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Bad News for Greece and Us Print
Thursday, 07 April 2011 04:33

Folks in Greece are being taught Keynesian economics by people who don't believe in it. It seems that when you strangle your economy, budget deficits rise. Greece's shrinking economy is leading to larger deficits (less growth means lower taxes and more transfer payments for things like unemployment insurance) and a rise in its debt to GDP ratio (when GDP falls, the debt to GDP ratio rises).

The news is that the austerity being imposed by the EU and the IMF is making Greece's debt situation worse, not better, just as all of us Keynesian types predicted. While the Greek experience should be a warning against going down the austerity path in the United States, due to the incompetence of the U.S. media it will be taken as a further warning of the need to act on the budget deficit quickly.

This is sort of like pointing to the medical problems of a person suffering from anorexia as evidence of the urgent need to lose weight. That makes no sense, unless you are involved in the national debate over economic policy.  

 
The Chicago Tribune Tells Readers That Real Leaders Take Money From the Sick and Elderly and Give It To the Rich Print
Thursday, 07 April 2011 03:50

My home town paper, the Chicago Tribune, wants us all to take House Budget Committee Chairman Paul Ryan's budget proposals very seriously. Remarkably the paper, which recently went through a leveraged buyout that puts ordinary tax scams to shame, tells readers to "trust us."

Even if it weren't for the stench of the paper's leveraged buyout it would be hard to trust an editorial that never once mentions health care costs and uses the cheap trick of lumping Social Security in with Medicare and Medicaid as unaffordable "entitlements." Of course everyone involved in the budget debate knows that the real story of the federal government's long-term deficit problem is health care. If we paid the same amount for health care per person as other wealthy countries we would be looking at huge budget surpluses, not deficits.

Remarkably health care costs never get mentioned in the piece. According to the Congressional Budget Office, Ryan's plan would actually increase what we pay for health care, giving tens of trillions of dollars over the coming decades to the health care industry. And, contrary to the Tribune's assertion, it would likely put many elderly and sick into poverty by dismantling Medicare and Medicaid.

The editorial also neglected to mention the tax cuts that Representative Ryan wants to give the wealthy. Under current law, folks like Goldman Sachs CEO Lloyd Blankfein would be paying a marginal tax rate of 39.6 percent on income above $500,000. Instead, Mr. Ryan would have them pay a tax rate of just 25 percent. (He would also cut Goldman Sach's corporate taxes as well.) This means that if Mr. Blankfein earned $20 million of income subject to the ordinary tax rate, Mr. Ryan would be giving him a tax break that is worth almost $3 million a year.

So, if you're keeping score, Representative Ryan's plan would give the wealthy hundreds of billions a year in tax cuts, it would give the health insurance industry and health care providers hundreds of billions of dollars of additional revenue each year, and it would deny tens of millions of retirees and sick people any guarantee of decent health care. And the Chicago Tribune tells us that this is "what real leaders do."

 
Representative Ryan Proposes Medicare Plan Under Which Seniors Would Pay Most of Their Income for Health Care Print
Wednesday, 06 April 2011 04:42

That is what headlines would look like if the United States had an independent press. After all, this is one of the main takeaways of the Congressional Budget Office's (CBO) analysis of the plan proposed by Representative Paul Ryan, the Republican chairman of the House Budget Committee. Representative Ryan would replace the current Medicare program with a voucher for people who turn age 65 in 2022 and later. This voucher would be worth $8,000 for someone turning age 65 in that year. It would rise in step with the consumer price index and also as people age. (Health care expenses are higher for people age 75 than age 65.)

According to the CBO analysis the benefit would cover 32 percent of the cost of a health insurance package equivalent to the current Medicare benefit (Figure 1). This means that the beneficiary would pay 68 percent of the cost of this package. Using the CBO assumption of 2.5 percent annual inflation, the voucher would have grown to $9,750 by 2030. This means that a Medicare type plan for someone age 65 would be $30,460 under Representative Ryan's plan, leaving seniors with a bill of $20,700. (This does not count various out of pocket medical expenditures not covered by Medicare.)

