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Failing Drug Research Model: Can't the NYT Talk About Patents? Print
Monday, 07 March 2011 04:15

It seems not. A front page NYT article reported on the drop in profits that the drug industry expects over the next year as many of its blockbuster drugs lose patent protection. The article reports that some of the major pharmaceutical companies may cut back their research spending as a result.

The article never discussed the possibility of alternative funding mechanisms. For example, Joseph Stiglitz, the Nobel prize winning economist, has advocated a prize fund whereby the government would buy up patents and allow all drugs to be sold at their competitive market price. It is also possible for the government to simply pay for the research up front (it already finances almost half of biomedical research through the National Institutes of Health). This also would allow the vast majority of new drugs to be sold for a few dollars per prescription.

This sort of overview of the pharmaceutical industry would have been an appropriate place to discuss the merits of the current patent system for financing prescription drug research.

Robert Samuelson Wants to Take Money from Seniors to Make the Wall Street Boys Richer Print
Sunday, 06 March 2011 21:16

Yes, Robert Samuelson is at it again, spreading inaccurate and misleading claims about Social Security to justify taking money from retirees.

It seems that for some reason he has a hard time understanding the idea of a pension. This shouldn't be that hard, many people have them.

The basic principle is that you pay money in during your working years and then you get money back after you retire. Social Security is a pension that is run through the government. Therefore Samuelson wants to call it "welfare."

It is not clear exactly what his logic is. The federal government runs a flood insurance program. Are the payments made to flood victims under this program "welfare?" How about the people who buy government bonds. Are they getting "welfare" when they get the interest on their bonds? If there is any logic to Mr. Samuelson's singling out Social Security as a source of welfare, he didn't waste any space sharing it with readers.

There are a few other points that deserve comment. He claims that the trillions of dollars of surplus built up by the trust fund over the last three decades were an "accident." Actually, this surplus was predicted by the projections available at the time. If anyone did not expect a large surplus to arise from the tax increases and benefit cuts put in place in 1983 then their judgement and arithmetic skills have to be seriously questioned.

In terms of the program and the deficit, under the law it can only spend money that came from its designated tax or the interest on the bonds held by the trust fund. It has no legal authority to spend one dime beyond this sum. In that sense it cannot contribute to the deficit. Mr. Samuelson apparently wants to use Social Security taxes to pay for defense and other spending.

If we allow for the possibility that we could impose a "Social Security" tax on workers and then use this money for other purposes, the decision to not use it for other purposes can be said to make the deficit larger. But this is sort of like saying that our decision not to steal money from disabled people makes the deficit larger. After all, if we had a policy of stealing from the disabled, then the deficit would be lower. How can anyone argue with that.

Finally Samuelson decided to get a little creative with numbers to press his case. He told readers that:

"In 2008, a quarter of households headed by people 65 and over had incomes exceeding $75,000."

That's not what the Census data show. They put the share of the over 65 population with incomes of more than $75,000 at 15.8 percent. And, almost half of these people had incomes of less than $100,000. In this context it worth remembering that President Obama put his lower cutoff for those subject to tax increases at $200,000.

So, we are reminded yet again that Robert Samuelson really doesn't like Social Security and that he is willing to make up numbers to push his case.

The Post Complains About Congress Soliciting Bernanke's Opinion Print
Saturday, 05 March 2011 09:12

The Washington Post editorial board is upset that members of Congress tried to prompt Federal Reserve Board Chairman Ben Bernanke to weigh in on the merits of Republican proposals for large budget cuts. While they are right to be upset about such childish behavior, the Post missed the main reason.

After Alan Greenspan, Ben Bernanke is the person most responsible for the economic collapse the country is now recovering from. He was one of Fed governors from 2002 to 2005, before having a brief stint as President Bush's chief economic advisor. He then returned as Fed chairman in January 2006. During this period, he stood by and did nothing as the housing bubble grew to ever more dangerous levels and in fact publicly insisted that it was no big problem. It would be hard to imagine a more disastrous mistake.

Given Mr. Bernanke's track record he is very lucky to have a job (and indeed a well-paying one) at a time when so many workers do not. It is hard to see why the opinion on economic policy of someone who didn't see any problem with an $8 trillion housing bubble would be especially valuable.

