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Where Did the Administration Assume Declining Health Care Spending? Print
Tuesday, 22 June 2010 07:03

That is the question that readers of the WSJ are asking. The Journal told readers that:

"The deficit is lingering at nearly 10% of the gross domestic product. Even under the president's assumptions on declining health-care spending and a freeze on non-security domestic spending, the deficit would not drop to what Mr. Orszag has called sustainable levels over the next decade without a sharper policy response."

Of course the reason that the deficit is lingering at near 10 percent of GDP is that the unemployment rate is lingering at near 10 percent of the labor force. This has depressed tax collections and increased payouts for unemployment insurance and other benefits.

Deficits are projected to rise relative to the size of the economy precisely because the budgets do not assume that health care costs decline. Rather, the projections assume that cost growth will continue to outstrip the growth of the economy. If health care costs were contained then the projected shortfalls would be easily manageable.

 
Washington Post Has Front Page Piece on 157 Percent Tariff on Ironing Boards, Ignores Much Larger Government Imposed Distortions on Prescription Drugs Print
Tuesday, 22 June 2010 05:09

The Washington Post, which has famously fumed about the fact that union auto workers earn $57,000 a year, devoted a major front page story to an Indiana ironing board factory that benefits from a tariff on Chinese ironing boards that can be as high as 157 percent. The article includes several statements from economists about the unnecessarily high prices that consumers pay for ironing boards and the resulting economic distortions.

It is worth noting that the Washington Post has never once reported on the distortions created by the system of financing prescription drug research through government patent monopolies. As a result of these patent monopolies, drugs that could be profitably sold as generics for $4 a prescription are instead sold as brand name drugs for prices that can be tens or even hundreds of times higher. The mark-up on branded drugs can be equivalent to tariffs of several thousand percent.

The distortions created by patent monopolies are increased as a result of the asymmetric information in the sector. The manufacturer knows far more about its drugs than patients or doctors. This allows the manufacturer to mislead patients and doctors about the safety and effectiveness of drugs. There are more efficient ways to support research into the development of new drugs. (The government already spends $30 billion a year on bio-medical research through the National Institutes of Health.)

Given its interest in ironing boards, and the relative impact on the public's well-being of prescription drugs and ironing boards, it might be reasonable to expect that Post would at least once consider the distortions created by patent monopolies in the prescription drug industry.

 
How Many People Work on a Drilling Rig? Print
Tuesday, 22 June 2010 04:54

Marketplace radio passed along to listeners the oil industry assertion that it was spending $300 million a month on the wages of workers on offshore drilling rigs that have been idled by President Obama's moratorium on new deep water drilling. The Washington Post reports that the ban has idled 33 deep-water drilling rigs.

If the average worker on a rig earns $100,000 a year, the industry's claim about lost wages would imply that it was employing 36,000 workers, or more than 1,000 on each idled rig. This seems implausibly high, and should cause reporters to question the industry's claim rather than just report it as being true. (The industry has an incentive to exaggerate the impact of the moratorium on workers since it helps to advance its agenda of ending the moratorium.)

 
Theory, Stimulus, Unemployed Workers and Unemployed Politicians Print
Monday, 21 June 2010 03:58

In his NYT column today Ross Douthat picked up on a line of attack initiated by Tyler Cowen last week: that the push for stimulus is asking politicians to take big risks based on a theory. To paraphrase a former president, this depends on what your definition of "theory" is.

We always take actions based on our expectation of how the world will respond. This expectation can be called a theory, since we have a whole set of postulates about how the universe behaves. If fire fighters hook up a hose to a fire hydrant, it is because they have the expectation that when the hose is connected, that water will run through it and that the water will quench the fire. We can follow Tyler Cowen and Ross Douthat and call the belief that motivates the fire fighters' actions a theory, but it is a theory that is grounded in considerable evidence.

