The Washington Post has a lengthy piece discussing the new Office of Financial Research that was set up as part of Dodd-Frank. The purpose of the office is ostensibly to prevent another financial crisis. The article focuses on the supposedly brilliant people who are staffing or advising the office and sophisticated tools that they intend to use on their job.

In fact, it was only necessary to have someone familiar with basic arithmetic and economics to prevent this crisis. It was easy to see that house prices had become grossly out of line with economic fundamentals during the bubble years. It was also easy to see that this bubble was driving the economy as residential construction rose to record shares of GDP and the wealth from bubble generated housing equity pushed consumption to record shares of disposable income.

The collapse of this bubble was the basis for the crisis. If we had seen all the same crazy financial schemes without the bubble, the consequences of their implosion for the economy would have been minimal. By contrast, if the bubble had grown to the same level without crazy financing, its collapse would have still led to a severe recession.

There are many people in positions of power and authority who like to focus on the financial aspects of the crisis because it makes it appear complicated and gives them an excuse for having failed to recognize it in advance and taking steps to stop it. The reality is that it was all very simple and the people in positions of responsibility were simply too incompetent and/or corrupt to do anything to prevent this disaster. 

Can it be a requirement that major budget pieces include at least two sentences on the budget's impact on growth and jobs. This may not be important to balance budget worshippers, but this does matter to the people who have to work for a living.

I hate to be partisan here (seriously -- I criticize the Obama administration all the time), but this map showing declines (blue) in mortality rates for women and increases (red) looks a lot like voting patterns. There is a lot of red across the south and Republican Midwest. The blue tends to show up in Democratically dominated states like California and New York and to be most highly concentrated in the Democratic parts of Democratic or mixed states, such as the Chicago metro area in Illinois or the Detroit metro area in Michigan.

Of course there are many factors that determine life expectancy and some of them will not be easily affected by state policies, especially in the short-term. But the relationship shown in the map is striking. Needless to say, if the color pattern were reversed we would be hearing this as the lead news story for the next century.

In a piece on the new initiative by Japan's central bank to raise its inflation rate to 2.0 percent, the Washington Post told readers:

"The risks are known but impossible to quantify: of inflation remaining tame until it roars out of control, or of asset bubbles creeping into unexpected parts of the economy as investors take advantage of cheap money worldwide to make ever-riskier bets."

While central banks, like the bank of Japan and the Fed, have displayed an enormous lack of competence in recognizing and countering asset bubbles, there are no known instances of inflation remaining tame until it "roars out control," apart from countries victimized by war or natural disaster. This horror story seems to be entirely an invention of the Post (or its unnamed sources).

In all the standard models inflation is a process that builds up gradually over time once an economy is hitting capacity constraints. Economies do not just jump from being severely depressed to having soaring inflation. For this reason, serious people would view this prospect with roughly the same concern as an attack from outer space.

It is also worth noting that this piece places an excessive emphasis on deflation. Japan has occasionally seen modest deflation (a drop in annual prices of less than 1.0 percent annually) over the last two decades. There is no particular importance to having deflation as compared to an inflation rate that is too low.

The issue here is that it would be desirable to have a lower real interest rate given the weakness of Japan's economy. (The real interest rate is the nominal interest rate minus the inflation rate.) Since the nominal interest rate can never go below zero, the only way to lower the real interest rate is to push inflation higher.

For this reason, deflation is harmful, but only in the same sense that a lower inflation rate is harmful. A decline in the rate of inflation from 0.5 percent to -0.5 percent is no worse than a drop in the inflation rate from 1.5 percent to 0.5 percent. There is no magic about crossing the zero line. It is unfortunate that the Post and other news outlets have fostered so much confusion on this issue.

It might have been worth making this point in an article on President Obama's budget proposal that tells readers of his plan to cut Social Security by reducing the annual cost of living adjustment. It would have been worth putting this proposal in some context, since many readers may not understand its consequences.

President Obama's proposal would reduce benefits by 0.3 percent for each year after a worker retires. After ten years benefits would be cut by 3.0 percent, after twenty years 6.0 percent, and after 30 years 9.0 percent. Over a twenty year retirement, the average cut would be 3.0 percent.

This cut would be a bigger hit to the typical retiree's income than President Obama's tax increases at the end of 2012 were to the typical person affected. A couple earning $500,000 a year would pay an additional 4.6 percentage points on income above $450,000. This would amount to $2,300 a year (4.6 percent of $50,000). That is less than 0.5 percent of their pre-tax income and around a 0.6 percent reduction in their after-tax income.

By comparison, Social Security is about 70 percent of the income of a typical retiree. Since President Obama's proposal would lead to a 3 percent cut in Social Security benefits, it would reduce the income of the typical retiree by more than 2.0 percent, more than three times the size of the hit from the tax increase to the wealthy.

Source: Author's Calculations.

The New York Times ran a front page piece warning readers that the cost of treating dementia is "soaring." The piece tells readers of the findings of a new study by the Rand Corporation that shows the cost of dementia doubling by 2040 from its 2010 level.

Are you scared? Are you shaking in your boots? Thinking about pulling the plug on these costly old-timers?

Well our friend, Mr. Arithmetic, reminds us that the Congressional Budget Office projects that the size of the economy is projected to roughly double over this period. This means that the Rand study's finding implies that dementia will impose pretty much the same burden on the economy in 2040 as it does today.

