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Thomas Friedman Wants Us to Follow Greece Print
Sunday, 22 January 2012 05:45

At least he does when it comes to restructuring our Social Security system. One of the widely ridiculed features of Greece's social welfare system was a differential retirement age for the public pension system that made the qualifying age for their Social Security system dependent on a worker's occupation. According to a widely repeated account hair dressers could retire at age 50.

The co-chairs of President Obama's deficit commission, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson proposed that the U.S. adopt a similar system of occupation specific eligibility ages to go along with its proposal to raise the normal retirement age to 69. (Friedman wrongly attributes the plan to the commission as a whole, when he endorsed it in his column. The commission did not approve a plan.)

The Bowles-Simpson plan would also sharply cutback benefits for middle income workers like school teachers and firefighters in future decades. It would also immediately change the annual cost of living adjustment formula so that benefits would reduced be by 0.3 percentage points annually compared with the current formula. Their plan would reduce benefits by 3.0 percentage points after workers have been retired 10 years and 6.0 percentage points after workers have been retired 20 years. In case we don't think this is a sufficient sacrifice from retired workers, the Bowles-Simpson plan also proposes sharp cuts in Medicare that are likely to lead to much higher health care costs for the elderly.

Interestingly, in spite of his concern about competitiveness, Friedman never discusses the value of the dollar. The over-valued dollar is the main factor in the country's trade deficit. A lower valued dollar makes U.S. goods more competitive by making imports more expensive for people in the United States and our exports cheaper for people living in other countries. For some reason, he never mentions the over-valued dollar in his piece.

 
Educating Steven Rattner on Government Debt Print
Sunday, 22 January 2012 05:14

Steven Rattner remains convinced that handing future generations trillions of dollars of government bonds imposes a burden on them and is very unhappy that I don't see things that way. Let's try this one more time.

Let's say that we add $10 trillion to the national debt over the next decade. We'll assume that it is owned domestically. That is of course not true, but the foreign ownership of debt is determined by our trade deficit, which in turn depends on the value of the dollar, not the budget deficit. Furthermore, no one is disputing that foreign ownership of U.S. assets (either government debt or private assets) will be a drain on the economy.

At some future point, everyone who owns this debt today will be dead. They will have no choice but to hand this debt on to members of the next generation, either their own heirs or someone else's. (Note, contrary to Mr. Rattner's assertion in his original NYT piece, the debt does not disappear, the ownership is transferred. [Sorry Mr. Rattner, you don't get the $1 million prize.]) This means that future generations will be both paying and receiving debt service on $10 trillion of debt. How is this a burden on future generations as a whole?

Again, the taxes needed to pay the debt service do imply distortions, but the distortions will not be anywhere near the size of the debt. Furthermore, there are all sorts of distortions in the economy, many of which could be much larger, that we never think of as imposing a burden on future generations.

The most obvious are patent and copyright protections. By virtue of these government-granted monopolies, we force people in the future to spend hundreds of billions more per year to buy protected products like prescription drugs and computer software than they would pay in a free market. The additional costs associated with these protections have the same impact on the economy as a tax of the same size. Why are deficit hawks like Rattner completely unconcerned about the implicit tax burden of patents and copyrights that we are imposing on our children?

There is one other logical point where Mr. Rattner needs some education. I had suggested that the Fed could just hold the $3 trillion in assets currently on its books. In this case the interest on the debt is paid to the Fed and is refunded right back to the Treasury. Where is the burden on our kids?

Rattner responds by favorably quoting a blog commentator:

"You don’t know what the Fed will do or be able to do in the next generation."

Of course I don't know what the Fed will do, but this is a matter of public policy. Congress could mandate that the Fed will hold $3 trillion in assets and refund the interest to the Treasury. The Fed can raise reserve requirements (the favored tool of China's central bank) to stem any inflationary impact from this decision. The point of raising this issue is that this is one way that we can issue debt today and impose no debt service burden on future generations. The debt service is paid from the government to the government. That's pretty straightforward, isn't it?

 
Where Does Ezekiel Emanuel Get His Wage Data? Print
Saturday, 21 January 2012 22:29

Ezekiel Emanuel told readers of the necessity of controlling health care costs in order to allow workers to see real wage growth and to free up spending for other areas of the budget. To make this case he comments:

"During those 30 years [1980-2010], the only sustained period when real hourly earnings increased was 1990 through 1998 — which coincided almost exactly with a period of unusually low increases in health care costs."

That is not what the data from the Bureau of Labor Statistics show. In fact, there was essentially no real wage growth from 1990 to 1996. However, wages grew at a healthy rate from 1996 to 2001. The major factors behind the stronger wage growth of the late 90s were the uptick in productivity growth beginning in the middle of 1995 and the low unemployment rate in the years 1996-2001.

realwages

Source: Bureau of Labor Statistics.