According to the Social Security trustees, the benefit for a medium wage earner who first starts collecting benefits at age 65 in 2030 would be $32,200. (This adjusts the benefit projected by the Social Security trustees [$19,652 in 2010 dollars] for the 2.5 percent annual inflation rate assumed by CBO.) For close to 70 percent of seniors, Social Security is more than half of their retirement income. Most seniors will get a benefit that is less than the medium earners benefit described here since their average earnings are less than that of a medium earner and they start collecting Social Security benefits before age 65.

Furthermore, the portion of income going to health care costs will increase through time according to the CBO analysis. This is due both to aging of individuals and to increasing health care costs through time. As noted insurance for older beneficiaries will cost more than insurance for younger beneficiaries, but Representative Ryan's voucher would still only pay the same amount for their care. This means that if the average 80-year-old cost twice as much to insure as the average 65-year-old, then the premium that would come out of a seniors' pocket would be twice as large. This implies that if the program had been in effect for 15 years in 2030 then the average senior would be paying $41,400 for a Medicare equivalent insurance package in 2030, 25 percent more than the medium earner's benefit in that year.

The other reason that Representative Ryan's plan will lead to rising health care costs for seniors through time is that the voucher payment does not keep pace with health care cost inflation. As costs continue to rise relative to the voucher, seniors will be required to pay a larger portion of their health care costs themselves. It is worth noting that 2030 is only 8 years after the voucher program kicks in.

 
Those Shoe Stores and Realtors Who Will Increase Hiring When the Government Lays Off Workers Print
Tuesday, 05 April 2011 21:20

Economists usually think that firms increase hiring when they see more demand for labor, but we have a new story coming from John Lott Jr, courtesy of Fox. Mr Lott argues that firms will hire more workers because the government is laying off workers.

Lott tells readers that:

"Democrats respond that government spending can’t be cut because it would eliminate jobs. Just the proposed $61 billion cuts by House Republicans in the current budget is said to “amount to a loss of 700,000 jobs.” The claim only counts the jobs funded by the government and assumes that this spending isn’t offset by the loss of private sector jobs. The notion is that if the government doesn’t spend the money, it never really exists."

Actually many of these lost jobs are not funded by the government. (The federal government only employs a bit over 2 million workers directly. It will not lose one-third of its work force as a result of these cuts.) Most of the lost jobs would be from reduced spending on private sector goods and services by the government or from reduced spending by workers who had formerly been employed by government agencies.

It is difficult to see how the government cutbacks would be offset by increased private sector hiring. If the economy were closer to full employment then we might expect to see interest rates fall in response to a cutback in government spending. This could spur increased consumption and investment, which would then lead to more hiring.

However in the current environment it is difficult to believe that these cutbacks would lead to any noticeable reduction in interest rates, nor that the reduction in interest rates would lead to any noticeable increase in spending. In other words, in the current circumstances it is likely that government cutbacks simply lead to a reduction in demand and employment as seems to be the case in the United Kingdom at present. (The OECD just lowered its growth projection for the UK this year to 1.0 percent. The UK adopted a Republican-type austerity program last summer.)

 
Social Security Tied to Tsunami in Japan and Bubonic Plague Print
Tuesday, 05 April 2011 08:36

Okay, we haven't seen this headline yet, but given current fashions in Washington policy circles it can only be a matter of time. Today the New York Times ran a column on Social Security by Alicia Munnell, the Director of the Center for Retirement Research at Boston College and a former member of President Clinton's Council of Economic Advisors.

This column made the claim that Social Security does contribute to the deficit, telling readers that:

"scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness."

This is an interesting observation. These projections are supposed to reflect current law. Under the law, as Munnell points out, Social Security is prohibited from spending anything beyond the money in its trust fund. This means that if these baseline projections show deficits from the program spending at levels beyond what can be supported by the trust fund, then they are not making projections based on what Social Security can legally spend.

The more obvious complaint would seem to be with the nature of the projections than with the Social Security program. In effect, the projections assume that Congress will opt to maintain the level of scheduled benefits without doing anything to increase revenues. While this is a possibility, that seems a rather strong assumption to include in a baseline projection.

The column also includes another serious stretch. It tells readers that people are taking Social Security at the earliest possible age of eligibility because they are worried that the program will not be there for them if they wait until a later age. The article links to a USA Today article which supports this view by noting that the percentage of people who began taking benefits at age 62 rose sharply in 2009.

