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"Trade" Deals Have Little to Do With Trade Print
Wednesday, 05 November 2014 16:27

The folks at the NYT apparently haven't been reading much about the Trans-Atlantic Trade and Investment Pact (TTIP) or the Trans-Pacific Partnership (TPP), including what appears in the pages of the NYT. If they had done their homework, the paper wouldn't be telling readers:

"This is one area [trade] where the Obama administration and Republicans should be able to find common ground. Republicans are enthusiastic advocates of increased trade, and the president is eager to get the added authority to negotiate new trade deals and win approval of a trade agreement with nations on the Pacific Rim.

"The main obstacle could be Democrats, many of whom are skeptical of trade deals that officials warn could cost American jobs. But a significant segment of Democrats back trade expansion, and a deal could probably be found if congressional Republicans and the White House both press for it."

In fact, the TTIP and TPP (the two main deals currently being negotiated) will do almost nothing to increase trade and quite possibly could reduce it. As Paul Krugman (an economist and columnist for the New York Times) has pointed out, these deals do very little to reduce formal trade barriers, since these are already very low.

Both deals are primarily about imposing a business-friendly regulatory structure on the signatories to the agreements. One aspect of this regulatory structure is creating a quasi-judiciary system, investor-state dispute settlement councils, which would operate outside the existing legal structure of the countries in the agreements. The agreements, which are being negotiated in secrecy, also will have provisions on the environment, health and safety regulation, and copyright and patent protection. All of these provisions will supersede existing domestic law and regulation.

The increases in patent and copyright protection in these deals (yes, that is "protection" as in the opposite of free trade) will raise the price of prescription drugs and other items. These higher prices will reduce purchasing power and slow growth. They will likely lower, not raise, the amount of trade. This means that if Republicans are actually enthusiastic about increased trade, they probably would oppose both the TPP and TTIP.

On a different topic, in discussing Republican plans to change the Affordable Care Act, the piece told readers:

"At the same time, a bipartisan group of lawmakers has also called for returning the health law’s definition of full-time work to 40 hours from 30, arguing that the lower limit is forcing too many people out of work because of employers’ efforts to comply with the law."

It is worth noting that there is zero evidence for this assertion. The provision described here requires that firms with more than fifty employees either provide insurance for their workers or pay a fine. For a worker to be covered by this provision, they have to be employed for more than 30 hours per week. There is no evidence that firms that don't provide insurance and employ more than 50 people have reduced hiring relative to other firms.

Also, this provision has been suspended so that it actually has not taken effect yet. In the first half of 2013, when employers would have thought the provision applied, since it had not yet been suspended, they did not expand the share of the workforce working just under 30 hours to avoid having to pay the penalty. There was a very modest increase in the share of the workforce working 25-29 hours, but this was due to a reduction in the share working fewer hours.

In short, the claim that the ACA has cost jobs is just something Republican politicians say, like evolution may not be true, it is not a claim that bears a relationship to the real world. The NYT should have clarified this point for its readers.

If Shareholders Stopped Letting CEOs Rip Them Off It Would Reduce Inequality Print
Wednesday, 05 November 2014 05:45

Eduardo Porter has an interesting discussion of inequality, based in large part on the views of M.I.T. Professor Robert Solow. Solow views it as unlikely that it will be possible politically any time soon to have tax and transfer policies that do much to lesson inequality. However he does hold out the hope that changes in corporate practices could lessen before tax inequality.

This is an extremely important point. There is considerable research showing that CEOs and other top management essentially ripoff shareholders, taking advantage of their insider power to give themselves pay that has little to do with their productivity, measured as the return they give to shareholders. (Lucian Bebchuk has a good summary of the issues.) If shareholders can better gain control of their companies, they might cut pay by 50 percent or more, bringing CEO pay in the United States in line with pay in other wealthy countries.

Since CEOs are among the very top earners in the U.S. economy, reductions in their pay will have a substantial impact on wage inequality. In addition, there is likely to be a spillover effect. If the CEOs of major companies earned $3-4 million, instead of $10-$20 million, then the pay of top management in places like universities, non-profit hospitals, and private charities might be similarly reduced. The lower pay of top executives in these institutions would also free up money for higher pay for those at the middle and bottom of the wage ladder.

