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NPR Tells Us That Republicans Believe that Fannie and Freddie Caused the Crash Print
Tuesday, 17 August 2010 04:16

Yes, NPR looked into the eyes and now they know what the Republican leaders believe:

"In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy."

In Journalism 101 reporters are told not to say things that they don't know to be true. And high on the list of things that reporters do not know is what politicians really believe.  

News flash! Politicians sometimes say things that they do not believe to be true. The Republican allegations about Fannie and Freddie would likely be on this list, since they are so obviously not true as one of the sources in this piece points out.

Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage-backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.

It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.

Responsible reporters would simply present the facts here. They would not try to tell us what the politicians really believe, since they really have no idea.  

 

 
How Will Cuts to Social Security Affect Spending By Retirees? Print
Monday, 16 August 2010 04:44
For some reason this question was never raised in a WSJ piece reporting on the expected reduction in spending by baby boomers who will be retiring over the next decade.
 
China Has Long Been the World's Second Largest Economy: NYT Kills Electrons for Nothing Print
Sunday, 15 August 2010 20:15

The NYT is touting the big news. China just passed Japan as the world's second largest economy! This is painful because the piece badly misleads readers about the relative size and importance of China's economy.

Measured by purchasing power parity -- a measure that assigns the same price to goods and services regardless of where they are produced -- China has long been the world's second largest economy and in fact is already more than twice as large as Japan's economy. It is only by using an exchange rate measure of GDP that China's economy ends up being a close rival of Japan.

The exchange rate measure adds up the size of the economy's output in its own currency, then it converts this measure into dollars at the current exchange rate. Of course there is a large arbitrary component of the exchange rate at any point in time. In China's case, the government has a policy of deliberately depressing the value of its currency. Some estimates put the under-valuation at more than 40 percent. If China allowed the value of its currency to rise, then its exchange rate measure of GDP would rise accordingly. In other words, China could have passed Japan in GDP by this measure two years ago if it had allowed its currency to rise by 20 percent against the dollar.

This is why economists generally use the purchasing power parity measure for most purposes. This much better reflects the relative productive capacity of different countries' economies.

 
Everyone Cannot Use Trade Surpluses to Generate Demand Print
Saturday, 14 August 2010 07:48

The NYT has an article touting the success of Germany's economy. It notes that the Germany's strong growth in the second quarter (8.8 percent annual rate) and relatively low current unemployment rate (7.0 percent) support the view of Germany's leadership that austerity was the right path to foster growth.

It would have been worth noting that it is not possible for every country to follow Germany's path of relying on a large trade surplus (someone must have a corresponding deficit). Germany and some number of other nations can create domestic demand through trade surpluses, but this strategy cannot be followed everywhere.

It also would have been helpful if this article reported economic data that would have been meaningful to its readers. For example, GDP is always reported as an annual growth rate, not a quarterly rate. Also, it would have been more useful to present the OECD harmonized unemployment rate for Germany (7.0 percent), which is measured in the same way as the U.S. rate, rather than the German official rate, which counts part-time workers as part of the unemployed.

 
Protectionism Leads to Corruption # 27,453: The Case of Drug Patents, Again Print
Saturday, 14 August 2010 07:30

The NYT tells us that the Feds are investigating drug companies again. It appears that they were making payoffs to foreign doctors to get them to prescribe their drugs.

A brief reference to econ 101 would be helpful here. Economists like it when goods sell for their marginal cost. Trade barriers like tariffs or quotas often raise the price of items by 20-30 percent above their marginal cost. The extra profit created by this gap provides the protected industry with an incentive to engage in corrupt activities like payoffs to politicians to preserve their protection.

Drug patents can raise the price of protected drugs by more than 100 times (10,000 percent) above the free market price. This gives them very large incentives to engage in corrupt activities, so we should not be surprised to find out that they do.

 
Fun With Paul Ryan and the Washington Post Print
Friday, 13 August 2010 04:29

The Washington Post really really hates Social Security. They hate Medicare almost as much. Therefore they are willing to give its critics space to say almost anything against the program (the real cause of September 11th) no matter how much they have to twist reality to make their case.

Today, Republican Representative Paul Ryan stepped up to the plate. The Post felt the need to give him an oped column after Paul Krugman cruelly subjected Mr. Ryan's "Roadmap for America's Future" to a serious analysis last week. This violated the long accepted practice in elite Washington circles of not holding proponents of Social Security and Medicare cuts/privatization accountable for the things they say. It is therefore understandable the Post would quickly give a coveted oped slot to Mr. Ryan to make amends for such a grievous breach of protocol.

