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The Problem of Japan's Declining Population Print
Sunday, 20 March 2011 08:27

The Post had yet another piece warning of the horrors of Japan's declining population. Of course Japan is a densely populated country with very high priced land. However, it is possible that if its population declines too much that they will no longer be able to find workers to push people into over-crowded Tokyo subway cars. 

The piece also confuses the importance of foreign holdings of public debt and foreign indebtedness. It argues that Japan need not fear a run on its public debt because the vast majority of the debt is held domestically. The more important issue is that Japan is a huge net creditor country as a result of running large trade surpluses for decades.

Its net indebtedness position is the key factor in this story. If it had a large foreign debt it would have to fear a flight from the yen even if none of its public debt was held by foreigners. Such a run would send the yen plummeting and cause import prices to soar. This is exactly the same risk it would face if foreigners owned its public debt, since the central bank would always have the option to buy the debt sold by foreign investors.

This point is important because many deficit hawks make  the same sort of misleading comment about U.S. debt. Insofar as there is a problem of foreigners holding U.S. debt it is due to the trade deficit the country is running. This gives foreigners the dollars they need to buy U.S. assets of any sort, including the stocks and bonds of private companies, as well as U.S. government debt.

The trade deficit in turn is the result of an over-valued dollar, not the budget deficit. Therefore, if these deficit hawks were really concerned about foreign holdings of U.S. assets then they would be focusing their efforts on getting the value of the dollar down, not reducing the budget deficit.

 
The Post Lashes Out at Effort by France and Germany to Impose Their Will On Fiscally Troubled Euro-Zone Nations Print
Sunday, 20 March 2011 08:15

Sorry this one only seems to be available in print, but the Post had an editorial on Sunday ("The E.U.'s finger in the dike," 3-20-2011: A20) that deserved attention. The piece rightly noted that the latest euro zone rescue package is again likely to come up short and also called attention to the continued under-capitalization of the major European banks. But it also lashed out against a "raw exercise of power by Berlin and Paris."

Was the Post upset about demands that heavily indebted countries raise their retirement ages, end wage indexation or, in the case of Ireland, reduce their minimum wage? Nope, none of these demands struck any negative notes at the Post editorial board. The source of the Post's anger was the demand that Ireland raise its 12.5 percent corporate income tax rate.

 
Fox on 15th (a.k.a "The Washington Post") Continues Its Campaign Against Public Pensions Print
Sunday, 20 March 2011 07:54

The Washington Post continued its attack on public pensions with a front page story that focused on Costa Mesa, a small California city, that it reports is laying off half of its workforce to cover the costs of its pensions. The article then goes on to imply that Costa Mesa is in some way typical of the situation facing state and local governments across the country, telling readers that in 2009, 58 percent of state and local pension funds were less than 80 percent funded. (It is worth noting that the rise in the stock market since its trough in 2009 will have eliminated much of the reported shortfall.)

According to the information presented in the article, Costa Mesa is far from typical. The article claims that 20 percent of the city's revenue will be needed to pay retiree benefits in a few years. The national average is close to 3 percent.

The article also focuses on the pensions of police officers. These pensions are far more generous than those of most public employees. The pensions of non-security personnel average around $20,000 a year. Generally workers have to put in 30 years with the government to receive their pensions, so the cases of these workers retiring with full pensions in their early 50s are rare. Also, nearly a third of state and local employees are not enrolled in Social Security so their pension will likely be their only regular source of retirement income.

 
Thomas Friedman Talks Dumb Print
Saturday, 19 March 2011 22:39

That was his word, but since he brought it up, the term can be rightly applied to his reference to the "unsustainable deficit." Of course people who are not dumb know that the story of exploding budget deficits is a story of exploding private sector health care costs. The United States already spends more than twice as much per person as the average for other wealthy countries, with little obvious benefit in outcomes.

This is why people who are neither dumb nor dishonest talk about the need to fix the country's health care system, not the budget deficit. If the U.S. health care system were as efficient as the system in Canada, Germany, the Netherlands or more than 2 dozen other countries, there would be no long-term deficit problem.

 
News Flash!!!! Prices Rose Last Month! Print
Saturday, 19 March 2011 08:26

CNBC and USA Today told readers the shocking news that:

"A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008."

