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The Post Pushes More Demographic Fears Print
Monday, 31 October 2011 04:03

The Washington Post seems obsessed with pushing stories that old people will bankrupt the world. It had another front page article today warning that aging populations threaten disaster.

Among the lines in the article we are told that:

"China (1.5) is racing to get rich before it becomes old." [The "1.5" refers to the birth rate per woman.]

It is difficult to see much of a race. China's rate of annual productivity growth has been close to 8 percent over the last three decades. This means that output per worker has increased roughly tenfold over this period. If the ratio of workers to retirees falls from 6 to 1 to 2 to 1 over this period (a much larger decline than we will actually see), and retirees consume 75 percent as much as active workers, this rate of productivity growth would be sufficient to allow the income of both workers and retirees to rise more than eightfold. 

The other presumed demographic crises have the same nature. Even modest rates of productivity growth can easily offset the impact of aging in raising the ratio of older dependents to workers.  With 2 percent annual productivity growth (roughly the rate in the U.S. over the last two decades) output per worker would double over 35 years. If the ratio of workers to retirees fell from 3 to 1 to 2 to 1 over this period, both workers and retirees could enjoy an 80 percent increase in living standards. (This discussion ignores the fact that the ratio of younger dependents [children] to workers has fallen sharply in countries with declining populations. It also ignores ways in which declining population may improve living standards that are not picked up in standard measures of living standards such as less crowded transportation systems and less pollution.)

 
Is Keynesian Economics Prohibited In NYT Discussions of the ECB? Print
Sunday, 30 October 2011 09:55

The NYT had a discussion of the Mario Draghi and the situation he faces as he prepares to take over as head of the European Central Bank (ECB). The piece does not even mention the argument that the ECB is creating a downward spiral in euro zone economies by requiring deficit reductions, which have the effect of slowing growth, which thereby causes countries to miss deficit targets. It then demands more stringent cuts.

This is the logic that led to a second recession in the United States in 1937. If Draghi maintains the path pursued by his predecessor, then the euro zone economies face a real risk of a second recession and quite possibly the collapse of the euro. It is remarkable that this issue is not addressed in this piece.

 
Pearlstein on the Economic Policy Institute's 25th Anniversary Print
Sunday, 30 October 2011 09:37
Okay, this is a bit indulgent, but Washington Post columnist Steve Pearlstein did a piece (unfortunately buried in the business section) on the 25th anniversary of the Economic Policy Institute. I and several other CEPRites are EPI alums. The piece is worth reading not just for its praises of EPI but for a bit of recent Washington policy wonk history.
 
NYT Public Editor on Conflicts of Interest Among NYT Writers Print
Sunday, 30 October 2011 07:55
NYT Public Editor Art Brisbane took up the issue of undisclosed potential conflicts of interest by the people who write for the NYT. It is a serious discussion. Presumably it means that the NYT should inform readers of things like the fact that former head of President Clinton's Council Of Economic Advisers, Laura Tyson, is also a board member at Morgan Stanley. It would have to do the same when it runs a column by Erskine Bowles, the former co-chair of President Obama's deficit commission.
 
Washington Post Discards All Journalistic Standards In Attack on Social Security Print
Saturday, 29 October 2011 22:53

News outlets generally like to claim a separation between their editorial pages and their news pages. The Washington Post has long ignored this distinction in pursuing its agenda for cutting Social Security; however it took a big step further in tearing down this barrier with a lead front page story that would have been excluded from most opinion pages because of all the inaccuracies it contained.

The basic premise of the story, as expressed in the headline ("the debt fallout: how Social Security went 'cash negative' earlier than expected") and the first paragraph ("Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went 'cash negative.'") is that Social Security faces some sort of crisis because it is paying out more in benefits than it collects in taxes. [The "runaway national debt" is also a Washington Post invention. The deficits have soared in recent years because of the economic downturn following the collapse of the housing bubble. No responsible newspaper would discuss this as problem of the budget as opposed to a problem with a horribly underemployed economy.]

This "treacherous milestone" is entirely the Post's invention, it has absolutely nothing to do with the law that governs Social Security benefit payments. Under the law, as long as there is money in the trust fund, then Social Security is able to pay full benefits. There is literally no other possible interpretation of the law.

As the article notes, the trust fund currently holds $2.6 trillion in government bonds, so it is nowhere close to being unable to pay benefits. The whole point of building up the trust fund was to help cover costs at a future date when taxes would not be sufficient to cover full benefits. Rather than posing any sort of crisis, this is exactly what had been planned when Congress last made major changes to the program in 1983 based on the recommendations of the Greenspan commission.

The article makes great efforts to confuse readers about the status of the trust fund. It tells readers:

"The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing."

