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Senator Kyl Claims that Businesses Don't Hire When Demand Increases Print
Monday, 28 November 2011 06:10

Economists and people who believe in gravity think that firms hire when they see an increase in demand. The alternative is to turn away customers because a business does not have the necessary staff. Companies trying to make profits generally do not like to turn away customers.

Nonetheless, Republican Senator Jon Kyl said that the payroll tax cut did not lead businesses to hire workers. It is clear that workers did spend much of this tax cut. The savings rate in the last quarter was under 4.0 percent. If workers did not spend much of the tax cut, the implication is that the saving rate would have been under 3.0 percent in the absence of the tax cut. While this is higher than the near zero rate when the housing equity created by the bubble was driving consumption, it is far below the 8.0 percent pre-bubble average. 

The NYT should have pointed out that Kyl was wrong; that he either doesn't understand basic economics or was deliberately making assertions that he knew not to be true. Instead it just presented Kyl's statements and responses by Democrats in he said/she said context. NYT reporters have the time to find the truth of such statements, most NYT readers do not.

Robert Samuelson Gets it RIGHT! Print
Monday, 28 November 2011 05:54

As we like to say here at Beat the Press, the long-term deficit problem is primarily health care, health care, and health care. Robert Samuelson gets this one 100 percent right in his column today.

He concludes that the way to contain costs is some sort of voucher system or a single-payer type universal Medicare program. It's questionable whether a voucher system will actually contain costs, as opposed to reduce the quality of care (unless it involves buy-ins to other countries' systems), but this is the direction the budget debate should take. The question is how we deal with health care costs; it is not a problem of an out of control budget more generally.

Germany Insists that Euro Zone Countries Move Aggressively to Slow Growth and Raise Unemployment Print
Monday, 28 November 2011 05:41

The euro zone economies continue to operate well below their potential GDP, with large amounts of excess capacity and huge numbers of unemployed workers. In this context, the main impact of the austerity being demanded by Germany of countries across the euro zone will be a further reduction in growth and increase in unemployment. Slower growth will worsen budget deficits across the region.

This point should have been mentioned in a Washington Post article on the pursuit of austerity in euro zone countries. Many Post readers may not recognize that the predicted effect of these policies is to slow growth and raise unemployment.

Bill Keller Missed the Housing Bubble Print
Monday, 28 November 2011 05:04

NYT columnist Bill Keller decries a political process in which the consensus of mainstream economists is not according the respect it deserves. He failed to note one obvious reason why these experts' views might not be getting much respect: almost none of the experts noticed the huge housing bubbles whose collapse led to severe recessions in the United States and Europe.

In this case, the process of credentialing ensured that evidence would be ignored rather than examined. Those who raised concerns about the bubbles were dismissed as cranks. Even after the collapse, the economists who managed to overlook the largest asset bubbles in the history of the world have suffered almost no consequences in terms of their employment or professional standing. Clearly the economics profession does not have a structure where performance is rewarded and failure is punished. Given this fact, it is certainly understandable that the pubic would be suspicious of pronouncements by economists.

It is also worth noting that Keller's takeaway about the profession's consensus of what needs to be done is in fact wrong, or at least seriously misleading. He says that there is a need to reduce "entitlements." In fact, there is no obvious need to reduce Social Security. Its cost is projected to increase only modestly in coming decades as a share of GDP and is fully paid by its designated tax through the year 2038. Even after that date, the tax is projected to cover more than 80 percent of scheduled benefits through the rest of the century.

The real story is Medicare and Medicaid, the cost of which is in turn driven by the broken U.S. health care system. If the United States paid the same amount per person for health care as people in other wealthy countries we would be looking at long-term budget surpluses, not deficits. It is misleading to describe the problem of a broken health care system as a problem of "entitlements."

This is especially important because it conceals the main choice in containing Medicare and Medicaid costs. On the one hand, we can look to reduce the quality of care provided by these programs, as advocated by politicians of both parties. Alternatively, we can look to reduce the waste and excessive fees charged by providers.