The rest of us may not have the power to invent the facts that would be needed to push our policies, but that doesn't mean we can't have fun. Let's count the inaccuracies (they call them something else outside of DC) in Mr. Ryan's piece.

 

1 and 2) In the second sentence we get the line:

"Only in Washington could the government raid one entitlement program [Medicare] to finance a brand-new one [Obama's health care program] and still claim that deficits have been reduced and entitlements have been reformed." 

Let's see, "raid" refers to proposals to contain costs in Medicare. If I spend less on groceries this week, have I "raided" my food budget? At the least, this is an interesting use of the term "raid." Assume for the moment that the projected cost savings can be achieved without jeopardizing the quality of care (Ryan does not argue this point), what is the problem with using savings from one program to finance another and still have some additional savings left over to reduce the deficit?

That's the same arithmetic they use everywhere, even in Representative Ryan's home state of Wisconsin. (I know this, when I was in high school I went to a math contest there.) And President Obama's program was scored as reducing the budget deficit by the non-partisan Congressional Budget Office, so it was not his administration's own funny numbers.

The second sentence of the second paragraph tells readers: "Last year's report revealed a $38 trillion shortfall over the next 75 years."Actually, that was the projected shortfall over an infinite horizon with the vast majority of the bad news coming after 2100. The shortfall over the 75 year horizon was $13.1 trillion.

Presenting a huge sum like this without any context (e.g. approximately 2.6 percent of future GDP) is certainly misleading, but in keeping with the Post's policy of affirmative action for deficit hawks like Ryan, we'll ignore this one.

3) In the next sentence Ryan tells readers:

"This year the shortfall appears to have decreased, but only after the Democrats' health bill cut $529 billion from Medicare." Okay, this may not be a misrepresentation, just a non sequitur. Yes, if you are to improve a program's finances you must either increase its revenue or cut its spending, so the Democrats propose to cut spending on Medicare. You caught them in the act, Mr. Ryan.

4) In the next sentence we have: "This apparent improvement was the basis for Democratic celebration -- even though the program remains tens of trillions of dollars in the hole." 

This one is beyond debate. The new projections show a Medicare shortfall equal to 0.3 percent of GDP over its 75 year projection period. This is equal to $2.7 trillion. And, even in Washington, $2.7 trillion is not "tens of trillions."

The next sentence is: "With the same legislation that cut more than half a trillion dollars in Medicare spending, the Democrats created a nearly $1 trillion health-care entitlement." Okay, this is not an inaccuracy, but Mr. Ryan the deficit hawk has now managed to attack the Democrats for cutting Medicare three times and we have just started the third paragraph.

5 and 6) Ryan then tells us: "The Obama administration's own chief actuary has explained that in addition to the dubious assumptions on provider cuts and other claims of savings, the health-care law's Medicare cuts cannot be used to both reduce Medicare's unfunded obligations and pay for a new entitlement."

The chief actuary is a non-political position. The current chief actuary, Richard S. Foster, was not appointed by Obama.

The accounting used by the Obama administration with the Medicare savings is the standard accounting used for trust funds for decades.

7) Ryan begins the fourth paragraph: "Put simply, Medicare is on course to collapse." No, the trustees report released last week implies that it has a relatively minor shortfall. The trustees could be wrong, but if their projections prove accurate, then Medicare is actually in fine shape.

8) In the middle of the paragraph we get: "Exacerbating our unsustainable trajectory, health spending explodes under the Democrats' health plan -- raiding Medicare, expanding Medicaid and creating two entitlements without any clue of how to finance the ones we have now." Actually, CBO and the trustees showed health spending growing less rapidly than they had been without the plan. And, note that we have our fourth "raid" of Medicare. 

9) The paragraph concludes: "the CBO warned last month of a devastating debt crisis within two decades." Actually, CBO bears part of the blame on this. It made a mistake in its projections which it subsequently corrected.

10) The fifth paragraph begins: "We do not have a choice as to whether Medicare will change from its current structure." No, if the trustees projections are correct, then we do not have to change Medicare's structure beyond the changes in current law.

11 and 12) Later in the paragrpah Ryan tells us: "the Democrats' political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would "end Medicare as we know it."

The main attacker of Ryan is Paul Krugman. Krugman is very far from being part of the "Democrats' political machine." In fact, he is almost certainly the prime embodiment of the "professional left" recently criticized by White House spokesperson Robert Gibbs.

