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The Fed's Mandate Means That It Must Pay Attention to Stock and Housing Prices Print
Sunday, 16 March 2014 14:37

A NYT commentary by Jeff Sommer told readers that the Fed is not likely to focus much on recent trends in stock and housing prices at its next meeting because asset prices are not part of its mandate. The piece commented:

"Even if such issues [recent trends in stock and house prices] provide a subtext for Fed discussions, the direct effects of Fed policy on the stock and housing markets may not be an explicit part of the Fed’s agenda this week.

"That’s partly because Congress didn’t include financial asset prices in the Fed’s mandate, which is 'to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.' Those stable prices referred to items like cars, food and shoes, not to financial assets like stocks and bonds, whose price levels fall outside the Fed’s traditional purview."

The last two recessions were caused by collapses in asset bubbles. These collapses had enormous impact on employment, as well as inflation and interest rates. It would be absurd for Fed officials to say they will not focus on asset prices because they are not directly part of their mandate.

 
George Will Is Badly Confused on Economic Issues, Again Print
Sunday, 16 March 2014 08:31

Fortunately for Mr. Will, he works for Jeff Bezos, a man who accumulated $32 billion (more than 40 percent of the annual food stamp budget) by assisting people in evading state and local sales taxes. (Under most state laws, people are obligated to pay sales tax on items they buy over the Internet, however enforcement is essentially zero. The amount of tax that Amazon customers have avoided as a result of purchasing over the web is at least an order of magnitude greater than Amazon's profits since it inception.) Given his background, Bezos would probably not be concerned that Will misrepresents facts to readers.

Will starts by complaining that President Obama's proposal to raise the minimum wage would "do very little for very few." Since the Congressional Budget Office just calculated that the proposed wage hike would directly or indirectly raise the wages of 25 million workers, Will must be giving new meaning to "very few."  He then goes on to complain about the farm subsidies in the new agriculture bill, referring to the "geyser of subsidies" in  "the $956 billion farm legislation." Whatever the merits of the subsidies, they come to less than 10 percent of the total cost of the $956 billion figure highlighted by Will.

Will next complains about the increase in spending on food stamps, telling readers:

"Between 2000, when 17 million received food stamps, and 2006, food stamp spending doubled, even though unemployment averaged just 5.1 percent ." While some of this rise was attributable to increased outreach to eligible families, the employment picture had deteriorated sharply from 2000 to 2006, with the employment to population ratio dropping by 1.5 percentage points. This corresponds to 3.4 million fewer people working. (It's not clear what information Will thinks he is providing by giving the average unemployment rate for the period. If we are looking at changes, it is the endpoints that matter.) Also, food prices rose by 16 percent over this period, which explains a substantial portion of the increase in spending. (Will's source shows that the 2000 level of beneficiaries was a low-point driven by the strong economy of the late 1990s. The number of beneficiaries in 2006 was still below the number in 1995.)

We then get this great invention from Will:

"We spend $1 trillion annually on federal welfare programs, decades after Daniel Patrick Moynihan said that if one-third of the money for poverty programs was given directly to the poor, there would be no poor."

Read more...

 

 
Fun With Really Big Numbers at the Washington Post Print
Sunday, 16 March 2014 08:09

Some folks might think that the point of a newspaper is to provide information to readers. Those people have nothing to do with reporting at the Washington Post. That is why, in an article on unexpected state budget surpluses, the paper told readers that capital gains taxes from the initial public offerings of Facebook and Twitter generated $3 billion in unexpected revenue for California, that Florida's legislature is voting on a $400 million tax cut, and Idaho is projecting an $80 million surplus.

These are all very cute numbers which probably mean almost nothing to 99 percent of Washington Post readers. If the paper was actually trying to inform readers it might have told them that the money from Facebook and Twitter amounts to approximately 3 percent of the state's revenue for a year. It could have told readers that Florida's proposed tax cut comes to a bit more than $20 per person and that Idaho's projected surplus is equal to just under 3.0 percent of its budget.

