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Robert Samuelson and the Family Deficit Print
Monday, 27 October 2014 04:43

We can finally declare the budget deficit crisis over; Robert Samuelson has moved on to the talking about the "family deficit." Actually, many of the points he makes are reasonable, the question is the policy implications.

People in committed relationships, generally involving marriage, do much better on average than do single adults on a variety of social and economic indicators. Perhaps more importantly, their children do much better as well. The data show that marriage is increasingly a middle class and upper class story, with those in the bottom half, and especially bottom quintile of the income distribution much less likely to be married and their children much less likely to be raised by a married couple. And in the United States, children raised by single parents generally don't do well in life.

It would be nice if the government could so something to ensure that all these single people, and especially single parents, were in happy committed relationships. But governments tend not to be good as matchmakers. Many relationships are seriously abusive. Someone married to a spouse who has serious problems with drugs or alcohol, or who can't control their temper, is not necessarily doing themselves or their children a favor by remaining in the marriage. And the government would not be doing anyone a service in this situation by preventing a divorce or separation.

Pro-marriage policy (e.g. tax incentives) may sound nice, but only until we give them a bit of thought. A marriage subsidy implicitly penalizes single adults. Recognizing the benefits that marriage offers, do we want to further penalize those not in a happy marriage and their children?

We can pursue policies that will make peoples' lives more secure and in that way likely increase the frequency of happy marriages. Legalizing marijuana and decriminalizing drug use in general would likely be a big step in the right direction. Men in jail generally are not good husbands and fathers.

Greater employment security and higher wages would also be a big step forward. Frequent job changes and moves are a disruption in anyone's lives. And the stress of constantly struggling to find the money for the rent or mortgage could make any relationship difficult. And safe and affordable child care would benefit both children and parents, whether they are single or married.

These items are all part of a general economic agenda for full-employment and greater economic security. It would be great if the advocates of marriage would join in for this effort.

 

Note: Typos corrected, thanks to Robert Salzberg.

 

 

 
In Case You Wondered Why CEOs in the United States Make So Much Money Print
Sunday, 26 October 2014 07:59

Okay, there are a few hundred people who believe that the tens and hundreds of millions of dollars pocketed by CEOs reflect their worth in the market. (And most of those people write for newspapers or teach in business schools.) The rest understand that CEOs get incredibly rich by being able to rip off the companies that they supposedly work for. This is because the rules are rigged to give them effective control over the company. 

Gretchen Morgenson has a good piece explaining one way in which CEOs and other top management rig the deck. Her column today talks about a Delaware court ruling that allows companies to write by-laws that make shareholders pay the company's legal cost if they lose a case filed against the company. For example, this could mean that if shareholders sued a company because it rewrote the strike price on options given to an incompetent CEO, and then lost the case, then the shareholders would have to pay the company's legal expenses.(Most U.S. companies are chartered in Delaware, so this ruling makes a big difference.)

Since companies that overpay incompetent CEOs tend to have hugely overpaid lawyers, this is likely to be a very serious expense. This would be a major disincentive to shareholder suits, making it easier for CEOs to rip off the companies for which they work.

It is worth noting that courts always had the authority to require losers to pay the winners' legal fees in frivolous cases. The Delaware ruling means that losers would always be required to pay the company's legal fees, even if the loss was due to a technical issue, such as a missed filing deadline.  

 
Krugman on Quantitative Easing and Inequality Print
Saturday, 25 October 2014 10:16

Paul Krugman is on the mark in his comments on quantitative easing and inequality. The policy has helped boost the economy and create jobs, it is almost certainly a net gainer from the standpoint of distribution. I would make three additional points, all going in the same direction.

First, when comparing the real value of the stock market to prior levels which we should expect an upward trend. The economy grows through time, as do profits, just assuming that profit share remains constant. The profit share has of course grown in recent years. This means that if the price to earnings ratio remains constant, then the value of the market should grow at roughly the same rate as the economy.