Of course Ryan's plan would end Medicare as we know it. It replaces a Medicare system that pays directly for health care with a voucher system. The voucher is explicitly designed not to keep pace with health care costs. Ryan describes the rate of increase in the size of the voucher as "a blended rate of the CPI and the medical care component of the CPI." In other words, something less than the rate of increase in health care costs. It is also means-tested, so that individuals with incomes above $80,000 would see their voucher cut in half (we might see a lot of people earning $79,999 under the Ryan plan) and those with incomes over $200,000 would not get the voucher.

13 and 14) In the next paragraph Ryan boasts that his Medicare cuts (raids?) would maintain the program's solvency: "while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman."

Of course the current projections already show that the program will be there for younger generations, so they don't need Mr. Ryan's plan, if the projections are correct. And there is absolutely nothing that ensures that Mr. Ryan's Medicare voucher will provide seniors with the same coverage that he enjoys as a member of Congress.

15) The next paragraph reads:

"Far from the claims of "radicalism," this proposal is based on a key reform from the National Bipartisan Commission on the Future of Medicare, chaired by then-Sen. John Breaux (D-La.). That commission in 1999 recommended "modeling a system on the one Members of Congress use to obtain health care coverage for themselves and their families."

Ryan's Medicare plan is a voucher system like the Congressional health care system is a voucher system in the same way that a Yugo and a BMW are both cars, but there is absolutely nothing about Ryan's proposal that ensures Medicare beneficiaries the same quality of care as members of Congress.

16) Ryan then describes his Medicare voucher:

"The Medicare payment would grow every year, with additional support for those who have low incomes and higher health costs, and less government support for high-income beneficiaries."

Actually, the payment is explicitly designed to fall behind the rate of medical care cost inflation. Rather than those with lower incomes getting more, those with higher incomes (above $80,000 a year) would fall further behind inflation.

17 and 18) The penultimate paragraph begins: "If we act now, we can avoid disruptions for current seniors while advancing patient-centered reforms so Medicare will be strengthened for future beneficiaries. The alternative is the European-style death spiral of the welfare state: kick the can down the road as our debt explodes."

Again, the latest projections from the Medicare actuaries imply that there is no great urgency to "act now." The "European-style death spiral" might be useful political ad hominem, but it has no meaning. Some European countries, like Greece and Italy, do face severe budget problems, however some of the countries with the most expansive welfare states, like Denmark and Sweden, have much lower debt burdens than the United States.

19) Ryan continues: "Under an ever-expansive, all-consuming central government, costs will be contained with Washington's heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors' care."

Actually no one has raised the issue of rationing in any context. President Obama's plan will limit the procedures for which the government will pay, as is currently the case with Medicare. However, there is nothing that President Obama has put forward that would do anything to prevent people from getting whatever care they are willing to pay for. Apparently the word "rationing" scores well in focus groups, which is why Ryan and other Republicans use it frequently in their attacks.

20) The second to the last sentence in the last paragraph tells readers: "Ironically, if Democrats succeed in demagoguing to death efforts to save Medicare, that political victory will hasten the program's end." Of course, the Medicare trustees projections are correct, the program is nowhere near death, so we don't need Mr. Ryan's voucher plan to save Medicare.

Ryan concludes by telling readers that his proposal is "my sincere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met -- mathematically and politically -- and to challenge those who disagree with my proposal to offer their own."

In the forgiving spirit of Friday the 13th, I will not count the reference to sincerity as an inaccuracy. The 20 inaccuracies and 4 references to raiding Medicare can speak for themselves. Of course to the seniors who would be unable to afford decent health care if Mr. Ryan's plan became law, his sincerity won't make any difference.

But, I am happy to offer my own test of Mr. Ryan's sincerity. How about giving Medicare beneficiaries the option to buy into the more efficient health care systems in Europe, Japan, and Canada. The beneficiaries and the taxpayers will split the savings. This leaves the current system intact for those who like it, while offering seniors who opt to go elsewhere for their health care the opportunity to pocket tens of thousands of dollars while saving taxpayers money as well. What's wrong with giving people a choice, Mr. Ryan?

 
The High Cost of Protectionism in Prescription Drugs #53,476 Print
Thursday, 12 August 2010 21:42

The NYT has a front page article on the enormous success in identifying biological markers for the development of Alzheimer's that resulted from a collaborative effort in which all data was made freely available. The article reports the assessment of the leading participants that this departure from normal practice allowed for much greater progress than would have otherwise been possible.

