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Robert Samuelson, Wrong Again Print
Friday, 30 December 2011 06:47

To his credit, in his column today Robert Samuelson apologized for a mistake in an earlier column. In the prior column he claimed that if Keynes saw the level of indebtedness of countries today, he would not be arguing that governments should be running deficits to stimulate the economy. The problem is that the level of indebtedness in the UK, where Keynes was writing, was far larger in the 30s than the level of indebtedness currently faced by the United States and every other wealthy country, except Japan. 

However, he makes up for this apology by making several new mistakes or misrepresentations. In the former category he repeats what he said in the prior column:

"I was arguing that today’s highly indebted governments have less leeway to adopt massive 'Keynesian' stimulus programs of spending increases or tax cuts without triggering a backlash from bond markets — higher interest rates that undermine the stimulus. I still believe that’s true; the evidence is Greece, Ireland, Portugal, Spain and Italy."

Spain certainly cannot belong on this list since it was not and is not heavily indebted. It was running budget surpluses before the crisis and even now its debt to GDP ratio is still under 70 percent. Ireland also had surpluses and low debt before the crisis, but had its debt surge as a result of assuming the debt of private banks that it rescued.

Samuelson again refuses to note the fact that these countries are in a fundamentally different situation than the United States because they are on the euro and therefore do not issue their own currency. Countries with greater debt burdens, like the UK and Japan, pay far lower interest rates than these euro zone countries. This presumably has something to do with the fact that they have central banks that can buy up their debt if there is a panic in the market. 

In arguing for cuts to Social Security and Medicare, Samuelson continues to ignore the fact that retirees pay for these benefits. Older people get a disproportionate share of government spending just as rich people do. In the latter case the reason is that rich people own a disproportionate share of government bonds and therefore get a disproportionate share of the interest paid out by the government each year. It would make as much sense to say that we should cut interest payments to rich people because the money could be better spent on children as it does to say that we should cut Social Security benefits to wealthier beneficiaries. The point is the same in both cases: they paid for these income flows.

Also Samuelson pulls a cheap trick in trying to make his case by telling readers that:

"among the richest fifth, Social Security accounts for slightly less than a fifth of total income."

This is true only because it refers to an average for the top quintile. This average includes the incomes of people like Peter Peterson and Warren Buffet. Ninety percent of Social Security benefits go to individuals with non-Social Security income of less than $40,000 a year. Eliminating the Social Security of people like Peter Peterson will not affect the program in any visible way. The only way to achieve notablyesavings is by reducing benefits for people who by any definition are very middle class. (Remember, for tax purposes people are not rich until their income crosses $200,000 a year.)

The main source of the country's projected long-term budget problems is Medicare and Medicaid. The costs of these programs are driven by our broken health care system. We pay more than twice as much per person for health care in the United States as people in other wealthy countries with little to show in the way of outcomes.

This is not a problem of seniors getting too much in benefits. It is a problem of paying too much for the health care that they and others receive. The answer to this problem is to fix the health care system, not to deny care for seniors. (One obvious route is to rely on increasing trade in health care services, but unfortunately hard-core protectionists dominate public debate so this is rarely even raised as an issue.)

 
Social Security Is NOT Selling Government Bonds Print
Friday, 30 December 2011 06:31

In an article discussing the implications of the extension of the payroll tax cut, the Washington Post told readers:

"This year, the Social Security system projects that it will pay out $46 billion more in benefits than it will collect in cash. It made up for the shortfall by redeeming Treasury bonds bought in years when there were cash surpluses."

This is not true. The Social Security trust fund is projected to earn $114.9 billion in interest on the bonds it holds. It will use a portion of these earnings to pay current benefits. It will not be redeeming its bonds.

 
When Companies Write Off Stock Options Is It an Unfair Tax Break? Print
Friday, 30 December 2011 06:02

The NYT had an interesting piece on a provision in the tax code that allows companies to write off the value of exercised options as employee compensation. This is deducted from profits and reduces their taxes accordingly.

It is not clear that this treatment is improper. In principle, the value that the company is paying the executives getting options is the value of the option at the time it is issued. For example, if a company's stock is current valued at $10, an option to buy the stock at any point in the next five years for $10 a share, may be worth $5. In principle, an award of 1 million options would then be worth $5 million. This is what the company should deduct from its profit at the time the options are issued.

However, the story described in this piece is that companies don't make any deduction from profits when they issue the options (meaning they pay more in taxes in the year of issuance then they actually should), but then deduct the value of options when they are redeemed. This means that if the stock price rises to $30, in this case the company would deduct the $20 million gain on the options (one million $30 shares being sold to the executive for $10) from its taxes. As the piece notes, this is not very different from a situation in which the company just paid the executive with $20 million in stock.

