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Good NYT Piece on Public Sector Pension Funds Being Ripped Off Print
Monday, 02 April 2012 06:43

The NYT had a good piece reporting on the fact that public sector pension funds that have invested heavily in alternative investments (e.g. hedge funds, real estate funds and private equity funds) have done much worse than those that just held traditional investments (e.g. stocks and bonds). While the managers of these alternative investments did quite well collecting fees, the governments did not.

There is a simple way to avoid this problem. If the funds made compensation for the managers of these investments almost entirely contingent on their beating a conventional market basket, then the risk would be shared. If managers are not willing to accept such contracts it implies that they don't believe they will be able to beat the returns on conventional instruments. If the managers don't believe that they can beat conventional returns, then governments should not either.

The Cost of Health Care in Europe: The Debut of Professional Wrestling on NPR Print
Sunday, 01 April 2012 16:52

National Public Radio told listeners that, "Like the U.S., Europe Wrestles With Health Care." If the wrestling in Europe is anything like the U.S., then we must be talking about professional wrestling. ("Hit him over the head with a chair!")

The per person cost of health care across Europe is far less than in the United States. According to the OECD, in 2009 (the most recent year for which it has comparable data), per capita health care expenditures in the United States were $7,960. In France, Germany, and the UK, the three countries featured in the piece, the costs were $3,978, $4,218, and $3,487 respectively.

In other words, costs in the U.S. were more than twice as high as in France and the U.K. and more than 80 percent higher than in Germany. While the rise in health care costs poses a problem in these countries, as it does in the United States, the impact is very different than what it is in the United States. NPR should have pointed out the huge difference in current costs instead of trying to imply that all countries face the same problem.

There is one other point in this piece that badly needs correcting. The piece quotes Arthur Daemmrich, a professor at Harvard Business School:

"In Britain, for example, a new bio-tech drug that extends a person's life on average one or two months, but costs $25,000, would not be reimbursed."

Actually, the drug does not "cost" $25,000. The British government gives a drug company a patent monopoly that allows it charge $25,000 because the government will arrest any competitors that try to sell the drug. The actual cost is more likely in the range of $5-$10.

This speaks to the incredible inefficiency associated with the patent system as a mechanism for financing drug research. However it is wrong to imply that it would be expensive to society to give patients these drugs. It would actually be very cheap.

E.J. Dionne Inadvertently Gives Evidence on the "Right's Stealthy Coup" Print
Monday, 02 April 2012 04:05

In his column today, titled "the right's stealthy coup," E.J. Dionne discussed the takeover of the Republican Party by its extreme right-wing. For example, he noted that the Republican Supreme Court justices appear to be taking positions that even President Reagan's solicitor general considers absurd.

Dionne then shows how effective the right has been in their stealthy coup effort when he refers to "a vote on the deficit-reduction proposals offered by the commission headed by former Sen. Alan Simpson and Erskine Bowles, former chief of staff to Bill Clinton."

Of course there were no deficit-reduction proposals offered by the commission. The commission never issued any proposals. The by-laws of the commission 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 by December 1 on any plan. There was an informal poll of members on December 3, 2010. This poll found that 11 of the 18 commission members supported the proposal put forward by the commission co-chairs, Morgan Stanley Director Erskine Bowles and former Senator Alan Simpson.

This means that the proposals that Dionne refers to as coming from the commission are in fact just proposals from the co-chairs. They cannot accurately be called proposals from the commission.

Remarkably, the right is using public money to advance this deception. The commission's website inaccurately posted the report of the co-chairs as a report of the commission. Showing an extraordinary sense of irony, they titled the report, "the moment of truth."

Esquire Magazine: Writer wanted to help convert class war into generational war. No skills required; pays top dollar. Print
Friday, 30 March 2012 22:06

This could well have been the want ad Esquire used to attract a writer for its story titled, “War Against Youth.” This lengthy piece is the best compendium of warped logic and misplaced facts on this topic since the Peter Peterson financed film, IOUSA.

The whole story is given away in the first paragraph:

“In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.”

That sounds really awful. Thankfully it is not true, as readers could find by looking at the chart that accompanies the article. This is a ratio of wealth, not income.

This is a huge difference. Wealth adds up a household’s total assets. This means the value of their home, their 401(k) and other savings, their checking account and car. The calculation then subtracts liabilities: mortgage debt, car loans, credit card debt, and student loans. This is very different from income, which for most people means their wages and for older people their Social Security.

If the writer, the editor, the fact checker or anyone at Esquire had a clue, they would have caught this mistaken first paragraph and killed the piece. As their chart shows, the median net worth for households over age 65 was $170,494. That merits repeating a couple more times. The median net worth for households over age 65 was $170,494. The median net worth for households over age 65 was $170,494.

Again, net worth refers to total assets minus liabilities. This means that if we add up the home equity of the typical household over age 65, their 401(k) and all other savings, the value of their car and any other possessions they might have, it comes to just over $170,000. This is a bit more than the price of the median home.

In other words, if the typical household over age 65 took all of their wealth, they would have enough money to pay off their mortgage. After that they would be entirely dependent for their living expenses on their Social Security benefit, which averages a bit more than $1,200 a month.

To take another comparison, the lifetime accumulation of wealth of the typical household over age 65 would be approximately equal to what the CEO of Goldman Sachs earns in two days. A top hedge fund manager, who makes $3-4 billion a year, can pocket this much money in ten minutes. Yet, Esquire tells us that it is the high living retirees getting by on their $1,200 a month Social Security checks who are responsible for the questionable future facing the young.