If we assume a 2.4 percent trend growth rate between 2007 and the present, the market should be roughly 17 percent higher in real terms today than in 2007, assuming no increase in trend profit shares. In other words, the market is pretty much in line with where we would expect it to be if there were no extraordinary monetary policy in place and the economy had followed it trend path. Crediting or blaming the Fed for the market's bounceback from the 2008-2009 lows is just silly.

The second point is that the impoverished masses with large interest incomes (that's a joke) also would benefit from the increase in asset prices, if they held any longer term bonds. When the interest rates on 10-year and 30-year bonds plummeted, the price of these bonds soared. This would have increased the wealth of middle income people who held these bonds. It's possible that they don't want to sell the bonds (after all, they can't get a high interest rate if they re-invest the money elsewhere), but this the same story for rich people who hold lots of stock. The high stock price doesn't do them any good unless they sell some stock.

Anyhow, the point is that in order for our middle income people to be hurt on net by the fall in interest rates, not only would it be necessary that all their money was in interest bearing assets (as opposed to stock), but it would have to be in short-term assets like savings accounts or certificates of deposits. This is a very small group of people. (I know everyone has an aunt who has $50k in a savings account -- sorry, someone is lying in that story.)

Finally, normal middle income people tend to be big net payers of interest because of something called a "mortgage." They may also have student loan debt. Lower interest rates have allowed tens of millions of people to have substantially lower mortgage and student loan payments. This is a huge plus on the distributional side. That doesn't mean that mortgage and student loan payments are not a major burden in many cases, but they would be a much bigger burden if the interest payments were 1-2 percentage points higher.

In short, the distributional effects of QE were almost certainly a net positive, in spite of the fact that everyone's aunt got hurt.

 

 
The Ebola Vaccine: How Drugs Can Be Developed Without Patents Print
Friday, 24 October 2014 07:03

For those who find it difficult to understand how drugs can be developed without patent protection, the Canadian government has an answer. It paid for the development of an Ebola vaccine. While the vaccine was reportedly 100 percent effective in tests with lab animals, the government did not pay for the testing in humans that would be necessary to market the drugs.

This provides a good example where a government agency was able to finance effective research. (There are many others.)  Unless we think that the government somehow cannot pay for useful clinical tests (apparently the argument is the tests are too expensive for the government, it can only afford to pay exorbitant prices for the drugs themselves), it is difficult to understand an argument against publicly funded research for drugs which would allow them all to be sold at generic prices. This would end the absurdity of people facing life threatening diseases who can't get needed drugs because patent monopolies make them unaffordable. 

 

 
The Banking Industry Wins On Risk Retention With Mortgages Print
Friday, 24 October 2014 05:29

It's too bad that so many people in public life aren't old enough to remember all the way back to 2008. That is the only explanation for the rush to remove down payment minimums for a risk retention requirement on mortgages placed in mortgage backed securities.

This is the topic of an excellent column by Floyd Norris on how the banking and housing industry, with the support of some consumer groups, managed to remove any down payment requirements. The idea was that banks would have to keep a portion of the risk on all but the safest loans, thereby increasing the likelihood that they would not issue bad loans.

However the rules in the Dodd-Frank bill have been watered down so that even loans with no down payment could be put into mortgage pools even though they have more than four times the default risk of loans with 20 percent down payments. It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.

In fact, the only issue was whether they would pay somewhat higher interest rates in the form of mortgage insurance. This would add roughly 0.6-0.7 percentage points to the cost of a typical loan, reflecting the higher default risk. This issue has been hugely misrepresented by the banking industry and its allies so that they can freely return to the practices of the bubble years. 

 

 
David Brooks' Great Adventures in Fantasy Land Print
Friday, 24 October 2014 04:44

David Brooks has a tough job. He is supposed to present an intellectually respectable case for a political party that denies human caused global warming and has questions about evolution and the shape of the earth. This is why he must depart from the truth in laying out the path forward for the economy in his column this morning.

