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Covering Up for Representative Ryan Print
Sunday, 15 April 2012 07:44

David Leonhardt wrongly told readers that:

"Mr. Ryan’s plan would cut the top rate to 25 percent, from 35 percent, and still leave overall tax collection roughly where it has been, by eliminating tax breaks."

Ryan claims that his plan would leave tax collections roughly where it has been, however he has never identified a set of tax breaks that he is prepared to eliminate to accomplish this result. In fact, Ryan has explicitly ruled out two touching of the biggest tax breaks, which largely affect the rich, the special treatment of capital gains and dividends.

To get anywhere close to revenue neutrality without touching these tax breaks would require eliminating almost all the tax breaks that benefit the middle class, like the mortgage interest deduction, the deduction for employer provided health care, and the deduction for charitable contributions. This would amount to a massive transfer from the middle class to the wealthy.

While Leonhardt cites a poll showing widespread support for tax reform, it is unlikely that many people would support a reform that meant that they paid thousands more in taxes each year so that Mitt Romney and Warren Buffet could pay less. This outcome is only plausible if the media do not accurately inform voters about what is at stake.

Has the NYT Heard of Patents? Print
Sunday, 15 April 2012 07:32

Readers were no doubt wondering after seeing this piece on how insurers are trying to avoid being forced to pay for some new high-cost drugs. These drugs, which can make a huge difference in survival rates for cancer and other diseases, can cost tens of thousands or even hundreds of thousands of dollars a year.

The key point missing from this piece is that these high costs are entirely due to the patent monopoly given to drug companies by the government. These drugs could almost invariably be produced for less than a couple of hundred dollars a year. Needless to say, there would not be big fights between patients, insurers and the government if the drugs sold for $200 a year.

Of course we would then need an alternative mechanism to finance research, but readers will not even understand the problem if they don't realize it is the patent monopoly that creates high cost drugs, not the fundamental economics. This realization could lead to a consideration of better alternatives. 

Washington Bureaucrats Partying Like They're Google Print
Sunday, 15 April 2012 07:19

Suzy Khimm had a very nice column in the WAPO today making what should be an obvious point. The lavish party held by the Government Services Administration in Las Vegas, which has been the lead story in newspapers and news shows across the country, would be standard fare at any major corporate gathering. In fact, it would probably be considered stingy.

The outrage is that this affair was done on the taxpayers' dime. We certainly should be upset at government officials that use our money to throw themselves a party like this, but the fact that we even know about it is entirely the result of the greater disclosure required from government agencies than the private sector.

Khimm talks about how private sector values have begun to permeate the public sector as a result of increased contracting. This is undoubtedly true. But it is also worth asking whether we would ever hear about the lavish partying done by a Lockheed or the latest incarnation of Blackwater on their fat government contracts.

In principle, we are supposed to be saving money by using these contractors rather than having the government provide these services directly. If anyone believes this one, I have shares of a new social media company for you.

The world of government contracting is among the sleaziest places on earth. Friends and lobbyists are worth far more than effective and efficient service provision.

Anyhow, there is no excuse for ripping off the government with this Las Vegas party, but it would be great if the media paid as much attention to all the ripoffs carried out by private contractors. They are not hard to find.

Defending President Obama and the 1 Percent Print
Saturday, 14 April 2012 08:14

There are plenty of reasons to bash President Obama and even more to bash the richest 1 percent of the income distribution, but it is possible to go off track. The Post did so today in citing a study that shows the top 1 percent got 93 percent of the income gains from 2009-2010.

This is highly misleading because the vast majority of these income gains were capital gains due to the rebound of the stock market following its collapse in 2008-2009. Using this same measure of income, the top 1 percent suffered 49 percent of the income losses in the recession. 

While it is reasonable to include capital gains in a measure of income growth over a long-term (this is money that people have at their disposal), the short-term fluctuations give a very misleading measure of distribution of income. President Bush was not a hero to the bottom 99 percent because the stock market crashed under his watch and President Obama is not a sop for the rich because it recovered while he was in office. (Now bailing out Wall Street is a different matter.)

At one point in discussing Mitt Romney's record as governor of Massachusetts, it tells readers:

"Average weekly wages for workers rose slightly more than they did nationally while Romney was in charge. In Massachusetts, wages went up 4.1 percent from 2002 to 2006, adjusting for inflation. Nationally, they rose 3.2 percent."

Inflation in the Northeast was 1.9 percentage points higher over this period than for the nation as a whole. If the calculation of real wages used for this comparison simply used the nationwide inflation rate to measure the growth of real wages, then it would be seriously misleading. The regional CPI would imply that wage growth in Massachusetts lagged the nationwide average by roughly a percentage point, instead of exceeding it by 0.9 percentage points. (Of course, Romney's ability to influence wage growth in a 4-year stint as governor would be very limited in any case.)

