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Why Are All Health Care Reformers Protectionists? Print
Wednesday, 20 October 2010 04:29

David Leonhardt outlines an interesting proposal to reduce the cost of Medicare. He challenges readers to come up with alternatives.

There is an easy and simple one that health care reformers appear unwilling to consider. Let Medicare patients buy into the more efficient health care systems in other countries and split the savings. According to the Congressional Budget Office's projections, these savings will rise into the tens of thousands per beneficiary per year.

 
Government Intervention Makes Cancer Treatment Expensive Print
Wednesday, 20 October 2010 04:14
The NYT had an interesting piece this morning on how insurers are trying to reduce the cost of treating cancer. While the piece notes that much of the cost is related to the high price of new cancer drugs it would have been worth mentioning that this is the result of government granted patent monopolies. If the government used a different mechanism for financing drug development and allowed drugs to be sold at the free market price, all of these treatments would be relatively low cost. The doctors would be able to choose the one that they viewed as best for their patient without worrying about the cost.
 
Dumb Comments on CBS Money Watch: The Ratio of Government Payments to the Elderly Compared to Payments to the Young Print
Tuesday, 19 October 2010 12:39

Eric Schurenberg is upset about Social Security and Medicare benefits because the federal government spends 7 times as much on each senior as it does on each child. This is taken from a paper that came out from the Brookings Institution. 

Let's use the Schurenberg-Brookings methodology to see the ratio of average federal spending on the country's 400 billionaires to spending per child. For convenience let's say that federal spending averages $5,000 per child.

How much does the federal government spend on each billionaire? Most wealthy people hold some amount of their wealth in government bonds. Let's conservatively assume that our 400 billionaires hold an average of $1 billion worth of government bonds. Let's assume that these bonds pay an average interest rate of 4 percent. This means that the government is paying our billionaires an average of $40 million a year in interest. This is about 8,000 times what we spend on children on average. How's that for fairness?

Okay, everyone is jumping up and down saying that our billionaires paid for these bonds and this interest is just a return on that payment. This is true, but guess what? Our seniors paid Social Security and Medicare taxes to cover their benefits. In other words, they paid for these benefits much like the billionaires paid for their bonds, except of course that the seniors had no choice in the matter.

Ignoring the fact that Social Security and Medicare were paid for with designated taxes is dishonest, just as it would be dishonest to comment on the interest payments going to the billionaires without noting that they had paid for their bonds. But hey, this is the state of public debate in Washington.

 
The Washington Post's Entry in the "How Many Big Things Can You Get Wrong in a Short Article?" Contest Print
Tuesday, 19 October 2010 06:12

The Washington Post appears to have outdone itself in a discussion of the politics surrounding the foreclosure crisis. For beginners, it told readers that:

"Reviving the economy requires repairing the housing market."

What does the Post possibly think it means by this statement? Does it mean that reviving the economy means re-inflating the housing bubble? That's a novel economic theory. Maybe they should find an economist who won't laugh at it.

Does it mean that reviving the economy means allowing the bubble to complete its process of deflation. This would arguably be a good thing, because then people stop throwing money in the toilet buying homes at bubble-inflated prices. The further deflation of the bubble also means that homeowners would recognize how little equity they actually have so they can adjust their savings accordingly. But, this means a higher saving rate (i.e. less consumption), which would slow the economy, so it is difficult to understand how that promotes economic revival.

This great sentence continues:

"which won't happen until foreclosed properties and delinquent mortgages are dealt with."

The rest of the paragraph explains to readers that:

"So the White House, which is looking past the midterm elections, has been restrained. Housing and Urban Development Secretary Shaun Donovan wrote over the weekend that 'a national, blanket moratorium on all foreclosure sales would do far more harm than good, hurting homeowners and home buyers alike.'"

Okay, it's fun with logic time. Secretary Donovan wants more foreclosures, presumably to further depress prices. Nevermind that the impact is likely to be very limited at the moment, since banks already have a huge inventory of foreclosed homes that they are holding off the market.

If Donovan thinks it is good to speed up the foreclosure process then why is the administration pushing HAMP? According to Treasury Secretary Timothy Geithner, one of the main purposes of HAMP was to slow down the foreclosure process. So the administration thinks that it is very important to both speed up and slow down the foreclosure process? That may make sense to the Washington Post, but probably not to anyone else.

We should probably also mention the homebuyers' tax credits. These credits also temporarily supported the market. This allowed many homeowners to dump their homes at bubble-inflated prices. It also allowed banks to get out of mortgages that might otherwise have gone underwater, or in many cases, further underwater.

The article then gives us a quote from a Democratic consultant without a name:

"But shutting down foreclosures has the potential of shutting down the whole housing market, which isn't helpful to anybody."

