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Thomas Friedman Goes Big Getting It Wrong, Again Print
Wednesday, 23 November 2011 08:01

There are many people in the country that have very little understanding of economics. As an economist, I would like to see everyone be at least somewhat literate in the area, but this is the way of the world. It's not really that big of a problem in most cases, but it is when they write pieces on economic policy for the New York Times.

Yes, Thomas Friedman is at it again, bemoaning the fact that President Obama hasn't embraced the big cuts to Social Security and Medicare proposed by former senator Alan Simpson and Morgan Stanley director Erskine Bowles. (Friedman wrongly attributes the proposals to the commission that they co-chaired. The commission did not produce a report, Friedman is referring to the proposals of the co-chairs.)

The Simpson-Bowles plan is great if you think the country's biggest problem is high-living seniors. Of course very few people from any political perspective accept this view. Even large majorities of Republicans and self-identified conservatives oppose cuts to Social Security and Medicare. In fact, almost no one other than the Wall Street gang and people who write columns for the New York Times and Washington Post support cuts to these programs. This probably explains why President Obama did not follow Friedman's advice and embrace the Simpson-Bowles plan.

This is a matter of personal taste: some folks think that the best way to address whatever budget problems we might have is to fix the broken health care system, tax Wall Street, and place the burden on the big winners in the economy over the last three decades (i.e. the one percent). Then you have people like Thomas Friedman who think it's better to take money from seniors with a median income of $31,400.

But once we get beyond the questions of taste, we have Friedman's economics. He quotes Maya MacGuineas, the president of the Committee for a Responsible Federal Budget:

"'a free-standing stimulus that is not combined with a credible multiyear plan that truly stabilizes our fiscal imbalances would not solve our problems, .... because if nobody knows what is waiting around the corner, after the stimulus runs out,' many people will just take that money and stuff it in a mattress 'rather than in investments or spending.'"

Okay, so the argument here is that we will see high savings rates and low investment spending as long as we don't have a credible deficit plan. Let's think about this one for a moment. How many people are basing their decision on whether to take a vacation or buy a car on the government's deficit prospects for 2020?

I don't know many people who think this way, but let's suppose that my friends are atypical. Suppose that people are worried that come 2020 we will have some big tax increase because something really bad happens in the world due to our runaway deficits. Wouldn't it make sense for people to invest and make money now, since the future could be bad news?

Or, to take the other side of the coin, suppose that we all knew that our Social Security benefits will be lower 10 years from now due to the Bowles-Simpson cuts and that we will have to pay more for our health care because of cuts to Medicare. Wouldn't we then decide that we better save more (i.e. spend less) so that we would have more money to support ourselves in retirement? Doesn't that go the wrong way if the point is stimulus?

Maybe logic isn't Friedman's strong suit. Let's just look at the evidence. If we buy the Friedman story, then investment and consumption should be low today since people are worried about the deficits ten years out. Unfortunately the data do not support Friedman's story. Investment in equipment and software is nearly back to its pre-recession level measured as a share of GDP. This is pretty impressive, since there are huge amounts of excess capacity in large sectors on the economy. (Firms tend not to invest much when they already have more capacity than they need.)

The saving rate in the most recent quarter was under 5.0 percent. This compares with a post-war, pre-bubble, average of more than 8 percent. This suggests that, contrary to Freidman's economics, people are not putting money under their mattress, they are actually spending at a pretty good rate.

But so what if Friedman's got no theory and no evidence? That is no excuse not to be cutting Social Security and Medicare.

 
The Left and Right Can Agree That NPR Completely Misled Listeners About the Supercommittee and the Deficit Print
Wednesday, 23 November 2011 05:06

NPR badly needs donations of paper bags, because a lot of people there need to be wearing them over their heads after this piece. The piece ostensibly tells listeners that both left and right agree that things can't keep going as they are going and that the problem is Social Security, Medicare, and Medicaid.

This is hugely wrong. First, the budget deficit first became large when the economy plunged because of the collapse of the housing bubble. The deficit in 2007 was just 1.2 percent of GDP and was projected to stay low in the next several years, even if the Bush tax cuts did not expire.

In other words, there is no short-term deficit problem. The problem was a collapse of private sector spending that made it necessary for the federal government to pick up the gap. Those who are unhappy about current deficits want higher unemployment. That is the reality, whether they know it or not.

The longer term problem is a health care story. We can say the cost of anything together with Medicare and Medicaid funding is a problem, because rising private sector health care costs, felt through these programs, is the problem. For example, we could say that funding for NPR (through the Corporation for Public Broadcasting) plus Medicare and Medicaid will rise hugely as a share of GDP over the next two decades.

