Thomas Friedman gives the Republicans some well-deserved bashing in his column today, but he also unthinkingly repeats his standard lines:

"The second of our great long-term challenges are our huge debt and entitlement obligations."

Of course our debt has expanded substantially due to the economic devastation caused by the collapse of the housing bubble. It is not at level that poses any great harm to the country as witnessed both by the fact that financial markets are willing to lend the United States money at very low interest rates and also that the United States and other countries have been able to sustain much larger debt burdens for long periods of time.

The part about entitlement obligations is misleading since the real problem is the broken U.S. health care system. We pay more than twice as much per person for our health care as people in other wealthy countries. This gap is projected to rise rapidly in the decades ahead. If we paid a comparable amount for our health care we would be looking at long-term budget surpluses, not deficits.

It is ironic that Friedman unthinkingly repeats cliches about entitlements when the point of the article is adopting policies to ensure that the United States is among the HIEs (high-imagination-enabling country) rather the LIEs (low-imagination-enabling countries).

In a column discussing Charles Murray's new book, Coming Apart, Ross Douthat decries the fact the choices posed are between Murray's do nothing libertarianism and the "liberal view" that:

"there’s nothing wrong with America’s working class that can’t be solved by taxing the wealthy and using the revenue to weave a stronger safety net."

Of course there is a more obvious progressive response that involves reversing the policies that have led to the massive upward redistribution of income over the last three decades. This would include opening up highly paid professions (e.g. doctors, lawyers, economists) to trade in the same way that we have opened up manufacturing to trade. This would put downward pressure on the wages of these professionals. That in turn would lower the cost of health care and the other services they provide, thereby raising the wages of ordinary workers.

We could also look to alternatives to patent protection to supporting research in prescription drugs. We pay close to $300 billion a year (2.0 percent of GDP) for drugs that would cost $30 billion in a free market. The difference of $270 billion a year is roughly five times as large as the what is at stake with extending the Bush tax cuts to the wealthy.

The country could change rules on corporate governance so that CEOs don't get to effectively write themselves huge paychecks at the expense of other corporate stakeholders. If executives in the United States were paid in line with executives in other wealthy countries it would free up tens of billions of dollars for increased investment and higher pay for ordinary workers.

And, the government could end various forms of public subsidies for Wall Street banks, such as too big to fail insurance. This would also save tens of billions of dollars a year.

There are many things that could be done to improve the situation of the white (and African American and Hispanic) working class that have nothing to do with tax and transfer policy. However, folks like Douthat want to restrict progressives to a loser liberalism agenda which he quite correctly points out is not very attractive.

The Washington Post is widely known as a hotbed of Neanderthal protectionism, strongly supporting measures that shield highly educated professionals from international competition. This has the effect of redistributing income from autoworkers, textile workers and other people who have been subjected to international competition by deliberate policy to the highly educated workers who enjoy protection.

It carried its protectionist agenda a step further in a lengthy front page business section piece that told readers that:

"It is no exaggeration to say that the success of the health-care law rests on young doctors choosing to do something that is not in their economic self-interest."

This view is also pounded home in the headline to the print version of the article:

"The health-care overhaul depends on primary-care doctors. They work more and earn less. Who'd sign up for that?"

Remarkably the piece never once mentions the possibility of filling any potential shortage of primary care physicians with an increased number of foreign doctors. The article reports that the median compensation for primary care physicians is $208,700 a year.

There is no shortage of smart people in countries like China, India, Mexico and elsewhere who would be happy to train to U.S. standards, become completely fluent in English and work for half of this wage. The gap in wages between the United States and these countries is so large that doctors from these countries would be far ahead of what they could earn in their home countries even if they only made $100,000 a year.

It is also simple to design systems that would repatriate a portion of the earnings of immigrant doctors to their home countries so that they can train 2-3 doctors for each one that came to the United States. This could ensure that the countries sending doctors to the United States also saw improvements to their health care systems.

Unfortunately the Washington Post, like most of the political elite, is so committed to its protectionist agenda that it does not want such possibilities to even be discussed. 

The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn are the main factor behind the current deficit:

"Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt."

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a sudden urge on the part of politicians to increase the generosity and scope of these programs.

A second point that deserved more emphasis is the extent to which the projected budget problems in future years are the result of a broken health care system. The United States already spends more than twice as much per person for its health care as do people in other wealthy countries with little obvious benefit in outcomes. This gap is projected to grow rapidly in the decades ahead. If U.S. health care costs were in line with costs in other countries then the country would be looking at long-term surpluses, not deficits.