In principle, this tax treatment should be symmetric with the tax treatment where the value of the options is deducted from profits at the time they are issued. The article notes many cases with executives getting large windfalls and companies thereby getting large write-offs due to bounceback from the low stock prices of 2008-2009. While this is true, there were many options issued in the years 2005-2007 that ended up being worthless since the current value of the stock is below the strike price. 

There is an issue that many executives were rewarded for a run-up in strike prices that had nothing to do with their performance, however this is a problem of corrupt corporate governance, not the tax code. It is easy to write contracts that would only reward executives for their performance relative to a reference group so that they do not benefit from an economy-wide improvement. However, this is rarely done because corporate boards are often appointed by top management and have little incentive to reduce their pay.

It is likely that stock options cause problems in national income accounting, since this is one of the ways in which capital gains income is likely to end up being recorded as normal income, leading to an overstatement of the income side measure of GDP when the stock market rises rapidly.

 
The Over-Valued Dollar as Class War Print
Friday, 30 December 2011 05:47

This piece reports on a growing trend among major manufacturers to bring factory jobs back to the United States, but at much lower wages than what they had formerly paid. The article shows clearly how the over-valued dollar that was deliberately engineered by Robert Rubin in the late 90s has put downward pressure on wages of large segments of the U.S. workforce. With the dollar having reversed most of its gains from the 90s, U.S. manufacturing wages can again be competitive with wages in China and other developing countries. Further declines in the dollar will allow manufacturing workers to get higher wages and create more jobs.

Most professionals (doctors, lawyers, economists etc.) are largely protected (by policy) from the sort of competition that manufacturing workers face. For this reason they are likely to benefit from a higher valued dollar since it means that they can get cheaper manufacturing goods and pay less for overseas vacations.

 
Spain Did Not Run Up High Public Debt Print
Thursday, 29 December 2011 05:43

In an article discussing the current budget situation in Italy the NYT told readers:

"Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant."

Actually, of this group only Greece was consistently experiencing a rise in its debt to GDP ratio. In Portugal there was some increase in the debt to GDP ratio in the years prior to the recession, but Italy's debt to GDP ratio actually had been trending downward since 2000. Spain was running budget surpluses and had a considerably lower debt to GDP ratio than Germany.

The article also asserts that the market is forcing Italy to reform its budget. This is somewhat misleading since the European Central Bank (ECB) has played a major role in creating current market conditions. The ECB has been considerably less expansionary than the Fed during the downturn, even raising interest rates last spring, ostensibly to fight inflation. In addition to pushing up interest rates on government debt, the ECB's policy has reduced growth and employment, worsening the budget situation of euro zone countries.

 
The Daily Beast Acts Up on the Economy Print
Wednesday, 28 December 2011 14:15

Sometimes a little kid will deliberately be bad just to get attention from her teacher or parents. This seems to be the philosophy of a Daily Beast column by Zachary Karabell, which uses what seems to be some deliberately bad economic analysis to tell us things are really pretty good.

The piece begins with the incredible assertion:

"years from now, when we look back at 2011, it may be remembered as one of the best worst years of the early 21st century. You’d be hard-pressed to come up with an extended period where people were more negative, yet remarkably, in the United States at least, not much actually happened."

No, 2011 looks better than 2009 and 2010 and certainly better than ending of 2008, but most of the country would be hard-pressed to find a reason to put 2011 ahead of any of the years prior to the crash. The unemployment rate for the year is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. Real wages have been stagnant or falling for the last 4 years, with little prospect of turning around any time soon as the high rate of unemployment continues to depress wages.

In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security. According to a recent study by the Pew Research Center, the median older baby boomer (ages 55-64) had just $162,000 in wealth. This is roughly enough to buy the median home. This means that if this household took all of their wealth, they can pay off their mortgage. They would then be completely dependent on their Social Security to support them in retirement. And, half of older baby boomers have less wealth than this.

In short, most of the country is looking at a situation where they are desperate for work or fearful about losing their job. Older workers are looking at a retirement where they are not far above the poverty level, even after spending a life working in middle class jobs. The bad attitudes toward this situation are not the result of "groupthink" as the column asserts, they are the conclusion of people better able to understand the economy than Karabell.