Social Security is financed by its dedicated tax stream, which is projected to keep the program fully funded through the year 2038. It is misleading to imply that this is a cause of deficit problems. (Under the law, if Social Security funding is not increased, then only 81 percent of projected benefits will be paid in years after 2038. So the program would not contribute to the deficit.)

In reality, both left and right can agree that the broken U.S. health care system is the problem. The United States already pays more than twice as much per person as the average in other wealthy countries. If our per person health care costs were the same as those in Canada, Germany or any other wealthy country, we would be looking at huge budget surpluses, not deficits. 

 
Firms Buy Back Shares, Exactly As Economic Theory Predicts Print
Tuesday, 22 November 2011 06:24

The NYT had a piece that implied surprise that firms are cutting back production and investment plans at the same time that they are using billions of dollars to buy back shares of stock. It is difficult to understand the cause of the surprise. Demand and growth are very weak. In such circumstances, it would be expected that firms would cut back investment. Firms invest to make money, they don't invest to help the economy.

The only surprising item in this piece is the claim that:

"But spending on capital investments like new plants and infrastructure has stagnated more broadly in corporate America, confounding efforts by the Obama administration to spur economic growth."

Investment in the economy is actually quite high (investment in equipment in software is nearly back to its pre-recession share of GDP) given the huge amounts of excess capacity in many sectors. If the Obama administration was banking on even more investment than we are seeing then its economic advisers have an extremely poor understanding of economics.

 
German Concerns About the Euro's Credibility Do Not Make Sense Print
Tuesday, 22 November 2011 06:06

The NYT should have pointed this fact out in a discussion of the crisis facing the euro zone. The article includes a quote from Wolfgang Schäuble, Germany's Finance Minister:

"I’m convinced that if we abandoned the promise of euro stability, we would have a few weeks, maybe a few months of relief on the financial markets. But after a few months the problem would return. It is all about trust.”

If the European Central Bank (ECB) is buying debt issued by euro zone countries and explicitly guaranteeing their value, then it is logically impossible for the problem to return in a few months. The problem at the moment is one of solvency, Greece, Italy, and now Spain and possibly France risk being in a situation where they cannot pay their debts. They effective face bankruptcy.

However, their debt is payable in euros. The ECB will never run out of euros, it can create an infinite amount of euros. This means that Mr. Schäuble is either confused or being deliberately misleading when he claims that the problem would return if the ECB took responsibility for backing up sovereign debt. It will not.

In principle, the euro zone countries would risk inflation by going this route, but given the vast amounts of excess capacity throughout the euro zone, this is not a near-term fear. (Of course, somewhat higher inflation would be desirable since it would reduce debt burdens and facilitate the adjustments of Spain, Greece and Italy so that they could regain competitiveness in the euro zone.)

The euro zone countries need not fear a flight from the euro for the same reason that the United States need not fear a flight from the dollar. If the euro were to plunge against the dollar and other currencies, the products of euro zone countries would become hyper-competitive. Their exports to the rest of the world would soar and its imports would plunge. The United States, China, and other major countries would not tolerate this disruption to their economies. They would feel the need to support the euro and keep such a plunge from happening, in the unlikely event that the markets sent the euro tumbling.

 
The New York Times Runs an Editorial on the Deficit in the News Section Print
Tuesday, 22 November 2011 05:53

The NYT ran a piece in the news section bemoaning the failure of the supercommittee. The piece includes numerous assertions expressing the paper's unhappiness with the failure of the supercommittee that have no basis in reality.

For example, it told readers:

"The failure of the committee — which had been dubbed, with typical inside-the-Beltway grandiosity, the “supercommittee” — led to predictable, if bitter, kryptonite jokes. But it also prompted wrenching questions about whether Congress can be trusted to do its job: the committee, after all, was supposed to do the hard work that lawmakers had put off in August when they eventually agreed to avert default by raising the nation’s debt limit, waiting so long to do so that Standard & Poor’s lowered the United States’s credit rating."

It's hardly obvious that the failure has prompted "wrenching questions," even if the NYT might want it to. It is also not clear that the immediate issue facing the country is the "hard work" of reducing the deficit. Given that there are more than 26 million people unemployed, underemployed, or who have given up looking for work altogether, it would be reasonable to conclude that the most pressing problem is getting the economy back on track. This would require more stimulus, the opposite of deficit reduction.

This is an opinion piece that belongs on the editorial pages.

 
NPR Does Market Analysis Print
Tuesday, 22 November 2011 05:43

In its top of the half hour news segment on morning edition (sorry, no link), Morning Edition told listeners that the stock market plunged on Monday because of the fallout from the failure of the supercommittee. Of course the stock market does not tell us why it moves the way it does. This was NPR's assessment of the reason for the market's movement.

