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Is NPR Unable to Get Access to Data on Health Care Costs? Print
Sunday, 01 May 2011 16:58

It seems that NPR is unable to get access to data from the OECD or even the Center for Medicare and Medicaid services. If it were, it would not have so badly misinformed listeners about Medicare costs yesterday.

NPR told listeners that Medicare's costs are unsustainable and that the reason is that patients do not see the cost of their treatment. Actually, private sector health care costs have risen as rapidly on an age-adjusted basis as Medicare. Furthermore, health care costs in the United States average more than twice as much per person as costs in countries like the United Kingdom and the Netherlands where patients see a much smaller share of their costs than they do under the Medicare system. If the United States paid the same amount per person for health care as these or any other wealthy country it would be looking at huge budget surpluses in the long-term, not deficits. 

The article also mentioned Representative Ryan's plan without pointing out that the Congressional Budget Office's projections show that it would hugely raise the cost of providing care to retirees. The CBO projections imply that the Ryan plan, which was passed by the Republican-controlled House of Representatives last month, would raise the cost of buying Medicare equivalent insurance policies by $34 trillion over Medicare's 75-year planning period. This is almost 7 times the size of the projected Social Security shortfall.

In this context it is probably worth mentioning that the Republicans in Congress have targeted NPR for budget cuts.

Is George Will On Amazon's Payroll? Print
Sunday, 01 May 2011 09:33

That might speak better of him than the possibility that he wrote this column out of ignorance. The column is a criticism of Illinois and other states for trying to apply sales tax to Internet sales. As it stands now, many Internet retailers do not collect state and local sales taxes on most of their sales since they are only required to collect the tax in states where they have a physical presence.

This creates an enormous loophole whereby individuals who mostly shop at traditional retailers (who are less wealthy on average) subsidize individuals who shop frequently on-line. In particular, it provides an enormous subsidy to on-line retailers who split the gains with their customers. Amazon, as the country's largest on-line retailer, is the biggest beneficiary of this subsidy, which is why it is often known as the "Jeff Bezos public welfare program."

There is no rationale that passes the laugh test for this subsidy. It would be comparable to saying that businesses that have addresses ending in the number "6" don't have to collect sales tax. This would imply higher taxes on other businesses to subsidize the lack of tax collections on businesses with addresses ending in the number "6." This particular story is somewhat worse than giving a random subsidy since the current policy subsidizes a huge Internet retailer at the expense of mom and pop retailers. It is difficult to see why anyone would want to weaken local businesses as a matter of public policy.

Will's arguments against taxing Internet sales look like Amazon press releases since they make no economic sense. He argues that Internet retailers don't benefit from the police and fire protection and local schools in the same way as traditional brick and mortar retailers. Actually, the UPS drivers that deliver Amazon's products do depend on publicly maintained roads, as well as police and fire protection.

It is an arguable, but irrelevant, point as to whether the ratio of public benefit to sales volume is greater for the products that Amazon typically ships than a retailer in which most of the value-added takes place elsewhere, like a car dealership. The more fundamental point is that the sales tax is primarily a tax on the consumer, who typically bears the vast majority of the sales tax. This is simply a way to get consumers to pay for the public services that they get from the government. The current system allows consumers who buy from Amazon to avoid paying their fair share.

The next step for Will in this argument is to point out that Wal-Mart, Target and other major retailers are doing a big push to tax away Jeff Bezos' welfare check and make Amazon pay the same sales tax as everyone else. It is quite a sight to have Will, who has repeatedly argued for the beneficial effects of money in politics, suddenly troubled by the fact that major retailers are acting in their own interest. In this case, they also happen to be acting in the public interest as well.

Finally Will gives us the horror story that making Amazon pay taxes will cost JOBS!!!!!! His poster child is Tim Storm, the owner of an Internet retailer who had been based in Illinois. The retailer was an Amazon affiliate. Under a new state law, Amazon was supposed to pay sales tax on its Internet sales in Illinois because its affiliates gave it a physical presence in the state. Amazon responded by cutting ties to any businesses that were located in Illinois so that it would not have to collect Illinois state sales tax.