For extra credit in the acting up department Karabell throws in a few broad assertions that are simply wrong. For example he tells us that:

"Overall growth for the next year is shaping up to be 2 percent, give or take. That is pretty lame compared to the heady days of the 1990s or even the mid-2000s. But those seemingly halcyon periods benefited from bubbles, whether the stock market and telecom spending in the 1990s or the housing and debt-inflated growth of the mid-2000s. So while activity now doesn’t look so good by those comparisons, it is actual economic activity undistorted by bubbles. It’s as if the economy of the past 20 years was wearing platform shoes ('Wow, she’s like 6 feet tall'); it looked a lot bigger than it was."

Actually 2.0 percent annual growth would look bad compared to the 80s, the 70s, the 60s, and the 50s. It is simply a very bad growth rate. Trend productivity growth in the U.S. is between 2.0 and 2.5 percent. Labor force growth is averaging around 0.7 percent. This means that we need growth of around 2.5 -3.0 percent just to keep even with the growth of the labor force. At a 2.0 percent growth rate unemployment will be rising, not falling. This has nothing to with platform shoes, it's arithmetic.

Furthermore, given the severity of the downturn we should be seeing growth in a 5-8 percent range to get the economy back to its potential level of output. People should be outraged at the thought that the economy might only grow at a 2.0 percent rate.

Karabell also tells readers:

"It is also true that we have a structural jobs issue, but not an issue of making things and innovating."

If we had a structural jobs issue then there would be sectors of the economy where large numbers of jobs are going unfilled, workers are putting in long hours, and wages are rising rapidly. This would be the result of the labor shortages in these areas.

We don't see any major sectors that fit this bill. That implies that the problem is not one of structural unemployment but simply a lack of demand. We just need the government to spend more money, the Fed to be more aggressive in pushing down long-term interest rates or boosting inflation, or a decline in the value of the dollar to boost exports. We can also put more people to work by having people work shorter hours through work sharing. Saying the problem is structural is simply wrong and points people away from the obvious solutions.

 
Washington Post Runs Another Front Page Editorial About the Deficit Print
Wednesday, 28 December 2011 08:03

The Washington Post used a front-page, above-the-fold article, to complain that Congress and President Obama had not done as much as it would have liked to reduce the deficit. Every person interviewed for the piece shared the complaint. The piece did not present the views of a single person pointing out that more progress on deficit reduction could have led to even more unemployment than what the country is already experiencing.

Nor did the Post present the views of anyone pointing out the fact that the deficit is large because the economy collapsed. The article likely led readers to believe that the country has large deficits because we have out of control spending or massive tax cuts. Anyone with access to the Congressional Budget Office's projections knows that the deficits would have been relatively modest in the last few years had it not been for the downturn caused by the collapse of the housing bubble.

It is remarkable that the Post never makes this point in its budget reporting. Of course, mentioning this fact would call attention to its unbelievable level of incompetence in ignoring the housing bubble. While the Post devoted endless and editorial space to the modest deficits of the bubble years, it completely ignored the growth of the housing bubble that eventually sank the economy and caused the large deficits of the present. 

Nor did it present the views of anyone applauding the fact that the Super Committee failed in its efforts to cut Social Security and Medicare. The Super Committee, a group with a guarantee of a special fast-track vote on its budget proposal, has been a longstanding dream of the many groups funded by Wall Street investment banker Peter Peterson. The fact that they finally realized this dream and were able to do nothing with it is very noteworthy. Many people around Washington and across the country applauded this failure as a great victory. Their views should have been presented in the article.

The article includes several other misleading or simply false statements. In the latter category are several references to proposals from Simpson-Bowles deficit commission. This commission produced no proposals. The co-chairs, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles, produced a proposal, however this proposal was not approved by the commission. 

The piece also includes several comments to the effect that Social Security and Medicare will break the budget. In fact, Social Security's costs are rising very gradually. Furthermore, its projected benefits are fully paid for through the year 2038 with no changes whatsoever in the program. Even after that date, if Congress does not change the law, Social Security cannot contribute to the deficit. It would only be able to pay out about 80 percent of scheduled benefits (roughly 10 percent more than the average benefit received by today's retirees).

Every budget analyst knows that the real source of the country's projected long-term deficit problem is the projection that health care costs in the United States will continue to explode. However this fact was never mentioned in the article. 

 
David Brooks Is Projecting His Self Indulgence Again Print
Tuesday, 27 December 2011 05:07

Undoubtedly projecting from the fact that he can draw a nice 6-figure income for little obvious work, David Brooks complained in his column:

"Today, the country is middle-aged but self-indulgent. Bad habits have accumulated."

For the most part the column is a confused diatribe against the Obama administration's economic policies with a lecture on moral rectitude thrown in for good measure. He starts by condemning the efforts to stimulate the economy by telling readers:

"Today, Americans are more likely to fear government than be reassured by it.