There are enormous distribution implications to how this issue is resolved. However most people will not even be aware of these issues if the media hides them under the problem of "entitlements."


Is David Gregory a Vegetable? Senator Schumer and the Budget Deficit Print
Sunday, 27 November 2011 11:10

Thirty years ago, the Reagan administration told us that ketchup is vegetable. More recently Fox News told us that pepper spray is essentially a food product. So inevitably people must be asking whether David Gregory is a vegetable.

Gregory, who is the host of Meet the Press, had Senator Chuck Schumer on the show speaking about the failure of the supercommittee to come up with a deficit reduction plan. Schumer listed the causes of the deficit as the Bush tax cuts, the increase in military spending and the increasing cost of Social Security and Medicare (referred to as "entitlements). Remarkably, Schumer did not mention the recession, which is by far the most important cause of the large deficits of the last few years.

An anchor who was not a vegetable would have jumped on Senator Schumer and asked him if he is really unaware of the recession and its contribution to the deficit. Gregory simply went on to the next question as though Schumer had said something that made sense. So what exactly does Gregory do for his pay?

The Double Taxation of Corporate Profits and Other Fairy Tales Print
Sunday, 27 November 2011 10:17

The usually insightful Steven Pearlstein swallowed a big one today in pushing the line that the taxation of corporate profits when they are paid out as dividends amounts to "double taxation." The problem with this story is that the corporation really is a distinct entity from the individual who receives dividends. In fact, according to the Supreme Court, they are actually distinct persons.

This is not a philosophical question; it is a very concrete economic one. No one is forced to organize a business as a corporation. Anyone can operate any business as a partnership. Partnerships do not pay a separate tax, the partners only pay tax on the profits as individuals.

In this sense, the corporate income tax is 100 percent a voluntary tax. It is paid only because people consider the benefits of corporate status to be worth more than the taxes that they must pay.

This removes any logical possibility of double taxation. The corporate income tax is effectively the fee that stockholders pay for the benefits of corporate status. By holding stock, they have voted with their feet to pay this tax. Their income, and the tax on it, should be treated as distinct from the corporate income. If individuals are not paying tax on their dividends and capital gains then it is not taxed.  

[Stuart Levine offers well-taken correction below. Only closely held partnerships avoid taxation. Any partnership that had publicly traded share would be subject to taxation. Of course, this is still a choice made by owners of the partnership.]

George Will Is Confused by Numbers at the Post Office Print
Sunday, 27 November 2011 08:39

I know, everyone is saying that "George Will" and "confused by numbers" is repetitive, but it is nonetheless necessary to say in reference to his latest piece calling for privatization of the United States Postal Service (USPS). The point is supposed to be that the USPS is hopelessly inefficient compared to its private sector competitors and that if it were required to be run at a profit it would soon be out of business.

Actually, the data don't really make this case. In 2006 Congress required the USPS to advance-fund retiree health benefits. While this may be advisable, this is not the normal practice among private businesses. Furthermore, it required that it build up the advance funding at a rapid pace (over 10 years), using health care cost growth assumptions that are way out of line with those used in the private sector.

The result was an added expense of roughly $5.5 billion a year that shifted the USPS from profits to losses in 2007 and 2008 and made its losses considerably larger in each of the last two years. Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years.

The USPS also suffers by virtue of the fact that it is required to invest its pension fund exclusively in government bonds. If it were allowed to invest in the same mix of assets as the heroic job creators in the private sector, the return on the fund would be 1-2 percentage points higher, saving the USPS roughly $1 to $2 billion in annual pension expenses.

These two changes, which would involve treating the government-run USPS in the same way as heroic job creators in the private sector, would restore the USPS to profitability over the course of a business cycle, even if they could not guarantee profitability even at the bottom of the worst downturn since the Great Depression. Apparently Will has not heard of the recession since it is not mentioned anywhere in his piece. (It's hard to get news at the Washington Post.) The profitability of the USPS has always been highly cyclical. 