A third factor that provides an important backdrop to this discussion is the path of wage growth. The people interviewed for this piece expressed concern for their children and grandchildren's living standards based on the possibility that they would face higher taxes. However, the extent to which taxes impose a burden depends hugely on workers' before tax income.

If workers get their share of projected productivity growth, then real wages will rise by roughly 1.3 percent a year, even assuming a higher portion of compensation going to pay health care benefits. This growth rate implies that wages will be nearly 40 percent higher after 25 years, roughly a generation. This would mean that if most workers got their share of productivity gains, then after-tax wages would be far higher for the next generation than for current workers even if the tax rate they paid increased substantially. 

This brings home the point that the real problem faced by the people interviewed for this piece and elsewhere in the country is that they have not been sharing in the gains of economic growth. If the current policies that enforce this pattern of income distribution persist, then workers in the future will find their taxes to be a serious burden, however the core problem is the set of polices (e.g. trade, Fed policy, patent policy etc.) that lead to an upward redistribution of income, not taxes.

The Washington Post has an interesting piece about opposition to a trade pact between the European Union and India which could limit the ability of India to supply generic medicines for treating AIDS and other diseases. The article repeatedly refers to the agreement as a "free-trade" pact.

This is 180 degrees wrong. Patent protection is the opposite of free trade. It is a government granted monopoly. Patent protection is a government policy for supporting innovation. Just as trade protection in other areas is a form of industrial policy.

Patent protection leads to the same sort of distortions as economists criticize from other types of protection except the magntiudes are much larger with patent protection. In the case of prescription drugs, it often raises prices by many thousand percent above the free market price. Most tariffs only raise the price of products by 20-30 percent. There are arguably more efficient mechanisms for supporting research on prescription drugs.

The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.

It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:

                               X-M = (S-I)+ (T-G)

This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.

That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.

That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villian the story.)

But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.

BusinessWeek decided to take a shot at Paul Krugman. Okay Krugman, like everyone else in public debate, is fair game. But if they can find a reporter who knows a little economics they might better serve their readers by constructing a little scorecard.

Krugman (along with a few other Keynesian types out here) has staked out very clear positions on a number of key economic issues such as the size of the stimulus, the impact of deficits on interest rates, and the impact of quantitative easing on inflation. Maybe Businessweek can tell its readers whether the Keynesians have been right or whether the fresh water types carried the day.

Then, if they really want to be cruel, they can ask who warned about the housing bubble before it actually sank the economy.

Short-term measures of real family income are driven primarily by sampling error and erratic movements in the consumer price index. The latter is mostly due to fluctuations in energy prices.

This is the reason that most economists, unlike USA Today, would not take seriously a report showing a large gain in median family income in the last four months of 2011. The main reason for the sharp rise in income shown in this report is likely the sharp drop in the consumer price index over this period.

It is more useful to report these data over longer periods of time so that random fluctuations play less of a role. Given the vast amount of material that is available for free on the web, it is especially difficult to understand why USA Today would place so much emphasis on a newly produced report that is being sold for $20 each.

The NYT had an interesting article reporting on new research showing a sharply growing gap in educational outcomes based on the income of children's parents. While the racial gap has fallen sharply, this income gap has exploded.

The discussion of this research was quite valuable, however the second part of the article was devoted to telling readers that nothing can be done. For example, article concluded by presenting the views of Douglas Besharov, a fellow at the Atlantic Council who was formerly at the American Enterprise Institute:

"The problem is a puzzle, he said. 'No one has the slightest idea what will work. The cupboard is bare.'"

Of course there are all sorts of ideas on measures that would reduce income inequality, which would presumably also reduce the large gap in educational outcomes. For example, if doctors and lawyers were not largely protected from international competition they would no longer have the sort of incomes that would allow them to hire tutors and give other advantages to their children compared with the children of ordinary workers.

The Washington Post still seems to not have seen the housing bubble. A front page article refers to a housing "slump" and discusses the possibility that the states' settlement on foreclosure practices will heal the housing market.

These sorts of comments imply that it is plausible that the housing market will somehow bounce back to its bubble levels of prices and construction. It isn't.

The bubble led to house prices in many parts of the country that were completely out of line with the fundamentals of the housing market, just as was the case with stock prices at the peak of the stock bubble in 2000. It also led to enormous overbuilding of housing.

There is no reason to expect house prices to bounce back at all, as house prices nationwide are just now returning to trend levels. Housing construction will pick up gradually as the oversupply from the bubble era is gradually reduced through population growth, but there is no plausible story where we will see some sort of boom in housing construction at a time when vacancy rates remain near record highs.