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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?

Read more...

 

 
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.

Read more...

 

 
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 

Eurointelligence

Larry Elliott@Guardian

Blog Centre for European Reform

Bruegel Blog

Voxeu.org

Economics Intelligence

The Irish Economy

Progressive Economy@TASC

Karl Whelan

Yanis Varoufakis

OFCE

 

National Economics Blogs

 

Herdentrieb@Zeit

Thomas Fricke@ Financial Times Deutschland

Nada es Gratis

Econ Stuff

Telos

 
The Iron Grip of Accounting Identities Print
Wednesday, 28 March 2012 18:55

James Kwak responded in Baseline Scenario to some of the points that I raised in the review of the new book he co-authored with Simon Johnson, White House Burning. I want to focus on one issue in particular because it is really central to how we understand the economy.

I argued in my review that the fundamental imbalance in the U.S. economy is the trade deficit. This deficit is in turn caused by the over-valued dollar. The latter is a direct result of the decision of developing countries to accumulate massive amounts of foreign exchange reserves (i.e. dollars) in the wake of the East Asian financial crisis.

Developing countries saw the harsh treatment of the East Asian countries following the crisis and decided that they did not want to be in the same situation. Their protection against this event was the stockpiling of huge amounts of reserves. They acquire the reserves by running trade surpluses, which they use to acquire dollars. The decision of foreign central banks to buy and hold dollars keeps up the value of the dollar against their own currencies. If they didn't buy dollars, the value of the dollar would fall relative to their currencies.

This matters for our trade deficit because the higher valued dollar means that imports are cheaper for us, which leads us to buy more imports. In addition, the high dollar means that our exports are more expensive for people in other countries. Therefore they buy less of our exports. If we import more and export less, then we get a trade deficit.

This matters for the budget deficit story because if the United States runs a trade deficit, then it means that the United States has negative national savings. This is definitional; as a country we are buying more than we are selling.

Read more...

 

 
UK Enjoys the Fruits of Deficit Reduction: Economy Shrinks 1.2 Percent Print
Wednesday, 28 March 2012 07:33

The NYT reported on a revision to 4th quarter GDP data in the UK that showed the economy shrinking at a 1.2 percent annual rate rather than the 0.8 percent rate previously reported. Unfortunately, the  article reported the data giving quarterly rates, so most readers probably did not recognize that the 0.3 percent decline from the third quarter translated into a 1.2 percent annual rate.

Since this is written primarily for an audience in the United States, and GDP growth numbers are always reported as annual rates, the NYT should have converted the quarterly rate so that readers would understand what the number.

 
NYT Puts an Anti-Obamacare Piece in the News Section Print
Wednesday, 28 March 2012 04:43

It's always good to get the perspective of the people on the ground when reporting on a policy. However, when they say things that are clearly not true, reporters should provide readers with the correct information. The NYT fell down on the job in a piece that presented the views of a number of people in Massachusetts who were unhappy with the mandate and employer penalties in its health care law, which is the model for Obamacare.

The piece begins by telling us about Wayde Lodor, a 53 year-old independent product development consultant from Leominster. Mr. Lodor says that he is in good health and therefore does not want to buy insurance for himself and his college age daughter. The article tells us that Lodor estimates the cost of this insurance at $1,200 a month.

A quick visit to the Massachusetts insurance exchange reveals that the lowest cost plan for a 53-year old with one dependent child would be $685. This is only a bit more than half of Mr. Lodor's estimate of what he would have to pay to comply with the mandate. It would have been helpful to tell readers that Lodor had seriously over-estimated the cost of complying with the mandate.

The piece then talks to Teofilo Cuevas, who it tells us earns about $40,000 a year as a meat cutter at a grocery store. Mr Cuevas has apparently dropped his employer provided insurance because he could not afford the co-payments. It would have been useful to note that Mr. Cuevas' income would qualify him for subsidies under the Massachusetts plan. He would not be required to pay more than $235 a month. That may still be a serious burden, but it would have been useful to provide this information.

The next source is a small business owner, Ronn Garry Jr., owner of Tropical Foods, a grocery store in the Roxbury section of Boston. Mr Garry complained that the $295 per worker penalty for firms cost him nearly $30,000 a year. Actually, 70*$295 = $20,650. This would usually be thought of as close to $20,000, rather than nearly $30,000.

The piece also relies on Garry's claim that he faces this fine only because not enough workers signed up for his employer provided plan. It is possible that Garry provides little subsidy with this plan so that it is unaffordable for most of his workers.

Finally, the piece turns to William Fields, who is described as "a consultant in Boston who helps employers comply with the law." Mr. Fields is quoted saying:

"You have some of those who are truly bad guys and should be fined,. ... But the ones that are personal to me are the $50,000 fine that puts my client out of business.”

Fields does not give any examples of businesses that were closed because of this fine. It would have been worth pressing him on the topic because it is not clear what he thinks he is saying.

Any business that goes under is by definition marginal. This means that any expense can be seen as putting it under. This could mean its electric bill, a dry-cleaning bill, or any other item. To owe a $50,000 fine the business would need to have 170 employees. A firm with 170 employees would typically have sales of at least $5 million a year. The odds are that if a $50,000 penalty caused such a firm to close, it probably would have gone out of business in any case. In other words, this firm was on its way down and paying the fine really did not affect its fate.

It would have been helpful to readers if this article had made an effort to determine the accuracy of the assertions these people were making rather than just reporting them unquestioningly. 

 
Retail Stores Fail in Germany for the Same Reason They Fail in the United States (see addendum) Print
Tuesday, 27 March 2012 06:49

The NYT had a story about an uptick in confidence among German retailers, suggesting that German consumers will increase their spending. The piece noted that Germans save more than people in the U.S. then told readers:

"Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable."

In Germany consumption accounts for 57 percent of GDP compared to around 70 percent in the U.S.. This difference is not the reason that retailers fail in Germany, because the gap is not new.

Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers. There are plenty of retail stores that are able to do just fine in Germany even with a smaller share of GDP going to consumption.

Addendum:

Andrew Watt at the European Trade Union Institute, offers a correction. He points out that the consumption share of GDP did in fact rise substantially in the United States from the mid-90s to the present. This would mean that the retail market had improved in the United States relative to Germany, where the consumption share remained pretty much constant over this period.

 
State Run Pensions: Just Because Something is New to the NYT, Doesn't Mean It Is New Print
Tuesday, 27 March 2012 04:22

The people who have been working for more than a decade to have states use their public employee pension systems to provide pensions to workers in the private sector will undoubtedly be happy to see the NYT's piece on the topic this morning. However they will be surprised to have the idea referred to as "new."

At the top of this list would be the Economic Opportunity Institute in Seattle, Washington, which has been promoting "Washington Voluntary Accounts" since 2000. They even got legislation approved a few years back, but the fiscal crisis resulting from the recession nixed the start-up funding. 

There was a similar effort in California in 2007 to piggy back pensions on its CALPERS system. Connecticut and Maryland's legislatures were also close to approving comparable measures. Anyhow, it's great to see the NYT finally take notice now that some efforts are being made in New York on this issue, but it would be good if it did its homework.

(Here's one of my papers on the topic.)

 
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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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