While most Post readers understand percentages and can relate to to a per person dollar amount, it is unlikely that many are familiar with the size of these states budgets or economies offhand. They could take two minutes to look this information up on the web, but most readers will have less time for this task than the Washington Post's reporter. In fairness, the piece did point out that a proposal to use $4.6 billion to fund pre-kindergarten programs would take up about 3 percent of the state's overall budget. (The higher level of implied spending presumably includes money other than what appears in the general budget.)

 
Stiglitz Sets the Record Straight on "Globalization" Print
Sunday, 16 March 2014 08:00

Joe Stiglitz had a nice piece on globalization pointing out that recent "trade" agreements have been largely about shaping rules and regulations to benefit the one percent rather than reducing trade barriers. The strategy of the Obama administration and other proponents of deals like the Trans-Pacific Partnership is to make nonsense claims about the economic benefits of these deals and use ad hominem arguments against the opponents (i.e. call them Neanderthal "protectionists").

In reality, it is the proponents of these deals who are the protectionists, supporting the barriers that limit competition from foreign doctors and others in highly paid professions. And, one of the main goals of these deals is to increase the strength of patent and copyright protection, often raising the price of the affected items by several thousand percent about the free market price.

 
Inequality in Income Translates Into Inequality in Life Expectancy Print
Sunday, 16 March 2014 07:51

This NYT piece compares life expectancy and health outcomes in Fairfax, Virginia, a wealthy county of Washington suburbs, with McDowell County, West Virginia, a poor coal-mining county in Appalachia. It describes some of the differences in living conditions that have led to a 15-year gap in life expectancies between the two counties. The differences in health outcomes in these counties are attributable to factors that have led to sharp increase in gaps in life expectancy by income across the country.

 
Washington Post Is Confused: Pharmaceutical Industry Lobbyists Try to Increase Profits, not Improve Global Health Print
Saturday, 15 March 2014 08:13

The Washington Post finds politics to be very confusing. It apparently thinks that the people paid high six or even seven figure salaries to lobby for the pharmaceutical industry are humanitarians trying to advance global health. 

Toward the end of an article on efforts by drug companies to get stronger patent-type protections in the Trans-Pacific Partnership (TPP) the Post told readers:

"But pharmaceutical industry advocates worry that without strong global rules, the drug development process will suffer."

Of course the industry advocates say they "worry" that drug development will suffer, just as the defense lawyer always says her client is innocent. Just as lawyers are paid to defend their clients, lobbyists are paid to promote the case for their client. Newspaper reporters and editors should understand this fact.

It would also be worth mentioning that the protections being pushed by the pharmaceutical industry in this deal will likely worsen inequality and lead to fewer jobs for workers in the United States. They will transfer more money to the shareholders and top executives of the drug companies. They will also leave consumers in the countries who are parties to the TPP with less money to buy U.S. made products.

 
Was the Irish Recovery Driven by Drugs? Print
Friday, 14 March 2014 07:22

Apparently it was in large part, according to this WSJ article. The piece tells readers that Ireland's economy shrank by 2.3 percent from the third to the fourth quarter, meaning that it dropped at a 9.2 percent annual rate, to use the normal terminology of people in the United States when talking about growth data. However the article later tells us that the story is not as bad as it first appears, since much of this decline is due to a major drug going off patent, which has reduced the income flows recorded in Ireland.

Due to its low corporate tax rate, many multinational companies book income in Ireland even though it was actually generated elsewhere. These phantom income flows have little to do with the state of the Irish economy. To avoid this problem it is more useful to look at gross national income. If we look at the OECD data on Irish national income we find that the number for 2012 (the most recent year available) was still 8.6 percent below the 2008 level. In fact, it was 2.3 percent below the 2005 level. Obviously Ireland is yet another one of those great success stories from the economic whizzes at the European Commission.  