It would be useful if in this or other articles the NYT explored the implications of this experience for bio-medical research more generally. It suggests that if research was freely shared that scientists may be far more successful in developing new drugs and other treatments for medical conditions. An open system of research would require the elimination of patent protection, but this would also mean that drugs could sell at their competitive market price rather than at prices that are several hundred to several thousand percent above the free market price.

 
The Vast Majority of Small Businesses Have Nothing To Fear From the End of the Bush Tax Cuts Print
Thursday, 12 August 2010 07:16

The Post had a piece on the expiration of the Bush tax cuts which reported an analysis by the Joint Committee on Taxation on the incidence by income group. The article noted that the analysis showed that 97 percent of tax filers reporting small business income would not pay higher taxes under the tax plan put forward by President Obama. However, it reported that 50 percent of small business income goes to taxpayers who would see an increase in their taxes.

It would have been worth noting that in most of these cases the tax increase would be trivial. For people with incomes between $200,000 and $500,000 the average tax increase would be $409 as shown in the chart accompanying the article. It is difficult to believe that a tax increase of this magnitude would affect business decisions to any noticeable extent.

 
How Would Fed Policy Lead to Inflation Without First Creating Jobs? Print
Thursday, 12 August 2010 07:04

In discussing the Fed's recent to decision to reinvest the money it earns from mortgage backed securities back into long-term government debt the New York Times presented at length the views of Carl Walsh, an economics professor at the University of California, Santa Cruz. He warned that if banks suddenly withdrew the $1 trillion in reserves that they held at the Fed it could generate inflation.

While this is in principle possible, it would have been worth noting the mechanism through which inflation would be generated. The banks would have to lend out the money to firms who invest it, thereby increasing employment. This would lead to more jobs, higher wages, and then higher demand, which would allow firms to be able to raise prices.

This process takes time. The Fed would have ample opportunity to raise interest rates and slow growth before inflation got too high. Most people would probably be willing to take the risk that the economy might jump back to full employment too quickly.

 
Social Security Trust Fund: It's Real Print
Thursday, 12 August 2010 04:42

Allan Sloan is a thoughtful business columnist whose work is generally quite insightful. His piece on the Social Security trust fund is not up to his usual standards.

There is nothing mysterious or shady about the trust fund. It is an asset to the Social Security system, which means that it can be used to pay benefits. Of course, as Sloan points out, its assets are U.S. government bonds, which are liabilities for the federal government, just like the government bonds held by banks, corporations and the general public.

To see the basic logic, imagine that we had a huge private pension fund to which we all contributed a portion of our wages. Call it "Private Social Security" or PSS. Suppose that PSS had an investment policy of investing its excess contributions entirely in Treasury bonds, just as Social Security does.

At some point, PSS plans to stop accumulating money and will instead begin to sell off its Treasury bonds to meet its benefit obligations. When it begins selling these bonds, the government will have to find other buyers for its debt. This could lead to higher interest rates for the federal government, as a major buyer for its debt has now become a seller. However, no one would describe this as a problem for PSS. It is selling its bonds just as any other bondholder might do. As long as it has bonds to sell to pay its benefits, we would consider PSS to be fine in terms of its ability to meet its obligations, unless the solvency of the federal government itself was called into question.

Now, let's take away the "P." What is the problem with the Social Security trust fund selling off its bonds to pay benefits? This is exactly the way the program was designed. It quite deliberately accumulated government bonds during the years that the baby boomers were in the work force with the intention that they would be sold off when baby boomers retire to help fund their benefits.

It's true that the government must find other buyers for these bonds, or alternatively raise taxes or spend less. But, that would be equally true in the case of PSS. This is an issue for the government, but not for either the PSS pension fund or Social Security. 

And, this is not just semantics. By definition workers, and only workers, pay Social Security tax. It is a payroll tax that is capped at just $106,000, so the chairman of Goldman Sachs pays no more in Social Security tax than a senior teacher or firefighter who may also hit the wage cap. By contrast, most of the general budget is financed through personal and corporate income taxes, which disproportionately come from higher income taxpayers. So it matters hugely that the bonds held by the trust fund are repaid from general revenue, as opposed to coming from additional Social Security taxes.

It is often claimed that the Social Security surplus has been used to hide the government deficit. It is not clear what is meant by this, but the government certainly has not been doing the hiding. Every government budget document directly shows the budget deficit, excluding the surplus from Social Security. If anyone has used the surplus to hide the deficit it would be the reporters who convey information about the deficit to the public.

 

 

 
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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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