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Senator Kent Conrad Advocates Default on the National Debt Print
Friday, 28 January 2011 06:39

This would have been an appropriate headline for an AP article which included a quote from North Dakota Senator Kent Conrad implying that it would be reasonable to default on the government bonds held by the Social Security trust fund:

"I've received the lash from those who say, 'Well, you shouldn't have to cut Social Security because there are trillions of dollars of assets.' It is true there are trillions of dollars of assets. It is true that they're backed by the full faith and credit of the United States. It is also true that the only way those bonds get redeemed is out of the current income of the United States."

This assertion is true of all government bonds, however Mr. Conrad is clearly suggesting that it would for some reason be appropriate not to honor the bonds held by the Social Security trust fund. It is unusual for a prominent senator to suggest defaulting on the national debt. This fact should have been the central focus of the article.


 
Representative Ryan Can't Tell the Difference Between Greece and the United States: Where Is the Ridicule? Print
Wednesday, 26 January 2011 05:41

During the presidential primaries, then Senator Obama gave a talk at fundraiser in which he referred to people in small town Pennsylvania as "bitter." The media highlighted this "gaffe" and made it a major theme over the next few weeks of the campaign. In other words, it was big news that Obama had said something that the media viewed as inappropriate.

Last night, in the official Republican response to President Obama's state of the union address, Representative Paul Ryan suggested that the United States could be like Greece if it did not change its current budget path. This comparison was either dishonest or reflected an extraordinary degree of economic ignorance.

Briefly, there are three big reasons that the United States is very different from Greece:

1) The United States has its own currency -- this means that we can always buy our own debt. That could lead to inflation, but insolvency is not an issue. So the story of no one being willing to buy U.S. bonds is not even a theoretical possibility. Of course the people who actually have their money on the line are very willing to buy U.S. bonds, demanding an interest rate of just 3.4 percent on 10-year Treasury bonds.

2) The United States collect taxes. The OECD puts tax evasion in Greece on the order of 35 percent. This of course encourages corruption in all aspects of Greek government. If the rich rip off the government by not paying the taxes they owe, why shouldn't everyone else try to rip it off too?

3) The United States has a huge diversified economy. If you want to find an economic illiterate, look for someone who warns that the dollar will plummet in value if we don't get our debt under control. If our dollar plummets in value (e.g. 2 dollars = 1 euro, 3 yuan = 1 dollar), the U.S. would suddenly be hyper-competitive. We would buy nothing from the countries who rely on the U.S. market. And our exports would be wiping out competitors around the world. For this reason, China, Germany, Japan and everyone else would make sure that the dollar did not just plummet. This would not be the case with Greece if it did have its own currency.

This is why we give politicians who compare the U.S. to Greece a nice lollipop and balloon and pat them gently on their little head. And if they are important politicians, we give them a big helping of ridicule.
 
Social Security and Medicare: A Teachable Moment for Robert Samuelson? Print
Thursday, 27 January 2011 21:53

Washington Post columnist Robert Samuelson told readers that this is a teachable moment when it comes to Social Security and Medicare. Let's see if he is right.

In his column he takes issue with the idea that people pay for their Social Security and Medicare benefits:

"Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study."

However if we look at this Urban Institute we study that this man will have paid $290,000 for his Social Security benefits. According to the study, he will only get $256,000 back. In other words, he will have paid $34,000 more in taxes than he will get back in benefits. (This calculation assumes that the taxes earn an interest rate that is 2 percentage points above the inflation rate.) So, contrary to what Samuelson implies, the Urban Institute study shows that this middle income person will have more than paid for the Social Security benefits that he is scheduled to receive under current law.

The study does find that this man will get back more in Medicare benefits than what he paid. It estimates the value of his Medicare benefits at $161,000 for which he will have paid $55,000 in taxes. However, the idea that this person is getting some big giveaway from the government is a bit misleading. People in the United States pay more than twice as much per person for their health care as people in Canada, Germany, and other wealthy countries. This means that the money is not really going to the beneficiary, it is going to the pharmaceutical industry, high-priced medical specialists, and other sources of waste in the U.S. health care system.

