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Rattner on Income Inequality Print
Monday, 17 November 2014 06:08

Steve Rattner gets many things right in his NYT column on income inequality. (Okay, I'm going soft because he used a chart from CEPR on mandated vacation.) But there is one point worth correcting.

His charts showing income inequality before taxes and transfers across countries is misleading. The OECD counts government run pension programs like Social Security as a transfer. Most other countries have much more generous public pension programs than the United States. As a result, many retired workers in these countries have no income except their government pension. They also pay more in "taxes" for their benefits.

This makes before-tax income seem much more unequal than would be the case if we treated the pensions as being privately run. That implied redistribution is then very large, even if the pension program is only modestly redistributive (i.e. workers' benefits reflect what they paid into the program).

Btw, inequality really is not hard. If we free trade for the services of doctors and other highly paid professionals, a more efficient mechanism than patent monopolies for developing prescription drugs, and taxed the financial sector like other sectors, we could undo most of the increase in inequality over the last three decades. 

 
Robert Samuelson Wants to Take Away Social Security from the Affluent Elderly Print
Monday, 17 November 2014 05:38

Robert Samuelson does the old "pox on both your houses" routine, complaining about Republicans who want tax cuts for rich people and Democrats who defend Social Security and Medicare. Naturally, there are many problems wrong with Samuelson's formulation. (The "pox on both your houses" story will always sell in elite DC circles, it doesn't matter what the facts of the situation are.)

First Samuelson asserts:

"Democrats’ rigid support of retirement spending is squeezing many valuable domestic programs that, like defense, are now underfunded."

Really? Is there any evidence whatsoever that we would be spending more money on education, infrastructure, clean energy, etc. if we spent less on Social Security and Medicare? Samuelson certainly doesn't present any. The reality is that we are under no real world budget constraints at the moment or in the near-term future. We face political constraints and there is no reason to believe that the Republicans would view an agreement to cut Medicare and Social Security as anything other than an opportunity to give more money to the rich.

The more fundamental problem is that Samuelson's prescription of reducing benefits for the "affluent elderly" doesn't make any sense. This is for two reasons. First, unless "affluent" means something different for Samuelson than the rest of us, there ain't no money there. When we raised income taxes, the line for affluent was an income of $400,000 a year. Even if we cut that in half because we think seniors needs less money, we would find that there ain't nothing there.

While people earning over $400,000 have very large incomes, which can provide substantial tax revenue, they don't have very large Social Security checks. It would just be a rounding error in the budget if we took away all of their Social Security and Medicare. To really have a noticeable impact on the budget we would have to go after people who have non-Social Security income of around $40,000 a year. This is not most people's definition of "affluent." (It's funny this double-talk appears in a piece lecturing the public on the need for honest discussion.)

The other problem with cutting benefits for the affluent elderly is that they paid for these benefits. We could with as much justification go after the interest payments on the government bonds held by the affluent elderly, but most people probably would not consider this very fair.

According to an analysis from the Urban Institute most seniors pay more in Social Security taxes than they will receive back in benefits. The value of Medicare benefits exceed the taxes paid in, but this is due to the fact that we pay twice as much per person for our health care as people in other wealthy countries with nothing to show for it in terms of outcomes. The problem here is not how much seniors are getting, but rather how much we are paying to doctors, drug companies, and other health care providers.

Unfortunately, health care providers are a protected class in elite Washington circles. (Drug companies are big advertisers in the WaPo.) So instead we get pox on both your houses pieces that don't make any sense.

 
WaPo Wonders Why Man Run Over By Car Can't Walk and Wages Aren't Growing Print
Sunday, 16 November 2014 15:18

When a Washington Post editorial frets over weak wage growth is is a bit like ISIS wondering why foreign reporters don't seek their leaders out for interviews. Come on folks, are you serious?

We've had three and half decades in which we have maintained much higher unemployment rates than in the Golden Age (1947-1973) when workers shared in the gains of productivity growth. As Jared Bernstein and I show in our book, wage growth at the middle and the bottom of the wage ladder is directly related to the level of unemployment. Of course the Washington Post has endorsed most of the high unemployment policies in the form of the Fed's anti-inflation policy, a high dollar policy that gave us large trade deficits, and reducing budget deficits and thereby depriving the economy of much needed demand.

But the Post's attack on wages goes well beyond these macroeconomic policies. It has supported trade deals that are designed to put downward pressure on the wages of large segments of the labor force by placing them in direct competition with low-paid workers in the developing world. Yet, it will not even consider policies that would allow consumers to gain by subjecting doctors, lawyers, and other highly paid professionals to the same sort of competition.

The paper also has been an enthusiastic supporter of increased protectionism in the form of stronger patent and copyright protection. As a result of patent protection, we now spend close to $400 billion a year (@2.2 percent of GDP) on prescription drugs alone. We would probably spend about one-tenth this amount if drugs were sold in a free market.

And, the Post has been a consistent opponent of policies that would restore the balance of power between unions and management. The plunge in unionization rates has also been a big factor in reducing wages for most workers.