He gives us four items to move the economy forward, but we don't have to get beyond the first one to realize that he is not serious. Brooks tells us:

"If you get outside the partisan boxes, there’s a completely obvious agenda to create more middle-class, satisfying jobs. The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling, considering how much support there is from both parties."

Really? There is bipartisan support for having the federal government borrow money (i.e. run larger deficits) to build up the infrastructure? Is Paul Ryan calling for this? Ted Cruz? Marco Rubio? John Boehner? Who are the Republicans who are there demanding that the government run larger deficits to build up the infrastructure?

Brooks could do the country an enormous public service here by naming names. The reality is that President Obama has been unable to get any notable Republican support for even nickel and dime infrastructure projects. It probably wouldn't even matter if he agreed to restrict the spending to Republican congressional districts.

Then we get Brooks telling us:

"The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly."

There are two questions that come up here. First what is the definition of "affluent" and second what counts as "generosity."  When we were debating tax brackets in 2012 the Republicans insisted that you wouldn't be wealthy enough to pay higher taxes unless your income was above $400,000 a year. By contrast, President Obama put the cutoff at $250,000.

If we accept either of these definitions and think that the excessive generosity takes the form of Social Security and Medicare benefits, then we can stop right here. The money involved is too trivial to make any difference in the lives of working people. In order to have anything worth the trouble we would have redefine affluent to something like an income of $40,000 a year.

Read more...

 

 
Wanting to Run a Marathon in Two Hours is Not the Same Thing as Having a Plan to Run a Marathon in Two Hours Print
Thursday, 23 October 2014 19:59

That distinction would have improved the accuracy of a NYT article on the Republicans' economic plans. The piece noted that Senate Republicans have limited their economic agenda. It told readers that they no longer call for the repeal of the Affordable Care Act and have abandoned the "so-called Ryan Plan, a long-term budget to revamp Medicare and Medicaid and significantly reduce other domestic and military spending enough to balance the budget in 10 years, while sharply cutting taxes."

Actually the Ryan plan was not really a plan to balance the budget while sharply cutting taxes. Ryan instructed the Congressional Budget Office (CBO) to assume enough budget cuts from non-Social Security and non-Medicare spending to bring the budget into balance. He never proposed any specific cuts that would come anywhere close to meeting this target. In fact, he recently has been pushing for increases in spending in one of the areas that he previously had slated for cuts, the Earned Income Tax Credit.

There is a similar story on the tax side. Ryan instructed CBO to assume in its scoring that enough deductions would be eliminated to offset the revenue lost from his tax cuts, however he has never actively supported the elimination of any major tax break (e.g. the mortgage interest deduction or the deduction for employer-provided health insurance). In short, he had nothing resembling a real plan.

The piece also told readers:

"While most economists and business executives do not look to Congress for much, they do want a rewriting of the corporate tax code and a revamping of fast-growing entitlement benefit programs, even as they acknowledge that is virtually unachievable."

It is not clear how it determined the views of most economists and business executives. While there probably is little disagreement that the corporate tax code is a mess, it is not clear that most economists and business executives see an urgency to "revamping fast-growing entitlement programs." The real news here is that the sharp slowdown in health care cost growth in recent years has caused projected growth of Medicare and Medicaid spending to fall sharply. In fact, the projections have fallen more as a result of the slower pace of health care cost growth than would have been accomplished by many austerity plans, like the one put forward by Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission.

This slowdown in health care cost growth has removed the urgency for doing anything to change Medicare and Medicaid. Given the very limited assets of most workers near retirement age, there are few economists who view it as realistic to have any substantial cuts for Social Security any time soon. So it is simply not true that there is some widespread consensus around overhauling these programs.

 

 
Cut the Fracking Nonsense: Demand, not Supply Explains Low Oil Prices Print
Wednesday, 22 October 2014 07:57

Joe Nocera is anxious to credit shale oil with the recent plunge in oil prices, but our old friend Mr. Arithmetic sees things differently. In his column pronouncing the end of OPEC, Nocera credits the "shale revolution" in North America, which he credits with an additional 3 million barrels a day of production.