NPR's assessment suffers from two problems. First, the failure of the supercommittee was widely expected by the end of last week. This means that most of the impact should have been seen last week, not on Monday.

The other problem is that a failure to deal with the deficit, insofar as the deficit is viewed as a major problem, should most directly affect the bond market. In fact bonds went the way: prices rose and yields fell.

If there was concern that deficits would now become dangerously large as a result of the supercommittee's failure, the bond market did the exact opposite of what would have been predicted. This suggests the need to find an alternative explanation for the drop in the stock market, like the growing probability that the euro will meltdown and produce another Lehman type freeze up. That would be very bad news for the economy and future corporate profits.

 
Joe Nocera Tells Why We Should Not Use Patent Monopolies to Finance Drug Research Print
Tuesday, 22 November 2011 05:30

Actually he never mentioned patent support for drug research. However, his column did a good job of showing the waste and corruption that result from the monopoly rents created by patent monopolies.

In this case, the drug Avastin was determined to be ineffective as a treatment for breast cancer by the food and drug administration. Nonetheless, many insurers are likely to continue to pay for the $90,000 a year treatment. This is in part driven by the views of researchers who are on payrolls of the Genentech, the drug's manufacturer.

This is exactly the sort of corruption that economic theory predicts when government monopolies allow companies to sell their products at prices that far exceed the free market level. It is likely that if Avastin were sold in a free market, the cost of a year's treatment would only be a few hundred dollars a year. This would remove the incentive to mislead the public about its effectiveness.

This sort of outcome should lead to a debate over the best way to finance prescription drug research. Unfortunately most people in policy positions are hard-core protectionists, so this discussion almost occurs.

 
Column from Another Planet: David Brooks Talks About the Sun and the Moon Print
Tuesday, 22 November 2011 05:16

David Brooks devoted a column today to the weak political support for either political party. He never once mentioned the recession and the prolonged period of high unemployment. (He literally does talk about the sun and the moon.) While this may not explain the failure of one party to achieve dominance in the 90s or the first part of the 00s, the theme of his piece, it is undoubtedly the central feature of the political scene at present.

The closest that Brooks comes to mentioning unemployment is when he comments that:

"some liberals, who represent, at most, 30 percent of the country, are disappointed because President Obama hasn’t ushered in a Huffington Post paradise."

There are certainly many liberals (and non-liberals) who are unhappy that President Obama has not been able to bring the economy closer to full employment. That may be Brooks' perception of "Huffington Post paradise."

 
Robert Samuelson Does the Old Social Security and Medicare Trick Print
Monday, 21 November 2011 06:14

Medicare costs are projected to soar over the next two decades, more than doubling as a share of GDP. This means that anything you put together with Medicare in a sentence will also have explosive growth, such as "Medicare and national park maintenance are projected to more than double as a share of GDP over the next two decades."

For this reason, honest people don't lump together other programs, like Social Security, with Medicare. Social Security's costs are projected to rise at a much more modest pace and, according to the Congressional Budget Office's projections, these added expenses will be fully covered by the Social Security trust fund through the year 2038. But, we don't expect honest discussion from Robert Samuelson.

The problem with Medicare is of course the broken health care system. If the United States paid the same amount per person as people in other wealthy countries then we would be facing long-term budget surpluses, not deficits. While reforming the U.S. health care system is difficult, there are enormous potential gains from trade. However, the Washington elite are such ardent protectionists when it comes to the incomes of their friends in the health care industry, they will not allow the issue of promoting trade in health care to even be considered.

It is also worth noting that the tax plan put forward by Senator Patrick Toomey, which Samuelson touts in this piece, would imply huge tax cuts for the highest income households compared to a situation where the Bush tax cuts are allowed to expire, which is current law.

 
Republicans Plan to Lie on Tax Policy in the 2012 Election Print
Monday, 21 November 2011 06:02

That should have been the headline of a Washington Post piece on the future of the Bush tax cuts. The piece quotes Grover Norquist as saying:

"And GOP strategists say the White House’s position makes the president vulnerable to charges that he would impose what many Republicans are already calling the 'biggest tax increase in American history' if reelected. 'We’ll run against their tax increase,' said GOP anti-tax activist Grover Norquist, 'and we’ll crush them.'"

President Obama is not proposing the biggest tax increase in history. He is proposing ending the Bush tax cuts for the richest 2 percent of the population. This is not even close to the biggest tax increase in history.

If the Republicans make the charge that it is the biggest tax increase in history then they are not telling the truth. They apparently believe that the media will allow them to get away with making a lie the centerpiece of their campaign.

 
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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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