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NYT Scare Story on SF Retiree Health Care Print
Thursday, 16 December 2010 22:41

The NYT printed a scare story about San Francisco's retiree health care costs in lieu of a printing news. The paper told readers that the projected cost of providing health care for retired city workers has been estimated at $4.4 billion and the city has put aside just $9.7 million to cover this cost.

That sounds really really scary. However those who read through the article would discover that the city is currently spending more than $138 million a year for retiree health care. This fact implies that the city has been in the habit of paying for these expenditures out of its current budget. Furthermore the projection that is the highlight of this article implies that there will be no substantial increase in this figure in the years ahead. (If the $4.4 billion is spend over the next 30 years it would imply an average annual cost of $147 million.)

It is possible that the San Francisco's health care burden is more onerous than this calculation suggests, but readers of this article would have no way of knowing since the point of the article seems to have been to scare readers rather than provide information.

 
Post Finds Economic Momentum in Strange Places Print
Thursday, 16 December 2010 05:47

The headline of a Washington Post article told readers:

"Economic recovery gains momentum."

The report that provided the basis for this assertion was the Fed's release of data on industrial production for October. This report showed a rise in production of 0.4 percent in November, after a revised decline of 0.2 percent (previously reported as 0.0 percent) in October. However, this swing was entirely the result of a reversal in the output of utilities, which plunged in October and then jumped in November.

Fluctuation in utility output are overwhelmingly determined by weather conditions, not the state of the economy. Economists usually focus on manufacturing output which is more stable. This increased by 0.3 percent in November, the same as the rate now reported for October (revised down from 0.5 percent). This is a somewhat slower pace of growth than the 5.3 percent rate over the last year.

 
The Post's News Section Told Readers that Congress Must Pass the Tax Deal Print
Thursday, 16 December 2010 05:27

The Post showed once again why it is known as "Fox on 15th Street" when it used a front page news story to tell readers that members of Congress:

"acknowledged the need to avoid expiration of the Bush tax cuts and the likely shock to the economy that would result."

It may be the view of the Post's editors that there is a "need" to avoid expiration of the Bush tax cuts, but this is not an objective fact about the economy. While the expiration of the tax cut without any other action by Congress would be a hit to the economy, the impact is not larger than other negative shocks that the Post has largely ignored in the past, such as the collapses of the housing and stock bubbles or the run-up in the value of the dollar in the Clinton years.

It is also important to note that the failure to approve legislation now does not preclude Congress from acting next year as the Post's article implies. If the economy remains weak, as is likely, there will be substantial pressure on Congress to approve additional stimulus. It is highly unlikely that Congress would do nothing if the economy stagnated and unemployment continued to rise. There is no precedent for such behavior.

 
Does the Commerce Secretary Really Not Understand How a Trade Deficit Works? Print
Thursday, 16 December 2010 05:15

It seems that he doesn't from the quote buried at the end of a NYT piece on U.S. trade with China. In reference to the trade deficit, Gary Locke, the Commerce Secretary said:

"The reality is that if we are to close the trade deficit, Americans need to export more and the Chinese need to purchase more."

Actually exports are only half of the story in trade. A trade deficit means that the United States imports more than it exports. Adjusting to more balanced trade almost always means both reducing imports and increasing exports. It is virtually impossible to envision a scenario in which the country moves to anything close to balanced trade without adjustments on both sides.

It is also worth noting that this piece very casually refers to "piracy" in reference to China's lack of respect for U.S. intellectual property claims. In many cases, the unauthorized copies of U.S. products may not violate current Chinese law. In such cases there is no piracy involved. 

It also would have been wort mentioning that enforcement of U.S. intellectual property claims will impose substantial costs on Chinese consumers and is likely to sharply slow growth by reducing their purchasing power.

 
Spain and Ireland had Budget Surpluses Print
Thursday, 16 December 2010 05:06

It would have been worth mentioning this fact in a piece that discussed Germany's effort to insist on fiscal responsibility in the euro zone's member states in the context of support for bailouts. Most of the currently troubled countries, with the major exception of Greece, would have met almost any standard of fiscal responsibility prior to the crisis.