If our health care costs were in law with those in other countries (all of which enjoy longer life expectancies), then Medicare benefits and taxes would be more nearly in line. More generally, if per person health care costs were in line with costs in the rest of the world, then the United States would be looking at huge budget surpluses, not deficits. This is the reason that honest budget analysts and commentators focus on fixing the health care system, not Social Security and Medicare.

 
Ross Douthat is Upset that No One Wants to Cut Social Security and Medicare Print
Wednesday, 26 January 2011 05:27

Every budget expert knows that Social Security is fully funded through the year 2037 with no changes whatsoever. Even if nothing is ever done the program will always pay close to 80 percent of scheduled benefits. It also, under the law, cannot contribute to the deficit since it cannot spend more money than is in the trust fund.

Medicare costs are projected to rise more rapidly, but this is due to rising private sector health care costs, not the inefficiency of Medicare. This means that containing Medicare costs and preventing a soaring deficit involves fixing the health care system, not gutting Social Security and Medicare.

While these simple facts are known by every budget expert, that doesn't keep the pundits from insisting that President Obama and other politicians support cuts to Social Security and Medicare. Hence we get Ross Douthat whining that no one seems to be listening to him in today's NYYT.

 
Umm, Congressional Districts Are Roughly the Same Size Print
Tuesday, 25 January 2011 05:27

The New York Times told readers that: "The median Democratic Congressional district now has a population 11 times as large as the median Republican Congressional district, according to an analysis by Transportation Weekly, a trade publication that focuses on federal transportation spending."

This is not right. Congressional districts are required to have roughly the same population under the constitution. There cannot be perfect equality since districts cannot cross state lines but the most populous district does not have even twice the population of the least populated district. The idea that the median Democratic district has 11 times the population of the median Republican district is absurd on its face.

 

[Addendum: the NYT corrected this article -- ratio referred to population densities, not population.

 
Medicare and Social Security as the Biggest Drivers of the Deficits Print
Monday, 24 January 2011 15:46

Why does the NYT have to lump Medicare and Social Security together when everyone knows their stories are fundamentally different? According to the Congressional Budget Office, over the next quarter century annual spending on Social Security is projected to increase by an amount equal to 1.4 percentage points of GDP. This is considerably less than the increase in annual defense spending of 1.7 percentage points of GDP between 2001 and 2010. And, Social Security expenditures over this period are fully paid for by past and future Social Security taxes.

In contrast, the cost of Medicare is projected to rise by 2.3 percentage points of GDP over this period, starting from a considerably lower base. The annual cost of Medicaid and other health care programs is projected to rise by 1.9 percentage points. As everyone recognizes, the story of long-term budget deficits is the story of our broken health care system. Why is this so hard to tell the public?

(Thanks to Daniel Alvarado.)

 
Another Front Page Post Editorial Against Social Security Print
Monday, 24 January 2011 11:21

The Post wrongly told readers in a front page news story that "budget analysts across the political spectrum agree that popular Medicare and Social Security programs will have to be overhauled to truly cure the nation's ills." This is not true.

For example, a book that was co-authored by Peter Orszag, who had been President Obama's director of the Office of Management and Budget, and Peter Diamond, a Nobel Laureate and Obama nominee to Fed, suggests relatively modest changes to Social Security. In fact, virtually all budget analysts across the political spectrum agree that the shortfall in the Social Security program is relatively minor.

 
Fareed Zakaria's Pinata of Errors Print
Monday, 24 January 2011 05:29

Those of us who follow economic reporting closely have long recognized the Washington Post's opinion pages as the mother lode of confused economic thinking. Fareed Zakaria lives up to the standard in today's column, which offers policy tokens for both the left and right.

He starts by noting that the tax/spending package agreed to by President Obama and the Republicans last year added $900 billion to the deficit over 10 years and then wrongly tells readers:

"We can't keep playing this game."

Of course we can. The important point, apparently lost on Zakaria, is that the deal increased the deficit by $900 billion over the next two years. This is a period in which virtually every economic forecast projects the U.S. economy to be well below full employment levels of output. This means that deficit spending will crowd out little or no private investment. So what exactly is the problem with playing this game; that we might put more people to work?

Even the interest burden on this debt need not pose a problem. The Fed could simply buy and hold the bonds used to finance the debt. This would mean that the interest is paid to the Fed, which then refunds it to the Treasury at the end of the year. Last year the Fed paid almost $80 billion back to the Treasury. When the economy eventually moves back toward full employment it can raise reserve requirements in the banking system to ensure that the additional reserves don't lead to inflation.