Presumably Douthat and Cowen don't object to the fire fighters hooking up hoses to fire hydrants to put out fires; their concern is that the evidence for stimulus is weaker than the evidence that hoses connected to hydrants put out fires. To my mind, the evidence for the effectiveness of stimulus is roughly comparable to the evidence for the effectiveness of fire hoses hooked up to hydrants in putting out fires, but this would be a very long story.

It might be more interesting to note what passes for contradicting evidence in current debates. A few weeks ago, the NYT published a short piece by Edward Glaeser that showed no correlation between the amount of stimulus spending awarded by state and the change in the unemployment rate from January of 2009 and March of 2010. This piece of evidence against stimulus was promptly cited by David Brooks in his column the following week.

Should Glaeser's finding have left supporters of stimulus disappointed? Well, if we look to Glaeser's source, we would see that he was looking only at the $61.4 billion in stimulus spending on infrastructure projects that had been received by the states by the end of March of 2010, not the entire stimulus package.

There are several reasons why we would not have expected to find much of an effect in this analysis, first and foremost, its size. This money was awarded over a 13 month period over which GDP would have been almost $16 trillion. This means that Glaeser was looking for differences in the change in unemployment rates by state based on spending that was less than 0.4 percent of GDP over this period.

We would expect spending equal to 0.4 percent of GDP to increase GDP by roughly 0.6 percent of GDP, once the full multipler effects are felt (although not all within one state -- more later). According to the assumptions used by the Obama administration in laying out its stimulus plan, this would be expected to increase total employment by roughly 600,000 workers (some demand is met by increased hours per worker), or by just over 0.4 percentage points. Of course, this is the average gain in employment due to this spending, Glaeser was looking for differences in the change in unemployment based on differences in spending.

This would be difficult to detect even in a very stable economy. Picking up the impact of such a relatively small amount of spending over a period in which the unemployment rate rose from 7.7 percent to 9.9 percent would be virtually impossible even if the data were perfect, but they are not.

First, the measure of spending is money received by state, not money actually spent. Some states may spend money as soon as they get it from the federal government or possibly even beforehand, if they know it is coming. Other states may still be in the process of taking bids on contracts for some of this money even after they have received it. This means that there would be no close relationship between money received and the jobs created by the stimulus.

Second, we would not expect there to be a one to one relationship between stimulus per state and declines in the unemployment rate for two reasons. First, much of the money will support jobs that go outside of the state. Suppose New York City spends lots of money improving its infrastructure, thereby creating a large number of jobs. Many of the people hired will no doubt live in New Jersey and Connecticut. Glaeser's methodology would find little evidence that this spending lowered unemployment since the effect would be diffused throughout the three states. This would be the case with many states with metropolitan areas that overlap state boundaries.

This problem would be even more important with the indirect employment created by the respending of income. While some of this money may be spent on services provided in the local economy (e.g. hair cuts and restaurants), much of it will be spent on goods that were manufactured all over the world, making it even harder to detect any relationship between stimulus spending per state and changes in the unemployment rate.

A second reason why there could be little relationship between changes in unemployment rate by state and stimulus spending is that the unemployment rate measures people who are looking for work, not jobs. This number may actually rise when there are more jobs created. People often drop out of the labor force in a period of high unemployment because they feel it is futile to look for work. This means that they are not counted as being unemployed. When they start to see jobs being created, they begin to look for work again, raising the unemployment rate.

This effect is well-known. That is why economists who are seriously looking for a relationship between employment and stimulus spending would look at jobs created by state rather than changes in the unemployment rate. This would also help to get around the state spillover effect since we would look at which state the employer is in, as opposed to the state where the worker lives.

Finally, Glaeser's time periods do not coincide. He looking at spending that was allocated from mid-February 2009 until the end of March 2010. He compared this to the change in the unemployment rate from January 2009 to March of 2010. While the endpoints are reasonably close (the March data is compiled based on a survey conducted in the middle of the month), the start points do not match and it matters.