Let's see, we have how many hundreds of thousands of homes that non-foreclosed sellers are putting on the market each month, plus a backlog of several hundred thousand foreclosed homes already in the banks' possession. How exactly does a moratorium on foreclosures shut down the whole housing market?

Then we have the orphan and widow sob story:

"A freeze in foreclosure sales also hurts private investors - including endowments, pension funds and mutual funds - who in good times greased the wheels of the real estate market by buying mortgage securities."

Yes, some endowments, pension funds and mutual funds made bad investments because their highly paid investment advisers were too incompetent to see an $8 trillion housing bubble. What does that have to do with an insistence that the law be followed when houses are foreclosed. Endowments, pension funds and mutual funds also lost money when companies in which they held stock were hurt by trade agreements. The Post has never mentioned this fact prominently. In any case, this is the way a capitalist economy works. Almost anything the government does or does not do will cause endowments, pension funds and mutual funds to lose money on some of their holdings.

The Post concludes by giving us a tirade from a Virginia realtor who "upset that deadbeat borrowers may get a break." Of course the issue here is simply making sure that the law is followed -- a fact that the Post managed to obscure very effectively in this article. Presumably even the Virginia realtor would agree that banks should not be able to throw people out of their home without going through the normal legal process. 

 

 
Number Games: The Retirement Age in France is Already 65 Print
Tuesday, 19 October 2010 04:50

If you asked people what the retirement age is for Social Security most people would probably say 66, or perhaps age 65 if they missed the fact that the age for full benefits has been increased. However, workers can qualify for early benefits at age 62 and most workers do in fact start collecting benefits shortly after reaching this age.

This is why it is very disturbing to see the NYT and other reports on France routinely refer to President Sarkozy's plan to raise the retirement age in France from age 60 to 62. This refers to the early retirement age. The normal retirement age is already age 65 and would rise to age 67 under Sarkozy's proposal.

In the same vein, the article refers to a plan by Germany to raise its retirement age to 63 without noting that this refers to the early retirement age. The age for full benefits in Germany is currently 67.

The article also points out projections for declining ratios of workers to retirees, which will put pressure on retirement systems. It would have been helpful to point out that real wages are projected to increase at the rate of approximately 1 percent annually. This would allow workers to spend a larger portion of their life in retirement if they opt to take a portion of this gain in longer retirements with somewhat smaller pay gains.

 
Robert Samuelson is Worried More Quantitative Easing Could Spark Strong Growth Print
Monday, 18 October 2010 05:11

I'm not kidding, read it for yourself. Samuelson notes Fed plans to buy more Treasury bonds. He then warns of the "dangers." He comments that the policy may prove ineffective -- the Fed may be pushing on a string:

"But if all the cheap money spurs much higher economic growth, many of these reserves will turn into loans and raise the specter of higher inflation -- 'too much money chasing too few goods.' The Fed would then have to withdraw or neutralize the added money through higher interest rates."

That's great, we're sitting here in the most prolonged downturn since the Great Depression, with the inflation rate closing in on zero, and Samuelson is worried that we may get a burst of growth that could lead to higher inflation. Only in the Washington Post.

 
Banks Can Hire More Workers: Tell the Post Print
Monday, 18 October 2010 05:00

The Washington Post apparently thinks that banks have a fixed number of employees. This is the only meaning that can be attached to their warning in an editorial arguing a foreclosure moratorium that:

"An ironic consequence of diverting staff to fixing affidavits now is that it leaves fewer people to modify salvageable loans."

See, the way this would work is the banks would realize that they need more workers to handle the foreclosure process in a way that complies with the law. (You know, the law, what the rest of us have to obey.) The banks would run help wanted ads, maybe even in the Post, and employ some of the millions of people who have lost their jobs in the downturn. Hiring more workers would of course lower bank profits and dip into executive bonuses, but that is the way things are supposed to work in a market economy.

 
The White House KNOWS That a Foreclosure Moratorium Will Hurt Bank Profits, the NYT Doesn't Know What the White House Thinks Print
Monday, 18 October 2010 04:35

The mind readers at the NYT told readers that:

"The Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy [emphasis added]."

It is easy to see how a foreclosure moratorium might hurt bank profits. After all, the banks could be forced to follow the same laws on mortgages and property transfers as the rest of us. This would raise their costs and reduce their profits, which is why they had been taking short-cuts instead of following the law.

However it is not easy to see the chain of events whereby a foreclosure moratorium hurts the broader economy. Certainly Housing Secretary Shaun Donovan couldn't produce a credible story in the piece in the Huffington Post cited in this article.

Donovan uses the absurd story of a young woman who just bought a foreclosed property who he claims would have been unable to achieve her dream of homeownership if a foreclosure moratorium were in place.

Huh? Doesn't the housing secretary know that there is a huge inventory of foreclosed homes that banks are holding off the market waiting for better times? If the pipeline of newly foreclosed homes was temporarily stopped by a moratorium, this inventory would easily keep the market well-supplied with foreclosed properties for long into the future.