 
MSNBC Finds It's Hard to Get Good Help: Abby Huntsman on Social Security (see correction and second correction) Print
Friday, 14 March 2014 05:07

It's always entertaining when people who obviously have no clue about the basic facts on Social Security take to educating people on Social Security. Of course it's unfortunate when such people actually get taken seriously. In the hope of reducing this risk, BTP takes this opportunity to address Abby Huntsman's warning to millennials about the risks posed to them by Social Security.

Ms. Huntsman (the daughter of unsuccessful presidential candidate Jon Huntsman) tells her audience that the problem is that people are living much longer so that we are seeing much higher ratios of retirees to workers than when the program was first established in 1937. There are two big problems with the basics of Huntsman's story. First, most of the gain in life expectancy that she points to in the segment is the result of reduced infant mortality, not people living longer. For example, the Social Security trustees report shows life expectancy at birth increased by more than 15 years from 1940 to 2012, however life expectancy at age 65 has increased by just 6.5 years. It's great to see lower infant mortality rates, but this doesn't affect the finances of Social Security, it is the increase in life expectancy at age 65 that matters.

However the  bigger problem with Huntsman's diatribe is that this increase in life expectancy was expected at the time the program was created. As a result, a number of increases in the tax rate were put into place in the next five decades. The initial tax rate was just 2.0 percent of wages on both the worker and the employer. Since 1990 it has been 6.2 percent of wages for both employer and employee. (The taxable wage base was also increased substantially.) These increases were put in place to deal with the costs associated with a rise in the ratio of retirees to workers. The age for receiving full benefits has also been increased from 65 to 66 at present, and will rise to 67 for people reaching age 62 after 2022. It is flat-out wrong to claim either that the increase in life expectancy caught anyone by surprise or that no changes were made to deal with longer life expectancies.

The other part of Huntsman story that is even more misleading is the idea that the finances of the program poses some insoluble problem or that the program will impose an unbearable burden on millenials. In fact, average wages are projected to grow substantially in coming decades. If most millenials get their share of wage growth, then they will enjoy far higher standards of living than do workers today, even if their taxes are increased to cover the cost of a larger number of retirees.

The figure below shows the Social Security trustess projections for wages over the next seven decades. It also shows after Social Security tax wages under the assumption that taxes are increased at the rate 0.05 percentage points on both workers and employers each year from 2020 to 2050. This increase will be enough to leave the program fully funded well into the next century even assuming no other changes are ever made.

social security wages 14144 image001

                         Source: Social Security Trustees Report and author's calculations.

Of course there is a big problem wiith this story. In the last three decades most workers have not shared in the growth of the economy. Most of the gains have gone to profits or highly paid workers like Wall Street traders, CEOs, and some celebrity types like Ms. Huntsman. If this pattern continues then millenials may not see rising living standards in the decades ahead. However, the risk to living standards posed by the continuing upward redistribution swamps any risks posed by a larger population of retirees. It is understandable that those who benefit from the upward redististribution would prefer to have public attention focused on Social Security, but this focus is not based in economic reality.

 

Correction:

Mike Anderson has pointed out that the tax increase specified in this post would not be enough to produce a balance over the trust fund's 75-year planning horizon. In order to get to balance with a tax increase phased in over 30 years, beginning in 2020, it would be necessary to have a tax increase of roughly 0.22 percentage points annually (0.11 percentage points on both the employee and employer). This implies a cumulative tax increase of 6.6 percentage points by 2050, slightly larger than the 6.4 percentage point increase in the payroll tax between 1960 and 1990. This calculation assumes no reduction in scheduled benefits, no increase in the retirement age, and no increase in the cap on taxable income. It also assumes no further tax increases in years after 2050. Under this schedule real after-Social Security tax compensation would be on average almost 50 percent higher in 2050 than it is today. By 2060 it would be more than 60 percent higher.