And,the Post has been a protector of the vast rents earned by rich people in the financial sector. It has opposed the I.M.F. and others who want to subject the financial sector to the same level of taxation of other sectors.

So, the WaPo is troubled by the fact wages aren't growing. Hmmm, maybe if they followed the news more closely they would be better informed on the topic.

 
NYT Doesn't Give Japan Credit It Deserves On Advancing Women in Labor Force Print
Sunday, 16 November 2014 12:27

A NYT editorial today rightly raised warning signals about weak economic growth in the United States and around the world. While the basic point is well-taken -- tens of millions of people are being denied the opportunity to work or to get pay increases due to bad macroeconomic policy -- the piece does get a few things wrong.

Most importantly it criticizes Japan's Prime Minister Shintzo Abe for failing to carry though with his commitment to bring more women into the labor market. Actually, Japan has made enormous progress in this area according to the OECD. It reports that the employment to population (EPOP) ratio for prime age women (ages 25-54) went from 69.1 percent in 2012, when Abe took office, to 72.0 percent in the most recent quarter. By comparison, the EPOP for women in this age group in the United States is just 69.9 percent.

This is a very dramatic increase in a relatively short period of time. Undoubtedly Japan can and should go much farther. If barriers are removed, such an inadequate child care arrangements and work place discrimination, their EPOP would certainly go higher. (It's in the high 70s for the Nordic countries.) Also, many women are still excluded from better paying jobs and full-time employment. It is nonetheless worth noting the impressive progress that has been made under Abe.

There are a couple of smaller points worth mentioning in this piece. It reports that the euro zone grew by just 0.2 percent in the third quarter. This is a quarterly rate of growth. While it is conventional in Europe to report growth at quarterly rates, the standard in the United States is to report growth in annual rates. The annual rate of growth in the third quarter in the euro zone was 0.6 percent. This doesn't change the argument, but newspapers should be trying to convey information in ways that are understandable to readers. It is almost certainly the case that most readers thought the 0.2 percent figure referred to an annual rate.

Finally, the piece refers to the recovery from the "financial crisis." While the financial crisis was lots of fun, the reason that the economy in the United States and elsewhere are still stumbling is that we had housing bubbles that collapsed. These bubbles had been driving growth. In the wake of their collapse there is no source of demand to replace the demand that had been generated by the bubble. This is really a very simple story.

Focusing on the financial crisis is a distraction and makes the problem appear far more complex than is actually the case. It's a problem of insufficient demand, end of story.

 
AP Reports that 99.8 Percent of Social Security Disability Payments Were Proper Print
Saturday, 15 November 2014 09:34

If you doubt that AP would write a story to make this point, you guessed correctly. AP actually decided it was REALLY BIG NEWS that Social Security's inspector general found evidence that 0.2 percent of payments were improper.

The news service devoted a major article to reporting that $2 billion in benefit payments over the last seven years appear to have been given to people who did not qualify for disability. The piece neglected to mention that the program paid out close to $900 billion in benefits over that period. This means that improper payments identified in the inspector general's report were less than 0.3 percent of the total payments in the program.

Since the piece does not provide any context it is likely that many people will be led to believe that the disability program is rife with fraud when in fact the report is indicating the opposite. It would be great if improper payments were zero, but in a program that pays out $140 billion in benefits every year, this is not going to happen. It makes sense to try to reduce improper payments as much as possible, but it doesn't make sense to spend $10 billion to eliminate $2 billion in improper payments.

It is also important to note that there are undoubtedly people who should be getting disability who have been wrongfully denied benefit. We could have workers dying of cancer or unable to work due a heart attack or stroke or other disability who an a judge somehow decided was not eligible. If we put more pressure on judges to turn down claims then there will be more people improperly denied benefits.

There is another important point to keep in mind when the media decided to highlight relatively small amounts of waste or improper payments in government programs. AP has this information because the government investigated its own payment practices and issued a public report. Walmart, GE, and other private companies don't disclose instances of fraud and improper payments so we aren't likely to read AP stories about the waste and abuse in the private sector. (They could do their own investigations, but that's another story.)

Anyhow, if we start hearing political hysteria over $2 BILLION in improper disability payments over the coming months, remember to have sympathy for the folks who have problems with big numbers. 

 
NYT Reports That Some Health Insurers Are Raising Their Prices and Some High School Kids Are Smoking Marijuana Print
Friday, 14 November 2014 23:32

This one should be in the "you must be kidding category." The New York Times has a front page story with the headline, "Cost of Coverage Under the Affordable Care Act (ACA) to Increase in 2015." Hmm, that would mean that 2015 is just like 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007 ... you get the idea. Costs of health care have always gone up, apparently the Affordable Care Act didn't change this fact. NYT headlines ain't what they used to be.

The substance of the article, insofar as there is any, is not much better. There are places in the country where some plans had large increases in prices. That is unfortunate, but if the NYT had a bit more experienced reporters, they would know that there were frequent incidents of large increases in insurance premiums before the ACA. Given that there are literally thousands of different plans, it would be surprising if some did not have large increases.