The key to reducing CEO pay is to create a well-working system of corporate governance where shareholders can actually impose a check on top management. This is a soluble problem, as demonstrated by the fact that other countries have been able to rein in CEO pay.

Ending Experience Rating for Small Business is a Big Deal Print
Wednesday, 05 November 2014 05:32

The NYT had a piece discussing the extent to which small businesses are continuing to offer health care insurance to their workers through the exchanges created by the Affordable Care Act (ACA). Incredibly, the article never mentioned the prohibition on experience rating.

While many states had regulations that limited experience rating, prior to the ACA many small firms would see huge increases in premiums if one of their employees developed a serious illness. The ACA requires that insurers can only adjust rates in accordance with the age composition of the workforce, they cannot charge higher rates to a company because one or more of its employees has a serious illness. This will make insurance considerably more affordable for many businesses.

It would not be surprising if the ACA did cause fewer small businesses to offer insurance. The main purpose of the ACA was to create a well-working individual insurance market so that people who did not have insurance through an employer would be able to get affordable insurance through the exchanges. Insofar as the ACA succeeds, there is less reason for a small business to go through the effort of arranging its own insurance. This is not obviously a bad thing, since employers are not necessarily well-positioned to determine the best insurance for their workers.  

Washington Post Pushes for Government Guaranteed Subprime Mortgage Backed Securities Print
Sunday, 02 November 2014 08:35

Yes, that seems to be its fondest dream for the outcome of Tuesday's election. The bulk of its lead editorial touting the prospects for bipartisanship is focused on pushing the Johnson-Crapo bill, a measure that would replace Fannie Mae and Freddie Mac with a system whereby the government guarantees 90 percent of the value of privately issued mortgage backed securities (MBS). This means that Goldman Sachs, Citigroup and other folks who might issue MBS could now tell their customers that even in a worst case scenario they couldn't lose more than 10 percent of the value of their securities.

Fans of the market should be asking two questions here. What problem is this intended to solve? And why do private issuers need a government guarantee?

The answer to question one seems to be that the Washington Post doesn't like public companies (Fannie and Freddie) issuing mortgage backed securities. It gives us no reason why it doesn't like them. After all, the worst garbage mortgages of the housing bubble days were securitized by private issuers, not Fannie and Freddie.

And everyone agrees that it will be more costly to have private issuers replace Fannie and Freddie, with the range of estimates being that the Crapo-Johnson system will add 0.5-2.0 percentage points to mortgage interest rates. That is the cost of the additional risk, bureaucracy, and profits for the financial sector. So other than raising the cost of mortgage finance and increasing the profits of the financial industry, it is difficult to see what is supposed to be accomplished by this "reform."

This takes us directly to the second point. If we want the market to handle mortgage finance, why do we need a government guarantee. The Wall Street boys had no problem selling their garbage all around the world when it carried no guarantee whatsoever. Do we think that they will have higher quality MBS now that they can tell customers that the government is capping their losses at 10 percent even if the thing is total garbage.

It doesn't help matters that not a single bank executive went to jail or was even prosecuted for lying about the quality of the mortgages in the subprime MBS they threw together in the housing bubble days. If we believe in market incentives, why would we think they would act differently in the future? In other words, they gets lots of money for lying and no risk for getting caught.

Those who hope that the regulators will ensure the quality of MBS need look no further than the requirement that securitizers maintain a 5 percent stake in mortgages that have less than a 20 percent down payment. This requirement would have simply raised the cost of these mortgages to customers who are at a much higher risk of default. (Homebuyers with low down payments could also purchase mortgage insurance. This would add roughly the same cost to the mortgage interest rate as replacing Fannie and Freddie with the Johnson-Crapo privatized system.) However due to the pressure of the banking industry and some housing groups, this down payment requirement was eliminated.

In normal non-bubble times, the default rate for mortgages with down payments of 20 percent or more is less than 2 percent. By contrast, according to the advocates of the elimination of down payment requirements, the default rate for those putting less than 10 percent down is 10 percent, more than five times as high.



