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Robert Samuelson Does the Big Lie, Big Time Print
Monday, 22 November 2010 06:02

Competent budget analysts know that the long-term budget problem is a health care cost problem. If U.S. per person health care costs were comparable to those in any other wealthy country, we would be looking at huge projected surpluses not deficits. Because health care costs are rising rapidly in the private sector, it means that the public sector programs that pay for these benefits (most important Medicare and Medicaid) also have rapidly rising costs.

If Medicare and Medicaid are lumped together with any other programs then the combination of Medicare, Medicaid, and the other program will be the cause of the deficit. For example, the categories of Medicare, Medicaid, and foreign aid explain the vast majority of the projected increase in the deficit over the next quarter century. Similarly, the combination of Medicare, Medicaid, and school lunch programs also explains the vast majority of the projected increase in the deficit over the next quarter century.

Robert Samuelson throws in Social Security as the third program so that he can tell readers:

"America's budget problem boils down to a simple question: How much will we let programs for the elderly displace other government functions."

Social Security does not in any honest way since it is fully financed over the period in question by the designated Social Security tax. But Samuelson does not feel bound by such details.

Of course there are easy ways to prevent health care costs from bankrupting the country, most obviously by taking advantage of the lower cost health care available in other countries. But, Samuelson never discusses such possibilities, focusing exclusively on cutting benefits on which the vast majority of retirees depend.

 
The Washington Consensus That Excludes the Overwhelming Majority of the Public Print
Monday, 22 November 2010 05:35

A front page Washington Post editorial touted the "accord seen in debate over deficit." It begins by telling readers that: "the sacrifices necessary to achieve those goals are coming into sharp focus."

Included in the Post's list of sacrifices are cuts to Social Security. It never mentions the fact that poll after poll continue to show that the vast majority of the public strongly opposes cuts to Social Security. It is only the select group of Washington insiders that the Post chose to cite that is agreeing on the "sacrifices necessary."

It is also worth noting that the Post did not even mention plans by the Bowles-Simpson and the Pew-Peterson deficit commission to cut the annual cost of living adjustment. This change would reduce benefits by an average of 0.3 percentage point for each year that a worker receives benefits. This means that after 10 years their benefits will be 3 percent lower as a result of this cut. After 20 years the cut will be close to 6 percent. If the average beneficiary receives benefits for 20 years this means that the average benefit cut will be close to 3 percent.

For most retirees Social Security is most of their income. For the bottom 20 percent of the income distribution, it is almost their entire income. This means that the change in the Social Security indexation formula proposed by these deficit cutters would have almost as much effect on after-tax income for many retirees as the proposed ending of the Bush tax cuts for high income households, which would increase their tax rate by 4.6 percentage points on income above $200,000. While the Post has devoted endless news stories to the consequence of this change in the tax code, it did not even think it was worth mentioning the proposed cut in Social Security benefits. 

It is also worth mentioning that the Post's consensus on reducing the deficit excludes the proposal from the IMF for more taxes on the financial sector. Insofar as taxes on the financial sector are not being considered it is likely attributable to the fact that financial interests are playing such a central role in the debate. A newspaper would call attention to this fact.

 
NPR Presents More Misleading Commentary on the Deficit Print
Monday, 22 November 2010 05:18

The lead story on Morning Edition presented Joe Minarik, from the Committee of Economic Development, as a neutral budget expert to talk about the deficit. Minarik assured listeners of the need to both cut spending and raise taxes. Mr. Minarik never bothered to point out that the long-term deficit problem is entirely a health care cost problem. If per person health care costs in the United States were comparable to costs in any other wealthy country (all of which enjoy longer life expectancies) the long-term projections would show huge budget surpluses, not deficits. 

The piece also implies that the deficits being run at present pose a serious problem, with the host asking Mr. Minarik whether some of the current $1.4 trillion deficit can be seen as a "good" deficit since it involves an investment for the future.

In fact, all of the current deficit can be seen as a "good" deficit since it is increasing output and employment. If the government was currently spending less or taxing more it would be putting less money into the economy. This would lead to less demand and fewer jobs. In other words, we would be throwing our children's parents out of work. It is difficult to see how this helps them.