February Jobs Report: How Big is "Big?" Print
Saturday, 05 March 2011 08:51

The headline of the NYT article on the February jobs report told readers about the "big jump" in private sector jobs reported for the month. While the 222,000 increase in private sector jobs was indeed good compared to the anemic growth that we have been seeing, it is a bit misleading to describe this as "big." In the four years from January 1996 to January 2000 the economy generated an average of almost 240,000 jobs a month.

In past recoveries from serious downturns the economy generated jobs at a far more rapid rate. In the year following the end of the 1981-82 recession the economy created private sector jobs at the rate of more than 280,000 a month, in a labor market that was almost 40 percent smaller than the current market. In the year from November 1976 to November 1977 the economy created more than 290,000 private sector jobs per month in a labor market that was just a bit more than half as large as today's.

It is also important to remember, as noted in the article, that the February number was in part a bounceback from a weather-weakened January number. Firms that put off hiring because of weather conditions in January ended up doing their hiring in February. The average growth in private sector jobs for the last two months was just 145,000.

Given the ongoing decline in public sector employment due to state budget crunches (@15,000-20,000 per month), this is only a bit more rapid than the 90,000 growth rate needed to keep pace with the growth of the labor force. At this rate, the economy will not return to normal levels of unemployment until well into the next decade.

Economists on Stock Returns: It Depends on the Weather or Maybe Politics Print
Friday, 04 March 2011 05:46

It would be nice if the answers that economists gave us on economic issues did not change when the political environment changed. Unfortunately, we don't live in such a world. This can be seen very clearly in the current debate over the assumption on rates of return that public pensions should make for the assets they hold in stock.

Most economists today seem to be lining up on the side that pensions should only assume that stock will provide the same rate of return as Treasury bonds. Even though the expected nominal return on stocks might be 10 percent, these economists argue that because of the risk associated with stock returns public pension funds should only assume the rate of return on risk free Treasury bonds, roughly 4.5 percent.

The counter-argument is that state pension funds can essentially be indifferent to the risk of market timing. If the market is depressed for a few years, the state pension fund would still have adequate assets to pay all benefits. There would only be a problem if the market remained permanently depressed, which is not plausible if the widely accepted projections for long-term economic growth prove accurate.

This lower rate of return makes a huge difference in the size of pension liabilities. This change in accounting, coming at a time when state budgets are hard-pressed due to the recession, would create substantial pressure to reduce pension benefits and possibly eliminate defined benefit pension plans altogether.

It is interesting to note that the economists' concern with pension fund accounting just happens to coincide with a major push by the right-wing to attack public sector workers and especially public sector pensions. State pensions have been assuming 10 percent nominal returns on their pension's stock holdings for decades. This fact never seemed to trouble economists previously.

Interestingly, many economists had argued the exact opposite position in the context of Social Security privatization. Andrew Biggs, one of the economists who has been very prominent in the debate for lowering the return assumptions on public plans, explicitly argued for assuming a high rate of return for the stock held in privatized Social Security accounts. Other proponents of privatization took the same perspective, which was the main benefit of their proposal.

Even advocates of preserving the current Social Security system wanted to assume a higher rate of return for money held in stock, albeit for stock held in the Social Security trust fund. Two of the country's leading experts on Social Security, Henry Aaron and Robert Reischauer, both explicitly called for putting part of the Social Security trust fund in the stock market to take advantage of the higher rates of return offered by stock. President Clinton made the same proposal.

It is worth noting that these plans for putting Social Security money in the stock market were made near the peak of the stock bubble, when price to earnings ratios were approaching 30. In this context, they were making absurd assumptions about the prospect for future returns, as some people pointed out at the time. By contrast, now that the market has plummeted from its bubble peaks and price to earnings ratios are close to their long-term average, it is plausible that the market will provide its historic rate of return.

If economists were consistent, they would apply the same methodology for assessing stock returns in the context of Social Security privatization in the late 90s as they apply to public pension funds in the current crisis. This does not appear to be the case.

The NYT on Foreclosure: Can We Talk About Sex? Print
Friday, 04 March 2011 04:50

Actually, I meant to say "the housing bubble," but in top policy circles it might be easier to get a discussion going on sex. The NYT's lead editorial defends the Obama administration's housing programs based on the fact that house prices are falling again. This is really confused thinking.