Will's hero moved his business with 54 employees five miles north across the Illinois border into Wisconsin. He made this move even though less than 1 percent of his business is with Amazon. Will then tells us that Illinois's decision cost the state jobs and tax revenue.

Actually Will's story shows nothing of the sort. First, if the claim that less 1 percent of Storm's business was with Amazon, then Storm's decision to move was motivated by politics or factors other than the economics of the Internet tax. It is very costly to move a business. There is no way that the profits earned on Storm's Amazon sales will make up for these costs. Politicians would be fools to base public policy on political motivated decisions by business people.

Furthermore, Storm's move almost certainly did not cost jobs, or at least not the 54 jobs that Will implies. In the United States people are allowed to cross state borders to work. It is likely that the vast majority of Storm's 54 employees followed the business north of the state border. And the revenue loss may not be substantial either, since those workers who lived in Illinois (some probably already lived in Wisconsin) will still be paying taxes on their wages from Storm's business.

Finally, Will gives us a picture of Illinois as a state that is horribly mismanaged and being taxed to death. He tells is that"

"A study by the Illinois Policy Institute, a market-oriented think tank, concludes that between 1991 and 2009, Illinois lost more than 1.2 million residents — more than one every 10 minutes — to other states."

If we look at population changes between 1990 and 2009, we find that Indiana, Will's low tax hero state saw population growth of 15.6 percent, while Wisconsin had growth of 15.3 percent. This is somewhat higher than Illinois's 12.7 percent rate. However the gap does not suggest the mass flight from high taxes that Will implies. Illinois's growth was still considerably faster than the 8.1 percent rate in Iowa, its western neighbor. So the data do not quite fit the story.

In short, Will does not have much of a case here. Is it better that he knows it and gets paid to say otherwise or that he simply has no clue on the things he writes about? This is the great philosophical question of the week.

$34 Trillion In Waste is Not Worth Talking About at the Washington Post Print
Sunday, 01 May 2011 08:12

The Washington Post managed to completely ignore the Congressional Budget Office's projections showing that Representative Ryan's privatized Medicare system would increase the cost of providing Medicare equivalent policies by $34 trillion over the program's 75-year planning period. This sum is nearly 7 times the size of the projected Social Security shortfall, a topic that has received an enormous amount of attention in the Washington Post. It comes to roughly $110,000 for every man, woman, and child in the country.This additional cost is money that would be transferred from households to private insurers and health care providers.

Failing to mention the enormous waste that CBO projects would result from the Ryan plan is like writing a history of the 1940s and neglecting to mention World War II, only in the Washington Post.

Has Anyone at the Washington Post Heard of National Income Accounting? Print
Sunday, 01 May 2011 07:47

It seems that the answer is no. The Post ran a major front page article about the switch from the huge budget surpluses projected in 2000 to the large deficits that we are now seeing today. It never once discussed the implications of such surpluses for the economy.

National income accounting is helpful for understanding items like budget deficits because it provides a simple framework in which their impact can be examined. National income accounting has the advantage that it is by definition true -- there is literally no way around these accounting identities. National income accounting is also taught in every introductory economics class so it is reasonable to expect that the people who deal with economic issues at major news outlets would be familiar with it.

One of the identities in national income accounting is that the trade surplus (actually current account surplus, but these can terms can be used pretty much interchangeably for the United States) is equal to the net national savings. Net national savings in turn is equal to the government budget surplus (public savings) and the excess of private savings over private investment (private savings).

As a conscious policy under the Clinton administration (pushed by his second Treasury secretary, Robert Rubin) the United States begin to push for a high dollar. It used its control of the IMF in dealing with the East Asian financial crisis and subsequent crises in the developing world to put muscle behind the high dollar policy.

The high dollar in turn led to a large trade deficit. If the dollar is over-valued by 25 percent it has roughly the same impact as imposing a 25 percent tariff on all U.S. exports and giving a 25 percent subsidy to all imports. In other words, we expect a high dollar to be associated with a large trade deficit. This is exactly what happened in the late 90s, the high dollar sent the trade deficit soaring to record levels.