The unemployment rate rose from 7.7 percent to 8.2 percent between January 2009 and February 2009, an increase of 0.5 percentage points. Presumably we would not expect the state by state distribution of this rise in unemployment to be affected by a stimulus package that was not even approved until the following month. This one-month increase in the unemployment rate was larger than the expected effect of the stimulus.

In short, it would have been astounding if Glaeser's methodology had found a relationship between stimulus spending and changes in the unemployment rate by state, even if the stimulus was working exactly as predicted. Yet, this little exercise is taken as serious evidence against the effectiveness of the stimulus.

Getting back to the Douthat/Cowen complaint that the belief in stimulus is only a theory, it would not be difficult to create equally flimsy evidence showing the ineffectiveness of fire hoses in putting out fires. Fortunately, this evidence would not be taken seriously by anyone with fire fighting responsibility. The main difference between the theories of fighting unemployment with stimulus and fighting fires with water pumped through fire hoses is what is accepted as evidence against the theory. This takes us to the sociology of the economics profession, which is a very bad neighborhood.

What is a mild-mannered politician concerned about getting re-elected supposed to do? Well, there are theories about this as well. Most of them show that politicians do very badly in their quest for re-election in periods of high unemployment. So, it is not clear that the proponents of stimulus are asking politicians to take too great a risk when they suggest hooking up the fire hose and trying more stimulus.

 
The Post Tells Readers that the Public Is More Concerned About Deficits Than Jobs Print
Sunday, 20 June 2010 13:00

The Post is always anxious to tell readers about the need to reduce the deficit, it's endlessly repeated editorial line. Of course this is the opposite of what the polling data show.

For example, a poll conducted by Pew on June 3-6 asked respondents which economic issue concerned them most. Forty one percent said jobs, only 23 percent said the deficit. A NBC/Wall Street Journal poll from early May found that by 35 percent to 20 percent people thought economic growth and job creation should be the first economic priority. Only 20 percent ranked the deficit first.

A Fox News poll, also done in early May, found that by a margin of 47 percent to 15 percent people thought the economy and jobs was a more important priority than the deficit and government spending. An early April NYT/CBS poll found that 23 percent of respondents listed the economy as the top priority, while 22 percent listed jobs. Only 11 percent listed the deficit.

So, the polls don't seem to support the Post's claim that the public is more worried about the deficit than jobs.

Thanks to Ben Somberg for calling this one to my attention and supplying the polling data.

 
More Scare Stories About State Pensions at the NYT Print
Sunday, 20 June 2010 10:27

The vast majority of state and local pension funds are underfunded. The NYT, and especially Mary Williams Walsh, have done excellent work over the years trying to call attention to this underfunding. However, today's article on the topic definitely goes overboard.

The article is largely based on an analysis by Joshua Rauh, a finance professor at Northwestern University, that calculates the unfunded liabilities of pension funds by assuming that assets only get the same rate of return as U.S. Treasury bonds. By contrast, the standard method for calculating liabilities assumes that pension funds earn a real return of 5.0 percent annually, based on the mix of assets they generally hold.

While the article implies that the state's assumption is overly optimistic, in fact it is a very reasonable assumption, given the current ratio of stock prices to trend earnings. With the plunge in the stock market following the recession and the financial crisis, the ratio of price to trend earnings is now close to the historic average of 14.5 to 1. This makes it possible for stocks to provide close to their long-run average real rate of return of 7.0 percent. By contrast, assuming a 7.0 percent real return on stocks at their pre-crash price level (which pension funds did) was close to ridiculous.

This makes a huge difference in the assessment of the size of the shortfall. For example, the shortfall of Ohio, the state with the largest shortfall relative to the size of its budget, falls in Rauh's analysis from $217 billion to $75 billion. The shortfall of Illinios, which is highlighted in the article, falls from $219 billion to $85 billion.