It is reasonable to consider privatization of any government service, as well as the opposite. The decision should be made based on whether the private sector can accomplish the task more efficiently. The numbers are certainly not as clear cut as Will seems to believe.

In addition, the USPS carries a mandate to ensure that everyone in the country has access to low-cost mail service. It is obligated to deliver a letter from the most remote island in the Florida keys to Nome Alaska for the same cost as sending a letter across the street in Manhattan. We know that the letters can be delivered across the street in Manhattan at a lower cost, but no private delivery service will ship letters between small towns across the country for 44 cents. We may not care about this implicit subsidy to small town America, but anyone who talks about privatizing the USPS without dealing with the issue of guaranteed universal service is pushing an agenda, not discussing the issues involved with privatization. 

The Philanthropy of the Rich Does Have a Cost to Taxpayers Print
Saturday, 26 November 2011 17:04

The NYT reported on a new philanthropic trend among the wealthy, where rich people try to use their money to deliberately influence public policy in part by funding pilot programs that can serve as a model for larger public programs. At one point the article refers to funding for various education projects in New York and Newark and told readers:

"Officials in New York and Newark say the money from private sources will not replace existing public programs, but will instead allow rapid experimentation with new approaches to old and seemingly intractable problems, at no cost to taxpayers."

Actually, the money that wealthy people donate to philanthropies does carry a cost to taxpayers. It is deducted from their taxable income or the estates that they would pass on to their heirs. Depending on the relevant tax rate, the dollars contributed to philanthropies by the wealthy could lead to losses of government revenue of as much as 50 percent of the money contributed.

It is entirely possible that most charitable organizations promote the public good to a sufficient extent to warrant this sort of revenue loss, however it is inaccurate to imply that these contributions are costless to taxpayers. Everyone else faces a higher tax burden as a result of the tax savings that the wealthy receive from their charitable contributions.

Matt Miller on the Decadence of the Western Intellectual Class Print
Saturday, 26 November 2011 08:07

Actually Matt Miller was ostensibly writing in the Washington Post about the "decadence of the Western governing class," but he was inadvertently telling readers much more about the failure of people who pass for intellectuals in public debate. Miller passes for somewhat of an expert on economic and budget policy, yet this column posed two amazing questions for readers:

"According to the IMF, China’s GDP per capita is about $8,400. The United States’ is about $48,000. How can it be that a country nearly six times richer is relying on a country so poor to help finance its current consumption?"

"Related surreal question: What does it say when Europe, where most nations have per-capita incomes ranging from $35,000 to $45,000, is also passing the tin cup to much poorer China in an attempt to backstop its recklessly leveraged banks and governments?"

Of course these questions both have very simple answers that are 180 degrees at odd with Miller's austerity prescriptions. In the first case, those who took intro econ know that if any country, no matter how poor, decides to deliberately depress the value of its currency against the dollar, then it will run a trade surplus with the United States. In other words, the answer to Miller's question is that it is a deliberate policy of the Chinese government to support the consumption of the United States.

Miller apparently doesn't know that China pegs its currency against the dollar. In order to keep the yuan from rising against the dollar, it has purchased over $1 trillion of U.S. assets over the last decade. The United States is in fact not "relying" on China to finance its current consumption. In fact, the official policy of both the Bush and Obama administrations was that we wanted China's government to stop buying up dollars and thereby depressing the value of the yuan. [While this is the public policy, this may not be the actual policy, since many powerful interests like Wall Street banks and major retailers benefit from the over-valued dollar.]

This would allow the dollar to fall. That would make Chinese imports more expensive to U.S. consumers and U.S. exports cheaper for people in China. That would cause the U.S. trade deficit with China to fall, and possibly turn to a surplus, which is the textbook relationship between rich countries and poor countries. 