The current problems of these countries stem from the collapse of housing bubbles that for some reason the top officials of the European Central Bank either did not see or did not take seriously. It would have been worth pointing out that Germany's fiscal responsibility agenda would not have helped in the current situation. 

 
If People Don't Spend Money on Cars, They Will Spend it On Something Else Print
Wednesday, 15 December 2010 16:21

The auto industry put out a study that apparently assumes that if people don't spend money on cars, they will not spend it on anything. This was in the context of evaluating the employment impact of proposals to substantially increase mileage standards.

The NYT uncritically reported the projections from this study, which found that a large increase in mileage standards could reduce the number of jobs nationwide by 1.3 million. The article did not include the views of any economists who would have pointed out the unrealistic nature of this assumption.

 
The End of Extraordinarily Low Interest Rates Is Not Grounds for Panic Print
Wednesday, 15 December 2010 04:59

The interest rate on 10-year Treasury bonds plummeted in the summer, falling at one point to under 2.4 percent. It has recently risen back to a still very low rate just under 4.5 percent.

The Washington Post had a front page piece that highlighted this run-up in rates. The piece warned that higher rates will slow the economy and raise the government's borrowing costs. It suggested that the higher rates could be attributable to the tax deal between President Obama and the Republicans in Congress which will close to $900 billion in debt over the next two years.

It is worth noting that the recent rise in interest rates puts them at almost exactly the level projected by the Congressional Budget Office (CBO) last summer. CBO projected that the 10-year Treasury bill rate would average 3.4 percent for 2010 and 3.5 percent for 2011. The CBO projections suggest that the drop in interest rates was the development that needed to be explained, not the recent increase.

 
Just Because the Post Doesn't Like Social Security Doesn't Mean That It Is Not Important Print
Tuesday, 14 December 2010 05:19

The Washington Post has long expressed its disdain for the Social Security program in both its opinion and news section. It continued this practice by not even mentioning the potential impact of the tax compromise on Social Security in an article reporting on the progress of the bill in the Senate.

The risk is that the Republicans will put pressure on President Obama to extend the payroll tax cut beyond this year by describing the end of the tax cut as a tax increase. This raises the prospect of a permanent reduction of 2 percentage points in the payroll tax. The loss of this revenue would effectively double the projected shortfall in Social Security over its 75-year planning horizon putting its future in serious jeopardy.

While this article reported the results of a poll on the package it ignored the most obvious implication. The extension of unemployment insurance benefits is hugely popular even among Republicans. This suggests that the benefit of extension would likely pass as a stand alone effort. That means that politicians who are raise concerns about the unemployed as a reason for supporting this package are not being honest.

It also would have been helpful if the numbers in this piece were expressed as a share of the budget and/or the economy. That way most readers may have been able to assign them some meaning. As it is, the Post could have just substituted the words "really big number,"  RBN to save space, and provided as much information to the overwhelming majority of its readers.

 
Robert Pozen’s Myth Creation on Social Security Print
Monday, 13 December 2010 12:36
The Boston Globe helped to create some new myths on Social Security with a piece by Robert C. Pozen that ran under the headline “Myth Busters: The Truth About Social Security Reform.”

Pozen first told readers that Social Security is not progressive even though its payback structure is highly progressive. (A low-wage earner will get a payment equal to about 90 percent of their average wage income, while a maximum wage earner [$106,800 in 2010], will get a benefit equal to less than 30 percent of their taxable wage.) He argued that the differences in life expectancy (wealthy people live longer), offset the progressivity of the payback structure.

While this is partially true, the differences in life expectancy do not fully offset the progressivity of the payback structure. Also, Social Security includes survivor and disability benefits that disproportionately benefit low and moderate-income earners.

The second myth created by Pozen’s piece is his claim that the proposed increase in the Social Security retirement age is no big deal. He described as a myth the claim that:

The Budget Commission’s proposal raises retirement age too quickly, especially for physical laborers.”

