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The New York Times Tells President Obama That He Has to Cut Social Security and Medicare Print
Wednesday, 10 August 2011 04:36

The NYT ran a piece that told readers that it was necessary for President Obama to cut Social Security and Medicare for the good of the economy. This is not obviously true. There is no shortage of economists who would say that the economy's main problem is a lack of demand. This can be met by more stimulus, more aggressive action from the Fed, or a decline in the value of the dollar.

Remarkably, the NYT did not include the views of any economist who made these points. The only views presented in these articles were of those who wanted to cut Social Security and Medicare. The former is especially peculiar since the latest projections from the Congressional Budget Office projects that the program will be fully solvent until 2038 even with no changes and it could always pay more than 80 percent of scheduled benefits. Also, under the law the program cannot contribute to the deficit since it can only spend money raised through its designated tax.

One of the two experts cited in the piece suggested the need to means-test Social Security. Analysts familiar with the program generally do not support means-testing since it is likely to raise little money unless it is applied to people with very modest incomes.

 
National Public Radio Redoubles the Effort to Cut Your Social Security and Medicare Print
Wednesday, 10 August 2011 03:35

Wall Street investment banker Peter Peterson has pledged $1 billion to the effort to cut Social Security, Medicare, and Medicaid. Other Wall Street types are doing their part, as is National Public Radio.

They are doing a full court press now -- things are really terrible, if you don't give up your Social Security and Medicare, then the economy might collapse. (Oh yeah, the economy already did collapse because none of these people were troubled by the $8 trillion housing bubble, but don't think about that.) Standard and Poor's might have to downgrade the U.S. again, even if they can't get their arithmetic straight. (Math is hard.)

NPR did its part yesterday with a piece that told us that the debt is not just that scary $14 trillion number that we all hear, it's actually -- stand back boys and girls -- $211 trillion!!!!!!

Are you impressed? You should be. This is an extraordinary example of cesspool journalism that would even embarrass Fox News.

The piece gets from the debt number normally reported to $211 trillion by doing some unusual accounting (following a methodology developed by Boston University economist Lawrence Kotlikoff) and also hiding assumptions about exploding private sector health care costs. First, the calculation adds up all the Social Security and Medicare benefits that current workers are projected to receive and then assumes that no new workers pay taxes into the system.

This methodology would imply enormous deficits in these programs even if they were projected to be fully solvent forever, in the sense that current tax payments would always pay current benefits. The reason is that today's workers will provide a smaller share of the tax revenue as more of them retire. It is unlikely that any of NPR's listeners would be very scared if it told listeners that Social Security and Medicare would be fully solvent indefinitely, but applying the methodology from this segment it could tell listeners about tens of trillions of dollars in uncounted debt.

The other part of the story is that much of this $211 debt figure is driven by projections of exploding private sector health care costs. Per person Medicare costs are projected to rise far more rapidly than the rate of economic growth in the projections used in this segment (albeit not in the Congressional Budget Office's baseline or the Medicare Trustees projections) because private sector health care costs are projected to rise far more rapidly than the rate of economic growth. The projections in this segment imply that the cost of providing a Medicare equivalent policy for an 85-year old in 2030 will be $40,000 a year (in 2011 dollars) in 2030. The cost would exceed $100,000 a year (also in 2011 dollars) by 2080.

If private sector health care costs actually follow the path assumed in this segment's debt calculations it would devastate the economy even if we eliminated public sector health care programs like Medicare and Medicaid. On the other hand, if U.S. health care costs were contained, like those in every other wealthy country, then there would be no long-term deficit problem.

An honest news report would have discussed the projections of explosive private sector health care costs and what they mean for the economy if they prove true. It would not hide these projections in a huge debt figure and tell its listeners that the debt is much bigger than they realize.

The only possible point of a piece like this is to scare people. It provided no information whatsoever about the country's fiscal situation to NPR's listeners.

 
Chilean Students are Protesting Cuts to Education, Quick What Do the Bankers Think? Print
Tuesday, 09 August 2011 19:46
That must have been what the editors at Reuters asked their reporter in Chile. How else could one explain the quote from the head of research at a Santiago brokerage house at the end of a short story on student protests. I guess no story is complete without presenting the view of the financial sector on the topic.
 
Productivity, Profits, and Job Growth Print
Tuesday, 09 August 2011 14:07

An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.

Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can't get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.

Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.

It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.

It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.

 

Productivity Growth, 1995-2011

prod

Source: Bureau of Labor Statistics.

 
The Post Is Learning a Bit More About Trade and the Economy Print
Tuesday, 09 August 2011 04:56

In an article on the value of the dollar the Washington Post noted that a high dollar makes U.S. goods less competitive in international markets. While this is an improvement over pieces that warn the dollar could plummet if the U.S. doesn't get its budget deficit down, the article still remains confused on the issue. It later told readers:

"For the better part of the past decade, the dollar has steadily lost value against other international currencies, reflecting both the rapid economic growth of many developing countries and a persistent U.S. pattern of spending more than it takes in."

Of course the U.S. pattern of spending more than it takes in is due to the fact that the dollar is too high. In a system of floating exchange rates, like the one we have, the price of currencies is supposed to fluctuate to bring trade into balance. This means that the trade deficit is caused by the over-valued dollar and a decline in the dollar is the predictable result.

 
Son of Senator Simpson Misrepresents His Plan on NPR Print
Tuesday, 09 August 2011 04:31

Steve Inskeep allowed former Wyoming Senator Alan Simpson (who is also the son of a Wyoming senator) to misrepresent the deficit reduction plan that he co-authored with Morgan Stanley director Erskine Bowles. Simpson complained that most of the criticism he got came from people in their 70s, which he said was foolish because his plan would not even hurt people in their 70s.