The piece later went on to present a comment from Stephen Weiss, who is identified as being with Short Hills Capital:

"This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs."

Actually this story is incredibly confused in almost every dimension. Prices rise almost every month with this "special index" and every other consumer price index as can be seen in the chart below.

CCPI

Source: Bureau of Labor Statistics.

 

There was an extraordinary surge in commodity prices at the beginning of 2008 which was reversed when the world economy sank into recession. Now that the economy is starting to recover and developing countries like China and India are growing rapidly, prices for commodities are recovering from their recession slump. It was entirely predictable that prices would reach a "record high" again as they did in 1999, 2000, 2001, 2002, etc.

This news also provides no reason whatsoever why the Fed should shift its focus from core inflation, which excludes food and energy prices, to the broader measure that includes these prices. The Fed's actions will have virtually no effect on food and energy prices. These will be determined by world demand. The Fed could raise rates and slow growth in the U.S., but this would have only a marginal impact on the price of food and energy worldwide. Unless we can find a way to slow growth in China, India, and Latin America, we are not likely to see much reduction in food and energy prices.

 
The Post Tells Readers that Brave People Do What the Rich Tell Them to Do Print
Saturday, 19 March 2011 07:43

In an article reporting on a letter from 64 senators urging president Obama to work on the recommendations from the co-chairs of his deficit commission, the Post described President Obama's own smaller budget cuts as "timid." (The sentence appears in the print version, but not in the on-line version.)

This is an interesting perspective. Politicians and policy workers around Washington and the country are being paid billions of dollars by wealthy people like investment banker Peter Peterson to support cuts to programs like Social Security and Medicare. It is interesting the Post apparently thinks that it is brave to harm poor and middle class people to benefit the wealthy, while it is "timid" to support the less privileged.

It is also worth pointing out that the Post wrongly refers to the recommendations from the deficit commission's co-chairs, former Senator Alan Simpson and Erskine Bowles, as the recommendations of the commission. The commission never voted on their proposals which almost certainly would not have been approved given the stated opposition of several commission members. 

 
Buffett Tells Country, TARP Gave Over $1 Billion to Goldman Sachs Print
Friday, 18 March 2011 17:12

At a time when all the tough guys in Washington are making plans to cut Social Security and Medicare benefits for high-living seniors and to cut Head Start for low-income kids, it was generous of Warren Buffett to point out that we taxpayers gave over $1 billion to Goldman Sachs through TARP. Buffett probably didn't intend to point out this fact to the country, but it is an unavoidable implication of his $2 billion profit on his loans to Goldman. 

Buffett made his $5 billion loan to Goldman about a week before the Treasury lent $10 billion to Goldman through the TARP program. Buffet got 10 percent interest on his loans, while the Treasury got 5 percent on its loans. In addition, Buffett got a much more generous commitment of stock warrants, which is the basis of the $2 billion in profits that he is now set to pocket.

The Treasury boasted of getting a $1.1 billion profit on its loans to Goldman, but as Mr. Buffet showed, this was far below the market rate of interest on loans to Goldman at the time. The difference between the return received by Buffett and the return received by the Treasury was in effect a gift from taxpayers to the top executives at Goldman and their shareholders. When Treasury Secretary Geithner and other officials claim that the government made money on the TARP loans it is either due to their ignorance of the workings of financial markets or a deliberate effort to deceive the public.

It is also worth noting that the TARP money was only a portion of the extraordinary assistance that the taxpayers have given Goldman's top executives and shareholders. The FDIC also guaranteed tens of billions of loans to Goldman. Goldman was allowed to borrow tens of billions of dollars from the Fed at below market interest rates. And it was allowed to become a bank holding company, and thereby gain the protection of the Fed and the FDIC, at the peak of the crisis, averting a run that which would almost certainly have been fatal.

In addition, Goldman benefits from the implicit subsidy of its "too big to fail" status, the belief that the government will bail it out if it gets into trouble. This allows it to borrow in credit markets at a lower cost than if it did not have implicit government protection.

 
It's Friday and Charles Krauthammer Is Confused On Social Security Again Print
Friday, 18 March 2011 05:47

Charles Krauthammer still does not understand the concept of government bonds. He badly wants the government to default on the bonds held by the Social Security trust fund. It seems that the main reason is that these bonds are effectively wealth to ordinary workers, not rich people or banks.