"Secular Stagnation" Is Progress, Now Can We Talk About the Trade Deficit? Print
Saturday, 01 November 2014 07:40

Matt O'Brien has a nice piece presenting charts from Larry Summers (yes, the rest of us had made this point long ago) showing that estimates of potential GDP have dropped as the economy has remained weak since 2007. The point is that a temporary downturn can have lasting economic consequences. Unemployed workers lose skills and can become permanently unemployed. And, by having a long period of weak investment, the economy's capacity will be expanding less rapidly than would otherwise be the case. As the piece notes, this means that current obsession with deficits is not just lowering output and raising unemployment in the present, it is likely to have a lasting impact on the economy.

It is great to see people like Larry Summers openly pushing the idea that the economy can face serious demand problems. This view was routinely ridiculed by mainstream economists all through the 1990s and the last decade, so it is nice to see them change their minds. Summers has even gone the extra mile of noting that lack of demand is not just a problem in the current downturn but one that has been present since the 1990s. This shows the potential for learning among mainstream economists.

However there is still one additional step that they must take to get the full picture. As every intro textbook tells us, Y = C+I+G+(X-M). That means the level of demand in the economy is equal to the sum of consumption, investment, government spending, and net exports. This is an accounting identity -- it is true by definition. It cannot be wrong, if you don't like it then it's your problem.

The significance of this simple identity is that net exports have been a large negative since the late 1990s. Back in the early post-war years we typically had trade surpluses. We began to run modest trade deficits in the 1970s due to the OPEC price increases. The trade deficit rose sharply in the 1980s following a run-up in the dollar, but then fell back to around 1.0 percent of GDP following the Plaza Accord, which brought down the value of the dollar against the currencies of our major trading partners.

The deficit stayed close to 1.0 percent of GDP until 1997. That was when the East Asian financial crisis hit. The harsh terms imposed on the countries of the region by the United States and the I.M.F. required them to massively increase their exports. This led them to sharply reduce the value of their currency against the dollar. Furthermore, to avoid ever being in the same situation as the East Asian countries, most countries in the developing world followed the same course. They lowered the value of their currency so that they could increase their exports and accumulate massive amounts of dollars to hold as reserves.



Holy Cowdroppings Batman, Medicare Spent 0.0003 Percent of Its Budget on Drugs for Dead People! Print
Friday, 31 October 2014 06:58

Yes that is the big scoop that the folks at AP uncovered today. According to a report from its Inspector General, $292,381 was paid out for HIV drugs after the patients were already dead. That undoubtedly sounds awful to many readers -- yet another case of bungling bureaucrats in Washington throwing our hard-earned tax dollars into the garbage.

It turns out the situation could be even worse. According to the article, the $292,381 is just for one narrow program. If we add up the cost of all the drugs paid out to dead people, it could be in the millions. How horrible is that?

If AP wanted to treat this seriously instead of trying to create an Ebola panic over Medicare payments for dead people, it would have given some context for these numbers. The spending on dead people is from Medicare Part D, a program with an annual budget of $85 billion. That means the $292,381 that was identified as paying for dead people comes to 0.0003 percent of total spending. If the full amount for the whole program runs as high as $3-4 million then we might be looking at 0.004-0.005 percent of total spending. 

Expressing these numbers in percentage terms might not make for as good a story, but it would actually be giving readers information. The incredible aspect to this issue is that there really is no disagreement about the basic point. Everyone knows that the numbers in the AP article are completely meaningless to almost everyone who reads them.

The question is why use them? Why would a news service not express the numbers as percentage so that the vast majority of readers would understand their significance. This was a point that Margaret Sullivan, the NYT Public Editor raised last year. She found David Leonhardt, then the Washington editor in complete agreement. Nonetheless, nothing changed at the NYT or anywhere else. Huge numbers are still expressed without any context even though everyone knows that almost none of their readers will understand them.

Naturally this creates an impression of massive fraud and waste even when the numbers are actually trivial compared to the size of the program. Just to be clear, any fraud and waste is bad. It would be nice if the money spent buying drugs for dead people were zero, but that is not going to happen in a program that spends $85 billion a year.

