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Will a Partial Default on the National Debt be Necessary to Get the Deficit Under Control? Print
Wednesday, 09 June 2010 04:41

That is what the Washington Post argued in an article on President Obama's deficit commission today. The article told readers that: "Adjusting Social Security benefits is a likely point of consensus, commission members say." [The word "adjusting" is presumably a typo. The only way to reduce the deficit is by cutting benefits.]

The Social Security trust fund holds more than $2.6 trillion in government bonds. According to the Congressional Budget Office, this money will be sufficient, along with current tax revenue, to pay all scheduled benefits through the year 2044. The decision to cut benefits would effectively mean defaulting on these bonds -- denying workers the benefits that they have already paid for through the designated Social Security tax.

The article misrepresents the finances of the program by telling readers that: "Social Security has been self-supporting since 1935, with taxes paid by current workers financing benefits for current retirees." This has not been true since the Greenspan Commission's recommendations were implemented in 1983. The commission's plan raised taxes and the normal retirement age, thereby reducing benefits. This led to a substantial degree of pre-funding, allowing the trust fund to accumulate more than $2.6 trillion in government bonds over the last quarter century.

As a result of this prefunding, the article's comment later in the paragraph: "Sometime in the next few years, taxes will no longer cover benefits," has no relevance to anything. Under the law, Social Security benefits are paid out of the trust fund, it makes not an iota of difference whether annual Social Security tax revenue is greater or less than annual benefit payments. This is an invention of the Washington Post and critics of Social Security.

The next paragraph tells readers:

"The program's defenders argue that there is no crisis: If Treasury would repay billions of dollars in surplus Social Security taxes borrowed over the years, the program could pay full benefits through 2037. But many budget experts question whether supporting the existing benefit structure should be a cash-strapped nation's first priority."

It is worth noting that the decision not to "repay billions of dollars in surplus Social Security taxes," is effectively a decision to default on the portion of the government debt held by the Social Security trust fund. It is worth highlighting this point so that readers understand the position being advocated by "many budget experts."

 

 
What's the Risk of Inflation With 9.7 Percent Unemployment? Print
Wednesday, 09 June 2010 04:18

The NYT discussed the likely path of fiscal and monetary policy. It noted that it was unlikely that the Fed would adopt a substantially more expansive path concluding with a quote from an economist: "A second round of quantitative easing at the moment would substantially increase inflationary risks."

It is worth noting that there is no economic theory that shows quantitative easing (the Fed buying long-term bonds) leads to inflation when the unemployment rate is far above normal levels, as is the case at present.

 
The Pro-Stimulus Crowd Is Very Enthusiastic About a Financial Speculation Tax Print
Tuesday, 08 June 2010 06:13

The lead Washington Post editorial complained that the pro-stimulus crowd is not supporting its plan to cut Social Security benefits or to raise taxes on the middle class as a path to deficit reduction, insisting that this means they are not serious about reducing the deficit in the long-term. In fact, many progressives have supported measures that would address the long-term budget problem with items like a financial speculation tax.

There are also measures that would substantially reduce health care costs like publicly funded clinical drug trials which could allow all drugs to be sold as generics for $4 per prescription. This would save hundreds of billions annually in spending on prescription drugs. We could also allow Medicare beneficiaries to buy into the more efficient health care systems of other countries, with the government and the beneficiaries splitting the savings. This could save trillions of dollars in the decades ahead.

However, the Post does not even want these ideas discussed since they could hurt the powerful interest groups whom they favor. Rather, the Post insists on measures that will low and middle income families.

It is also worth noting that the reason the deficit has soared in the last few years has been due to the collapse of the housing bubble. If the Post had not almost exclusively on economists who could not see an $8 trillion housing bubble as its sources and for its oped page content, it is possible that policymakers would have noticed the bubble and acted to rein it in before it grew large enough to wreck the economy.
 
USA Today Didn't Notice That the Unemployment Rate Is Almost 10 Percent Print
Tuesday, 08 June 2010 05:10

With so much focus on the deficit it's probably hard to keep track of things like the unemployment rate. This is the likely explanation for a USA Today article that told readers in its first sentence: "last week's disappointing report on the job market may not be as dreary as it appears."

The article explained that many of the 411,000 workers who took jobs with the Census may have taken private sector jobs had they not had the option of working for the Census. According to the article, these people opted to take what they viewed as relatively high-paying and easy temporary jobs rather lower paying permanent positions in the private sector. It refers to evidence of a similar effect in prior years when Censuses were conducted.

It is important to note that the question is not whether the Census workers would have taken other jobs (they may have), but whether anyone would have taken the other jobs. The argument in USA Today is that low-paying jobs have gone unfilled because employers, who would have hired the Census workers, view other applicants as being unqualified. The comparisons to past Census years is dubious. The unemployment rate was 4.0 percent in 2000 and 5.0 percent when the 1990 Census was being conducted.