These are still substantial shortfalls and should not be trivialized. However, they are not nearly as unmanageable as the numbers discussed in this article. For example, the shortfall in Illinois would be equal to roughly 13 percent of the gross state product (GSP). This shortfall could be met with a combination of tax increases and spending cuts equal to roughly 0.5 percent of the state's GSP over the next 30 years. This would involve a substantial, but not unprecedented, budget adjustment.

 
Peter Peterson's Fiscal Times Blesses Deficit Reducers as Being Non-Ideological and Washington Post Concurs Print
Sunday, 20 June 2010 07:26

On the last day of 2009 (yes, coincidentally December 31st), the Washington Post departed from standard journalistic practice by running material produced by the "Fiscal Times" in its own news section. The Fiscal Times is a news service funded by billionaire investment banker Peter Peterson. Peterson has been working to gut Social Security and Medicare for at least two decades, starting and funding a wide variety of organizations that have this as their purpose.

The Fiscal Times is Peterson's latest creation in this line. He had his kid hire some of the journalists displaced by the collapse of the newspaper industry to put it together. While most newspapers would not publish as news material produced by an organization with such a clear agenda, the Washington Post apparently had few concerns along these lines.

Today the Post ran a piece from the Fiscal Times that glorified the efforts of two members of President Obama's deficit commission who are trying to push through a plan that is likely to involve substantial cuts to Social Security and Medicare, the country's most important social programs. The piece implied that the two members who accepted the view that it is necessary to reach an agreement on reducing the deficit in the current political environment are getting beyond ideology. In contrast, those who think it is important to protect social programs that virtually the entire working population will depend on in retirement are somehow being ideological.

It told readers that: "On the fiscal commission, Stern [Andy Stern, former head of the Service Employees Internation Union, one of members highlighted in the peice] is already looking for ways to break through the ideological camps on deficit-reduction." In fact, individuals who are not motivated by ideology would note that the country's projected long-term deficit problem is driven almost entirely by the broken U.S. health care system.

If per person health care costs were the same in the United States as in any other wealthy country, then the projections would show huge budget surpluses rather than deficits. It also should be possible for the people in the United States to take advantage of lower-cost health care systems elsewhere, even if the power of special interests like the insurance and pharmaceutical industry prevent reform here. This basic fact should feature prominently in any discussion of the long-term deficit that is not motivated by ideology. It is never mentioned in this piece.

The article also treats an assertion from Mr. Stern as a basic fact: "Now Stern argues that deficit reduction isn't simply a conservative issue. 'What I keep saying to the progressive community is that when the crisis hits, it's students, workers and poor people who pay the price.'"

Of course, the crisis has hit - the country is facing its worst downturn since the Great Depression. While students, workers, and poor people have paid the price, this is entirely the result of politics. The government quickly moved to rescue the major banks, using vast amounts of public money to save Citigroup, Goldman Sachs, Morgan Stanley and Bank of America from bankruptcy. At the same time, it has refused to spend enough money to boost the economy back to full employment levels of output or take serious steps to prevent people from being thrown out of their homes.

However, the decision to protect the wealthy rather than students, workers, and poor people was entirely a political decision. The banks were able to use their political power to ensure that they got the resources needed to prevent their collapse. On the other hand, those not interested in helping students, workers, and poor people began to highlight concerns about deficits in order to head off additional spending. It may always be the case that the wealthy will dominate the political process to the extent that they do today, but it is worth pointing out that it is politics, not economics, that determines who suffers in a crisis.

 
Did China Make a Mistake Putting Unemployed Workers to Work? Print
Friday, 18 June 2010 05:16

The Post apparently thinks so. It told readers that a year and a half after China initiated a massive infrastructure focused stimulus program that kept its economy growing at near double-digit rates:

"many economists and others here are asking pointed questions: Does China really need all this infrastructure? And what's going to happen when the bills come due?"

