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Ross Douthat Claims That "Everybody Knows" Something That Is Not True Print
Monday, 27 September 2010 08:50

That's right NYT columnist Ross Douthat told readers today that: "And as everybody knows, the only way to really bring the budget into balance is to reform (i.e., cut) Medicare and Social Security."

Of course everybody who knows anything about the budget knows full well that this is not true. The budget problem is almost entirely a story of a broken health care system. If the United States had the same per person health care costs as any of the countries which enjoy longer life expectancies than the United States, then it would be facing long-term budget surpluses, not deficits. 

Everybody also knows that Social Security does not contribute to the deficit. It is financed by a separate designated tax. The most recent projections from the Congressional Budget Office show that this tax will be sufficient to fully fund benefits through the year 2039 with no changes whatsoever. 

Given the health of the program, it is not clear why anyone would want to cut Social Security except to take money from ordinary workers -- a major sport in Washington. It would make more sense to default on the national debt.

 
Lessons for Post Media Critic on How Real Reporters Write Print
Monday, 27 September 2010 06:28

Howard Kurtz, the Post's media critic, had a lengthy profile of NYT columnist and Princeton economist Paul Krugman in the paper today. At one point Kurtz told readers that:

"Many other White House officials [other than Larry Summers] view Krugman as an irritant who has become predictable and whiny in his criticism."

Actually, Mr. Kurtz doesn't know how other White House officials actually view Krugman, he only knows how they say they view Krugman. Since Krugman has been a harsh critic of many Obama administration policies, the unnamed White House officials would have good reason to try to discredit Krugman to the public regardless of whether or not they thought these criticisms were accurate.

This is why a competent reporter would write that:

"White House officials say they view Krugman as an irritant who has become predictable and whiny in his criticism."

This would accurately convey information to readers instead of serving the White House public relations effort.

 
Robert Reich is Correct, the NYT's Incompetent Book Reviewer Is Wrong Print
Sunday, 26 September 2010 19:54

The New York Times assigned former Washington Post reporter Sebastian Mallaby to review Robert Reich's new book, Aftershock: The Next Economy and America's Future. It is unfortunate that they couldn't find someone familiar who knew some economics for this task.

Near the beginning of the review, Mallaby tells readers:

"Reich insists instead that American consumers, and particularly the middle class, have been buying too little. For years, the United States has consumed more than it has produced; the excess demand has sucked in products from abroad, which is why the nation has run a trade deficit. The idea that the economy has suffered from a lack of demand is, shall we say, eccentric."

Actually, there are few economists who would say that the United States had excess demand throughout most of the last decade, so Robert Reich is exactly right on this point and Sebastian Mallaby is completely wrong. The trade deficit was the result of an over-valued dollar.

This is actually very basic economics. The value of the dollar determines the relative price of foreign and domestic goods. If the dollar is sufficiently over-valued then the United States could be running a trade deficit even when demand is grossly inadequate -- as is the case at present. The high dollar makes imports very cheap for people in the United States, which causes us to consume large amounts of imports. It also makes U.S. exports expensive to people living in other countries, which means that we will have weak exports. It is remarkably that Mallaby is apparently unfamiliar with this basic logic and that his mistake was apparently not caught by the editor.

 
Does the United States Benefit from Having an Immigrant Underclass? Print
Sunday, 26 September 2010 10:14

Yes, they work cheap, but is it a good thing to have a group of especially low-paid workers in the United States? That is the question that goes unaddressed in Ezra Klein's column hyping recent research suggesting that immigrants do not lower the wages of even less-educated workers.

While there are some issues about the research findings (rent, which is a large share of low-wage workers' budgets, is far higher in cities with large immigrant concentrations [e.g. Los Angeles and Miami] than in cities with relatively few immigrants [e.g. Buffalo and Toledo] which makes real wage comparisons difficult), the implications are a bit more complicated than suggested in the column.

Essentially the research implies that less-skilled immigrants have formed an underclass that is paid so poorly that its size does not affect the wages of even the least skilled native born workers. This would be consistent with the findings of other research that it is taking far longer now than in prior decades for immigrants' wages to catch up with the wages of native born workers. As would be expected, new immigrants primarily compete with other earlier immigrants, so a more rapid flow depresses their wages.

