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Krugman Is Wrong: The United States Could Not End Up Like Greece Print
Friday, 25 March 2011 03:58

It does not happen often, but it does happen; I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments:

"But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt."

Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece.

Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. Unless Greece leaves the euro (an option that it probably should be considering, at least to improve its bargaining position), it must pay the rate of interest demanded by private investors or meet the conditions imposed by the European Union/IMF as part of a bailout.

However, because the United States has its own currency it would always have the option to buy its own debt. The Federal Reserve Board could in principle buy an unlimited amount of debt simply by printing more money. This could lead to a serious problem with inflation, but it would not put us in the Greek situation of having to go hat in hand before the bond vigilantes.

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The Washington Post Has Not Heard of the Social Security Trust Fund Print
Friday, 25 March 2011 03:33

This appears to be the case, since the Post featured an article, arguing that Social Security benefits should be cut, that made no reference to the the trust fund. The article tells readers:

"Social Security is the single largest federal program, dispensing about $700 billion last year to nearly 60 million people, the vast majority of them retirees. Since the program’s creation in 1935, the cost of Social Security benefits has been entirely covered by payroll taxes paid by current workers. This year, however, payroll tax revenues are projected to fall $45 billion short of covering benefits, and the problem is projected to grow as the number of retirees balloons compared with the number of working adults."

Actually, there have been prior years when current taxes did not cover benefits, but more importantly the program quite deliberately built up a surplus of more than $2.6 trillion, which is held in U.S. government bonds. It is drawing on the interest from these bonds in 2011. It will eventually rely on the principle on these bonds, which will be sufficient, together with current taxes, to cover all benefits through the year 2037.

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The Gap Between New and Existing Home Sales: Adjusting to the Bubble Print
Thursday, 24 March 2011 06:56

In his blog today, Floyd Norris notes an unprecedented divergence between the trends in existing home sales and new home sales. He points out that existing home sales have held up reasonably well, while new home sales are down by more than 75 percent from their bubble peak.

While this is largely true (Core Logic and real estate analyst Keith Jurow have noted an upward bias in the realtors' data on existing home sales) this gap is also entirely predictable given the rise and fall of the housing bubble. New homes are the mechanism that adjusts supply and demand. When prices went through the roof during the run-up of the bubble, builders rushed to build new homes so that they could profit from the extraordinarily high prices. As a result, we had near record rates of new construction from 2002-2006.

However, once the bubble burst and prices began to tumble, there was little reason to build new homes. A large supply of homes for sale and falling prices makes building new homes an unprofitable venture. The price that builders can expect to receive is on average more than 30 percent less than it was at the peak of the bubble and they are likely to have to wait a long period of time before they can even make a sale.

For this reason, it should not be surprising that new home sales have fallen by much more than existing home sales following the collapse of the bubble. They will presumably rise back to a more normal level in the next two or three years, which is likely to mean at least a 100 percent increase from the February level. At that point, we will again be building homes fast enough to replace worn out structures and to meet the needs of a growing population.

 
Robert Pozen's Liberal Plan for Social Security and Dean Baker's Conservative Plan for Tax Reform Print
Thursday, 24 March 2011 04:44

Back in the old days news outlets used to try to have people associated with a political position represent that position. In other words, they used to have conservatives represent conservative positions, liberals represent liberal positions, etc. It just seemed reasonable to have the people who actually held a particular political standpoint present that standpoint to the public.

But, that was then. Now, with the ascendancy of the right over national politics, there is no reason to waste valuable space in major media outlets allowing those who are left of center to express their views. There are plenty of conservatives who regularly express their views in the opinion and news sections. Why not let some of them also express the views of those who are left of center as well?

This obviously was the position taken by the Washington Post when it decided to have Robert Pozen, a finance industry executive and advocate of Social Security privatization, tell liberals what their position should be on Social Security. David Leonhardt highlighted Pozen's "liberal plan" in his NYT blogpost today.

The gist of Mr. Pozen's proposal is to leave benefits mostly unchanged for the lowest wage earners while reducing benefits and raising the retirement age for middle income workers like school teachers, construction workers and fire fighters. By reducing the benefits for those in the middle, Mr. Pozen wants to make Social Security more "progressive." Naturally liberals who were troubled by high-living nurses and plumbers will rally behind this bold effort at redistributing income.