It would also have been useful to find a budget expert who knew that when a debt is accumulated makes a difference in terms of its burden. A debt that is run up as a result of deficits when the economy is far below its potential need pose no burden whatsoever. The central bank can simply hold the bonds issued to finance the debt. This means that the interest is paid to the central bank which in turn pays it right back to the Treasury.

If debt is run up due to a weak economy, then an economy can sustain much larger levels of debt. For example, Japan now has a debt to GDP ratio of almost 230 percent. Yet, it can still borrow long-term in financial markets at just a 1.0 percent interest rate. This indicates that debt levels that are far higher than anything currently projected for the United States can be easily sustained. A real budget expert would know this.

 
Washington Post Accuses People in Washington of Doing Drugs: The Fed and Fiscal Policy Print
Sunday, 21 November 2010 08:42

The lead Washington Post editorial told readers that:

"Yet buying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name."

Huh? How does pushing interest rates down to boost employment look like fiscal policy? Isn't that pretty close to the textbook definition of monetary policy? Back when I was learning economics, fiscal policy was when the government directly spent money or gave tax cuts, it wasn't about making it cheaper for the private sector to borrow.

The editorial is also troubling by seeming to suggest that the Fed should no longer have a mandate to pursue full employment.

"Still, the Fed is nearly unique among central banks in the developed world in having responsibility to maximize both price stability and employment. The fact that the left can attack him for not pursuing full employment aggressively enough, while the right can accuse him of pursuing it at the risk of hyperinflation, suggests that the dual mandate piles a heavy political burden on what is and should be a nonpolitical institution."

The Post is apparently upset that Chairman Bernanke and the Fed are attracting criticism. Sure no one likes to be criticized, but why would anyone think that this is a problem? From the standpoint of an economist this boils down to the question of whether all the nasty comments directed at Bernanke are causing us to have trouble getting people to serve at the Fed. That doesn't seem to be an issue at the moment, so there is no obvious reason that criticisms of the Fed chair should bother us.

The other flaw in the Post's logic is the utterly crazy idea that taking away the Fed's mandate to pursue full employment is somehow non-political. Monetary policy has enormous impact on the level and distribution of income in society. If the Fed has a green light to ignore high levels of unemployment and it takes advantage of this option, then it will be potentially costing the country trillions of dollars of lost output.

Furthermore, since the incomes of middle and lower income workers are most sensitive to the rate of unemployment, the bulk of these losses would be endured by those at the middle and bottom of the income distribution. The negative hit to the incomes of those at the middle and bottom due to high unemployment dwarfs everything that Congress ever debates in terms of TANF, EITC, UI and just about any other tax and transfer program. It is hard to understand why anyone who believes in democracy would want to put such a central economic decision (the trade off between the unemployment rate and the risk of inflation) outside of the scope of political action.

 

 

 

 

 
If China is Worried About Losing Jobs Why Is Its Central Bank Raising Reserve Requirements? Print
Saturday, 20 November 2010 08:57

The NYT reports that China's central bank is raising the reserve requirements for banks. It claims that this is being done to give the central bank more money with which to buy dollars in international currency markets, which will keep the yuan from rising.

The article claims that China does not want the yuan to rise because a higher yuan would make its exports less competitive and therefore cost jobs. However, raising reserve requirements will reduce lending, thereby also throwing people out of jobs.

The article also says that China is worried about inflation. If this is true, then the most obvious way to reduce inflationary pressure would be to just let the yuan rise. This would make imports cheaper and also slow growth by reducing exports.

The actions of China's central bank is inconsistent with the motives attributed to it in this article. Either those governing China's central bank are confused about basic economics or the article has inaccurately presented the motives for its actions.

 
Tell Market Place, Peter Peterson Spent $1 billion of His Own Money to Cut Social Security Print
Friday, 19 November 2010 05:56

BusinessWeek editor Peter Coy told Market Place radio listeners that Peter Peterson spent $1 billion of his own money to inform people about the budget problems facing the country (emphasis in original). This is not true.