This is the same situation the government faces when Wall Street investment banker Peter Peterson or any other holder of government bonds decides to cash in their bonds when they become due. In such cases it "must raise taxes, cut spending or borrow more heavily from outside investors." The Post's reporters and editors should understand this fact.

The article then goes on to incorrectly accuse Senate Majority Leader Harry Reid of misrepresenting the finances of Social Security:

"In an MSNBC interview, he [Senator Reid] added: 'Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.'

"Such statements have not been true since at least 2009, when the cost of monthly checks regularly began to exceed payroll tax collections. A spokesman said Reid stands by his comments and his view that Social Security is entirely self-financed."
 
Of course Senator Reid is exactly right. The system is self-financed under the law. In 2009 it began drawing on the interest on the government bonds it held. That is exactly what the law dictates, when Social Security needs more money than it collects in taxes, it is supposed to draw on the bonds that were purchased with Social Security taxes in the past. This means it is self-financing.
 
Again, this is like Peter Peterson selling his government bonds to finance one of his political ventures. Just like Social Security, he is drawing on his own money. The Post may have missed it, but there was a big debate last summer over raising the government's $14.3 trillion debt ceiling. This $14.3 trillion figure included the $2.6 trillion borrowed from Social Security. If Social Security sells some of these bonds and this money is used to pay benefits, it does not raise the debt subject to the ceiling by a penny. This is very simple and very clear.
 
The article then turns to Morgan Stanley director Erskine Bowles who describes a plan he put forward along with former Senator Alan Simpson, his co-chair on a deficit commission appointed by President Obama [the article wrongly describes this plan as being the commission's plan. That is not true, the commission did not approve any plan.]

“It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year. 'By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,'” Bowles said. 'I thought that’s what we as Democrats were supposed to be for.'"

Actually the plan put forward by Bowles and Simpson would have implied large cuts for most low-income workers who would not have met the work requirements needed for the higher benefit. The cut would have taken the form of a 0.3 percentage point reduction in the annual cost of living adjustment. This cut would be cumulative, after 15 years of retirement a beneficiary would be seeing a benefit that is roughly 4.5 percent lower as a result of the Bowles-Simpson plan. The plan also phased in an increase in the age for receiving full benefits to 69, which is also a benefit cut for lower income retirees.

For lower income retirees Social Security is the overwhelming majority of their income. This means that the benefit cut advocated by Bowles and Simpson would imply the loss of a much larger share of their income than the end of the Bush tax cuts would for the wealthy. However, the Post has never described the ending of these tax cuts as a "modest" or "small" tax increase.

It is also worth noting that "upper-income workers," who would face benefit cuts under the Bowles-Simpson plan, are people with average earnings of more than $40,000 a year. This is not ordinarily viewed as the cutoff for upper income. In reference to the ending of the Bush tax cuts, the Post once ran a front page story questioning whether people earning $500,000 a year were wealthy. Clearly they apply a different standard to Social Security beneficiaries.

To push its line of fat and happy seniors the Post misrepresented research by Gene Steuerle on returns from Social Security taxes. At one point it told readers:

 "That return is diminishing, in part because people today have paid more into the system than previous generations. But a two-earner, middle-income couple retiring this year can expect to get $913,000 in Social Security and Medicare benefits over their lifetimes, in return for $717,000 in payroll taxes."

The trick in this picture is that the return refers to Social Security and Medicare, not just Social Security which is the topic of the article. The Steuerle paper actually has the Social Security returns shown separately in the exact same chart. Steuerle calculated that the two-earner couple referred to in the article would pay a bit less than $600,000 in taxes into the system and collect around $560,000 in benefits.

[This couple will get more back in Medicare benefits than they paid in taxes, but this is primarily because our health care costs twice as much per person as in any other wealthy country. This is a good argument for reforming the U.S. health care system but has nothing to do with the topic of the article.]

This article also repeatedly refers to the debate over cutting benefits as being an "ideological battle." There is no evidence presented in this piece that there is any ideological issue at stake. On the one hand are hundreds of millions of workers who want to see the benefits that they paid for. On the other hand are many wealthy people, exemplified by people like Peter Peterson and Erskine Bowles, who would rather use Social Security money to keep their own taxes low or to serve other purposes.

This is a battle over who gets the money. The references to ideology just confuse the situation.

[Addendum: In a comment below, Art Dover calls my attention to another inaccuracy in the article. It asserts: "The payroll tax holiday is depriving the system of revenue." This is not true. Under the law, Social Security is 100 percent reimbursed from general revenue for the taxes that were lost as a result of the payroll tax holiday. This is yet another fabrication by the Post in its crusade to cut Social Security.]

