBO projected that revenue would be equal to 18.6 percent of GDP in 1996 (Table 2-3). It turned out that revenue in 2000 was equal to 20.6 percent of GDP (Table 1-2). This differences of 2 percentages of GDP was not due to any change in tax policy, it was due to faster than expected growth and the large amount of capital gains taxes collected as a result of the bubble. (It is likely that some of the capital gains showed up as ordinary income and were taxed as ordinary income. This could explain the jump in the statistical discrepancy at the end of the 90s and the unexplained rise in tax collections in those years.) 

On the spending side, non-interest outlays ended up being 15.9 percent of GDP (Table 1-2), they had been projected at 18.2 percent of GDP in 1996 (Table 2-5). While there were some factors that lead to lower than expected spending, most notably slower than projected growth in health care costs, by far the biggest reason for the drop in spending as a share of GDP was the faster than projected growth in GDP.

In 1996, GDP was projected to be $9,094 billion in 2000 (Table 1-2). It ended up being $9,828 billion (Table 1-2). With GDP 8.1 percent higher than projected, the same level of nominal spending would be 8.1 percent less measured as a share of GDP. This means that if we spent exactly the same number of dollars projected in 1996, then spending would have ended up as 16.4 percent of GDP in 2000 rather than the 18.2 percent projected.

The remaining factor was the lower than projected interest payments. Because deficits were lower than projected in the years 1996-1999, interest on the debt only cost us 2.3 percent of GDP rather than the 3.1 percent projected in 1996.

In short, the hero of the budget surplus story was the stock bubble, not President Clinton's tax cuts and budget restraint. This is important not only in dishing out praise for the surplus, it is also essential to a proper understanding of the economy. 

Bubbles are not sustainable, by definition. The stock bubble began to burst in 2000. By the summer of 2002 stocks had fallen to roughly half of their peak values destroying $10 trillion in wealth. This gave us a recession which, although officially short and mild, led to the longest period without net job creation since the Great Depression (until the current downturn).

The ending of this bubble was the biggest factor turning the surplus into a deficit. The Bush tax cuts were very much secondary in this picture, as were his wars and the Medicare drug plan. The Bush administration might deserve serious grief for all three of these, but they were not the story of the end of the Clinton era surpluses. The end of the stock bubble was the end of the budget surpluses and that one cannot be blamed on President Bush. 


[Addendum: I see from the comments that I may have to do some real Clinton bashing. A few simple points here.


1) The 1996 projections took account of all the steps Clinton took to balance the budget. All the deficit reduction beyond this was due to the bubble.

2) The pick up in productivity growth, which began in the middle of 1995 (long before balanced budget glory), continued all through the Bush years. Anyone who wants to claim Clinton's balanced budgets spurred the surge in productivity, which was then destroyed by Bush deficits has a really big quarrel with the data. The story doesn't fit at all.

3) The deficit did fall sharply under President Bush as the economy recovered from the 2001 recession, until the collapse of the housing bubble brought on the recession in 2008. Yes, the deficit was brought down by housing bubble driven growth. On the other hand, in the absence of this bubble, the downturn from the collapse of the Clinton era stock bubble would have lasted longer. Blame who you like on that one, but them's the facts.

Anyhow, I'm not getting paid by either side in this story. I have been using the same analysis of the economy for the last 15 years. If that proves inconvenient for supporters of President Obama or Clinton that is their problem.]

Romney's Education Agenda: Beliefs Do Not Replace Policies Print
Tuesday, 12 June 2012 04:56

The NYT reports that Governor Romney will strongly push school vouchers if he gets into the White House. It told readers:

"Now Mr. Romney is taking his party back to its ideological roots by emphasizing a lesser role for Washington, replacing top-down mandates with a belief in market mechanisms."

Top down mandates are a policy. The policy is not replaced with beliefs, it is replaced with other policies. In this case, the piece tells us the policy is a voucher that can be used for private schools. While the article repeatedly assures readers that the motive is an ideological belief in markets, there is another possibility that goes completely unmentioned in this article.

There are companies that profit from running private schools. Such companies could make large amounts of money if the Federal government were to pressure state and local governments to give students a voucher that could be used in their schools.

It is possible that Romney and his advisers are motivated by the desire to appease people running for profit schools rather than an ideological belief in the idea that market forces will somehow fix education for low income student. This possibility seems especially plausible since there is now considerable evidence that increased use of market mechanisms will not improve the quality of education.

David Brooks Calls for Dissolving the People Print
Tuesday, 12 June 2012 04:26

Nope, I'm not kidding. His column today is devoted to "the follower problem." He is upset that people are cynical and don't seem to trust the elites. Brooks tells us:

"I don’t know if America has a leadership problem; it certainly has a followership problem. Vast majorities of Americans don’t trust their institutions. That’s not mostly because our institutions perform much worse than they did in 1925 and 1955, when they were widely trusted."

Let's leave aside 1925 since it was a very different world. In 1955 the economy was growing at a healthy pace with workers up and down the income ladder sharing in the prosperity. They were seeing rapidly rising living standards and it was a virtual certainty that children would enjoy much better standards of living than their parents.

Brooks may have missed it, but the economy collapsed in 2008. This was not due to any external event like a massive drought or asteroid strike, it was due to fact that the people who design economic policy were too brain-dead to see the largest financial bubble in the history of the world.

The result of this failure is that tens of millions of people are unemployed, underemployed, or out of the workforce altogether. Millions more are facing the loss of their homes. And a huge cohort of baby boomers, many of whom spent their lives working at decent paying jobs, are approaching retirement with nothing to support them but their Social Security.

The amazing part of this story is that the people most responsible for the disaster are still doing just great. Robert Rubin and Alan Greenspan are both very wealthy (the former more so than the latter) and still highly regarded for their views on economic policy. The Wall Street folks that pumped up the bubble and often wrecked their companies in the process are still hugely wealthy. (Think of Lehman's Richard Fuld or Bear Stearn's James Cayne.) And all the well-paid economists at the Fed, the Treasury, and the ECB who were completely out to lunch when it came to understanding the economy are still well-paid economists who are mostly still misunderstanding the economy. 

What could the masses possibly have to complain about?

Getting Around the Mortgage Pool Problem With Condemnation Print
Monday, 11 June 2012 09:25

A group of investors has a novel way of forcing mortgage write-downs. They want county governments to condemn the mortgages on underwater homes allowing them to be bought out of mortgage pools at fair market value. Their plan is to then issue new mortgages to current homeowners that reflect the market value of their homes.

It's a neat idea. I can't vouch for the legality of this approach, but serious people have spent a lot of time developing it. If it works, it could allow hundreds of thousands of homeowners to get out from underneath crushing debt burdens.

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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.