First, we should expect house prices to fall. Nationwide house prices have to fall by about 15 percent to return to their long-term trend level. No one has produced any remotely plausible explanation as to why we should expect house prices to diverge from a 100-year long trend, so this decline is consistent with the market returning to normal.

Why, as a matter of policy, would we want to try to prop up housing prices, even assuming that we could? Should the federal government be running an unaffordable housing program? 

House prices had been supported through the second half of 2009 and the first half of 2010 by the first-time buyers tax credit. This pulled purchases forward and now house prices are back on the path to correcting. Given the still near record housing vacancy rates, there is no reason to expect this decline to stop soon regardless of what we do on foreclosures. 

If we could talk about the housing bubble, there is an argument that the government could take steps to support house prices in markets where the bubble appears to have deflated. In former bubble markets like Las Vegas and Phoenix, it might make sense for the government to target loan money and other support in order to prevent prices from falling too far below the trend level. However, this would require distinguishing between markets where the bubble is still deflating from the ones where it has deflated. The price to rent ratio gives us an obvious to tool to make that assessment, but no one seems to want to have that discussion.

Returning to the question at hand, the Republicans are absolutely right, the Obama administration foreclosure programs have been a disaster. There are both policy and political obstacles that make effective programs a virtual impossibility.

On the policy side, the key problem is that the Obama administration never wanted to force the banks to do anything. This invites efforts at cherry picking. They want to have the government subsidize them to make modifications that it might have been in their interest to make in any case. This means the program is giving money to banks, not homeowners.

There is also the problem that servicers are not in the mortgage modification business. Servicers collect monthly payments, they assess fines and send out threatening letters when the payments are late. They move forward with foreclosures when the payments are repeatedly late. They don't have experience working with owners to do modifications.

Asking servicers to do modifications is like asking the police to be social workers. It might be nice if a beat cop could pull aside a troubled kid and give him some counseling, come by and check on his school work, and help him with his family problems, but that is not what cops do. It is the same story with servicers and putting a few thousand dollars on the table will not change this fact.

On the political side, it looks absolutely horrible for the government to be paying the mortgage of people who have fallen behind. Every person who has fallen behind on their mortgage has a neighbor who is working overtime or taken a second job, scrimped on basic expenses, and taken other extraordinary measures to keep current on their mortgage. Of course the Obama administration policy is not actually giving large amounts of money to defaulting homeowners, but the right has been effective in building this perception.

It is also worth noting that we would have a disaster if the government actually did offer large amounts of money to defaulting homeowners. This would give everyone incentive to default on underwater mortgages and have the government and/or lenders pick up the tab. While many of the people helped this way may be very deserving, many of the biggest gainers would be relatively well off people who bought expensive houses at bubble-inflated prices or opted to take large amounts of money out of their home when the bubble sent the price through the roof.

Some of the losers in this story would be the banks that pushed and packaged fraudulent loans. However the bulk of losses would be incurred by public and private pension funds, who bought mortgage backed securities (MBS) in good faith, and individuals who hold MBS in their retirement funds. 

There are policies that the Obama administration could pursue that provide benefits to troubled homeowners at no cost to taxpayers and with none of the policy and political risks noted here. For example, it could push to allow cramdown in bankruptcy. This means that judges could re-write mortgage contracts when a homeowner declare bankruptcy. It could also push for right to rent laws. This would allow homeowners to stay in their home as renters paying the market rents for a substantial period of time (e.g. 5 years) following foreclosure.

Both of these policies would increase the bargaining power of homeowners relative to lenders, leaving them in a better situation to keep their home and, in the case of right to rent, put them in a much better housing situation in the event that they can't keep their home. Neither policy requires any new government bureaucracy or creates any serious moral hazard problems.

Both cramdown and right to rent would require action by Congress, which may prove impossible, but at least the Obama administration would be pushing for sound policy. As it stands, the Obama administration programs are largely worthless. If the President wants to put on his fiscal austerity hat and cut out government waste, he's got some good targets here.