While this undoubtedly has put downward pressure on prices, it is not the major cause of price declines as can be easily seen from looking at the projections from before the economic collapse in 2008. The 2007 World Energy Outlook projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer than had been projected before the slump. This means production has actually grown less rapidly than projected. That is not a good explanation for declining prices.

Obviously the key is on the demand side. The story here is primarily that the collapse has led to less demand for energy than had been projected as world GDP is still far below the levels projected in 2007. It is likely that conservation and the switch to alternative energy sources also played a role in reducing the demand for oil, but clearly a less important one.

The point is that crowning fracking as the killer of OPEC doesn't make sense, because the numbers don't support it. And, we still don't have basic questions answered about the damage of fracking to the surrounding environment. (The frackers won't reveal the chemicals they use because they claim they are a trade secret. This makes it almost impossible to prove that fracking is responsible for contaminating ground water. The permission to pollute the area surrounding frack sites with impunity is yet another great departure from free market economics when it suits the interests of the rich and powerful.)

The plunge in oil prices is also not especially good news for folks who would rather not see the planet destroyed by global warming. A sane approach would be to impose a tax to offset the drop in prices with the revenue used to promote conservation and clean energy. But that one isn't likely to be on the political agenda any time soon.

 
The European Union's Greenhouse Gas Emissions Are Less Than Half as Much Per Capita as U.S. Emissions Print
Wednesday, 22 October 2014 03:43

That would have been useful background to be included in a NYT article on the European Union's plans for future emission targets. Many readers may not realize that the countries in the European Union are starting from a much lower emissions level than the United States. This means that reductions will be more costly to achieve.

 
Gretchen Morgenson Warns on Pensions and Private Equity (Guest Post) Print
Sunday, 19 October 2014 20:16

by Eileen Appelbaum

Gretchen Morgenson had a great column in Sunday’s New York Times that pulls back the veil of secrecy surrounding pension fund investments in private equity. PE firm Carlyle recently agreed to pay $115 million to settle charges that it had engaged in illegal activities. Shockingly, neither Carlyle nor the firm’s executives and shareholders will pay a penny of this amount. Instead, it’s the pension funds and other limited partners in this PE fund that are on the hook for paying the fine. As Morgenson points out:

Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states. Five New York City and state pensions are among them.

The retirees — and people who are currently working but have accrued benefits in those pension funds — probably don’t know that they are responsible for these costs. It would be very hard for them to find out: Their legal obligations are detailed in private equity documents that are confidential and off limits to pensioners and others interested in seeing them.

Indeed, Morgenson only knows about this because in a rare coup, the New York Times was able to obtain a copy of an agreement that limited partners in a Carlyle fund signed. In general, the secrecy surrounding the agreements that pension funds and other limited partners sign has made it impossible to tally up the total fees and expenses PE firms charge pension funds and their other PE fund partners. Despite the fact that public employee pension funds provide almost a quarter of the capital committed to private equity, while private pension funds commit another 10 percent, the terms of these partnership agreements are kept secret from the workers and retirees whose money is at stake. This is especially egregious in light of the sunshine laws that in most states require transparency and accountability on the part of government agencies, including public pension funds. Yet, as Morgenson documents, the version of the Limited Partner Agreement with Carlyle that the New York Times obtained through a Freedom of Information request was heavily redacted – 108 of its 141 pages were either entirely or mostly blacked out.

In an otherwise excellent article that should be read by every worker and retiree whose retirement savings are in a pension fund, Morgenson makes two misstatements that need to be corrected. First, she uncritically repeats the PE industry’s false characterization of its own activities.

"Private equity firms now manage $3.5 trillion in assets. The firms overseeing these funds borrow money or raise it from investors to buy troubled or inefficient companies. Then they try to turn the companies around and sell at a profit."

Read more...

 

 
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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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