This is not true. Senator Simpson's plan calls for changing the indexation formula for Social Security. Under Simpson's plan benefits would fall by roughly 0.3 percentage points annually compared with the current benefit schedule. After 10 years this would imply a benefit cut of 3 percent, after 20 years the cut would be 6 percent, and after 30 years it would be almost 9 percent. (Simpson's plan does provide a 5 percent boost to benefits after 20 years of retirement.)

Senator Simpson's plan would be a much larger hit to the income of seniors than most of the tax increases that were discussed in the debt ceiling debate. He should not have been allowed to so grossly misrepresent his plan to listeners.

Senator Simpson also was allowed to imply that President Obama's health care plan would be hugely costly, telling listeners that we could not afford it. The Congressional Budget Office's projections show that the plan would actually reduce the deficit while extending coverage.

 
NYT Gets Carried Away With Recession Watch Print
Tuesday, 09 August 2011 04:13

The NYT got a bit overenthusiastic about the prospects for a double-dip recession. It told readers:

"the most recent government reports of consumer spending and factory orders show that both have been falling."

This is not quite right. The most recent data on consumer spending showed that it was flat in June. The key category in factory orders is orders for capital goods. This represents investment demand, which reflects firms' confidence about future business prospects. Excluding aircraft (which are highly volatile) new orders for capital goods rose 1.1 percent in June after rising 1.7 percent in May. (The numbers would be roughly the same if aircraft are included.)

The article also includes a peculiar discussion of the housing market and its impact on the economy. It told readers:

"Some housing experts warn that further declines in home prices could help set off another recession. 'The wait-and-see attitude begets more bad economic data, and it can become a self-fulfilling prophecy,' said Andrew D. Goldberg, market strategist for J.P. Morgan Funds, an asset manager.

"The downward cycle that could be at play is known by some economists as a 'feedback loop' — when one piece of bad economic data has a way of making everything else worse."

Actually, we should fully expect a further decline in house prices since house prices are still about 10 percent above their long-term trend level. This decline in house prices will likely be associated with a further rise in the savings rate from its current 5 percent level, back to its pre-bubble post-war average of 8 percent.

 
New York Times Puts Editorial on Deficit Reduction on Front Page Print
Monday, 08 August 2011 10:05

A front page NYT article on the impact of the S&P downgrade included several assertions that were not supported by evidence. For example, the article told readers in the second paragraph:

"Even before the panel [the congressional commission established in the debt agreement] is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury."

This assertion is not sourced to anyone. Also, in the wake of the downgrade, interest rates on Treasury bonds have fallen, not risen. While this is likely the result of concerns over the survival of the euro, it indicates that financial markets are not especially concerned over S&P's downgrade.

The article also asserted that members of the congressional panel will have to "mute ideological disagreements." It is not clear that members of Congress have ideological disagreements. Members of Congress get elected because of their ability to appeal to powerful interest groups. The differences around proposals to cut programs like Social Security and Medicare or to raise taxes on the wealthy most obviously stem from the different interest groups being represented. It is not obvious that the ideology of individual members of Congress matters, since their ability to keep their jobs will depend on the extent to which members of Congress can keep their backers satisfied.

It also would have been useful to include the views of members of Congress who ridiculed the downgrade, pointing out that S&P had rated hundreds of billions of subprime mortgage backed securities as investment grade. It also had given top investment grade ratings to both Lehman and AIG until the day they collapsed. It also was off by $2 trillion in its calculations of U.S. indebtedness. In other words, there are very good reasons not to take S&P's ratings seriously and there certainly many people who do not, including it seems investors in financial markets.

 
A New Metric for Military Spending from Robert Samuelson! Print
Monday, 08 August 2011 04:42

Washington Post columnist Robert Samuelson came up with a new metric for measuring the size of the military budget. He told readers that under last week's debt deal:

"defense spending would shrink to 15 percent of the budget by 2016. This would be the lowest share since before World War II."

Wow, military spending measured as a share of the budget, what a great concept! The Samuelson measure means that we should be spending more money on the military if we were to have a national health insurance program run through the government, like Medicare. It also implies that if we privatize Medicare and Social Security, then we should cut back the military to keep its share of the budget in its normal historical range.

And remember, you can only find this in the Washington Post.

 
No One Told the Post About the Euro Zone Crisis Print
Monday, 08 August 2011 04:20

It's apparently hard to get economic news at the Washington Post. How else can one explain the fact that it explains the movement of markets over the weekend only in reference to S&P's downgrade of U.S. debt and completely ignores the debt crisis in Europe that could lead to the collapse of the euro. The latter threatens the same sort of freeze up of the financial system that we saw in the wake of the Lehman bankruptcy. It is likely that markets were more concerned about this prospect than the downgrade by one of the three major credit rating agencies.

The article also includes a bizarre quote from Kazahiro Takahashi, general manager of investment research with Daiwa Securities:

"But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.

'The same kind of problem should be expected for the U.S. economy, too, ... Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.'"

It is unlikely that the Post could find many other analysts who believe that the United States is about to experience deflation and even fewer who believe that the downgrade makes deflation more likely. If the U.S. was actually having difficulty taxing and borrowing to meet its debt payments, then it would most likely print more money to pay its debt. This would tend to increase inflationary pressure, not deflationary pressure.

It also would have been worth noting that S&P's downgrade of Japan's debt in 2002 had no noticeable impact on Japanese interest rates. The government can still borrow long-term at interest rates just over 1.0 percent. Furthermore, this was a clear example where Moody's was completely wrong. It is now 13 years after the downgrade, no one believes that Japan is anywhere close to defaulting on its debt. And, because of the deflation over this period, bondholders are getting repaid in yen that are worth more than the yen they lent.

 
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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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