Is the Obama Administration Still Clueless on Housing Bubble? Print
Thursday, 03 March 2011 06:15

The NYT implied that the Obama administration, which includes not a single economist who recognized the danger of the housing bubble, still does not understand the bubble. According to the NYT:

"the Obama administration, as well as the F.D.I.C., sees any broad settlement with the servicers [over improper foreclosure actions] as an opportunity to do more than just fix the foreclosure process. They want to stabilize the housing market, where prices are continuing to decline, and try to help bolster the economic recovery."

Actually nationwide house prices are still 10-15 percent above their trend levels. The housing vacancy rate, while down somewhat from its peak, is still far higher than any pre-bubble level. In other words, the Obama administration should fully anticipate that house prices will continue to fall. There is no obvious reason to want to prevent house prices from returning to more affordable levels.

Unfortunately the piece does not point out the absurdity of the position attributed to the Obama administration. Nor does it identify any of the officials holding this view so that they can be subjected to the ridicule they deserve.

Why Does the Post Think Politicians Are Philosophers? Print
Thursday, 03 March 2011 06:04
The Post referred to disputes among policymakers on how best to structure regulation of the financial sector told readers that:

"there are also deep philosophical and political differences as to what the government should do to prevent future crises."

The people who are making the decisions about regulating the financial sector are politicians. They get and keep their jobs by appealing to powerful interest groups who can finance election campaigns. Few, if any, of these people are known for their contributions to political philosophy. There is no obvious reason to believe that philosophy is a major factor in determining their approach to this issue and the Post certainly does not give us one.

Ben Bernanke, Who Claims to Have Brought the Economy to the Brink of a Second Great Depression, Gives States Advice on Dealing With Budget Shortfalls Print
Thursday, 03 March 2011 05:44

Suppose former FEMA director Michael Brown gave a lecture on how to best rebuild New Orleans following Katrina. Presumably the media covering the speech would point out that Brown's ineptitude in responding to the storm was one reason that the city's population was so devastated by it.

For this reason, it is surprising that Post never noted the same irony in reporting on Federal Reserve Board Chairman Ben Bernanke's advice to states dealing with budget shortfalls. The reason that nearly all the states are facing severe budget problems is that the economy is in the middle of the worst downturn since the Great Depression.

This downturn is the direct result of the Fed's failure to take steps to curb the growth of the housing bubble before it reached the point where its collapse would devastate the economy. Bernanke was at the center of this failure, having been one of 7 Fed governors from 2002 to 2005 and then coming back as Fed chairman in January of 2006.

Bernanke has never downplayed the extent of this disaster himself, telling Congress in the fall of 2008 that the economy was on the brink of a complete collapse. While the claim that the economy was at risk of a second Great Depression is not true (we know how a reflate an economy, so there never was any risk of a decade of double-digit unemployment), Bernanke has helped to promote it.


Are Republicans Really Worried That The Economy Is Creating Too Many Jobs? Print
Wednesday, 02 March 2011 05:47

That's what the NYT told readers this morning. The NYT said that:

"Republicans worry that the Fed is overstimulating the economy."

For those not familiar with the word "overstimulate," it means that the Fed is causing the economy to grow too rapidly and create too many jobs. This is an interesting position to hold at a time when the economy is experiencing 9.0 percent unemployment. It probably would have been better to just report what the Republicans said rather than directly attribute such an extreme view to them.

The article also quoted Alabama Senator Richard Shelby saying that: "Once price stability has been lost, it’s difficult and very costly to regain," adding that Shelby then invoked the 80s. It would have been useful to point out to readers that the recession brought on by Paul Volcker in 1981 to tame inflation was far milder than the one we are now experiencing.

The unemployment rate rose by 3.6 percentage points from its low in the summer of 1981 to its peak in December of 1982. This compares with a trough to peak increase of 5.7 percentage points in this downturn. Three years after the start of the 1981 recession the unemployment rate was back to its pre-recession level. By contrast, three years after the start of the current recession the unemployment rate stands 4.5 percentage points above its pre-recession level.

In other words, Senator Shelby is warning that if we take stronger steps to reduce the unemployment rate we risk a higher rate of inflation. And, the cost of bringing down this inflation may be less than the costs in unemployment that we are currently experiencing.

This article also presents Federal Reserve Board chairman Ben Bernanke's assessment on a range of issues. It would have been worth reminding readers that Mr. Bernanke did not see the $8 trillion housing bubble, the collapse of which brought on the worst downturn since the Great Depression.

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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.