The most obvious reason that the share of people age 62 who took benefits rose in 2009 is that the unemployment jumped by 5 percentage points from its 2008 level. There were undoubtedly many workers age 62 who unexpectedly lost their job and saw little prospect of finding a new one. Therefore they decided to start collecting their Social Security benefits.

There has been a lack of confidence in the Social Security system for decades. And there has been much more serious talk of reform at other times, notably the late 90s and 2005 when President Bush proposed to privatize the program. Concern about the future of the program is not a plausible explanation for the jump in people collecting early benefits in 2009, nor is it likely a major factor in the decision of workers to take early benefits more generally.

(Thanks to Eric Kingson, the co-director of Social Security Works, for calling this one to my attention.)

 
How Does the NYT Know That "Many House Republicans See a Need to Revamp Social Security?" Print
Tuesday, 05 April 2011 04:24

That is what the NYT told readers this morning. Of course the NYT has no ability to determine what needs politicians actually see, if in fact they do see anything. Politicians get elected by appealing to powerful interest groups who can supply them the money and support needed to win elections. They are not required to have visions of the country or the economy. What they present to the public as their vision is what they say, it may have nothing to do with what they actually believe.

The correct way to have reported this information would have been to tell readers that many Republicans "say" they see a need to revamp Social Security. It may have also been worth reminding readers that the Social Security trustees project that the program could pay all scheduled benefits for more than a quarter century and that after this date it would still be able to pay close to 80 percent of scheduled benefits, even if nothing is ever done to change the program. The benefit that is payable after 2037 would always be considerably larger than the benefits that retirees receive on average today.

 
David Brooks Is Excited: Paul Ryan Kicks the Elderly While Protecting the Wealthy Print
Tuesday, 05 April 2011 03:44

There are few things that get David Brooks more excited than seeing a politician beat up on the elderly and because he has a column in the New York Times, we all get to share the thrill. As Brooks tells us, Representative Paul Ryan, the Republican chairman of the House Budget Committee, has a long list of budget reforms and most importantly is prepared to go after Medicare. Ryan would replace the current Medicare program with a voucher system. This would end the commitment of Medicare to provide decent health care to the elderly and disabled. If private sector health care costs grow as projected the vast majority of seniors would soon find themselves unable to afford health care under Mr. Ryan's plan.

Brooks' excitement for Ryan extends beyond his willingness to cut Medicare benefits for retired workers. He tells us that Ryan would even, "reform the tax code along the Simpson-Bowles lines, but without the tax increases." What a guy, Ryan is even prepared to reduce taxes as he ends the security that Medicare provides for retired workers.

I'll confess to having gotten caught up in the excitement, but getting back to the facts that Brooks gets wrong, he tells readers that:

"The current welfare state is simply unsustainable and anybody who is serious, on left or right, has to have a new vision of the social contract."

Actually this is not true, as everybody who serious on the left or right knows. The U.S. health care system is unsustainable. If per person health care costs were the same as those in Germany, Canada or any other wealthy country, then the United States would be looking at long-term budget surpluses, not deficits. If the health care system is not fixed it will have a devastating impact on the economy regardless of what we do with public sector health care programs like Medicare and Medicaid.

Of course fixing the health care system requires going after powerful interest groups like the pharmaceutical and insurance industries and the doctors' lobbies. Attacking these powerful groups is less likely to draw praise from media pundits like Brooks. They don't get quite as excited when politicians attack the wealthy and powerful as when they attack ordinary workers.

Brooks is also excited by the fact that "the ex-chairmen of the Council of Economic Advisers and 64 prominent budget experts" signed letters stressing the urgency of reducing the budget deficit. While no one would want to question the credentials of these experts, they may want to question their competence.

Not one member of this group warned of the $8 trillion housing bubble, the collapse of which led to the worst downturn since the Great Depression. This downturn is likely to cost the economy close to $3 trillion in lost output and add a comparable amount to the nation's debt. In fact, if these budget hawks had a better understanding of the economy, they would have been focusing their concerns on the housing bubble instead of the deficit in the years from 2002-2006.

Their focus on the deficit distracted the public's attention from the economy's most pressing problem. Because of their prominence, these experts were able to draw media attention from those who were actually warning of the housing bubble. The result was the economic collapse that we are now experiencing and much larger deficits than the ones that had concerned them in the years prior to the collapse. There is no evidence that this group's understanding of the economy has improved in the last 4 years.


