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Military Budget Cuts: Denominator Please Print
Friday, 27 January 2012 06:36

The Washington Post reported on the Obama administration's plans to cut the military budget. It reports that the administration plans cuts of $487 billion over the next decade, but warns that the cuts could be as large as $600 billion.

It is unlikely that many readers would have the ability to assess the significance of cuts of this magnitude since few know how much the country is expected to spend on the military over this period. The baseline projections show that the government will spend roughly $8 trillion on the military over the decade. This means that the cuts proposed by the Obama administration come to a bit more than 6 percent of projected spending over this period. Six hundred billion in cuts would amount to roughly 7.5 percent of projected spending. It is worth noting that even under the larger package of cuts, we would still be spending a larger share of GDP on the military than we did in 2000.

 
Stanley Fish Gets It Wrong Big-Time on Inequality Print
Friday, 27 January 2012 05:41

In a NYT column on inequality and fairness, Stanley Fish told readers:

"Americans don’t mind if income is redistributed as long as it is done by market forces and not the government. Income equality is fine if it is 'naturally' achieved, but if it is socially engineered it can be perceived as class warfare, a plot against the well-to-do."

Three paragraphs later he poses the rhetorical question:

"Is it fair that Internet pirates in China can appropriate without paying for it the intellectual property of Americans who rely for their income on ideas they have copyrighted?"

The problem here is that copyright is social engineering. It is a government policy that redistributes money from the rest of us to the likes of Time-Warner, Disney, and Lady Gaga. The overwhelming majority of revenue raised through the copyright system goes to the entertainment corporations and a very small number of individuals. The vast majority of creative workers make little or nothing through the copyright system.

It is necessary to finance creative work, but copyright is an extremely inefficient tool for this purpose. (Here's one alternative.) It creates an enormous gap between the price and marginal cost of a product. Economists usually get upset when a tariff or other trade barrier raises the gap between price and marginal cost by 10-20 percent. In this case, items that would be free without a copyright monopoly, instead can be quite costly. This implies enormous economic losses.

In addition the enforcement of copyright is extremely expensive, especially in the Internet Age. The difficulties of enforcing this archaic system is the motive behind bills like SOPA, which would have imposed enormous costs on intermediaries to ensure that they were not being used to transfer unauthorized copies of copyrighted material. 

It is also striking that Fish makes the reference to copyright specifically in regard to China's respect for U.S. copyrights. This is noteworthy because the demand for China to respect U.S. intellectual property comes to some extent as a trade-off for raising the value of its currency against the dollar.

China clearly will not give the United States everything that may be on its wish list when they negotiate. This means that the more concessions it gets in an area like respecting intellectual property, the less it will get in other areas, like raising the value of the yuan against the dollar. This is directly related to inequality, since a sharp rise in the value of the yuan would lead to many more manufacturing jobs in the United States, which in turn would increase employment opportunities and wage growth for non-college educated workers.

In short, the example that Fish wants to give as a case of fairness -- China should respect U.S. intellectual property claims -- is actually the opposite on closer inspection. It is one of the ways in which government policy is social engineering designed to redistribute income upward.

[Thanks to Keane Bhatt for this one.]

 
At the Washington Post, When It Comes to the Fed and the Economy "Rescue" Doesn't Mean the Same Thing as it Does Elsewhere Print
Thursday, 26 January 2012 08:00

The print edition gave the headline, "they squabble: he rescues the economy," to a Dana Milbank column on Federal Reserve Chairman Ben Bernanke's loose money policies. Milbank's point is that Bernanke has clearly been shown to be right in having relatively expansionary monetary policies, as opposed to Republican critics who complained that this was debasing the currency and would trigger massive inflation.

However the notion of Bernanke and the Fed rescuing the economy would seem to require a bit of qualification. After it, it as Bernanke and the Fed who ignored the growth of the housing bubble until it grew so large that it eventually imploded and took the economy with it.

This is sort of like a doctor who misses the huge cancerous tumor growing out of a patient's forehead during a check-up. If he later performs the surgery that removes the tumor successfully, that could be said to save the patient's life, but it would be a bit of a stretch to give the doctor credit for rescuing the patient.

Even after the collapse the Fed has arguably been too limited in its response. When he was still a professor at Princeton Bernanke argued that Japan's central bank should deliberately target a higher rate of inflation (e.g. 3-4 percent) in order to reduce real interest rates further and thereby spur growth. Bernanke has been unable or unwilling to follow his own advice as Fed chair.

As a result of weak Fed policy, inadequate stimulus, and an over-valued dollar the economy remains horribly depressed four full years after the beginning of the recession. The first President Bush was booted from office due to an economy that looks fantastic compared to the one we have today.

 
Paying Internet Sales Tax Is Not an Accounting Nightmare Print
Thursday, 26 January 2012 06:19

The NYT reported on state efforts to collect sales tax on Internet sales. It reported the complaints of businesses about this practice including that of one business owner that:

"It’s not collecting sales tax that’s the hard part; paying taxes in the jurisdictions is an accounting nightmare.”

It would have been helpful to point out to readers that this is not true. There are companies that can do this for firms at a relatively low cost (similar to payroll companies). There is also low-cost software available to firms that would allow them to calculate the taxes themselves.

 
Indiana Imposes Tax on Workers Who Support Unions Print
Thursday, 26 January 2012 06:03

The NYT reported that Indiana's legislature approved a measure that requires that the workers who support a union at the workplace pay for the representation of the workers who choose not to pay for the union's representation. It would have been helpful to remind readers that a union is legally obligated to represent all the workers in a bargaining unit, regardless of whether a worker has opted to join the union.