It is also worth noting that these calculations assume some further upward redistribution of income. If some of the upward redistribution of the last three decades were reversed, the tax increases needed to balance the trust fund would be smaller.

 

Second Correction:

Sorry folks, sometimes you need a little sleep to see your spreadsheet clearly. Anyhow, having checked again, it looks like I was much closer to the mark the first time. An increase in the tax rate of 0.14 percentage points annually (0.07 percent on both the worker and the employer) begginning in 2020 and running for thirty years should be sufficient to make the trust fund balanced for its 75 year planning horizon. This leaves a total increase in the tax rate of 4.25 percentage points (2.23 on both the worker and the employer) by 2050. (The spreadsheet is available on request.)

 
The Root of Many U.S. Economic Problems Lie In Stanley Fischer's East Asian Bailout Print
Thursday, 13 March 2014 05:43

Morning Edition engaged in ritualistic praise of Stanley Fischer, in discussing his prospects for approval as President Obama's pick to be vice-chair of the Federal Reserve Board. It accurately reported that economists on both the left and right of the political mainstream respect Fischer and see him as central to shaping the current state of macroeconomics.

The small point left out of this discussion is that this macroeconomics led us into the worst economic downturn since the Great Depression, giving the country and the world a slump from which we have not yet recovered. Tens of millions of people have seen their lives ruined as a result of failed economic management.

Fischer personally played a direct role in creating the imbalances that led to the crisis. As first managing director at the I.M.F., he played a central role in directing the bailout from the East Asian financial crisis. The harsh conditions imposed by the I.M.F. led the countries of the region, along with countries throughout the developing world, to begin to accumulate massive amounts of reserves (dollars) in order to avoid ever being in the same situation as the East Asian countries.

This led to a huge rise in the value of the dollar and an explosion in the size of the U.S. trade deficit. The trade deficit created a huge gap in demand. This gap in demand was filled in the late 1990s with the demand generated by the stock bubble. The demand gap was filled in the last decade by the housing bubble. This is not a stable mechanism for generating demand.

In standard textbook economics capital is supposed to flow from rich countries to poor countries where in principle it will derive a higher rate of return. Fischer's policies at the I.M.F. led to a reversal of this pattern in a very big way. The consequences for the world economy have been disastrous. This point could have been made to NPR's audience if it had spoken to anyone who was not complicit in this momentous mistake.

 

 
Piketty's Relentless Wealth Gap Need Not Be So Relentless Print
Wednesday, 12 March 2014 12:08

Eduardo Porter picks up on the fashion book of the week, Thomas Piketty's Capital in the 21st Century. The punchline, which Porter accurately conveys, is that we are on a path of ever greater concentration of wealth and income. Piketty's isn't happy about this and recommends wealth and inheritance taxes as remedies, but since these taxes don't sound very likely, the picture looks pretty bleak.

While the book has much useful information and is well worth reading, folks can feel justified in taking its conclusion with more than a grain of salt. There is a lot about the determinism that doesn't seem quite so determined. For example, the greater concentration of income is most apparent in the U.S. and U.K.. There is nothing really to talk about in the case of France, not too much in the case in Germany, and pretty much zero in Sweden if we pull out the 70s when there was a sharp reduction in the concentration of income.

Much of the concentration of income hinges on policies that could easily be altered without overturning capitalism. For example, shorter and less stringent patent protection would go far towards reducing the concentration of income as would a return to the old fashioned view that monopolies like cable companies and Internet providers should be subject to regulation. (This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive.)

I have a longer list of items in my review of the book. I won't repeat everything here, but I will just say that anyone who gives Bill Gates credit for inventing the mouse can reasonably be accused of paying insufficient attention to institutional detail. I will also add that the figure accompanying the Porter piece, which projects [mistakenly] the ratio of private capital to income through the year 3000 certainly looks a bit overly deterministic.

 

Note: corrections made, thanks TK421.

 
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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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