It is also worth noting that in discussing ways to control costs, Emanuel never mentions increased trade. Every other country in the world pays far less for their health care than the United States even though they have comparable outcomes. This suggests the possibility for large gains from more trade. Unfortunately, discussions of health care policy are dominated by protectionists who do not want to see the industry exposed to increased international competition.

 
Would Mrs. O'Grady Be an Outstanding Teacher In Nicholas Kristof's Evaluation System? Print
Saturday, 21 January 2012 22:09

Nicholas Kristof used his column Sunday to tell readers about how an exceptional teacher, Mildred Grady, had made a huge difference in the life of a young African American boy. According to Kristof, Ms. Grady saw the boy, a known trouble-maker, steal a book from the library. Instead of turning him in, she bought several other books by the same author, which the boy subsequently stole from the library and read. As a result he became attached to reading. He went to college and then law school and went on to become a judge.

Kristof uses the example to explain the importance of good teachers. He argues that we need regular evaluations, with the teachers who score well getting big pay increases, and those who score poorly getting fired.

However, we do not know how Ms. Grady would have performed on the evaluations advocated by Kristof. It's possible that she would not have done very well under this system. That is especially the case if other less conscientious teachers focused on teaching to the exam, while she spent more effort trying to make an impact on the lives of her students.

It is entirely possible that Ms. Grady would not be one of the teachers rewarded under the system advocated by Kristof. In fact, such a system of evaluation could even drive dedicated teachers like Ms Grady away from the profession.

 
$1 Million Dollar Prize! Can You Find Someone Who Holds the View That Steve Rattner Rants Against In the NYT? Print
Friday, 20 January 2012 17:48

Steve Rattner is very upset. He tells NYT readers

"Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.

Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off."

Wow, I really would like to find the person who believes that government bonds will disappear when the people who own them die off. I sure hope Rattner can convince readers that this is not true.

However the true statement here, that Rattner either does not understand or is trying to obscure, is that the debt itself is not an inter-generational burden. Since ownership of the debt will ultimately be passed on to future generations (ignoring the portion that is held by foreigners -- which a function of the trade deficit), the debt itself is not a generational burden.

It can raise important issues of distribution within generations and the taxes needed to pay for the debt can create economic distortions, but many other things also lead to economic distortions (like patents and copyrights).

To carry this point a step further, since deficits that stimulate the economy today are likely to increase investment (especially if they are used to finance public investment and education), they are likely to make out children richer. Furthermore, the Fed could simply hold this debt and use higher reserve requirements in future years to stem an inflationary impact from a greater volume of reserves in the banking system. In that case, interest on the debt would be paid directly back to the Treasury. Where is the burden on our kids?

[Note: the million dollar prize is a joke.]

 
Michael Gerson Complains that the Washington Post Won't Print Serious Pieces on Economic Policy Print
Friday, 20 January 2012 06:21

That is the nature of the complaint in his column, that no one is talking about poverty, even if he probably doesn't realize it. Of course there are people talking about the factors behind poverty, the most important of which is the weak economy. When we had low unemployment and strong growth at the end of the 90s, even those at the bottom of the income ladder were seeing greater opportunities.

To get from here to there would require more stimulus, more aggressive action from the Fed, and a lower valued more competitive dollar which would bring millions of manufacturing jobs back to the United States. However, the Washington Post (along with most other major news outlets) almost never presents the views of those making such arguments.

While Gerson thinks the problem is that people are not talking about the factors that cause people to remain mired in poverty, the real problem is major news outlets are not anxious to promote this discussion.

 
Taking Campaign Promises Seriously: Remember Renegotiating NAFTA? Print
Friday, 20 January 2012 06:06

Ezra Klein tells us today that candidates take campaign promises seriously. I haven't reviewed the research, but it is easy to identify some important campaign promises that President Obama made over the course of his campaign that he clearly has not taken seriously while in office.

His pledge to renegotiate NAFTA was important in gaining support from manufacturing workers in many key primary states. This pledge was clearly never taken seriously once he got in the White House.

President Obama also promised to push for legislation that would allow for judges to rewrite the terms of home mortgages in bankruptcy. Any effort in this direction has been all but invisible since he entered the White House.

Finally, the public option portion of his health care plan clearly was not a priority for his administration. While he would have signed a bill that included a public option, he made it clear that he did not view it as an essential part of the plan.

Obviously there are promises that candidates feel little qualm about abandoning once they take office.

 
The Industry's Invented Numbers on SOPA Are Not Facts Print
Friday, 20 January 2012 05:26

The NYT presented as fact that the movie and entertainment industry are losing $58 billion a year due to the lack of enforcement of copyrights. This is simply a number invented by the industry. It is almost inconceivable that the industry would gain even 20 percent of this amount if all unauthorized copies could be eliminated. (Current revenue from DVD sales and downloads are around $10 billion and recorded music around $6 billion.)