There Was No Bowles-Simpson Commission Report, #45,373 Print
Saturday, 14 April 2012 07:49

Today Ezra Klein is guilty of that standard Washington insider mistake of referring to a Bowles-Simpson commission report. In his column, he contrasts the tax increases proposed by the commission (along with increases advocated by others), with the pledges by Romney to raise taxes on no one and the pledge by President Obama to not raise taxes on anyone other than the top 2 percent.

Of course there was no Bowles-Simpson commission report. The by-laws clearly state:

"The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission."

There was no vote taken on anything by December 1. (In fact there was never a formal vote.) And the report touted as being the commission report never had the support of more than 11 of the 18 members of the commission report.

Hence this report is accurately described as the report of the co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. In other words, the "Moment of Truth" is a lie.

Counting and Double-Counting In Medicare Print
Saturday, 14 April 2012 07:30

Steve Rattner put his ignorance on public display again in a column in the NYT.  He told readers that counting the savings projected in Medicare as a result of the cost controls in President Obama's health care reform as lowering the budget deficit amounts to double-counting. There is a simple word for Rattner's claim: wrong.

The logic is simple. The Medicare program is counted as part of the overall budget. (If Rattner has other information on this point, he could do a great service by sharing it with NYT readers.) However, part of Medicare (Part A, which covers hospital insurance and most other medical bills of seniors) is also required to be funded by the designated Medicare tax. Any savings in this portion of the program will improve the finances of the Medicare trust fund and also reduce overall expenditures, thereby leading to lower budget deficits.

This really is not rocket science. We finance some categories of transportation spending from the Highway Trust Fund, which relies on revenue from the gas tax. If we reduced this transportation spending it both frees up money in the trust fund and also reduces the budget deficit. There is no double-counting here, it is just counting pure and simple.

It is bizarre that this accusation of double-counting keeps coming up. It is wrong and does not belong in a serious newspaper.

(btw, health care costs in the United States are a huge problem. If the elites were not such ardent protectionists, they would be looking to have free trade in Medicare and health care more generally.)

Inflation: The Secret Answer to the Eurozone Crisis (see addendum) Print
Friday, 13 April 2012 05:22

Robert Samuelson is the type of guy who stands there holding a fire extinguisher trying to figure out what to do as the house burns down. In his column today he ponders the euro zone crisis. He relies extensively on Jay Shambaugh, an economist at Georgetown, telling us that Shambaugh identifies three distinct crises:

"First, there’s a banking crisis. Banks have too little capital (a buffer against losses) and have a hard time raising funds. Next is the sovereign debt crisis. The high debts of many countries raise fears that, like Greece, they may default. And, finally, there’s an economic growth crisis. Low growth or slumps afflict most of the 17 countries using the euro."

He continues:

"Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts. "

Wow, it sounds so hard. Now let's imagine that the religious zealots running the European Central Bank (ECB) learned some economics and turned away from their low inflation cult. They could do something like what was recommended by Olivier Blanchard, the chief economist at the IMF. The ECB could target a higher rate of inflation, say 4.0 percent.

If it could convince the markets it was serious about this target -- throwing out as many reserves as necessary to push inflation higher -- it would address all three of these inter-related crises. Higher inflation would directly reduce the burden of sovereign debt.

If inflation averages 4.0 percent over the next five years instead of 2.0 percent (the current target), then GDP will be roughly 10 percent higher, reducing debt burdens proportionately. This means, for example, if Greece is looking at a debt to GDP ratio of 120 percent in five years with the current inflation target, its debt to GDP ratio would be 108 percent in the higher inflation scenario.

Higher inflation will also have the effect of lowering real interest rates and thereby boosting growth. If businesses know that they will be able to sell everything they produce for 20 percent more five years from now, it will give them more incentive to invest. Higher growth will also help to alleviate government deficits and debt burdens.

Finally, the loans on banks' books are likely to look much better in a context where house prices have risen by 20 percent (this is moving in step with inflation -- that is not a housing bubble) and economies are stronger. Stronger growth will also reduce corporate bankruptcies.

The problem really is not that difficult if the people holding the fire extinguishers would use them. Unfortunately, the ECB crew, like Samuelson, seems determined to focus on its inflation fighting even as the house burns down around them.



I am well aware of the ECB charter. This is not an excuse. I recently wrote a column comparing the ECB's pursuit of 2.0 percent inflation with the Maginot Line that the French military constructed prior to World War II to defend against a German invasion.