 
When it Comes to Economic Growth, the Financial Times Doesn't Know Which Way Is Up Print
Saturday, 29 October 2011 12:17

The Financial Times ran a piece on Italy's debt crisis. At one point it told readers:

"With Italy needing to roll over nearly €300bn of its €1,900bn debt  mountain next year, Mr Berlusconi is under intense pressure from the EU and ECB to push ahead quickly with measures to lift the stagnating economy."

Actually, the opposite is true. The EU has been pushing Italy to take measures to reduce its deficit, like cutting spending and raising taxes. These measures will slow growth, not increase it.

 
A Declining Portion of Union Members are Young because ....... a declining share of workers are young Print
Saturday, 29 October 2011 11:45

The WSJ ran a piece about unions having increasing difficulty attracting young members. The article noted that in 1983, 39.6 percent of union members were between the ages of 16 and 34. This figure had fallen to just 24.6 percent in 2010, a drop of 15.0 percentage points. [I should point out that the source of these numbers is my colleague at CEPR, John Schmitt. I apologize for the CEPR promotion.] 

This might seem to suggest an alarming failure for unions in their ability to craft a message that is relevant to young workers. However, if we look at one additional item we would note that this group of young workers comprised 48.1 percent of total employment in December of 1983. That had fallen to 34.3 percent for September of 2011, a drop of 13.8 percentage points. In other words, the decline in the proportion of young workers in unions reflects almost entirely a drop of the share of young workers in total employment. There has been little change in the relative ability of unions to attract younger and older workers.

 
The Mysterious Drop in the Saving Rate Print
Saturday, 29 October 2011 08:36

The NYT told readers that the saving rate has fallen sharply in recent months, registering just 3.6 percent in September, down from rates of more than 5.0 percent earlier in the year. (In the pre-bubble era, the saving rate averaged more than 8.0 percent.)

The main reason for this decline was likely erratic income data. There are often erratic movements in these numbers that cannot be explained by actual developments in the economy. In the four months from January to May, a period in which the GDP data show the economy was barely growing, wage earnings reportedly increased at a 3.9 percent annual rate. By contrast, in the four months from May to September the data show that wage earnings rose at just a 0.4 percent annual rate even though the economy grew at a 2.5 percent rate in the third quarter.

This sort of sharp slowdown in wage earnings is not plausible in an economy where growth was actually accelerating. It is more likely that wages were understated in September and indeed the whole third quarter, which means that income growth would be stronger and that the savings rate would be higher.

It is also worth noting that some of the story here reflects the timing of car purchases. Car sales were depressed in the second quarter because of shortages related to the earthquake/tsunami in Japan. The third quarter sales were strong as manufacturers had big sales incentives to make up for lost ground.

 
Sham Shareholder Elections Do Not Reveal Views on CEO Pay Print
Friday, 28 October 2011 07:26

The Soviet Union regularly held elections for office in which the Communist Party would win well over 99 percent of the vote. No serious person would have concluded that the Soviet leadership enjoyed the overwhelming support of its people. The elections were a joke, with no opposition allowed to participate or even to publicly criticize the government.

In the same vein, shareholder votes on CEO compensation should not impress anyone as a serious expression of shareholder sentiment. The votes that are cast are non-binding. It is also very difficult to anyone to organize among shareholders. There is very little incentive to devote the time and resources to do serious organizing for a vote that is non-binding. The vast majority of shareholders do not even bother to vote.

This is why it is seriously misleading of the Huffington Post to tell readers in an article headline:

"CEOs compensated correctly, vast majority of shareholders say."

It is possible that most shareholders do approve of compensation packages that often hand failed CEOs tens of millions of dollars, just as it is possible that most people in the Soviet Union actually did support their leaders. However, in both cases, the rigged elections cannot be taken as evidence to support the position.

 [Thanks to James Pilant for the tip.]

 
Washington Post Gets Even Shriller About the Deficit! Print
Friday, 28 October 2011 07:02

"The budget deficit is coming and it's going to eat your children!" I'm sure it will not be long before we see this line in a Washington Post news story.

In an otherwise reasonable editorial urging that the dollar bill be replaced by a coin to cut down on printing costs, the Post referred to "the country’s financial emergency." Yes, that would be the crisis that has driven the interest rate on 10-year Treasury bonds to 2.4 percent.

The Washington Post and much of the rest of the media are doing their best to scare people about budget deficits, but the facts are stubbornly refusing to cooperate. The country does face an emergency. It is tens of millions of people suffering from unemployment or underemployment. This is the direct result of the fact that the people running the economy were too inept to notice an $8 trillion housing bubble before it burst and too incompetent to respond adequately after it burst. The obsessive distraction with budget deficits is a big part of both stories.

 
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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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