The goal would be to minimize the amount of fraud of this sort, but that does involve some common sense. It would be crazy to spend $1 million hiring investigators to eliminate $292,381 in payments for dead people. Furthermore, to let people in on a little secret, this sort of stuff happens in our ultra-efficient private sector as well. We are of course less likely to know about it, because private corporations don't have inspector generals who publicly disclose evidence of waste and fraud.

Anyhow, this sort of inept economic reporting is the sort of thing that could be corrected if there were organizations in Washington that cared about protecting government programs like Medicare, Mediciad, Social Security, and the rest. They could pressure AP, the NYT, the WaPo to stop indefensible practices in reporting. Unfortunately, no such organizations seem to exist.

Misplaced Celebrations On Third Quarter Growth Print
Friday, 31 October 2014 04:08

There was much celebration in the business press over the better than expected third quarter GDP growth. (See, for example, this WaPo piece touting the U.S. recovery as the "envy of the world.") Many were quick to say that the 3.5 percent growth for the quarter implies that the economy is now on a higher growth path, possibly in excess of 3.0 percent. Mr. Arithmetic begs to differ.

First, if we can look all the way back to the beginning of 2014 we see that the average growth for the first three quarters so far this year is just 2.0 percent, the same as the average for the prior three years. And, just to remind folks, we had a really bad recession back in 2008-2009. This has left us at a level of output way below the economy's potential. To make up the ground lost the economy has to be growing faster than its 2.2-2.4 percent potential growth rate. At the 2.0 percent growth rate we have seen so far in 2014, we are making up none of the lost ground.

The second point that should have featured prominently in all discussion of the GDP report is that the major drivers of growth in the quarter, net exports and military spending, will almost certainly not be adding to growth in the same way in future quarters and will most likely be in part reversed. In other words, the strong growth in these components is reason for believing future growth will be weaker, not stronger.

Net exports added 1.32 percentage points to growth in the quarter, while military spending added 0.66 percentage points. If the contribution of these sectors to growth had been zero, GDP growth would have been 1.5 percent rather than 3.5 percent.

If the folks who expound on the economy had access to data from the Commerce Department they would know that both of these sectors are very erratic, sharp movements in either direction tend to go in the other direction in the following quarter. (There is a logic to this. Imagine that the true path for both sectors is a constant growth path, but we have random error in either direction. If our error is on the high side one quarter, then if we get an accurate measure the next quarter, it would imply a decline from the erroneously measured number the previous quarter.)

The last time next exports added more than a percentage point to growth was the fourth quarter of 2013 when it added 1.08 percentage points. The following quarter it subtracted 1.66 percentage points from growth. Net exports added 1.12 percentage points to growth in fourth quarter of 2010. It subtracted 0.24 percentage points from growth in the following quarter.



In Case You Were Wondering What Folks Who Rate Subprime MBS as AAA Think of the Creditworthiness of the U.S. Government Print
Thursday, 30 October 2014 18:24

The Washington Post has the answer. It devotes an article to Moody's assessment of the financial situation of the U.S. government.

Most people probably know of Moody's as one of the credit rating agencies that were paid tens of millions of dollars to rate mortgage backed securities as investment grade during the housing bubble years. It's not clear when its assessment of creditworthiness supposedly became more credible.

Anyhow, the ostensible good news is that Moody's says we don't have anything to immediately worry about, the debt to GDP ratio is coming down for now.

"But -- and you knew this was coming -- there are dark clouds on the horizon. By 2018, the ratings agency expects annual deficits once again to surpass 3 percent of the size of the economy and to keep getting bigger. By 2030, debt held by outside investors is on track to rise from the current 75 percent of the size of the economy to 88 percent, an alarming increase that 'likely would bring negative pressure' on the nation's sterling AAA credit rating."

Moody's then gives us a number of suggestions that include cutting Social Security and Medicare benefits in order to avert this rise in the debt to GDP ratio to 88 percent. If you were wondering how bad it is to have a debt to GDP ratio of 88 percent, it is not a difficult question to answer. It turns out that there are many countries who already have debt to GDP ratios that are higher than the ratio that Moody's is warning we could hit in 2030 if we're not good.