Let's think about this one for a moment. China built or rebuilt roads, bridges, railroads, schools, hospitals and other public buildings all over the country. Were some of these projects wasteful -- absolutely. China's economic managers are surely very competent, but when you spend $800 billion quickly, you can be certain that a significant amount of money will be wasted.

So, what was the cost? Well, if only we had smart, prudent, deficit hawk types running things in China, the people who worked on these projects could have been unemployed. The Chinese really lost an opportunity by not listening to those deficit hawk types.

And, what about when the bill comes due? After all, China only has a couple of trillion dollars in foreign exchange reserves and a current account surplus of more than 6 percent of GDP (this would be more than $900 billion annually in the U.S.). With economy growing just 9-10 percent a year, they must be terrified about the looming debt crisis. Arghhhhhhhh!

 
The Realtors are Not Always Honest (Round III) Print
Thursday, 17 June 2010 05:15

Today, USA Today printed the realtors' story (earlier it had been the Post and then Marketplace radio), so BTP repeats an earlier comment. Btw, kudos to the National Association of Realtors for getting so many news outlets to swallow their story, hook, line, and sinker. You might think that an organization that helped inflate an $8 trillion housing bubble by insisting that nationwide house prices will never fall would have limited credibility at this point, but apparently not.

Marketplace radio repeated the National Association of Realtors' (NAR) nonsense that 180,000 homeowners who purchased homes in April may not be able to qualify for the first-time buyers' credit if the original deadline that requires a closing by the end of June is left in place. The NAR wants the deadline extended to the end of September.

As noted earlier, this claim is absurd on its face. While there was an uptick of homes sales in April, this was from rather depressed levels. The April sales volume did not approach the sales levels at the peak of the boom in 2006. At that time, the vast majority of closings took place within 6 to 8 weeks. Therefore, there is little reason to believe that this should not have been the case with the April sales as well.

This is especially likely to be the case since new contracts plunged (as measured by mortgage applications) immediately after the expiration of the credit. This means that workers would be freed up to handle the contracts signed in April.

The main effect of the extension of the credit being pushed by the NAR is likely to be to promote fraud. Many contracts are likely to be backdated so it appears that they were signed before April 30th and therefore qualify for the credit. The NAR has likely exaggerated the number of people potentially affected by the June deadline by at least an order of magnitude.

 
David Broder and Jim Cooper's Creative Economics Print
Thursday, 17 June 2010 04:58

David Broder used his Washington Post column to tell President Obama to stop worrying about the Gulf oil spill. (Hey, who cares about the potential destruction of a whole ecosystem for generations to come?)

He instead repeated an assertion from Representative Jim Cooper and the Wall Street Journal that companies are currently hoarding $1.84 trillion in cash:

"The newspaper noted that the cash reserves had jumped 26 percent in one year, the largest increase since at least 1952. Cooper's point is that by stockpiling that vast amount against the possibility of a double-dip recession or another wave of bankruptcies, nervous executives are starving business of investments for expansion and freezing unemployment at a painfully high level.

'They were badly burned in the Great Recession,' Cooper said, 'and now they are nervous about government policy.' Uncertainties in Washington about energy policy, taxes, financial regulation -- to say nothing about bad-news bulletins from Afghanistan and other overseas datelines -- cloud the economic picture more than oil plumes pollute the gulf."

While there is little economic evidence that would support Representative Cooper's assertion as to why companies are hoarding cash, there is a more obvious explanation. Firms are seeing very weak demand growth in an economy that has near double digit unemployment. There is a large body of research that shows that demand growth is the primary determinant of investment. In the absence of strong demand growth, firms do not want to take big risks on expensive new investments.

The most obvious way to increase to demand growth would be through more stimulus from the government. Both Representative Cooper and Mr. Broder have actively opposed more stimulus. So, the best explanation for why companies are sitting on vast hoards of cash is that people like Representative Cooper and David Broder have blocked efforts at more effective government stimulus.

 
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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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