In keeping with this spirit, suppose that we had a media that tilted as much to the left as the current outlets tilt to the right. Obviously, people like me would have the opportunity to lay out what the conservative position should be on reforming the income tax code.

So, here's the outline of my proposal which the Post will be running next week. It will leave income taxes largely unchanged on the bottom 98 percent of taxpayers. We will raise the marginal tax rate to 50 percent on incomes between $250,000 and $10,000,000. Then we would have a zero tax bracket for income over $10,000,000. This means that the richest of the rich will pay considerably less under the Baker plan than under the current tax code. This should accomplish the upward redistribution that is central to the right's political agenda. 

I can't wait to see my column in the Post and highlighted as a conservative plan for tax reform in Leonhardt's blog.

 
Balance at the Washington Post (a.k.a. Fox on 15th Street): Conservatives Tell Liberals Why They Should Support Cuts to Social Security Print
Wednesday, 23 March 2011 07:01

Showing the sort of balanced journalism that we have come to expect from the Washington Post, its oped page featured a column by Robert Pozen, a financial industry executive and proponent of Social Security privatization, telling liberals why they should support cuts to Social Security. The gist of Mr. Pozen's argument is that Social Security is becoming less progressive over time because the gap in life expectancies between higher paid workers and lower paid workers is growing.

Furthermore, because of growing wage inequality, a larger share of wage income is escaping the Social Security tax. In addition, Pozen tells us that the structure of retirement income subsidies is highly regressive since the bulk of the tax benefits go to high income earners.

So, how do we fix the situation? Maybe improve health care for the bottom half of wage earners (other countries don't have the same gap as the United States)? Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should try to restructure the economy to reverse the policies that have led to the upward redistribution of wage income over the last three decades. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should reverse the structure of retirement saving subsidies so that this is more progressive. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

How about raising the cap for the wages subject to the Social Security tax. No, Mr. Pozen tells us that Congress won't do that.

No, the best way that Mr. Pozen can think of for making Social Security more progressive is by cutting benefits for people earning $40,000 a year and higher. Yes, this has been the big problem the country is facing. School teachers, construction workers, and office clerks are getting too much money. We better take away their Social Security benefits so we can make this a fairer society. All good liberals would agree with that.

Remember you can read this only in the Washington Post.


 
The Painless Way to Reduce the Deficit Print
Wednesday, 23 March 2011 04:49

The NYT reported on the Federal Reserve Board's payment of $82 billion to the Treasury last year, more than 2.3 percent of the total budget. This is striking because this figure vastly exceeds most of the budget items that have dominated the attention of Congress and the media.

In principle, the Fed can offset much of the burden of the debt run up to boost the economy during the downturn by simply buying and holding it. In that case, the interest would be paid to the Fed and then refunded to the Treasury, leaving no net burden for taxpayers. The Fed could prevent this from leading to inflation when the economy recovers by raising reserve requirements. Of course most economists agree that a somewhat higher inflation rate would be desirable at the moment since it would alleviate the debt burden of consumers.

It is remarkable that this path towards dealing with the deficit has garnered so little attention. This could perhaps be explained by the fact that the Wall Street actors who are the main financiers of the anti-deficit crusade are not interested in a deficit reduction path that does not cut social spending and risks somewhat higher inflation. Higher inflation is generally anathema to the financial industry, since it devalues the debt it owns.

It is also worth noting that most people involved in the debate on economic and budget policy are not very astute observers of the economy. They were unable to see the $8 trillion housing bubble that both gave us the current downturn and the large deficits that have fixated Washington.

 
Remember the Housing Market? Print
Tuesday, 22 March 2011 05:02

Some folks might have heard of it. We had an $8 trillion bubble in this market in the last decade. It led to a huge construction boom. The wealth created by the temporary run-up in house prices also led to a consumption boom. When the bubble collapsed, construction plummeted and consumption fell back to more normal levels. The collapse of this bubble has given us the worse downturn since the Great Depression.

Given the importance of the housing market for the economy it might be reasonable for the media to pay some attention to important economic releases. However, news outlets don't seem to share that perspective. 