This means that non-members not only get the same wages and benefits that the union gets for its members, they also are entitled to the union's protection in the event of disputes with the employer. Most states allow workers to sign contracts that require non-union members to pay for the benefits they receive from the union.

The bill passed by Indiana's legislature prohibits unions and employers from signing this sort of contract. Instead, it requires unions to provide free representation to non-members.

 
Nameless Critics Attack the Fed at the NYT Print
Thursday, 26 January 2012 05:26

In an article that told readers of the Fed's plans to keep its zero interest rate policy through 2014 the NYT commented:

"there is growing criticism that the Fed’s policies are unfairly taking money from savers, including many seniors who planned their retirements around the interest rates that low-risk assets like bank deposits used to pay."

It would have been worth pointing out that one of the goals of this low interest rate policy is to get savers out of low risk assets and into something like stock that can provide a higher yield and also potentially give money to firms that are looking to raise money for investment. If a retiree has $100-200k in bank accounts, it is a fairly simple matter to shift $10-$20k into a low-cost stock index fund. This would imply some increase in risk for the saver, but it could mean much higher returns.

 
Larry Summers' Con Job Print
Wednesday, 25 January 2012 06:13

Larry Summers told Post readers that lack of confidence by businesses and consumers are major factors holding back the recovery. There is little evidence for this position.

Investment in equipment and software is almost back to its pre-recession share of GDP. The savings rate is still much lower than its post-war average, meaning that consumption is unusually high relative to income. This is especially striking since the huge baby boom cohort is at the edge of retirement and most have very little savings. This would be an argument for expecting a higher than normal saving rate rather than the opposite.

In short, there is no evidence in the data that lack of confidence is a major factor impeding recovery. The more obvious problem is that we simply lack a source of demand to replace the demand that had been generated by the housing bubble.

 
President Obama Did Not Talk About the Over-Valued Dollar Print
Wednesday, 25 January 2012 05:47

That is a point that would have been worth making in an analysis of President Obama's proposals to encourage job creation in the United States. The value of the dollar is by far the most important determinant of trade balance. If the dollar is over-valued by 20 percent this is equivalent to putting a 20 percent tariff on U.S. exports and giving out a 20 percent subsidy for imports.

If President Obama were serious about increasing U.S. employment in manufactured then it would be expected that he would say something about the over-valued dollar and his plans to bring it down. The fact that he didn't say anything about the dollar's value should have been noted in this piece.

 
Ross Douthat Doesn't Have Access to CBO Projections Print
Wednesday, 25 January 2012 05:34
If Ross Douthat had access to the Congressional Budget Office's (CBO) projections that show Social Security will be fully solvent for almost three decades, with no changes whatsoever, and that it could pay more than 80 percent of scheduled benefits after that date for the rest of the century (which is more than current retirees receive), then he would not have attacked President Obama for not having a plan to overhaul Social Security. Therefore, we can conclude that he doesn't have access to CBO's projections.
 
Thomas Friedman Shows Us Average Is Not Over Print
Wednesday, 25 January 2012 04:46

Thomas Friedman has a great sense of irony. In a column titled "Average Is Over" he shows readers that average is clearly not over. 

The column is a tidal wave of confusion about basic economics. The gist of the piece is that technology and globalization will displace all the average workers in the United States. Workers will have to be extraordinary to get decent paying jobs.

Both parts of this story are very poorly argued. Technology does replace many less-skilled jobs. Perhaps we should let Mr. Friedman in on a little secret here. This has always been true. The question is the rate at which technology displaces workers. Productivity growth has certainly be respectable since the pick-up in 1995 (@2.5 percent annually), but it is still below the 3.0 percent rate during the quarter century following World War II, when average was in. (Properly measured, productivity has been growing at closer to a 2.0 percent rate since the 1995 speed-up.)

Friedman apparently doesn't know that technology doesn't just eliminate jobs for less educated workers. The NYT had a piece a few months back on how new search technologies have drastically reduced the need for lawyers to do legal research. New screening devices can allow many medical diagnoses that formerly might have required doctors to be made by less highly trained technicians. Of course since doctors are a powerful interest group they may be able to ignore the development of technology and have rules that require that they still do diagnoses that could be performed instead by people earning one-fifth as much.

The real issues with technology are the rate at which it allows productivity to grow (in general, the faster the better, if the economy is not run by buffoons) and the extent to which it replaces low-skilled workers relative to the pace at which it replaces higher skilled workers. The same story applies to globalization.

We can get our manufactured products more cheaply from China. This is because it is a relatively poor country where people are willing to work hard for lower wages than workers in the United States. However China would also provide us with doctors, lawyers, architects and economists, all for much lower pay than their U.S. counterparts receive. This would drastically reduce the cost of health care, legal services, college education and other services provided by highly paid professionals. That would mean more economic growth and a big increase in living standards for the vast majority of people in the United States.

However, we don't see huge numbers of Chinese taking professional jobs in the United States leaving U.S. born doctors, lawyers, etc. out of work. The reason is that U.S. professionals have much more power than manufacturing workers. They use the government to erect barriers to limit the number of foreign professionals who can work in the United States. This ensures that average can survive and flourish in the highly paid professions.

If anyone doubts this fact, they should take a look at the transcripts from Federal Reserve Board's Open Market Committee Meetings for 2006. (Some of the highlights can be found here.) The transcripts show the people in top economic policy positions completely clueless as the housing bubble is in the process of deflating and the inevitable recession is coming into view. It is worth noting that none of these people have suffered serious career consequences from this failure showing that average (or below) still flourishes in these circles. But Thomas Friedman does a good enough job of demonstrating this directly twice a week in the NYT.

 
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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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