The correct course for French generals assigned to construct the Maginot Line would be to tell their superiors that it would not be an adequate defense against a German invasion. (The Germans just walked around the Maginot Line and went through Belgium.) If their superiors refused to listen, then the appropriate response is to resign, not to commit more resources to building a barrier that was absolutely useless for its intended purpose.

Similarly, competent economists at the ECB should be saying that adhering to a 2.0 percent inflation target as the sole purpose of a central bank is grossly irresponsible economic policy. If the governments insist on acting like fools then they should be forced to find certified fools to do their job. No serious economist has any business working for the ECB at a time when its policies are leading to so much devastation across Europe.

Preemptive Strike: Don't Panic About Unemployment Claims Print
Thursday, 12 April 2012 08:00

As I've complained in the past, the media frequently make too much of a single week's data on unemployment claims. There will likely be some tendency to hype the fact that last week's claims were reported today as 380,000 [corrected --thanks David G.], well above the consensus expectation of 355,000.

Before the exaggerations were on the positive side, today they are likely to be on the pessimistic side. Remember folks, it is just one week's worth of data. The numbers are erratic and are subject to revision (almost always upward).

There is probably some reality to this rise for reasons I have written on in the past. The unusually good weather in the Northeast and Midwest meant that there was likely more employment in construction, restaurants, retail and other sectors in these months than would typically be the case. This means that there will be less hiring in spring than usual.

This shows up in the UI data because people who lose their jobs will have a more difficult time getting new jobs in April than would ordinarily be the case because the seasonal openings are not there. This is not a disaster -- the economy is not in danger of sliding into a recession -- it just means that job growth will likely be somewhat slower in the months ahead than it was in the winter months.

One more point. The number of claims reported for two weeks ago was revised up from 357,000 to 367,000. This means that it was not the lowest number of claims reported for four years.

The Moment of Truth: Post Tell Readers We Should Only Care About Business Concerns Print
Thursday, 12 April 2012 05:06

There have been many people who have suggested that the Washington Post has a pro-business bias. The Post seemed to confirm that view in a piece on Mitt Romney's agenda for his first day as president.

It noted that Romney said he would demand that China raise the value of its currency as one of his day one items. It then told readers:

"But some China experts say Romney would nevertheless be risking a backlash from the Chinese — over an issue that is not a top priority.

"In a recent survey of the concerns of American businesses working in China, currency ma­nipu­la­tion was only the 26th-biggest worry.

"'You can’t go to the Chinese and say, "I demand eight fundamental changes!"' said Derek Scissors, a China expert at the conservative Heritage Foundation. 'You’ve got to pick your thing.'"

Of course Scissors' assessment is exactly right. The United States cannot simply make a set of demands on China and expect the Chinese government to accept them. It must prioritize its demands and be prepared to make concessions on issues of concern to China.

The Post implied that because the over-valuation of the dollar against the Chinese currency is not a major concern of business it should not be a concern to the United States. This only makes sense to someone who believes that the concerns of business should be given a priority over the concerns of the rest of the country. In fact, there is a clear opposition between the interests of many, if not most, businesses and the rest of the country on dealings with China.

According to mainstream economics, the main mechanism for adjusting a trade deficit is reducing the value of a currency. In other words, anyone who wants to see the United States move towards more balanced trade should want the dollar to fall.

(The Post should be in this camp, since it has endless tirades about the budget deficit. By definition, a trade deficit means that a country has negative national savings. Negative national savings means that either the public sector has a deficit or the private sector does, as we did in the housing-bubble years because of huge over-building and a bubble-driven consumption boom. Anyone who views those options as unattractive would want to see the trade deficit come down, if they understood economics.)



Tax Fraud Is Not A Healthy Basis for Growth Print
Thursday, 12 April 2012 04:38

The NYT wants readers to be sympathetic to countries that set themselves up as tax havens for corporations who would rather not pay their taxes. In a piece on the problems facing the Cypriot banking system the NYT told readers that the Cyprus does not want to turn to the European Union for a bailout of its banking system because:

"In return, the Union might demand that Cyprus raise its 10 percent tax on corporate profits, a crucial selling point and key to an economy based on financial and business services like accounting."

This is a strange assertion. A bloated state bureaucracy can be called a key to an economy that is based on a bloated state bureaucracy. This is not a basis for healthy growth, just as being a tax haven is not in general a basis for healthy growth.

There is no obvious reason to be more sympathetic to a government that wants to maintain a country as a tax haven than there is to be sympathetic to a government that wants to maintain a bloated bureaucracy as a patronage system. Neither provide a platform for healthy sustainable growth.

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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.