Peterson has consistently pushed for cuts to Social Security and Medicare. He has never supported the presentation of a balanced picture of the country's budget situation. For example, even though it is easy to show that the projected long-term budget deficit is entirely attributable to projections that per person health care costs in the U.S. will rise to three or four times the average for rich countries, this fact is largely concealed in Peterson-financed budget projects.

Peterson has almost completely excluded any discussion of financial sector taxes (the source of his wealth) from budget debates, even though there is wide recognition that the sector is a source of massive waste and rents. He has also routinely misrepresented the state of Social Security's finance in his public statements, repeatedly insisting that there is no trust fund. This is completely untrue and is an invention of Mr. Peterson. As can be seen in the Social Security trustees report and numerous other budget documents, the trust fund currently holds more than $2.5 trillion in government bonds.

 

 
How Could Brazil and Thailand Be Worried About Both a Falling Dollar and Rising Inflation from QE2? Print
Friday, 19 November 2010 05:54

It's okay for reporters to point out when important people aren't making sense. In fact, it is really part of their job.

We are told in the same piece that there is concern that the Fed's QE2 policy will drive down the value of the dollar and also that:

"Brazil, Thailand and other emerging economies, which fear that a surge of foreign capital will drive up prices and interest rates."

In this situation, it is appropriate to point out these views are contradictory. If the dollar falls in value relative to these countries' currencies, then it will make imports from the United States cheaper, driving down prices in these countries, not pushing them up. A lower dollar will also reduce exports from these countries, which will lower employment, thereby also reducing inflationary pressures. An inflow of foreign capital would be expected to push interest rates down, not up.

In short, if the views of the leaders of these countries have been presented accurately, then they badly misunderstand basic economics. This should have been pointed out to readers.

 
The IMF Could Not See the Housing Bubble That Wrecked the Economy, Wants Countries to Reduce their Deficits More Quickly Print
Thursday, 18 November 2010 08:10

The Washington Post thought it was important to tell readers that the IMF thought that deficit reduction plans in many countries are inadequate because these countries were overly optimistic in their growth projections:

"in its recent review, the IMF warned that governments were relying on optimistic assumptions about economic growth and had not yet specified adequate cuts in spending to control their finances."

 

It would have been worth reminding readers that the IMF managed to overlook the housing bubbles in the United States, Spain, Ireland and other countries that led to the current economic crisis. In fact, if IMF economists were held to the same standard of accountability as ordinary workers, the vast majority of them would be among the 15 million unemployed. If readers were aware of the quality of the economic work produced by the IMF they would probably not give its concerns much credence. 

 
NPR Gives Mara Liasson Segment to Lobby for Cuts in Medicare and Social Security Print
Thursday, 18 November 2010 05:22

NPR departed from normal journalistic standards this morning when it gave a reporter the opportunity to present her opinions on dealing with the deficit as facts to its listeners. Mara Liasson told listeners that it is not possible to address the deficit while leaving any specific area untouched. She included Medicare and Social Security on this list. 

Her statement is of course not true, as many people have shown that it easy to meet deficit targets without touching Social Security. In fact, on Tuesday, Representative Jan Schakowsky, a member of the President's deficit commission, laid out a plan for meeting the commission's deficit target that did not touch Social Security or Medicare. Ms. Liasson may not like Representative Schakowsky's proposal, but it is dishonest journalism to deny that a plan like this exists.

It is also easy to show that the deficit is first and foremost the result of our broken health care system. The country currently pays more than twice as much per person for health care as people in other wealthy countries. This ratio is projected to rise to three and four to one in the decades ahead.

If these projections for health care prove accurate then it will devastate our economy regardless of what we do with the budget deficit. On the other hand, if our health care costs are brought in line with costs in the rest of the world, then the country does not face a long-term deficit problem. Honest reporting on the deficit would point out this simple fact.

 
A Budget Proposal From A Commission Without a Single Member That Saw the $8 Trillion Housing Bubble That Wrecked the Economy Print
Wednesday, 17 November 2010 06:20
Yes, that would be the Rivlin-Domenici commission. In elite Washington circles ignorance is a credential.
 
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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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