There are some statements (derived from the cited research) that are simply untrue. There are very few jobs done by less-skilled immigrants that would not be done by native-born workers. They would be done, just at much higher wages. For example, the jobs in construction and meat-packing that are now filled largely by immigrants used to be filled by native born workers, and in fact were often sought out. But, the pay in these sectors has fallen sharply and many fewer native born workers are now willing to fill the jobs. However, there is nothing intrinsic to the jobs that makes them unsuitable for native-born workers.

Klein is right about the enormous potential gains from allowing in more highly-skilled immigrants but does not carry the point far enough. If the United States adopted more transparent professional and licensing standards for doctors and lawyers and other highly paid professionals, and adopted an open door policy for foreigners who met these standards, we could send pay in these professions plummeting. There would be enormous gains to consumers and the economy, which would swamp the marginal benefit of getting lower cost construction workers and custodians. However, doctors and lawyers have enough power to prevent such policies from being adopted and generally from even being discussed. 

 

 
The Washington Post Praises Baby Sitter Who Burned Down the House: the Kids Survived Print
Sunday, 26 September 2010 07:52

Most workers are held accountable for their performance. The same does not apply at the Washington Post for the people who run economic policy. Once again the Post offered praise to Presidents Bush and Obama for preventing a Great Depression.

Of course it is always good to prevent a Great Depression, but the only reason a severe recession is even on the agenda is the result of braindead economic policies that were almost entirely ignored by the Washington Post. In the real world avoiding a Great Depression is a rather weak boast. (For the record, the second "Great Depression" story is a myth to scare little children and Post readers. The first Great Depression was the result of a decade of failed policies, not a single mistake or set of mistakes at its onset.)

Competent economists saw and warned of the dangers of the $8 trillion housing bubble, the collapse of which eventually sank the economy. This was an entirely predictable and predicted event, as was the fallout from this collapse.

However, those warning of the bubble were almost completely excluded from the pages of the Post. Instead, the Post filled its economic coverage and opinion pages with discussions of the budget deficit, which was (and is) the topic of endless hyperventilation. 

 
Anti-Deficit Republicans Usually Don't Say That Deficits Are Blocking Private Investment Print
Saturday, 25 September 2010 07:43

The Post told readers that Republicans who complain about a bloated federal work force have the view that:
"new hires under Obama and the premium are helping to drive the deficit and discourage private investment that could boost the economy." 

Actually, they don't usually say this since the claim is so obviously at odds with reality. With interest rates at 60 year lows, it is very hard to say how the deficit would be discouraging investment -- as opposed to encouraging it by increasing demand. The argument against deficits usually involves name calling and hand waving. There is no obvious logic to it at this point and the Post is misleading readers by implying that there is.

 
Washington Post Routinely Misleads on Debt Burdens Print
Friday, 24 September 2010 05:31

The Washington Post, which is losing circulation rapidly, routinely misleads its readers about the burden of the national debt. First, it rarely puts debt and deficit numbers in any context. Telling readers that the debt will grow by $4 trillion over the next decade due to tax cuts is a meaningless statement to nearly all of its readers, who have no idea how large $4 trillion is. It would be a very simple matter to tell readers that this sum is approximately 2.3 percent of projected GDP over this period.

It also would be important to point out that debt accrued in a period of high unemployment, like the present, does not have to impose any current or future burden on the public since it can be fully financed by the Fed. If the Fed buys and holds the bonds used to finance the debt then the money paid by the government in interest would be refunded by the Fed every year creating no net interest burden for the government. Currently the Fed is refunding $77 billion a year to the government, more than one-third of the interest paid out by the government.

 
The Problems of Avandia: Another Example of Failed Big Government Print
Friday, 24 September 2010 05:18

The NYT had a front page article on the decision by regulators in the United States and Europe to restrict access to Avandia, a major drug for treating diabetes. The reason for the restriction was a new study that linked the drug to tens of thousands of heart attacks.

This assessment was based on an independent analysis of data from GlaxoSmithKline, the manufacturer of the drug. GlaxoSmithKline did not do (or report) this analysis itself even though it had the data. The patent monopoly on Avandia granted by the government gave GlaxoSmithKline a strong incentive not to find the potential dangers of its drug. This failure of big government should have been noted in this article. (There are more efficient alternatives to patent monopolies for supporting prescription drug research.) 