The news of a 9.6 percent drop in home sales in February seems to have escaped the notice of the New York Times and the Washington Post. The Wall Street Journal noticed the decline but raised the unlikely possibility that bad weather was a major factor explaining the falloff in sales.

This is unlikely since the data reports the number of sales that were closed in February. Since it typically takes 6-8 weeks between a contract's signing and the closing, most of the contracts for homes sold in February would have been signed in December and January. Weather would have only been a factor if bad weather at the end of the month had prevented people from coming in for a closing during February. 

It is also worth noting that both the median and average house price fell sharply in the month. The median house price is now 5.2 percent below its year ago level.

 
The Wall Street Journal Calls the Congressional Budget Office and the Social Security Trustees "Defenders" of Social Security Print
Monday, 21 March 2011 15:48

The WSJ ran an article in which implied that the ability of the Social Security to use the bonds in the trust fund to pay benefits was a debatable point. It noted that the benefits will soon exceed annual taxes, but then commented:

"Defenders of the program say there isn't an immediate need for changes in Social Security. Past surpluses and projected tax receipts are sufficient to pay full benefits until 2037. After that, seniors would get only 75% to 80% of promised benefits if changes aren't made."

Actually, all official budget agencies hold the view attributed by the Journal to "defenders" of the program. This is the law.

It is sort of like saying that "defenders" of Bill Gates say that he has $50 billion to spend as he likes. Defenders of Bill Gates may say this, but it also happens to be true. 

In the same vein, the article seems badly confused about how bonds work. It told readers:

"many Americans believe their retirement benefits are financed by payroll taxes they pay during their working lives. But as a pay-as-you-go system, Social Security uses the money collected from current workers to pay beneficiaries. Congress has changed the rules of the program—such as eligibility and benefit formulas—many times over the years.

For decades, Social Security collected more in taxes than it paid in benefits. The program lent that surplus to the U.S. Treasury by buying government bonds, and the government spent that money."

Many Americans do believe that their retirement benefits are paid by their payroll taxes, just as many believe that the earth is round and the humans evolved from less-developed primates. This happens to be true, so it is strange that the WSJ would explain to readers that people happen to believe what is true.

The fact that the government spent the money it borrowed when it sold bonds to Social Security has nothing to do with the time of day. It has also spent the money it borrowed from Peter Peterson or the government of China when they bought government bonds. Similarly, when General Electric, Boeing or any other company sell bonds they typically spend the money that they borrow. It is not clear what point is intended by this comment, but it has no obvious bearing on the ability of Social Security to pay benefits to retirees.

 
The Japanese Disaster and Plant Shutdowns Print
Monday, 21 March 2011 04:12

There have been numerous media accounts of plant shutdowns (largely in the auto industry) as the result of a cutoff of the supply of parts from Japanese manufacturers due to the earthquake/tsunami/nuclear disaster. These accounts are somewhat misleading.

While these disruptions may lead to reduced supply of some types of products, they will almost certainly not lead to overall shortages in the market. In other words, there may be some cars that temporarily will be in short supply, but it is almost inconceivable that there will be a shortage of cars more generally. This means that car buyers may switch brands; they will not be unable to buy a car.

In this case, the shutdowns of certain factories are likely to be offset by increased production at other facilities, with the net effect on the industry being close to zero. The shutdowns are of course bad news to the workers affected, but they will be of little consequence to the economy as a whole.

 
The NYT Gives Voice to the Educated Ignorant Young Print
Monday, 21 March 2011 03:58

Let's see, who is doing well in today's economy? Maybe the bankers at Goldman Sachs and J.P. Morgan with their below market bailout money and too big to fail subsidies? Maybe the defense industry with its huge mark-ups and no bid contracts? How about the drug companies who get handed hundreds of billions of dollars each year from government provided patent monopolies?

No, today's educated young are worried about being victimized by high living seniors who get Social Security and Medicare benefits. At least that is what Matthew C. Klein tells us in an oped column in the NYT.

The column bemoans the fact that the author and his highly educated friends see poor job prospects on the horizon. While there is much to complain about, if he really believes that the problem is generically people older than himself, rather than specifically the people who are a lot richer than himself, he has not gotten a very good education.

 
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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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