 
Actually, It Is the Projected Growth of Private Sector Health Care Costs That Is Unsustainable, Not Medicare Print
Monday, 04 April 2011 05:06

That is what a real newspaper would have told readers when it quoted House Budget Committee Chairman Paul Ryan saying:

"There is nobody saying that Medicare can stay in its current path."

However the Rupert Murdoch owned Wall Street Journal did not provide this information. The Center for Medicare and Medicaid Services projects that health care costs will rise rapidly in coming decades. While health care is overwhelmingly provided by the private sector, the rise in costs is projected to lead to large budget deficits because more than half of health care is paid for through public sector programs like Medicare and Medicaid.

If these projections prove accurate then it will have a devastating impact on the economy regardless of what happens to the public sector health care programs. On the other hand, if per person health care costs were brought in line with costs in other wealthy country, the government would be facing large surpluses, not deficits.

This article also tells readers that the debate will cause Congress to debate the role of government in the economy. It is not clear why it would lead to a debate over the role of government, the immediate issue being debating is cutting Medicare. The WSJ may want a debate over the role in government, but politicians in Congress are unlikely to conduct such a debate.

 
Are Employers Hiring More College Grads? Print
Monday, 04 April 2011 04:51

USA Today told readers that employers are disproportionately hiring college-educated workers. The data presented in the article actually do not make much of a case. While it is true that the employment to population ratio (EPOP) for college grads has risen, the increase has been very modest. The EPOP for college grads averaged 73.4 percent in the first three months of this year compared to 73.3 percent in the first three months of 2010.

As evidence that demand for college-educated workers is rising, the article reported that the professional and business services sector added 78,000 jobs in March. The article implies that these are jobs that require college degrees. In fact, more than a third of these jobs (28,800) were in the temporary help sector. Most of these jobs almost certainly did not require college degrees. Other sectors reporting good growth in March, such as restaurants and manufacturing, don't typically require that workers have college degrees. On the other hand, the government sector, which disproportionately employs workers with college degrees, shed jobs in March and the four prior months.

In short, it is not at all clear that the jobs being created by the economy at this point disproportionately require college degrees.

 
The New York Times Thinks That Congress is Full of Philosophers Print
Sunday, 03 April 2011 07:30
The New York Times apparently missed the elections last fall. This is the only possible explanation for its assertion that the budget debate in Congress:

"is likely to spur an ideological showdown over the size of government and the role of entitlement programs like Medicaid and Medicare."

The people serving in Congress got their jobs because they are effective politicians. This means that they have the ability to appeal to powerful interest groups; there is no requirement that they have any background in, or adherence to, any political philosophy. 

The debates over competing plans for Social Security, Medicare, and Medicaid are most obviously about the distribution of income between the wealthy and the less wealthy. Most Republican plans for Social Security would substantially reduce benefits for middle-income, and sometimes lower-income, retirees. Democratic plans tend to be more likely to increase taxes on the wealthy. This is most immediately a question of whether money should come out of the pockets of middle-income people or wealthy people.

In the case of Medicare and Medicaid, the most obvious issue is between those who would want to revamp the health care system in ways that give less money to the pharmaceutical industry, physicians, and insurers, thereby bringing per person costs in the United States more in line with costs in the rest of the world, and those who want to protect the income of these interest groups and instead save money by denying health care to people. There could also be more taxes on the wealthy to support the maintenance of quality health care for the aged and the poor. 

It is inaccurate to describe this as an ideological issue or a debate over the role of government. Both paths involve large roles for government. In the case of the Republican path, the government must play an intrusive role in protecting the patent monopolies of the pharmaceutical industry which allows them to charge prices that can be hundreds or even thousands of times the competitive market price. The same applies to the medical device industry. The government also imposes extensive barriers that keep doctors' fees far above those of comparably trained physicians in other countries. 

The debate is not over whether the government should play a large role in the health care sector. The debate is whether the government's efforts should be devoted to maintaining the incomes of health care providers or whether they should be devoted to providing health care to the public. The NYT badly misrepresents the issue in a way that strongly favors the Republican position by implying that this is an ideological argument over the size of government in the economy. It isn't. 

 
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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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