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NYT Wins Award for Misleading Headline for Article on G.A.O. Report on A.I.G. Bailout Print
Tuesday, 01 November 2011 05:13

The NYT headline told readers:

"G.A.O. Says New York Fed Didn't Cut Deals on A.I.G."

That should have us all reassured. After all, we don't want our government cutting deals when they bail out huge financial institutions.

Actually, the story says pretty much the opposite. The story tells how the Government Accountability Office (G.A.O.) found that the New York Fed made little effort to try to force banks to make concessions after it took control of A.I.G.

The point is that A.I.G. was effectively bankrupt and unable to pay all of its debts. In such circumstances it would have been reasonable for the New York Fed to insist that the creditors, in this case large banks like Goldman Sachs, accept some losses. These banks should understand that they take risks when dealing with financial institutions that are in questionable financial shape and should suffer some loss when they make a bad bet. However the government bailout of A.I.G. ensured that they suffered no consequences from their mistake. 

David Brooks Complains That He Can't Get Access to Inequality Data Print
Tuesday, 01 November 2011 04:34

Actually he didn't complain about his lack of access to data, but he probably should have given the column he wrote today. Brooks purports to lecture the Occupy Wall Street crew about how they are focused on the wrong inequality.

He tells them that that there are two inequalities in the U.S. On the one hand we have the CEOs, the Goldman Sachs crew, the lobbyists and the other members of the one percent who have done incredibly well in the last three decades. Brooks calls this the "blue inequality" since the really rich crew tends to live in places like New York City and Washington, DC that tend to vote Democratic.

Brooks tells us that this is less of a big deal than the red inequality, which he defines as the gap between college educated workers and those without a college degree. He tells us that this is the more important form of inequality. He tells us that this is a much bigger issue, since it affects so many more people.

This is where Brooks lack of access to data is so important. The wage gap between college grads and non-college grads is really a 90s story and even more an 80s story. In the last decade, workers with only a college degree (i.e. no professional or advanced degree) did not share in the benefits of economic growth. The ratio of the wages of those with just college degrees to those without college degrees has not risen much since the early 90s. 

Wages of non-college educated workers did suffer badly in the 80s due to policies such as the over-valuation of the dollar that made many U.S. manufactured goods uncompetitive internationally, the deliberate increase in unemployment during the Volcker years which threw millions of non-college educated workers out of work, and anti-union measures (e.g. the firing of the PATCO strikers and an anti-union National Labor Relations Board). However since the 90s, the wages of workers with high school degrees have not departed much from the wages of workers with just college degrees, the vast majority of the economy's gains have gone to the top 1 percent. It is too bad that David Brooks apparently does not have access to this data.

Bloomberg Turns Class War Into Generational War Print
Monday, 31 October 2011 15:01

The basic economic facts of the last three decades are smashing down around us like a ton of bricks. The bulk of the gains from economic growth have gone to the richest 10 percent and especially the richest 1 percent. The bottom 90 percent of the population has seen little benefit from three decades in which output per worker hour nearly doubled.

So how does Bloomberg News deal with this situation? It warns us of "generational war." It tells us that Social Security and Medicare benefits for seniors will be pitted against "investment in children, education, infrastructure and other programs."

In this context it is important to remember that it is only possible to pit seniors against children if higher taxes on the wealthy or on Wall Street are ruled out of consideration, as Bloomberg News seems to have done. It is also necessary to rule out major cuts in the defense budget, which Bloomberg News also seems to have done. If military spending were lowered to its pre-September 11th share of GDP, we would save more than $2.5 trillion over the next decade.

To pit the young against the old it is also necessary to rule out large cuts in government payments to the pharmaceutical industry. The government is projected to spend close to $1.5 trillion on prescription drugs in the next decade that would sell for around $150 billion in a free market without government granted patent monopolies. It is also necessary to rule out freer trade in medical services that would allow people in the United States to take advantage of the more efficient health care systems elsewhere in the world. If we paid the same amount per person for our health care as did people in any other wealthy country we would be looking at huge budget surpluses in the long-term, not deficits.

It is also necessary to rule out stimulative measures, like a more expansionary Fed policy and a lower valued dollar that would make U.S. goods more competitive in the world economy. These measures would have the effect of increasing employment, improving income distribution, and also alleviating the budget deficit that the Bloomberg News folks and their selected sources are so worried about.

In other words, if Bloomberg News only allows people into the debate who exclude any other possible option to address the budget shortfall other than cutting programs for the elderly or cutting programs that benefit children (apart from a brief comment from Representative Jan Schakowsky, who suggested taxing the rich) then it is possible to make the current budget situation into a generational war. However, this is political engineering on the part of Bloomberg News, it does not reflect the reality of the situation. And it hides the most obvious conflict in the economy today, the policies that have promoted the massive upward redistribution of the last three decades.

Will a Business With Profits of $1.1 Million Be Devastated by Another $5,000 in Taxes? Print
Monday, 31 October 2011 05:10

Apparently they would be, if we listen to the people interviewed in an NYT piece about the impact of a surtax on incomes above $1 million proposed by President Obama. The NYT interviewed people who own small businesses that occasionally have earnings that would put them over this $1 million cutoff.

It would have been helpful if the article had reminded readers that the tax is a marginal tax so that if a business owner crosses the $1 million threshold they would only pay the tax on the income above the threshold. For businesses that just slip into this category, the additional tax burden would be trivial. It is implausible that it would have a noticeable effect on their business, even though business owners are not likely to be happy about paying the tax.

Robert Samuelson Doesn't Think We Can Cut the Military Budget Print
Monday, 31 October 2011 04:50
Robert Samuelson told Washington Post readers that we cannot have large cuts in the military budget without jeopardizing the country's security. He seems to have forgotten the country spent 3.0 percent of GDP on the military in 2000 and was projected to continue to spend at that level or less. If the country were to return military spending to this level it would save more than $2.6 trillion over the next decade, before counting interest savings.
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.]

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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.