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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.
 
What Percent of President Obama's $1 Billion Re-election Campaign Funding Will Come from the Middle Class? Print
Monday, 13 December 2010 06:00
That is a question that the Post might have asked in a short piece that discussed the possibility that President Obama's re-election campaign will cost $1 billion.
 
The New York Times Redefines Middle Class Upwards Print
Monday, 13 December 2010 05:37

In an article that discussed the benefits of the tax deal for the middle class the NYT told readers:

"And other provisions that benefit the middle class have gotten virtually no attention, including a temporary repeal of a limit on itemized deductions and repeal of the phaseout for personal exemptions. Together, those tax breaks will cost nearly $21 billion."

The phaseout of the personal exemption only begins to kick in for couples with incomes over $250,000. This places them above 98 percent of the population in income.

 
China is Suffering from Both Labor Shortages and Surpluses (of the same type of labor) Print
Sunday, 12 December 2010 21:16

Yep, that's when you know when your economy is really in trouble. The NYT told readers today that China is suffering from inflation:

"Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year.

"That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation."

One might think a good remedy for this situation would be to raise the value of China's currency, which would reduce exports and the demand for labor in export industries. This would alleviate the labor shortage and the upward pressure it places on wages and thereby inflation.

But, "Beijing contends that raising the value of its currency would hurt coastal factories that operate on thin profit margins, forcing them to lay off millions of workers."

Okay, so Beijing is worried that measures to alleviate the labor shortage that it is concerned about will lead to layoffs of workers. There is either something being seriously misreported in this news story or China's leadership has less understanding of economics than the leaders in the United States.

 
Dana Milbank Celebrates Misleading Obama Administration Statements to Push its Tax Deal Print
Sunday, 12 December 2010 08:16

Dana Milbank is really excited as he tells readers in the first sentence of his column:

"For the first time in my adult lifetime, I am really proud of President Obama."

Wow, and why is Mr. Milbank so excited? Has President Obama stood up to the Wall Street banks, the health insurance industry, the pharmaceutical companies, or the oil industry? Well, not exactly, Milbank tells us that: "I'm proud that he has finally stood firm against the likes of Peter DeFazio."

For those who don't know of him, Peter DeFazio is a 12 term Congressman from Oregon. He has never held a leadership position in the party and has not played an important role in designing any major piece of legislation. (In other words, he does not have much power.) He has also backed President Obama on all the key items in his legislative agenda.  

But, Mr. DeFazio has criticized President Obama's tax deal with the Republicans. This got President Obama angry and he told DeFazio and his types to get lost. That passes for being tough at the Washington Post.

Milbank is also impressed that:

"That display [telling the liberals to get lost] was coupled with some hardball politics (Larry Summers's warning that rejecting the package would return the economy to recession)."

That's really cool. Larry Summers told the liberals that if this deal does not got through that the economy would go into a recession. How tough can you get?

Does Larry Summers have a model that shows the economy will fall back into recession without this deal? This certainly is not the forecast that the administration is using in its budget modeling. This modeling projects 4.3 percent as the growth rate for 2011. This modeling assumes the continuation of the Bush tax cuts, a continuation of UI benefits, and a couple of other items that would not happen if the Obama-Republican package and no subsequent language is approved. However, there are no (as in zero, nada, not any) models that show the items assumed in the President's budget projections, which may not happen absent this deal, boosting the growth rate by 4.3 percentage points relative to a situation without these items.

This means that when Larry Summers was playing hardball and telling Congressional Democrats that failure to the pass the compromise would lead to a recession he was saying something that is not true. Outside of polite Washington circles this is known as a "lie." (It is also worth noting that Larry Summers has a proven track record of being wrong about almost every major macroeconomic development in the last 15 years, the stock bubble, the housing bubble, the over-valued dollar, and financial deregulation.)

Apparently, at the Post, saying things that are not true to advance a political agenda is something to be applauded.

 

[Addendum and apology to readers. I foolishly accepted Milbank's characterization of Summers' remarks rather than reading the remarks myself.

Summers did not say that rejection of the budget deal would throw the economy back into recession as Milbank claimed. Summers said that rejection of the deal would increase the risk of recession. This claim is true, since the deal would be a net stimulus to the economy if enacted. If the economy does not get this stimulus, then it would be weaker and therefore at greater risk of recession. So, Summers statement is true; it is Milbank's inaccurate representation of his position that would be a lie.]

 

 

 
President Obama Gets Leading Proponent of Social Security Privatization and Bubble Economy to Tout Budget Deal Print
Saturday, 11 December 2010 09:18

That could have been the lead of a front page Washington Post news story reporting on a press conference in which former President Bill Clinton touted the budget deal that President Obama negotiated with the Republicans. Remarkably, President Clinton's record on these issues was never mentioned in the article.

As many former aides have acknowledged, President Clinton had been considering a variety of options for partially privatizing Social Security in the beginning of 1998 when the Lewinsky scandal exploded. With his presidency in jeopardy, Clinton had to rely on his core constituencies -- labor, the African American community, women's organizations -- all groups that would have been infuriated by an effort to privatize Social Security. As a result, Clinton was forced to abandon this effort.

President Clinton also set the economy on a path of bubble-led growth, touting the stock market bubble that drove growth in the late 90s. He also pushed for the financial de-regulation that helped clear the way for the abuses of the housing bubble era. In addition, he also actively promoted the high dollar policy that led to the enormous trade deficit, which was another major imbalance distorting the economy's growth path.

During his campaign, President Obama openly criticized this bubble-led growth path. Competent news reporters would have pointed out the irony that at this moment Obama now appears to be embracing the economic legacy he criticized. They also would have pointed out that Obama is relying on a Democratic president who was actively planning to privatize Social Security, ostensibly to curb fears that his deal could lead to the privatization of Social Security.

 
There Are at Least Two Schools of Thought About How to Stimulate Growth, But Only One Appears in the NYT Print
Friday, 10 December 2010 06:30

The statement about "at least two schools" is a quote in an NYT article from Germany's Foreign Minister Guido Westerwelle. However, one will look in vein in this article for anything other than the view from Mr. Westerwelle that:

"People used to think that it would be the next generation that would some day have to deal with the issue of public debts. ... And now everybody is surprised that it doesn’t take that long, that it hits us now in the shape of the ever increasing price of credits."

One alternative view is that unnecessarily tight monetary policy in the wake of the collapse of housing bubbles across Europe and the United States is forcing unnecessary austerity on Ireland, Spain, and other European countries. Proponents of this position point out that these countries are not suffering from a shortage of labor and capital, but rather a lack of demand.

This means that if the European Central Bank and/or national governments stimulated these economies by creating additional demand, this demand could easily be met without inflation. From this perspective, the imposition of austerity is simply pointless pain. Furthermore, the people who bear the brunt of the suffering are ordinary workers, not the bankers whose greed fueled the bubbles or the incompetent central bankers and other policymakers who allowed the housing bubbles to grow to such dangerous levels.

 
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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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