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Planet Money Is Off the Planet on Demographics and Retirement Print
Thursday, 03 November 2011 04:26

Most people who report on economics have heard of productivity growth. Virtually all economists see it as the main determinant of living standards. However, NPR's Planet Money seems unfamiliar with the concept.

It had a piece on demographics and the problems of supporting retirees in the context of stagnant, or even declining, populations. Incredibly the piece did not even once mention productivity growth.

Economists would consider productivity central to this issue, since it would determine the ability of workers to support a growing population of non-workers. (The burden imposed by supporting a larger number of retirees is at least partly offset by a reduced burden from supporting children.)

Productivity growth is the reason that the country has enjoyed a large increase in per capita income over the last four decades, even as the ratio of workers to retirees fell from 5 to 1 to just 3 to 1. With productivity growth of 2 percent a year (roughly the average over the last 4 decades), the output of an average worker would rise by more than 80 percent over a 30 year period. (Many workers have not benefited from this rise in productivity because of the upward redistribution of income during this period, however this is an issue of distribution, not demographics.)

If an average retiree has 75 percent of the income of an average worker, and the ratio of workers to retirees were to fall from 3 to 1 to 2 to 1 over a 30-year period, it would be possible for both workers and retirees to enjoy a 65 percent increase in living standards. The impact of productivity growth swamps the impact of the change of the dependency ratio in this story, which is why economists focus much more on productivity growth.

It is also worth noting that population growth can have a negative impact on productivity growth. Slower growth in the labor force can raise the capital to output labor, thereby raising the rate of productivity growth. Slower population growth is also likely to lead to less strains on the physical and natural infrastructure which could lead to large gains in living standards that are not measured in GDP. For example, people will spend less time commuting in cities with less dense populations. People will also have more access to natural resources like beaches and national parks if the population were smaller.

Any serious story on demographics and a rising ratio of workers to retirees would discuss these issues.


$800 Billion in Tax Increases Are Equal to 0.4 Percent of GDP Print
Wednesday, 02 November 2011 07:53

It would have been helpful if the Washington Post gave readers some context in an article that discussed Morgan Stanley Director Erskine Bowles' appearance before the supercommittee. Mr Bowles suggested that the committee agree to $800 billion in additional taxes over the next decade.

This amount is a bit less than 0.4 percent of projected income over this period. It is also less than one fourth of the increase in annual military spending (measured as a share of GDP) in the years since September 11th.

Europe Asks China for Help Because of 2.0 Percent Inflation Superstition Print
Wednesday, 02 November 2011 05:17

The Washington Post reported on the bizarre situation in which the relatively rich European Union is asking China, a relatively poor country, with assistance in its bailout package. It would have been appropriate to remind readers that the only reason that Europe needs help from anyone is that the people running the European Central Bank (ECB) are part of a bizarre cult that worships a 2.0 percent inflation target.

If the ECB was managed in the same way as central banks have been managed through time, it would simply step in as the lender of last resort and guarantee the sovereign debt of the euro zone countries and immediately put an end to the crisis. However, adherence to the 2.0 percent inflation cult prevents the ECB from functioning as a modern central banks.

The 2.0 percent inflation cult is proving to be one of the most destructive faiths in human history. The adherence to this cult prevented the ECB from taking an steps to stem the growth of housing bubbles across the continent. (This was also the case in the United States where the cult is not as widely practiced at the Fed.) Now that these bubbles have collapsed and left the economy in ruins, adherence to the cult is preventing the ECB from responding adequately.

[Addendum: Those interested in hearing more about the situation in Greece may want to tune into a conference on Thursday and Friday at the University of Texas organized by my friend Jamie Galbraith.]

It Doesn't Make Sense to Say GDP Growth Doubled in the Third Quarter Print
Wednesday, 02 November 2011 05:03

A top of the hour Morning Edition news segment told listeners that GDP growth nearly doubled from the second quarter to the third quarter, going from 1.3 percent to 2.5 percent. This is not a useful comparison.

The relevant comparison would be the percentage point change in the growth rate. For example, an increase in growth from 3.0 percent to 5.0 percent is far more meaningful than the rise from the first quarter to the second quarter, even though it is a near-doubling of the growth rate. When growth is slow, an increase that is large measured as a percent of the prior quarter's growth is not a big deal.

The IMF Will Wing it for Greece, Just Like They Did for Citigroup Print
Wednesday, 02 November 2011 04:42

The Washington Post is concerned that the referendum in Greece on the austerity plans will make it difficult for the IMF to approve the next tranche of a loan that will be needed for Greece to make a set of debt payments in December. It told readers:

"Papandreou’s announcement could put the IMF in a difficult position. The agency is due to approve the latest disbursement of money to Greece under an earlier loan agreement. But IMF rules allow such disbursements only under programs that are on track."

This certainly will not be a problem for the IMF. Since the beginning of the financial crisis all sorts of rules have been suspended in all sorts of different contexts. For example, when the crisis was at its peak in September of 2008 the FDIC suspended mark to market accounting, allowing banks to keep mortgages on their books at full value even when it was almost certain that they would take large losses on them. Citigroup was given guarantees on $300 billion in assets by the Fed and Treasury at a point where it was not even clear what assets were being guaranteed (i.e. they could after the fact put bad assets into the pool).

If the IMF wants to support Greek debt, which it probably will since a default would likely lead to major bank defaults, then it will have no problem getting around its rules. There is no legal body to which such a move can be contested.

This piece also neglected an important aspect to the decision to hold a referendum. The referendum will likely lead the troika dictating bailout terms (the IMF, the European Central Bank, and the European Union) to make further concessions. Their current plan implies more than a decade of austerity where Greece will not return to its pre-crisis level of per capita income until after 2020, even if the economy grows in line with projections.

(Since Greece's pension system has been one point of contention in the austerity plans designed by the troika, it is worth noting that IMF economists are often able to retire in their early fifties with six-figure pensions.)

Is Politico Giving Out Stock Tips? It Knows What Markets Want Print
Tuesday, 01 November 2011 07:18

People who have the ability to anticipate market movements can make enormous amounts of money running hedge funds and other investment vehicles. Apparently Politico is among the small group of analysts who know what will move markets.

It told readers that:

"If the committee were to take up changes to Social Security, it could show that Congress is looking for systemic changes to the nation’s finances — something markets and credit rating agencies want to see."

While the credit agencies, who are known for rating subprime mortgage backed securities Aaa, have been explicit in their instructions to Congress, it is not clear how Politico could determine the market's sentiments. In recent months bonds prices have soared and interest rate on 10-year Treasury bonds fell as low as 1.7 percent. Is Politico telling us that the bond markets are unhappy about the current budget situation and that interest rates will fall even lower if Congress cuts Social Security?

If that is the claim, it would be interesting to see Politico provide the evidence that is the basis for this assertion. Alternatively, if this is just intuition on the part of the reporters/editors at Politico, it would be important to disclose this fact as well.

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.

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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.