Furthermore, insofar as households are forced to pay more money for watching movies or listening to music, it means that they will have less money for buying other things. The impact of greater copyright enforcement on the economy would be similar to a huge tax imposed on watching movies and listening to music. This would lead to less economic growth and fewer jobs.

 
Zakaria Gets the Story Half Right on Workers and Jobs Print
Thursday, 19 January 2012 05:45

Readers don't expect much from the Washington Post when it comes to economic issues, so it is notable when an opinion column gets issues at least half right. In that vein, Fareed Zakaria's piece today noting the ways in which Germany seems to be outperforming the U.S. is worthy of attention. 

First, let's note a couple of the things he gets wrong. Zakaria touts the growth in exports under President Obama, claiming that they have been growing at a 16 percent annual rate. He tells readers that this "means that U.S. exports should double earlier than 2014, the goal President Obama set in 2009."

Apparently, Zakaria is looking at the nominal value of exports. The real value of exports has increased by a total of just 12.9 percent since the fourth quarter of 2008. At this pace, we won't see exports double until around 2023. Perhaps Obama meant that he would reach his goal primarily through higher prices, but usually presidents don't want to boast about higher inflation on their watch.

The second point is that no serious person (okay, this is the Washington Post opinion page) would value exports in isolation. Net exports, exports minus imports, create jobs, not exports alone. If we export car parts to be assembled into a car in Mexico, it certainly does not create more jobs in the United States than when the car was assembled in the United States.

Because imports have exceeded exports by a huge amount over the last 15 years (i.e. we have large trade deficits) the United States has lost millions of jobs. The trade deficit has only declined by about half a percentage point of GDP during the Obama years. So in this sense, trade has contributed little to growth and jobs. 

Zakaria also errs in his portrayal of the investment record on Clinton, Bush, and Obama. He tells readers:

"From 2001 to 2007, investment in equipment and software — the kinds of investments that boost productivity and create good jobs — declined 15 percent as a share of gross domestic product. ... In contrast, the current recovery, while anemic in terms of number of jobs created, is more broad-based and more durable. Business investment is rising, having boomed 18 percent since the end of 2009."

Actually, much of the investment in equipment in software at the end of the Clinton years was driven by the bubble in tech stocks. It was wasted establishing operations like Pets.com and other companies that quickly ended up in the dustbin of startup history. While this spending created jobs in the same way that paying people to dig holes and fill them up again will create jobs, it did not boost productivity.

Productivity growth over the Bush years averaged 2.2 percent annually. In the pre-recession period it averaged 2.7 percent. This compares to a 2.0 percent annual rate for the Clinton years taken as a whole and a 2.7 percent rate for the period following the beginning of the productivity speedup in 1995. In other words, there is little basis for saying that the falloff in investment in the Bush years harmed productivity growth.

On the other hand, the boom in investment during the Obama years touted by Zakaria is simply making up for the collapse of investment during the downturn. This is a normal pattern following a recession. Even with the Zakaria boom, equipment and software investment have still not risen back to its pre-recession share of GDP.

Now for the part that Zakaria gets right; Germany has done well because of its different attitude towards its workers. It is German government policy to try to persuade employers to keep workers on their payroll even during a downturn through policies like work sharing. This ensures that the workers continue to stay in the workforce and upgrade their skills. By contrast, many workers in the United States face long-term unemployment and some may never work again. 

Germany has been so successful with this policy that its unemployment rate is now 1.6 percentage points lower than it was before the recession began. That is in spite of the fact that its GDP growth has been no better than GDP growth in the United States. The difference has been its labor force policy. 

Zakaria notes the importance of the German experience and, citing a paper from the Brookings Institution, holds it up as a model for the United States. At CEPR we are always glad to see Brookings follow our lead so that the Post can write about a topic of importance.

 

 

 
Activist Supreme Court Makes Government Bigger Print
Thursday, 19 January 2012 05:21

The NYT reported on a Supreme Court ruling that retroactively granted copyright protection to foreign works that had previously been in the public domain. As Justice Breyer argued in dissent, this action appears to exceed the constitutional authority given to Congress, which ties copyrights to a specific public policy goal: "to promote the progress of science and useful arts."

In this case, since the copyright is explicitly being applied retroactively to work that has already been produced, it cannot possibly be viewed as providing incentive to develop the material. This means that the government is assigning a monopoly to items that were formerly in the public domain and available at no cost. It is prepared to arrest people and throw them in jail if they don't respect this government granted monopoly.

Given the large number of political groups complaining about activist judges and big government intervention into people's lives, it would have been useful to include some of their views about the court's action. Perhaps this can be addressed in a follow-up piece.

 
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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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