First, the commission did not issue a proposal. The co-chairs, Erskine Bowles and Alan Simpson, issued a proposal that got the support of 9 other commission members, 3 short of the number needed to make it a formal proposal of the commission.

Pozen goes on to tell readers that the proposal increases the normal retirement age at a:

“much slower pace for increases in the retirement age than the projected increases in life expectancy. During the 48 years between 2027 and 2075, the normal retirement age will rise by only two years, but life expectancy in the United States will on average rise by more than 10 years.”

Actually, the Social Security Trustees project an increase in life expectancy of 6.4 years over this period. The bulk of gains in life expectancy in recent years have gone to high-end earners. If this pattern continues in coming decades, it is very likely that the gains in life expectancy for most workers will not exceed the increases in the normal retirement age proposed by Bowles and Simpson.

Pozen then assures readers:

“In their proposal to reform Social Security, the co-chairs would allow physical laborers to claim half of their benefits early and the other half at a later date. Moreover, the proposal directs the Social Security Administration to develop a new and more flexible method for delivering retirement benefits for those in “physical labor jobs.”

Actually, the suggestion by Bowles and Simpson that there would be different retirement schedules for different occupations is reversing a worldwide trend toward standardizing benefit schedules. The Bowles-Simpson proposal is precisely the policy for which Greece was widely ridiculed. Hairdressers were one of the occupations that qualified for early retirement based on the fact that they worked with dangerous chemicals. It is not clear that the government is well positioned to make this sort of assessment and that it can impose rules that prevent easy gaming.

The third myth created by Pozner’s when he labels as a myth the claim: “The proposal would constitute a large “cut’’ in Social Security benefits for American workers.

Before addressing the benefit schedule, it is worth noting Bowles-Simpson propose a change in the annual cost of living adjustment (COLA) that would amount to roughly a 3.0 percent cut in benefits for someone who lives 20 years after starting to collect benefits. Whether or not this is “large” can be debated. However, it is worth noting that this proposed cut would have more impact on the after-tax income of most beneficiaries than the ending of the Bush tax cuts would have on most of the people who earn more than $250,000 a year.

For example, those earning more than $300,000 a year would see their income about $250,000 taxed at a 36 percent rate instead of a 33 percent rate. Since this higher rate would apply to just one-sixth of their income, it would reduce their after-tax income by just 0.5 percent. Only the very wealthy would see their after-tax income fall by a larger percentage due to the expiration of the Bush tax cut than the 3.0 percent cut in Social Security proposed by Bowles-Simpson from changing the annual COLA.

The media and members of Congress have certainly acted as though this change in taxes is “large,” so the proportionately bigger cut in benefits proposed by Bowles and Simpson must also be “large.”

Pozen wrongly asserts that:

“The proposal would actually increase the current schedule of Social Security benefits for low-wage workers. It accomplishes this result by expanding the concept of minimum benefits available to any worker.”

In fact, most low-wage earners would not have enough years of earnings to qualify for the step up in benefits proposed by Bowles and Simpson.

Pozen then notes that, in addition to the cut in the COLA, scheduled benefits will be cut for “more affluent workers.”  It is worth noting that “more affluent workers” in this context means anyone with average earnings above $10,000 a year.

Pozen also claims that the schedule of benefits proposed by Bowles and Simpson must be compared to the payable benefit in years after 2037, since the program is not projected to have enough money to pay full benefits in years after 2037.

In fact, there are literally an infinite number of ways to fill the gap in funding. The idea that if Congress does not endorse the Bowles and Simpson plan that there would be no other way to close the projected shortfall in the next 27 years is absurd on its face. 

 
Doesn't GE Stock Pay a Dividend? Print
Monday, 13 December 2010 07:55
I happened to notice Matt Kranz's calculations in USA Today of what someone would have earned owning shares of GE stock since 1970. The calculations don't adjust for inflation, which means that no one can assess what their real return would have been. Perhaps even more striking is the fact that the calculation does not include dividend payouts. Typically close to half of the real return on a stock will be in the form of dividend payouts.
 
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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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