"According to a Gallup survey, 64 percent of Americans polled said they believed that big government is the biggest threat to the country. Only 26 percent believed that big business is the biggest threat. As a result, the public has reacted to Obama’s activism with fear and anxiety. The Democrats lost 63 House seats in the 2010 elections."

One might think that the fact that the Obama administration relied on a stimulus that was only designed to lower the unemployment rate by 1.5-2.0 percentage points might have played a big role in the election defeat. (Read the number of jobs the stimulus was projected to create, not the baseline forecasts for the economy.) If the government had used bigger stimulus to get the unemployment rate down to say -- 7 percent -- it is difficult to believe that the Democrats would have suffered such a big defeat last year, in spite of people's fear of big government.

After dismissing the stimulative policies of the Great Depression, Brooks then gives us a beautifully crafted grand misunderstanding of economics comparing the economy today with the economy of the Progressive era:

"the underlying economic situations are very different. A century ago, the American economy was a vibrant jobs machine. Industrialization was volatile and cruel, but it produced millions of new jobs, sucking labor in from the countryside and from overseas.

"Today’s economy is not a jobs machine and lacks that bursting vibrancy. The rate of new business start-ups was declining even before the 2008 financial crisis. Companies are finding that they can get by with fewer workers. As President Obama has observed, factories that used to employ 1,000 workers can now be even more productive with less than 100."

The fact that factories can produce large amounts of output with 100 workers is in fact evidence of economic vibrancy, not the opposite. This is called "productivity growth." It is the main measure of the economy's ability to raise living standards through time. The fact that 100 people in a factory can produce the same output as 1000 people did 30 years ago means that we are potentially much richer than we were 30 years ago. We can have the other 900 people doing other productive work. Alternatively, we can all work many fewer hours.

Whether or not this productivity growth generates jobs depends on the structure of the economy. If the productivity growth translates into wage growth, as was the case with the very rapid productivity growth of early post-war period, then it is likely to be associated with a vibrant jobs machine. On the other hand, if the One Percent pocket most of the benefits of productivity growth, then we may have real problems of stagnation and lack of job growth, since the Bill Gateses of the world will probably not increase their spending much if they get another billion or two. The key issue here is the distribution of the gains of productivity growth, a simple fact that totally escapes Brooks.

Brooks then tells us:

"Moreover, the information economy widens inequality for deep and varied reasons that were unknown a century ago. Inequality is growing in nearly every developed country. According to a report from the Organization for Economic Cooperation and Development, over the past 30 years, inequality in Sweden, Germany, Israel, Finland and New Zealand has grown as fast or faster than inequality in the United States, even though these countries have very different welfare systems. "

This comment is highly misleading. While most countries have seen increases in inequality over the last three decades, even with the increases over this period countries like Sweden, Germany, and Finland are nowhere near as unequal today as the United States was at the start of this period.

Furthermore, it is not a simple fact of nature that the information economy will generate inequality, it requires the hand of Brooks' friend: big government. People are getting rich off the information economy because the government enforces copyright and patent monopolies. These are massive interferences by the government into the market. As a result of government granted patent monopolies were pay close to $300 billion a year for prescription drugs that would sell for around $30 billion a year in a free market. This $270 billion redistribution of income is close to 5 times as large as the money at stake with the Bush tax cuts for those in the top 2 percent.

The government must also take increasingly repressive measures to ensure that this income keeps flowing to the top. The Stop Online Piracy Act is the latest example of the efforts of big government to ensure that the money keeps flowing upward. In short, this upward redistribution is not the natural workings of the market, it is the direct result of the work of the big government that Brooks doesn't like and tells us the American people do not like either.

After the misleading economics, Brooks gives us a morality lecture:

"the moral culture of the nation is very different. The progressive era still had a Victorian culture, with its rectitude and restrictions. Back then, there was a moral horror at the thought of debt. No matter how bad the economic problems became, progressive-era politicians did not impose huge debt burdens on their children. That ethos is clearly gone."

As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple, at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue -- Bill Gates children may own all the debt -- but that is within generations, not between generations. As a group, our children's well-being will be determined by the productivity of the economy (which Brooks complained about earlier), the state of the physical and social infrastructure and the environment.

One can make the point that much of the debt is owned by foreigners, but this is a result of our trade deficit, which is in turn caused by the over-valued dollar. Brooks never said a word about the trade deficit or the value of the dollar, so insofar as there may be a real issue of indebtedness for our children, it is not even on Brooks radar screen.