While the article focused exclusively on the plans and areas with large increases (which are mostly sparsely populated cities and counties), it could have also focused on the areas in its own chart with small premium increases or even decreases. For example, the chart shows that the average premium in Cook County, IL (which includes Chicago) raised its premium by 1.0 percent in 2015. The average premium in Cuyahoga County, OH (which includes Cleveland) fell by 1.6 percent. And, the average premium in Bergen County, just outside of New York City, fell by 0.9 percent.

Information on the overall pattern of premium increases is news. The New York Times really didn't need to hire reporters to know that some insurers raised their rates on some plans by a large amount.

 
Actually, Republicans Are Pushing for More Restrictions on Trade Print
Friday, 14 November 2014 14:21

It is bizarre how many people can't seem to understand that patent and copyright protection are "protection" and not free trade. It doesn't matter if your friends are the ones who benefit from them or even if you think these forms of protection are good for the economy. They are still forms of protection. By giving firms and/or individuals monopolies, they are 180 degrees at odds with free trade.

This is why everyone should be very angry when the NYT told readers that:

"Mr. Obama has made clear he intends to work with congressional Republicans to push for fewer restrictions on trade."

This is not true. He is going to push for trade deals that will reduce some restrictions and raise others. It is entirely possible that the economic impact of the increased restrictions will exceed the impact of the reductions. (If the NYT has a basis for arguing the opposite, it has not shared it with readers.)

These trade deals will also impose a regulatory structure on a wide range of issues (e.g. the environment, work place safety, privacy) that will supersede domestic laws and regulations. It should be possible to report on these deals accurately.

 
Paying Off Student Debt Is Saving Print
Friday, 14 November 2014 07:55

Hate to be the econ nerd here, but this is the sort of thing that folks writing on economics should get straight. (The failure by econ writers to get such things right is one reason that Jonathan Gruber thinks the public is "stupid.") Anyhow, Catherine Rampell messes this one up in an otherwise reasonable piece discussing differences in saving rates by age.

The piece notes the negative saving rate reported for people under age 34 and then comments:

"These numbers have inspired various condemnatory headlines and think pieces about my generation’s irresponsible savings deficit. The more sympathetic coverage has at least acknowledged the effects of student loan debt and high youth unemployment, but even those articles came loaded with judgment."

Paying off student loan debt, just like paying off credit card debt or paying down a mortgage, is a form of saving. If young people are actually paying off large amounts of student debt then they would have a high saving rate, not a low saving rate.

The chart accompanying the column is interesting not only for the breakdowns by age, but because it shows the overall saving rate. It shows that the saving rate is actually relatively low, meaning that people are spending a lot. (This would be even clearer if it went back to years before 1990.)

We have heard endless comments from economists and economic reporters trying to explain why people are not spending following the collapse of the housing bubble. The simplest explanation is that they are spending, albeit not at the same levels as when they had $8 trillion of ephemeral bubble wealth driving their consumption. This is one of those points that is far too simple for economists to understand. 

 
Contrary to G-20 Goals, the United States is Working to Increase Trade Barriers Print
Friday, 14 November 2014 05:59

A NYT article on the G-20 summit describes the goal of such meetings:

"World leaders would work together to remove the roadblocks to economic progress, including corruption, trade restrictions and regulations that discourage hiring and firing."

Actually the United States has been working hard in international negotiations to increase barriers to trade in the form of patent and copyright protection. These barriers can raise prices of drugs and other products by several thousand percent above their free market price, draining money out consumers' pockets. The United States has even been encouraging such perverse practices as extending the length of copyright protection retroactively, in effect trying to give people in the past more incentive to produce creative work.

It is also worth noting that it is questionable whether protections against firing have much impact on hiring and growth. According to the OECD, Germany ranks near the top in the strength of its employment protection. It also has the lowest unemployment rate of any major economy. There is little or no correlation between employment and unemployment rates and the strength of employment protections.

 
Getting Carried Away in Attacking Refinancing Print
Friday, 14 November 2014 05:37

Bethany McLean goes a bit overboard in arguing against refinancing in a NYT column this morning. She cites data showing that the vast majority of subprime loans in the bubble years were for refinancing homes rather than home purchases.

The data are misleading because many of the subprime loans were issued to be refinanced. Many of these loans carried teaser rates and were pushed with the promise that people could refinance before the teaser rate reset. Many buyers took advantage of this option, often refinancing two or three times as house prices continued to rise. For this reason, it is misleading to imply that subprime loans were not important to home purchases during this period.

The piece also carries the bizarre assertion:

"Mr. Rosner [Joshua Rosner, a managing director at the research consultancy Graham Fisher & Company] also points out that while homeownership peaked in 2004, home prices peaked in 2006, because refinancing drove up prices."

This doesn't make any sense. Refinancing a home cannot drive up its price. The bubble was driven by demand for homes, not the demand for refinancing. The latter can plausibly drive up the price of mortgages, but it doesn't directly affect house prices. (Higher mortgages rates would be expected to lower prices, other things equal.)

 
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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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