Zakaria then gives us the right's caricature of U.S. politics, telling us with reference to policies to promote growth:

"The left and right disagree here as well, with the right focusing more on measures to spur the private sector and the left on government spending."

Let see, the right tends to be in favor of having the government impose strong patent and copyright monopolies on the market. Is this government involvement spurring the private sector? Does it spur the private sector more than having the government contract with private firms to develop new drugs or new software? If so, it is not obvious how.

How about if the Fed targets a higher rate of inflation (e.g. 3-4 percent) in order to reduce real interest rates and reduce private sector debt burdens. Is this a focus on government spending as opposed to the private sector?

He then tells us that the private sector has been investing furiously around the world but "meagerly" in the United States. If Zakaria had access to the Commerce Department's data he would know that investment in equipment and software has been rising at almost a 20 percent annual rate over the last year. Actually, investment has been relatively healthy in this downturn.

Zakaria then gives as an example of over-regulation driving business overseas Goldman Sachs' decision to only offer Facebook shares to its foreign customers. It's hard to see exactly what the problem is here. Facebook is trying to skirt U.S. laws on disclosure requirements for publicly traded companies. They are apparently able to do this by just selling shares to foreign investors. Perhaps this means that foreign investors will get a good deal or alternatively will get scammed by Facebook, but it is hard to see any important implications for the U.S. economy. This doesn't affect how many jobs Facebook will create in the United States.

Zakaria then turns to drug development where the Obama administration announced plans for a $1 billion program to help spur progress. He then complains that regulations are the problem, commenting that:

"The Food and Drug Administration takes twice as long to approve a drug as its European counterparts. As a result, health-care research has been moving offshore, particularly as China and India innovate in every product and process."

Actually this makes no sense whatsoever. Under the TRIPs agreement, countries are prohibiting from providing favorable access rules based on the location of research. This means that the rate at which the FDA approves drugs would have nothing to do with a company's decision on where to locate its research. We should expect company's to base their research where it can be done at the lowest cost. They would then look to have drugs approved wherever it is profitable to have them approved. There is no logical connection between the two, even though pharmaceutical industry lobbyists may try to convince members of Congress and gullible columnists that there is.

 
The NYT's Hallucinations of a Business Investment-Led Recovery Print
Sunday, 23 January 2011 18:54

The New York Times was touting the prospect of renewed spending by business leading the recovery. There are two major problems with this story. First, investment in equipment and software has already been growing rapidly. Over the last four quarters it has grown at almost a 20 percent annual rate. People who have access to the Commerce Department's data on GDP (a group that apparently excludes employees of the NYT) are aware of this fact.

The other important fact known to people with access to this data is equipment and software spending is actually a relatively small share of GDP. (There was huge overbuilding of non-residential structures, so it is not plausible to imagine a big pick-up in this sector any time soon.) Equipment and software spending were equal to 7.1 percent of GDP in the third quarter of 2010. This means that even if the growth rate doubles to 40 percent, it would only add 1.4 percentage points to GDP growth. This would have less impact than reducing imports by 10 percent.

In short, while a more rapid pace of investment spending can be helpful, it is unlikely to be sufficient to restore the economy to healthy growth path. That will almost certainly require a reduction in the trade deficit, which in turn depends on a decline in the value of the dollar. The latter is apparently a low or non-existent priority for the Obama administration.

 
China Can Only Steal Intellectual Property If It Says It Is Stealing Print
Sunday, 23 January 2011 08:56

With reference to intellectual property, the New York Times told readers that, "China has a well-earned reputation for theft." Intellectual property rules are defined by each country. China can only engage in "theft" if it has set up rules that is violating. In many cases, its laws on intellectual property do not provide clear protection to U.S. firms, therefore they may not be engaging in anything that can be described as "theft."

This article also misinforms readers about the relative size of the Chinese and U.S. economies. It told readers that China's per capita income is less than $4,300. This is the measure of income on an exchange rate basis. The more realistic basis for comparison is China's GDP measured on a purchasing power parity basis, which is $7,400 a year – 75 percent higher.

 
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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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