Using national income accounting, if the United States has a trade deficit of 4.0 percent GDP (roughly the 2000 level), then it must have negative national savings equal to 4.0 percent of GDP. There is no way around this, it has to be true.

If it has negative national savings equal to 4.0 percent of GDP then some combination of budget deficits and negative private savings must sum to 4.0 percent of GDP. In a context in which the country has a large trade deficit, if the government runs large budget surpluses, as it did in 2000 and CBO projected at the time would continue over the next decade, it would imply that there would be large negative private savings.

This could come about because of an investment boom, it is very hard to raise non-residential investment by much. Even at the peak of the Internet bubble in 2000, non-residential investment was up by only about 1.0 percentage point of GDP from its peak in the 80s cycle and was below its 70s level. This means that the huge budget surpluses projected by CBO in 2000 implied either extremely low private savings or a boom in residential construction. The last decade gave us both.

If the Post knew national income accounting it would have realized that it is pointless to discuss the budget deficit without reference to the trade deficit. This in turn means a discussion of the value of the dollar. Those who know national income accounting knew that the surpluses projected in 2000 were not plausible and furthermore would not have been desirable even if they were plausible. Without a large fall in the dollar, they implied a whole generation approaching retirement with almost no savings, since their failure to save was a logical implication of the budget surplus.

The real problem facing the economy is a hugely over-valued dollar. For some reason the Post, like most of the media, refuses to discuss this issue, instead distracting readers with phony morality tales about the budget deficit.

German Workers Might Get Pay Increases, Call In the Central Bank! Print
Saturday, 30 April 2011 08:31

The NYT reports that the low unemployment rate in Germany might allow workers to get higher wages, which could put upward pressure on the inflation rate. The only sources cited in this story are Jean-Calude Trichet, the head of the European Central Bank, Rainer Brüderle, the Economics minister for the conservative German government, and Jörg Krämer, the chief economist at Commerzbank in Frankfurt. It would have been useful to include the views of someone who believes that German workers should see pay increases.

Real wages in Germany have barely risen over the course of the last decade, even as productivity has grown by close to 2 percent a year. This has led to a shift from wages to profits. It has also meant that German labor costs have fallen relative to labor costs of the countries like Greece, Portugal, and Spain. The only way that trade between Germany and these countries can become more balanced (as long as they remain in the euro) is by having some combination of higher labor costs in Germany and lower labor costs in the peripheral countries. For this reason, higher wages for German workers would not just be beneficial to these workers, it would also be an important part of the re-balancing needed within the euro zone. It is remarkable that this obvious point is never mentioned in this article.

It is also worth noting that this article uses misleading unemployment data. It gives readers the official German unemployment rate of 7.1 percent. This measure counts part-time workers as unemployed. The OECD measure, which uses a similar methodology to the United States, shows that Germany has an unemployment rate of 6.3 percent. There is no excuse for not using the OECD measure since it is readily available and provides readers with a more accurate assessment of Germany's labor market situation.

The Post and Times Do He Said/She Said on Gas Prices Print
Saturday, 30 April 2011 08:11

It is difficult to understand why newspaper editors think that their typical readers have more time to evaluate the truth of politicians' claims that reporters who have a full time job to do such things. However these seems to be a widely held view, since so often articles are devoted to telling us what the politicians claim without including any effort to uncover what is true.

Today's he said/she said in the Post and the NYT is about high gas prices. The Democrats are looking to take back tax breaks from the oil industry while the Republicans are pushing to "drill here, drill now." It would have been useful to include a bit of analysis so that readers could judge the likely impacts of the two policies.

In the case of taking back tax breaks, there could be some modest deficit reduction to help the budget. The $4 billion annual figure cited by the Democrats would be a bit more than 0.1 percent of total spending. There could be some marginal impact on oil exploration and therefore future output, but given the likelihood that prices will remain high in the future, the plausible impact on supply and price in future years would most likely be too small to be measurable.

The plans to drill here, drill now would have zero impact on prices for some time, since most of the areas that have been put off limits to drilling by environmental regulation are difficult to explore and/or reach, like the Arctic Wildlife refuge or deep sea drilling in protected areas of the Gulf of Mexico. It would several years before any noticeable about of oil could be produced from these areas.