Discrepancies Between National Income and GDP Print
Friday, 30 March 2012 05:42

Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)

However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the "statistical discrepancy."

Appelbaum's post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.

There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.

The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.

The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.

This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.

The Lowest Number of Unemployment Claims Since April of 2008? Print
Friday, 30 March 2012 05:26

Yes, that it is the way that the media reported the Labor Department's release of new unemployment claims yesterday. Strictly speaking, this is true. The 359,000 claims reported for last week is the lowest number in almost four years.

However, it is worth pointing out that last week's number was originally reported as 348,000. It was revised up this week to 364,000. There has been a very consistent trend with claims numbers be revised upward over the last couple of years. (I don't think this is a deliberately rigging; it just suggests a bias in the methodology.) This upward revision makes the "lowest in four years" line somewhat less meaningful.

Michael Gerson Has Not Heard About the ACA Print
Friday, 30 March 2012 05:14

That's what readers of today's Washington Post column by Michael Gerson must conclude. After all, he tells readers that President Obama has done nothing to reduce the cost of government health care programs. If he had heard of the Affordable Care Act, then he would know President Obama had actually done a great deal to control the costs of these programs, as shown in the Congressional Budget Office's (CBO) baseline budget projections which show spending if the cost control mechanisms in the ACA are left in place. These had the effect of reducing the projected 75-year shortfall in Medicare by more than 75 percent. 

It would also be worth reminding readers that Representative Ryan's Medicare plan is projected to hugely increase the cost of providing health care to seniors. CBO's projections imply that Representative Ryan's plan would increase the cost of providing Medicare equivalent policies to people over age 65 by $34 trillion over Medicare's 75-year planning period. 

Helping Those at the Bottom by Paying Neurosurgeons and Pfizer More Print
Friday, 30 March 2012 04:38

Are you upset about inequality? According to the logic in a Washington Post column by Brookings economist Ron Haskins, we can help remedy the situation by doubling the pay of neurosurgeons to roughly $1 million a year and doubling what we pay to the pharmaceutical industry for drugs each year to $600 billion. 

If you don't understand how increasing the income of rich doctors and highly profitable drug companies helps those at bottom, then you obviously don't understand economics. It's all very simple.

Haskins argues that those of us who are concerned about inequality have ignored the value of government benefits. These include benefits like Medicare and Medicaid, that disproportionately benefit low and middle income people. If we add in the value of these benefits, then Haskins tells us that there has actually been very strong income growth at the middle and bottom of the income ladder over the last three decades.

However the problem in this story is that the value of these benefits is measured by their cost. If, for example, we measured the value of these benefits by imputing the per person costs of health care in Canada, Germany, Denmark or any other wealthy country, then including the value of government benefits would not change the income inequality story at all.

The reason for the difference in health care costs between the U.S. and these other countries is not due to the fact that we get better care. In fact, low and moderate income people get far better care in all of these other countries than in the United States. The reason is simply that we pay providers far more than these other countries do. But, if our measure of the income of the poor includes the payments the government makes to doctors and drug companies on their behalf, the more we pay them, the more rapid the growth of the income of the poor.

So if we want to help the poor, we should just increase Medicare and Medicaid reimbursement rates for doctors and drug companies. Got it?



Fed Policy: What Does the Washington Post Think It Is Saying? Print
Thursday, 29 March 2012 04:28

I can't argue with today's Post editorial on the Fed, primarily because I have no clue what they think they are saying. The Post comes out in favor the Fed's expansionary policy given the continued weakness of the labor market (yeh!). But it then warns:

"Still, these benefits [sustaining growth] come with risks attached. Among the biggest risks is that easy money from the Fed enables banks and firms to postpone necessary restructuring — and for Congress and the White House to postpone getting the federal government’s long-term fiscal situation under control."

Let's look at these separately. In terms of the banks, the Fed free money policy, and previously its special lending facilities, does more than just allow the banks to "postpone" restructuring. It allows them to avoid restructuring and continue to operate with an implicit too big to fail guarantee. 

Citigroup, Goldman Sachs, Morgan Stanley and most of the other big boys would have been bankrupt if the market was left to run its course. Instead the Fed stepped in and shoveled trillions of dollars of below market loans to these banks. This is what is known in other circles as "welfare."

The Post and other media outlets have given us the children's story that we made money on these loans. But this is just silliness. Using the Post's accounting, if the Fed gave me a 30-year mortgage at a 1.0 percent interest rate and I repaid the loan in full by 2042, the Washington Post would say that the government made money on this loan.

The reality is that at a time when the market demanded a huge risk premium to lend money to these banks, the Fed invited them in to borrow as much as they wanted at near zero rates. This both allowed them to get through the crisis and reinforced the idea that these banks carried the implicit "too big to fail" government guarantee.



European Economic Blogs Print
Thursday, 29 March 2012 03:56

In order to advance inter-Atlantic dialogue, we've encouraged some of our friends in Europe to put together a list of useful European economic blogs. Here is a list compiled by Henning Meyer, the editor of Social Europe Journal. You can find his post here.


European Economic Blogs


Not the Treasury View

Kantoos Economics

The A-List@Financial Times

Social Europe Journal 


Larry Elliott@Guardian

Blog Centre for European Reform

Bruegel Blog


Economics Intelligence

The Irish Economy

Progressive Economy@TASC

Karl Whelan

Yanis Varoufakis



National Economics Blogs



Thomas Fricke@ Financial Times Deutschland

Nada es Gratis

Econ Stuff


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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.