 
Robert Samuelson Again Forgets What He Said About the Budget Deficit Print
Monday, 26 December 2011 08:24

Less than a month ago Robert Samuelson told readers that it was unreasonable to expect the Super Committee to solve the country's deficit problem since the real issue is health care. He said that the Super Committee was not going to come up with a politically acceptable way to fix health care in three months so it was unrealistic to imagine that it would produce a solution to the long-run deficit problem.

His comments in today's column suggest that he is unfamiliar with the piece he wrote last month. (Hot rumor: there are two Robert Samuelsons.) This one tells us that the problems are that the Republicans don't want to raise taxes and the Democrats refuse to consider cuts in spending, therefore we are going to have a long-term budget problem that will lead to an enormous economic crisis.

Of course Samuelson's column last month was completely right. We pay more than twice as much per person as the average for other wealthy countries. If we get out health care costs in line with other countries we would be looking at budget surpluses not deficits. (Trade would be a good place to start. Unfortunately, the Washington Post and other major media outlets are dominated by hard-core protectionists.)

There are a few other points worth hitting Samuelson on in this piece. First, if we get military spending back down to its pre-September 11th share of GGP (3.0 percent), it will go far towards getting our future deficits down to sustainable course. (This would imply a savings of roughly $2 trillion over the next decade, if the reduction took place immediately.)

Second, there is no obvious reason that the Fed cannot simply continue to hold the assets that it has purchased as part of its quantitative easing program indefinitely. This means that the interest on these assets is refunded to the Treasury and therefore does not add to the deficit. Last year the Fed refunded $80 billion to the Treasury.

Third, listing Social Security as a benefit that people are unwilling to pay for is simply absurd. Samuelson uses 1960 as a base point. In the last five decades the Social Security tax has more than doubled and the age for receiving normal benefits has risen from age 65 to 66. It is scheduled to rise 67 in another ten years. People clearing are willing to pay for their Social Security benefits and have been.

Finally, the idea that if we don't get the deficit down something really bad is going to happen ignores the fact that something really bad is happening now. If someone had warned in 2007 that we face a prolonged downturn with an unemployment rate averaging over 9 percent for three years, they would have been ridiculed as a doomsayer. It is remarkable how easily Samuelson can ignore the disaster in front of his eyes, and would instead have us divert our attention to a vaguely defined really bad disaster in the indeterminate future.

Of course if the Post and other media outlets did not restrict their economic columns almost exclusively to people with no understanding of the economy, we might have been able to avoid the current disaster. After all, it does not take much economic sophistication to see an $8 trillion housing bubble, but the Post could not find anyone who rose to this level of knowledge.

 
Jonathan Alter and Nonsense on the Second Great Depression Print
Sunday, 25 December 2011 22:33

For family reasons I had occasion to see some of the Sunday morning talk shows. (These are best avoided for those with an attachment to reality.)

I got to see Jonathan Alter explain how President Obama and the Fed prevented a second Great Depression. The story went that the economy was losing 800,000 jobs a month when President Obama took office in January. If this had continued until the end of the year then we would have had a second Great Depression. Therefore the steps taken by President Obama and the Fed prevented the Second Great Depression.

There are two problems with this story. First, there is no reason to believe that the counterfactual, if the President and the Fed did not act, is that the economy would have continued to lose 800,000 jobs a month. In January the economy was still in a free fall from the Lehman bankruptcy. Is there any reason to believe that the free fall would have continued throughout the year in the absence of the stimulus and the Fed's aggressive actions? It's hard to see that.

It is hard to construct a coherent counterfactual for the Fed. In effect, the Fed is the fire crew that shows up at the scene and puts out the fire. What's the counterfactual to the fire crew showing up? If we assume that the counterfactual is that no fire crew shows up, then we can say that city would have burnt down, but that it is a highly unrealistic counterfactual. Similarly, a counterfactual that the Fed never does anything in response to an economic collapse seems rather unrealistic.

This brings up the second problem. The Great Depression was not one horrible year. It was a decade of double digit unemployment. To get a decade of double digit unemployment we would need the government to sit on its hands for a decade even as tens of millions of people are suffering. Again, this is possible, but it hardly seems the most likely counterfactual.

To be clear, I don't think there is any doubt that the stimulus helped the economy and created in the range of 2-3 million jobs. The Fed's actions to prevent a financial collapse were also a plus, although there should have been some quid pro quo for the trillions of dollars in below market loans going to the banks. But, the second Great Depression is a figment of the imagination of the Washington policy wonks.

Also, to be fair to Alter, he made a number of good points in this segment. However, the one about the second Great Depression is DC drivel that deserves to be attacked whenever it rears its ugly head.

 

 
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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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