And, wasn't one of the main purposes of HAMP to slow the process of foreclosure? The argument was that this slowing was necessary to stabilize the market. Does the Obama administration want to slow or speed up the process of foreclosure, or both? And are both essential for the housing market?

This is what a reporter would be asking after seeing Secretary Donovan's piece. (Btw, yes both HAMP and blocking a foreclosure moratorium helps banks.)

 

 
Deflating the Japanese Horror Story Print
Sunday, 17 October 2010 07:40

The NYT devoted a lengthy piece to telling readers how bad things in Japan have been since its bubbles collapsed in 1990. It gets many things badly wrong.

First and most importantly, Japan is actually considerably wealthier on average today than it was in 1990, contrary to the implication of this article. According to the IMF, per capita income is 16.4 percent higher in Japan today than it was in 1990. This is considerably less than the 21.5 percent growth in the UK over this period or the 36.6 percent increase in the United States, but it is still a substantial gain in living standards. It is also worth noting that Japan's gain in per capita income was accompanied by a considerable shortening in the ratio of hours worked to population (shorter workweeks and more retirees).

However the biggest flaw in the piece is its obsession with deflation. Japan's has suffered from deflation in the last two decades, but the rate of price decline has always been very gradual. Only in 2009 did it even exceed 1.0 percent. (It is projected to be larger than 1.0 percent this year.)

It makes very little difference to an economy whether prices are falling by 0.5 percent or rising by 0.5 percent. The argument that people put off purchases because they see prices falling is just silly. If prices are declining at the rate of 0.5 percent a year, then someone considering the purchase of an $800 refrigerator can save $4 by waiting a year. It is unlikely that these sorts of savings would have much impact on even the purchase of a big ticket item; it's inconceivable that they would have any impact on the purchase of more every day items like food and clothing.

The real issue is simply that Japan's inflation rate has been too low. In this sense, a 0.5 percent deflation rate is worse than a 0.5 percent inflation rate. But a 0.5 percent inflation rate is also worse than a 1.5 percent inflation rate. A low inflation rate, whether positive or negative, keeps real interest rates higher than would be desirable in a severe downturn. It also prevents the economy from inflating away the debt burden left over from the housing bubble.

This point is important because many people wrongly believe that the United States will only be suffering from a problem of too low inflation if the inflation rate actually turns negative and we have deflation. This is not true. The inflation rate in the United States is already a level that is hampering growth. Any further drop in the inflation rate will make the situation worse but there is no importance to crossing zero.

One final point worth noting: this article implies that Japan's low birthrate is a bad thing. Actually, Japan is a very densely populated country. This is why house prices are so high. If its population declined then housing prices would fall. (This is a sophisticated economic concept known as "supply and demand.") A lower population would also mean less greenhouse gas emissions for those who care about the future of the planet. For these reasons, a low birthrate could help Japan in the future.

 
Public Employee Bashing on the Dark Side Print
Saturday, 16 October 2010 16:04

With private sector unionization down to 7 percent, the right-wing is turning its guns on public sector unions. Since workers generally can opt to join a union in the public sector without the risk of being fired, there has been no notable decline in public sector unionization rates over the last three decades. The unionization rate in the public sector is still above 35 percent, which means that public sector unions continue to be an important force on the political scene.

The Washington Examiner accommodated this attack with a piece from Diana Furchtgott-Roth, the chief economist at the Labor Department in the Bush Administration. The centerpiece of Ms. Furchtgott-Roth's piece is a complaint "insourcing," which means having work done by private contractors done instead by public employees.

Her first sentence has the bizarre complaint that:

"Even though Americans face a 9.6 percent unemployment rate, with almost 15 million out of work, President Obama and Congress are trying to take more jobs from private businesses through 'insourcing,' which means taking contracts from private firms and giving the work to government employees."
The 9.6 percent unemployment rate is obviously awful, but what does that have to do with whether jobs should be done by workers in the public or private sector? For most people a job is a job. If some of the unemployed get re-employed in the public sector, what is the problem?
But the more fundamental point is that the policy that Furchtgott-Roth complains about does not in fact exist. She is upset about an insourcing policy that gives preference to the public sector over private contractors.
However, that is not the policy in place. The policy only gives preference to the public sector in cases where the work in question has an inherently governmental character (think of interrogating prisoners) or there had been a past history of abuse by private contractors (think of Halliburton).
The simple fact is that the role of private contractors in the federal government has exploded in the past decade. The real value of private contracts increased by more than 50 percent between 2000 and 2009. Many of these contracts have been associated with serious abuses. It is understandable that the recipients of these contracts would be concerned if some of this business ended up back in the public sector, but it is hard to see why the rest of us would be.
We might not expect the Washington Examiner to be "fair and balanced," but it would be nice if it stuck a little closer to the truth.
 
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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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