Furthermore, there is a world price of oil, not a domestic U.S. price. This means that increased drilling in the United States has roughly the same impact on U.S. prices as increased drilling in Kazakhstan or Iran. Plausible estimates of the amount of oil potentially produced from protected areas would be unlikely to lower the world price of oil by more than 10 percent and most likely less than 5 percent. (Drilling is unlikely to increase world supply by more than 2 million barrels a day, roughly 2 percent of world production.)

Even in this case, the increased supply would only be available for approximately 10 years. After that point, production levels would dwindle as would the impact on prices.

It would have been useful if these articles included some information on the likely impact of the policies being proposed, since most readers do not have more time than the Post and NYT reporters to examine these issues. 

The Drug Companies Mislead People About the Effectiveness of Their Drugs #54,732, Can We Ever Talk About Patents? Print
Friday, 29 April 2011 08:58

The NYT had an article about new research showing that a drug that sells for $50 a dose is just as effective in treating an eye disease as a drug that sells for $2,000 a dose. Why was Medicare and private insurers paying 4000 percent more than necessary to treat this eye disease? Because a drug company (Genetech) has a patent on the expensive drug which allows it charge prices that are far higher than its cost of production.

Economic theory predicts that when government interference in the market allows firms to charge prices above the cost of production, then they will engage in various rent-seeking behaviors to maximize their profits. These rent-seeking actions, like expensive lawsuits and paying off politicians, are a pure waste from an economic standpoint.

Economists usually get very upset when they see this sort of behavior, for example when an import tariff raises the price of a product by 20-30 percent. For some reason economists don't seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price, even though they can use the exact same graph to show the costs.

The ignorance of economists should not be an excuse for bad reporting. The fact that patent protection is at the root of the problem noted in this article should have been mentioned.

Doesn't Anyone Care About Homeownership Anymore? Print
Friday, 29 April 2011 07:40

It seems not given the almost complete lack of coverage of the release of data from the Census Bureau showing that the homeownership rate had fallen to its lowest level since the 4th quarter of 1998. I date the bubble as beginning in 1996. It remains to be seen whether all the growth in homeownership associated with the bubble will be reversed. 

On a more positive note, the release did show a substantial decline in vacancy rates, although they are still at historically high levels. With most of the air now gone from the housing bubble, we may finally be getting back to a more normal market.

The Post Is on Another Planet: Job Growth in the First Quarter Was Not Strong Print
Friday, 29 April 2011 05:57

The calls for the bankruptcy of the Washington Post (a.k.a. Fox on 15th Street) are getting louder. The post told readers that:

"The job market was a bright spot in the first quarter ... with the unemployment rate falling and job growth coming in strong."

The economy added an average of 159,000 jobs a month in the first quarter. At this pace it will take more than 14 years to get back to normal levels of unemployment. By comparison, in the year following the end of 1981-82 recession the economy created almost 290,000 jobs. Adjusting for the growth in the labor force, this would be a pace of more than 450,000 jobs a month now.

In the four years from 1996 to 2000, when we had already fully recovered from the prior recession, the economy generated 250,000 jobs a month. It is not clear what criterion the Post is using in describing the job growth in the first quarter as "strong."

The Washington Post Goes the No Evidence Route In Pushing Small Business Woes Print
Friday, 29 April 2011 05:45

The Washington Post devoted an article to the plight of small businesses in the recovery. It claimed that the weakness of small business growth, which it attributes primarily to a lack of access to capital, is a major factor impeding the recovery.

The piece gave absolutely no evidence that small business has performed markedly worse in this recovery than larger businesses. Nor did it give any evidence, other than the complaints of a person who owns a small coffee roasting business, that access to credit is a big problem for small businesses.

In fact, it cited the survey done by the National Federation of Independent Businesses that showed credit is not much of a problem. This survey has consistently shown that lack of demand is the major problem as noted in the article. 

If the Post did this piece based on evidence it would have highlighted the lack of demand that small businesses face. Lack of demand can of course best be addressed by additional spending, which would likely mean larger government deficits. That would directly contradict the Post's repeatedly expressed editorial position urging smaller deficits.

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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.