 
Another Ill-Informed Front Page Washington Post Editorial on Social Security Print
Friday, 24 September 2010 04:57

The Washington Post ran another front page editorial calling for cuts to Social Security. The context was a discussion of the Republicans' "Pledge to America." The editorial complained that the plan did not include any concrete ways to deal with Social Security.

It then suggested that three ways that the Republicans should look to put the system into long-term balance: "raising the Social Security retirement age, changing the cost-of-living formula, offering personal or private accounts." The first two measures are ones that are strongly supported by the Post editorial board (hence their appearance in this front page editorial), but strongly opposed by the vast majority of the public.

Insofar as it is necessary to address a funding gap (projections from the Congressional Budget Office show the program is fully solvent for the next 29 years with no changes whatsoever), polls show that the public overwhelmingly favors raising the cap on income subject to the payroll tax. Currently, high income workers only pay the Social Security tax on their first $106,000 in wages. Polls also show that the public much prefers even an increase in the tax rate itself to the cuts pushed by the Post editorial board.

It is also worth noting that offering private accounts is not a route toward improving the program's finances. Private accounts worsen the finances of Social Security by pulling money out of the system. This would be like a family facing budget problems deciding to buy a new car to help the situation. Private accounts may be an effective way to get fee income to Wall Street banks, but they do not help the finances of Social Security.

The article also reports on the Republicans calls for a "full accounting" of Social Security, Medicare, and Medicaid. It would have been appropriate to point out that there is already a very full accounting of these programs. The trustees of both Social Security and Medicare issue lengthy accounts of the programs' finances each year. (They do refuse to disclose the documents that provide the basis for these projections. However, the Republicans did not imply that they would make these public.) The Congressional Budget Office does regular analyses of all three programs. The Government Accountability Office also periodically evaluates specific issues connected with these programs on request from members of Congress as does the Congressional Research Service. In addition, the Centers for Medicare and Medicaid Research does extensive analysis of Medicare and Medicaid, along with other government health care programs.

In this context, the Republican call for a "full accounting" would appear to be a quest for a pointless government bureaucracy that would duplicate work already being done. A serious news article would have called attention to the Republicans' push for needless bureaucracy.

 
The Way Government Bonds Work: Lessons for Matt Bai Print
Thursday, 23 September 2010 07:35

Reporters for the NYT who write on economic policy issues should know the way government bonds work. However, that is apparently not the case with Matt Bai. In defending an earlier article in which he referred to the bonds held by the trust fund as "iou's," Bai responded to a reader's question:

"The principle to which you’re referring is that the government guaranteed all of this Social Security surplus money (which it spent) with Treasury Bills. The reality is that redeeming that trillions of dollars in debt would require issuing trillions more in debt."

Bai's statement is of course true, but that is the case with all government debt. For example, suppose Mr. Bai decided to buy $100,000 of 30-year Treasury bonds. If he did this the government would turn around and spend the money that Bai had lent it. Bai seems to think there is something sinister in this story, but in fact that is usually what happens when a government or company issues bonds: it spends the money.

Thirty years from now, in 2040, Bai will go to cash in his bonds. When he does this, the government will be forced to borrow another $100,000.

This is the same story as the bonds held by Social Security. It is really very, very simple. The government will have to redeem these bonds just like any other bonds. Now, Mr. Bai apparently wants the government to default on the bonds held by Social Security. It could do this just like it could default on any of the bonds it has issued.

The people who would not get the Social Security benefits that they had paid for certainly would have good cause to be very angry if this happened, since it is a policy that is difficult to justify. Of course they may advocate that the country default on its other bonds, which might be appropriate if the country really is in such bad fiscal shape that it can't meet its obligations to its retirees.

As a practical matter, Bai is badly confused about the nature of the country's debt burden. The debt that the country is now accumulating because of the downturn need not pose any long-term fiscal burden since the Fed can just hold the bonds and repay the interest to the government.

The longer-term projections showing a serious deficit problem are all driven by projections of exploding health care costs. If we don't fix our health care system then we will face serious economic problems, one of which will be the budget deficit. However, as all economists know, the real problem is with the health care system.

 
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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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