This story follows a common practice among the Washington elite. They continually highlight and exaggerate costs associated with an aging population. Of course as a practical matter there is little that we can do about these costs, although we can redistribute the burden. The implicit and explicit intent behind much of this discussion is that the elderly and their children should bear more of these costs, as opposed to the government.

Keeping the costs of an aging population front and center in public debate obstructs discussion of the massive upward redistribution of income over the last three decades. This upward redistribution has shifted roughly ten percentage points of GDP ($1.6 trillion annually) to the richest one percent of the population at the expense of the rest of the population. The impact of this upward redistribution on the living standards of the bulk of the population dwarfs the impact of any taxes that might be associated with caring for an aging population through Social Security, Medicare, and other government programs.

If issues were treated in proportion to their importance to the public we would be seeing daily pieces on proposals for breaking up the big banks, taxing financial speculation, ending patent monopolies for prescription drugs, free trade in health care services and other measures that would reverse the upward redistribution of income over the last three decades. However, importance to the public is apparently not a major criterion for determining news coverage. Hence we get misleading front page pieces in the NYT on the cost of dementia.

In his column today Robert Samuelson talks about the euro zone crisis and its latest manifestation in Cyprus in the context of the new book, The Alchemists, by his Washington Post colleague Neil Irwin. At one point he tells readers:

"The constant goal, as Irwin shows, has been to prevent a collapse of the global financial system, which could plunge the world economy into a genuine depression. Everyone embraces the goal..." (emphasis added)

Well not everyone shares the goal of preventing a financial collapse at all costs. That's in part because some of us know that there is no reason that such a collapse would plunge the world into a genuine depression.

The world has the tools to reverse the impact of a financial collapse and restore the economy back to a normal growth path. This was demonstrated a decade ago by Argentina. It defaulted on its debt and broke with the dollar in December of 2001. This led to a full-fledged financial collapse, which was followed by a sharp plunge in output in the first quarter of 2002.

By the second quarter its economy had stabilized. By the second half of 2002 its economy was growing rapidly and by the summer of 2003 it had made up all the ground lost from the financial collapse. It continued to growth rapidly until the world recession brought Argentina's economy to a standstill in 2009.

Source: International Monetary Fund.

The New York Times ran a piece with a headline complaining "public misconception of government benefits makes trimming them harder." The piece goes on to explain that the cost of the Medicare benefits received by a typical beneficiary vastly exceeds the taxes they will have paid into the system using standard discount rates. The piece tells readers that most readers do not recognize this fact, so they get upset at the idea of cutting benefits.

The desire expressed in the piece to cut Medicare benefits indicates a misconception by the NYT and the experts cited on the nature of Medicare costs. The United States pays more than twice as much per person for its health care as the average for other wealthy countries. If it paid the same amount as Germany, Canada, or any other wealthy country with comparable health care outcomes, most or all of the gap between taxes and benefits would disappear. 

This enormous gap in expenditures is not associated with better care, it is the result of the fact that doctors, hospitals, medical equipment suppliers and other providers get paid far more in the United States than in other countries. In effect, the NYT and the experts cited in the piece want to see Medicare beneficiaries accept lower quality care because we pay too much to doctors and other providers.

It is likely that most people would find their policy prescription somewhat perverse. It is hard to see why Medicare beneficiaries should feel guilty because the specialists who treat them can make $500,000-$600,000 a year. The more obvious response would be to force doctors and other providers to accept compensation that is more in line with world standards. (We could also give beneficiaries the option to buy into lower cost systems in other countries and split the savings.)

Of course the route of cutting payments to providers would mean confronting powerful interest groups. Many policy experts are reluctant to pursue this path. 

The Washington Post, which relied on David Lereah, the chief economist of the National Association of Realtors, as its main and often only source on the housing market, remains seriously confused about housing. An article on efforts by the Obama administration to push banks to increase lending implied that the situation of the bubble years were normal.

It told readers:

"Before the crisis, about 40 percent of home buyers were first-time purchasers. That’s down to 30 percent, according to the National Association of Realtors."

Of course in the bubble years many people were buying homes with zero or even less than zero down payments. (Many borrowers were able to borrow more than the sale price of the home.) It is bizarre that anyone would use this period as a basis of comparison. The current rate of new homebuyers is closer to the historic norm.

The piece later tells readers:

"One reason, according to policymakers [anyone with a name?], is that as young people move out of their parents’ homes and start their own households, they will be forced to rent rather than buy, meaning less construction and housing activity. Given housing’s role in building up a family’s wealth, that could have long-lasting consequences."

Actually renting also increases the demand for housing. Units switch back and forth all the time between being rental units and ownership units (30 percent of rental units are single-family homes). As a practical matter, the main factor depressing construction right now is the fact that the country continues to have a near record vacancy rate. The vacancy rate is the same whether a family is renting or owning.

Anyone who thought David Stockman's screed in the Sunday NYT against fiat money and the New Deal was an isolated incident has to contend with Roger Farmer's call for bringing back the housing bubble in the Financial Times. It's obviously nutty season at the major news outlets.

So boys and girls, get out those columns calling for a universal currency, the switch to seashell standard, and 28 cent a gallon gasoline. The major media outlets are waiting.