Krauthammer complains that the government bonds held by the trust fund are "special issue" bonds. He must know of a meaning for "special issue" that the rest of us don't. These are non-marketable bonds. That doesn't mean that the government can just default on them as Krauthammer wants to do. The implication -- actually the assertion -- of Krauthammer's piece is that because he doesn't like the people to whom these bonds are owed, the government can default and there would be no consequence.

That obviously is what Krauthammer wants, but that does not make it true. If the government were to default on its debt to Social Security then workers would justifiably be outraged. This could have both political and economic consequences. The disrespect this might cause for the government may lead to a surge in tax evasion and ignoring of other laws (perhaps even copyright). After all, why should workers respect the laws of a government that steals from them while protecting the wealthy?

Workers may also use their power as voters to decide that if the government can default on the debt it owes to them through Social Security that it can also default on the debt held by wealthy individuals like Peter Peterson as well as Wall Street banks. There certainly is no moral argument for honoring the bonds held by the latter group of investors if the government has defaulted on the bonds held by the trust fund. As an economic matter, it may also be better for most workers to see the government default on its debt in this situation, even recognizing the incredibly disruptions this would cause in world financial markets. (The money going to debt service could instead be used to pay Social Security and other benefits for working people.)

At a more concrete level, the assertion by Krauthammer that the bonds held by Social Security are not counted in the calculations of the government debt is just wrong. It is easy to find examples where it is included in calculations of the ratio of debt to GDP, as we find in the Economic Report of the President. There is also no shortage of deficit hawks who eagerly use the $14 trillion measure of the gross debt to make their argument, including for example, Charles Krauthammer, a Washington Post columnist [thanks to Joe].

It would also be nice if Krauthammer could take 2 minutes to understand something about means testing so that he would realize that this is not a practical way to solve Social Security's projected long-term shortfall.

 
Everyone Should Read Floyd Norris Print
Friday, 18 March 2011 05:16

Floyd Norris has a good piece about how overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan's nuclear power plant. The piece makes the essential point that seems to have escaped great economic thinkers here, that there is no way Japan can default on its debt.

Even though Japan's debt is more than twice its GDP (about three times the size of the U.S. debt), there is no risk of default since its debt is in its own currency. In this way Japan is like the United States and the United Kingdom, and unlike Greece and Ireland.

In the worst case scenario, Japan or the United States would print lots of money and see inflation. Given that Japan has been flirting with deflation for almost two decades this doesn't seem like a plausible scenario, but in any case it is not the story of Greece being held at the mercy of the bond vigilantes who will not buy its debt.

The people who hold up Greece's crisis as a possible scenario for Japan and the United States deserve our contempt if they are deliberately misleading their audience or our empathy if their mistake stems from their problems with understanding basic economics. However their arguments do not deserve serious consideration by people involved in policy debates.

 
Governor Walker Tells Post Readers That He Doesn't Understand Basic Economics Print
Thursday, 17 March 2011 05:33

It's always scary when someone in a position of responsibility doesn't understand some of the basics of their job. Apparently this is the case with Wisconsin Governor Scott Walker.

In a column in the Washington Post this morning Walker noted that under his new compensation package for public sector employees in Wisconsin, workers in the state will still be paying a far smaller portion of their health care benefits than most workers in the private sector or federal employees. He then comments:

"It’s enough to make you wonder why there are no protesters circling the White House."

Actually, it's enough to make you wonder what Governor Walker could possibly be thinking.

Employer payments for pensions, health care coverage and other benefits are part of a total compensation package. It makes little difference to an employer whether they pay another dollar for health care or for wages. Public employees in Wisconsin had bargained for a compensation package that gave them lower wages than their private sector counterparts, but more generous benefits. Their total compensation package was still somewhat lower than for private sector workers with the same education and experience. When Governor Walker increased the amount that workers had to pay for their pensions and health insurance, he cut their pay pure and simple putting them further behind their private sector counterparts.

Governor Walker seems not to understand this simple fact. According to the logic of his column, a worker getting a salary of $40,000 a year with full health care benefits and an employer-provided pension would be better off than a worker getting $200,000 a year and no benefits. Obviously this makes no sense. It would be good if one of Governor Walker's aides could explain this to him.

 
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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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