In the case of Europe, the problem is that the German government and the European Central Bank (ECB) are trying to impose austerity across Europe. The ECB has all the euros it could possibly need to bail out Greece, Italy and anyone else in sight. However, rather than use its ability to print euros to save Europe's economy, the ECB is trying to force cutbacks in social spending and protections for workers across Europe. The trip to China to seek support for a bailout was a silly diversion from the real issue.

The fact that Miller would be posing questions like these in the Washington Post shows the incredible decadence of the Western intellectual class. At least when it comes to economic policy, it is largely comprised of people who are either so ignorant of basic economics or so dishonest that they primarily act to confuse their audience and distort reality.

It says a huge amount about intellectual debate in the United States that almost no one lost any standing for failing to notice the housing bubble, the largest asset bubble in the history of the world. It is almost impossible to understand how an analyst who paid attention to basic economic data could fail to see the bubble and the distortions it created.

Yet, the experts who were completely surprised by the collapse of the bubble and its impact on the economy continue to dominate policy debate in both the United States and Europe. Now that is some serious decadence.

Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie Print
Friday, 25 November 2011 09:16

When a newspaper abandons journalistic standards in its news pages one hardly expects to find much commitment to truth on its opinion pages. Therefore it is not surprising that the Washington Post opened its pages to Tennessee Senator Bob Corker to spread the story that government support for homeownership through Fannie Mae and Freddie Mac was the cause of the housing bubble.

Corker tells readers:

"During the boom years, the GSEs’ affordable housing goals were coupled with a Congress and an administration that saw only the bright side of rapidly increasing homeownership rates. That meant that as housing prices began to spike, it was impossible to make credit slightly more expensive. Without countercyclical market mechanisms able to operate naturally, as housing prices went higher, the GSEs simply raced each other to lower guarantee fees, out of fear that they might lose business from mortgage originators such as Countrywide and Washington Mutual. The result, we now know, was a government-induced bubble followed by a painful collapse."

Okay, maybe Senator Corker really never heard of Citigroup, Goldman Sachs, Lehman Brothers, Bears Stearns, and the other Wall Street investment banks. He may not know that they were making tens of billions of dollars during these years securitizing the worst of the sub-prime mortgages, without any government guarantees except their implicit too-big-to-fail insurance. News may take a long time to reach Tennessee.

But surely the Post knows about privately issued mortgage-backed securities and their role in the bubble. It even published a very good column by Barry Ritholz a couple of weeks back outlining the story. So why does it allow Corker to publish something that it knows is not true? Would it print an opinion column blaming President Bush for actually doing the World Trade Center bombing?

There is a ton of data showing that the blame-Fannie-and-Freddie story is nonsense, but my favorite entry in this debate is a contemporaneous assessment from that well-known promulgator of left-wing propaganda, Moody's:

"Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs [Government Sponsored Enterprises] have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume – up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective."  (Moody’s, “Federal Home Loan Mortgage Corporation, Analysis,” December 2006, p.8)

So here we have Moody's expressing concern about the ongoing viability of Freddie Mac because they are losing out in the subprime and Alt-A market to the investment bank. This is its assessment at the time, before it was apparent (to them) that this market was a disaster in the works.

When someone claims that the bubble was the fault of Fannie and Freddie, they are either ignorant or lying. And, I am saying this as someone who was harshly critical of both at the time and would happy to see the euthanasia of these mortgage giants -- at least if the alternative is to see them returned to some sort of public-private hybrid.

Both companies deserve tons of blame, they could have possibly stopped the bubble cold if either of them had done something radical like announcing that they would require appraisals of rental values and only buy mortgages with a purchase price below some prce to rent ratio (e.g. 18 to 1). However, their failure to be heros does not make them the prime villians. That would be the Wall Street boys, end of story. 

Btw, if anyone is interested in knowing what happens to a public agency committed to homeownership in the middle of a housing bubble, that is not run for profit, then they should look to the Federal Housing Authority (FHA). While far from perfect, the FHA did not get caught up in the irrational exuberance of the bubble years. Its market share fell from around 10 percent in the late 1990s to 2 percent in 2005. 

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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.