There is Italy with a debt to GDP ratio of 136.7 percent and Spain with a debt to GDP ratio of 98.6 percent, according to the I.M.F. Even worse, we have Japan with a debt to GDP ratio of 245.1 percent. Even our good friends across the pond in the United Kingdom have a debt to GDP ratio of 92.0 percent.

Needless to say the markets are punishing these countries for their fiscal recklessness. As of October 30th, Spain had to pay an interest rate of 2.16 percent on its 10-year bonds, profligate Italy paid 2.46 percent. The United Kingdom had to pay 2.23 percent and Japan, hold your breath, had to pay 0.47 percent interest.

Look, we have real problems. Millions of people still can't find jobs and the weak labor market is redistributing income upward. And we should be worried about global warming. This stuff about long-term budgets is just brought to you by Jeff Bezos and his Wall Street friends because they want to cut Social Security and Medicare.

No one should be taking economic advice from folks who rate subprime mortgage backed securities AAA.

Washington Post Offers Lesson in Bad Public Opinion Polling Print
Thursday, 30 October 2014 04:21

The Washington Post has long used both its opinion and its news pages to push for cuts to Social Security. It has regularly exaggerated the problems with the program, for example once running a major front page story over the fact that 0.006 percent of Social Security benefits are paid out to dead people.

In keeping with this practice, the Post began a feature polling readers on how they would like to see the projected shortfall addressed with an article headlined, "Social Security Is a Mess. How to Fix It." Today the paper is reporting on some of the results. The piece begins:

"One thing was clear from the first month’s responses to our question about how to fix Social Security: Readers want something to get done.

"Only 2 percent of responses were in favor of 'doing nothing,' which would mean that after 2033 –when the Social Security trust fund is expected to be depleted– retirement benefits would be cut by 23 percent. And only 3 percent of responses said it would be a good idea to put off raising taxes until after the trust fund is depleted, at which point a steep tax hike would be needed to pay benefits [emphasis added]."

While the fact that only 2 percent of responses are in favor of "doing nothing" might sound compelling, there is an obvious problem with the sample. The overwhelming majority of Washington Post readers did not respond to the WaPo piece. The 2 percent in favor of doing nothing represent 2 percent of a tiny minority of Washington Post readers who are themselves far from representative of the population as a whole. Furthermore, the bias is compounded by the fact that if readers do not see an urgency to address the projected shortfall in Social Security they are almost certainly less likely to answer the paper's poll on the topic.

In effect, what the Post is telling us is that only 2 percent of their readers who took the time to answer its survey on Social Security felt that nothing should be done. Most of us might have guessed something like that without seeing the poll result.



Economists Who Saw the Housing Bubble Were Not Worried About a Depression Print
Wednesday, 29 October 2014 08:54

The Washington Post repeats the silly myth that we were in danger of a second Great Depression without heroic measures to save Wall Street. A piece on the path of quantitative easing (which was a good idea) told readers:

"But while economists generally agreed that effort [the Fed's purchase of $500 billion in mortgage backed securities in 2008-2009] helped the country avert another depression, the swift recovery that has historically accompanied downturns remained elusive."

It is quite fashionable among Washington elite types to insist that we would have had another depression if we didn't save the Wall Street banks, but do any of them have any idea what they mean by this?

The first Great Depression was the result of not having enough demand in the economy. We got out of it finally in 1941 by spending lots of money. The motivation for spending lots of money was fighting World War II, but the key point was spending the money. It might have been difficult politically to justify the spending necessary to restore the economy to full employment without the war, but that is a political problem not an economic problem. We do know how to spend money.

In effect, the pundits who say that we would have had a depression if we did not bail out the banks are saying that our economic policy is so dominated by flat-earth types that we would have to endure a decade or more of double-digit unemployment, with the incredible amount of suffering it would cause, because the flat-earthers would not allow the spending necessary to restore full employment. 

That characterization of our political process could be accurate, but it is important to be clear what is being said. The claim is not that anything about the financial crisis itself would have caused a depression. The claim is rather that Washington economic policy is totally controlled by people without a clue about economics. Apparently, the Post and others adhere to this view.

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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.