 
Economists Who Understand the Economy Are Not "hoping that households will soon borrow more and help sustain the recovery" Print
Tuesday, 08 June 2010 04:54
In a short piece on consumer borrowing the Washington Post told readers that: "economists are hoping that households will soon borrow more and help sustain the recovery." This may be true of the economists who Post reporters rely upon as sources, but it is not true of economists in general. Most households, including those at the edge of retirement have very little savings. With deficit hawks like the Washington Post editors and news reporters insisting on the need to cut Social Security and Medicare, it would be very unfortunate if these households did not increase saving and reduce their current consumption. The economists cited by the Post must want these people to live in or near poverty in their old age.
 
British Prime Minister Proposes Plan to Slow Growth, Raise Unemployment Print
Tuesday, 08 June 2010 04:38
The NYT reported on a speech by UK Prime Minister David Cameron in which he insisted on the need for large budget cuts and/or tax increases. The article included no assessment of this agenda from economists. Many prominent economists, such as Nobel Laureates Paul Krugman and Joe Stiglitz, have argued that deficit reduction in the near future will lead to higher unemployment and slower growth. Unlike the vast majority of proponents of fiscal austerity, these economists were able to see the $8 trillion housing bubble that wrecked the U.S. economy.
 
Economist Who Could Not See $8 Trillion Housing Bubble Warns of the Need to Reduce Deficits Print
Tuesday, 08 June 2010 04:14

That could have been the headline of an NYT article that reported on Federal Reserve Board Chairman Ben Bernanke's warning that the government had to reduce its budget deficit. The article quotes Mr. Bernanke as saying:

“We can see what problems can arise in a country if investors lose confidence in the fiscal position of that country, so it is very important that we address this problem.”

This might have been a good place to point out that Mr. Bernanke could not see the $8 trillion housing bubble whose collapse gave us the worst economic crisis since the Great Depression. It could have also pointed out that it is not clear what he meant, since Greece his presumed point of reference, has very little in common with the United States. Greece is a small economy that is far more dependent on international trade than the United States. It also does not have its own currency.

For these reasons, economists who can see an $8 trillion housing bubble do not think that the experience of Greece tells us: "what problems can arise in a country if investors lose confidence in the fiscal position of that country." The NYT erred badly in not noting Mr. Bernanke's poor track record in discussing his latest pontifications on economic policy.

 
Impossible German Debt Target Print
Monday, 07 June 2010 05:17

The NYT told readers that Germany has to make big cuts in its budget because:

"Germany has its own reason for introducing cuts: It is legally bound by the “Schuldenbremse,” or debt brake, that Parliament passed last year. This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now. Net borrowing, which will rise to about €86 billion this year, or about €48 billion more than in 2009, is the largest since World War II, according to the Finance Ministry."

I can't tell what is intended here, but clearly not what the article says. Debt of course is a stock, but the subsequent discussion refers to annual deficits, which are flows. Furthermore, a debt limit of 0.35 percent of GDP is ridiculously low, the euro zone is supposed to set a cap of 60 percent for the debt to GDP ratio, although almost every member state is now above this cap.

Anyhow, something is clearly wrong here, hopefully an editor will get it straightened out.

 
One Nuclear Bomb Can Ruin Your Whole Day Print
Monday, 07 June 2010 04:35

Robert Samuelson tells us that the problem behind the Gulf oil spill and the housing bubble meltdown is not the corruption of industry and regulators, but rather complacency born of success. In the case of the oil industry, Samuelson noted that the industry has been drilling close to 1.6 million barrels a day, with only a few hundred barrels a year being spilled. He makes a similar argument about the financial sector, noting the sharp decline in daily stock market volatility.

It is worth noting that the sort of bad events that one expects in these sectors are almost by definition going to be very rare (we will not have huge spills or financial collapses on a weekly basis) and very costly. Any regulator must understand this fact and if they are competent would not allow their judgment to be affected by the absence of a bad event for a long period of time. The cost of the economic meltdown will be at least $5 trillion in lost output in the United States alone. By contrast, the benefits from reduced daily volatility are trivial. (How much do you care if you risk buying a stock at a price that is 0.2 percent too high, when you have an equal probability of getting it at a price that is 0.2 percent too low?)

So, if our regulators cannot understand the potential harm from extremely rare, but extremely costly, disasters, then the country has a very serious problem.

 

 
NPR Hypes Economic Impact of Deep Water Drilling Ban Print
Monday, 07 June 2010 04:21

NPR had a segment on Morning Edition which badly misled listeners about the potential economic impact of a temporary ban on deepwater drilling. The piece focused on the impact of oil on the economy of Louisiana and the Gulf region. In doing so, it highlighted the total impact of the oil industry, not the marginal impact of additional drilling.

For example, it told listeners that oil accounts for 16 percent of Louisiana's state GDP compared to 1 percent for fishing and 4 percent for tourism. This is an interesting set of numbers but it has nothing to do with the impact of a ban on new deepwater drilling. No one is proposing that existing wells be shut down. This means that the vast majority of this 16 percent of GDP will not be affected by the ban. (It is also worth noting that the vast majority of this 16 percent accrues to BP and quickly leaves the state.)

The piece does later give an estimate from the state's development department that the bad on drilling could lead to a loss of 20,000 jobs (this presumably includes indirect effects). By comparison, Louisiana has approximately 120,000 construction jobs. If we assume that each construction job indirectly generates 0.5 jobs elsewhere then the ban on drilling would have roughly the same impact as a ten percent decline in construction employment.

 
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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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