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Washington Post Discovers that CBO Is Not God Print
Sunday, 02 March 2014 08:40

The Washington Post is widely known as the newspaper that uses both its opinion and news pages to constantly tell readers that we have to cut Social Security and Medicare spending because the Congressional Budget Office (CBO) predicts big deficits 10, 20, or 30 years in the future. That is why it was extraordinary to see an article in the Sunday paper telling readers that CBO is often wrong and that its scores may not always be the best basis for policy decisions.

The central theme of the piece was that the Eisenhower administration was able to commit $25 billion to building the inter-state highway system in 1956 (the equivalent of $1.1 trillion in today's economy) in part because he didn't have to get this spending scored by CBO. While this was clearly a large expenditure relative to the size of the economy, the benefits would have been very difficult for a CBO-type agency to quantify.

In pointing out the errors of scoring by CBO, the piece seriously understates the case. In 1996, after all the Clinton era increases and spending cuts had already been put into law, CBO still projected a deficit for 2000 of 2.5 percent of GDP ($420 billion in today's economy). In fact, in fiscal year 2000 we actually had a surplus of roughly the same size, implying a forecasting error of close to 5 percentage points of GDP.

This was not due to further legislative changes. The tax and spending changes over the intervening four years actually added slightly to the deficit. The problem was that CBO grossly under-estimated economic growth over this four year period and over-estimated the unemployment rate, predicting a 6.0 percent unemployment rate for 2000 when the actual rate was 4.0 percent. 

Having underestimated growth in the years 1996-2000, CBO then hugely over-estimated growth and revenue in the next decade, failing to see that the stock bubble would collapse, sending both the economy and revenue plunging. As a result, we never came close to paying off the national debt, Federal Reserve Board Chairman Alan Greenspan's big fear when he argued in favor of the Bush tax cuts in 2001.

And of course the CBO completely missed the collapse of the housing bubble and the fact that it would tank the economy. As a result, the Washington Post was highlighting concerns about the relatively small deficits of 2006-2007, while completely ignoring the bubble that was about to devastate the country.  

More recently CBO has likely been exaggerating deficit concerns by failing to fully incorporate the slowdown in health care cost growth in its projections of future spending. If this slowdown continues, then not only will near-term deficits be relatively modest, but even the longer term deficits highlighted by the Post will also be easily contained.

One issue this article gets wrong is the nature of the data at CBO's disposal. We have very reliable data on GDP dating back to the early post-World War II years. The Bureau of Labor Statistics is a reliable source of inflation data for 100 years. CBOs problem in its scoring does not stem from a lack of data.  

 
Venezuelans Do Not Pay for Their Goods in Dollars Print
Saturday, 01 March 2014 08:56

A NYT article discussing class divisions in Venezuela included a chart showing an implicit rate of inflation calculated by the Cato Institute. The chart shows an annual rate of inflation of more than 300 percent, compared to an official rate of around 50 percent.

The basis for the difference is that the Cato rate effectively assumes that items are paid for in dollars. As the black market price of Venezuela's currency plunges against the dollar, this leads to a very high measure of inflation. This measure is of dubious relevance to the people of Venezuela, since only a tiny portion of their purchases involve payments in dollars.

As a practical matter, because there are shortages of many items the true inflation rate would be higher than the official rate, since many items cannot be purchased at the measured price. However, the dollar conversion methodology used by Cato is not an appropriate way to measure the effect of shortages. In principle, the correct method would assign a price to the items that are subject to shortages based on their black market price and then weigh them in their proportion to consumers' consumption bundle.

 
Ruth Marcus KNOWS That We Can Never Raise Taxes to Pay for Social Security Print
Friday, 28 February 2014 06:43

It's pretty impressive to be able to know something about the future when all the evidence suggests the opposite. Washington Post columnist Ruth Marcus apparently knows that we will never be able to raise additional revenue to cover Social Security's projected shortfalls. That is the only way we can explain her assertion (expressed in euphemisms) that we have to cut Social Security benefits now to:

"protect those most in need of generous benefits."

Of course the evidence shows that the public has been in the past and is now willing to pay higher taxes in order to maintain Social Security benefits. Few, if any, members of Congress lost their seats over the tax increases put in place in the 1980s. Polls have consistently shown substantial support for raising revenue by increasing or eliminating the cap on taxable wages. And, they have even shown a preference for raising the payroll tax to cutting benefits. (In fact, less than one third of the public even noticed the 2.0 percentage point increase in the payroll tax at the start of 2013.)

The payroll tax increase needed to keep the program fully solvent for the rest of the century is less than one tenth of projected real wage growth over the next three decades. Given the popularity of Social Security across the political spectrum we might think that the public would be willing to pay some price to maintain benefits for all workers, not just those most in need of generous benefits. Fortunately we have Ruth Marcus to tell us otherwise.

 
The Congressional Budget Office Doesn't Believe Robots Will Take Our Jobs Print
Friday, 28 February 2014 06:22

The elite policy types in the United States are truly extraordinary in their ability to show great concern about completely contradictory possible states of the world. Floyd Norris shows one of the bases for serious hand wringing, higher future budget deficits, as projected by the Congressional Budget Office (CBO) in its latest outlook. Norris points out that the report assumes that the weak economic growth of recent years persists long into the future. (Norris notes CBO has badly erred before by extrapolating from the recent past, noting its projections from 2001 that assumed the stock bubble would persist into the indefinite future -- a point some of us noted at the time. However, its biggest error was failing to recognize that the housing bubble's collapse would tank the economy.) 

However more important than CBO's checkered track record is the fact that CBO's assumption of slow growth and slow productivity growth is 180 degrees at odds with the robots will take our jobs story. If robots are taking our jobs, then productivity growth will be fast, inflation will be very low (goods and services will be getting cheaper), and presumably interest rates will also be low. While it is possible that CBO's forecast will be right, if it is then the robot story is wrong and vice versa. That's the simple logic, but elite policy types are such impressive sorts that they can worry about both fast and slow growth simultaneously being a problem.

 
Camp Bank Tax Print
Thursday, 27 February 2014 06:06

My friend Jared Bernstein makes many of the right points on the Camp tax reform proposal, but let me add a few.

First, it is good to see the proposal for taxing the large banks. The logic is that these banks are benefiting from implicit government guarantees through too big to fail insurance, which the tax would in part offset. The problem is that the tax is an order of magnitude too small.

The tax is projected to raises $64 billion over a decade. By comparison, Bloomberg News estimated the size of the too big to fail subsidy at $83 billion a year. That estimate is likely too large, but even cutting it in half still implies a subsidy that is more than six times the size of Camp's tax. Most of us might think it's reasonable that our tax dollars help low income families buy food or get health care for their kids. It's a bit harder to make the case for an implicit tax to support the Wall Street fraternity parties at the St. Regis. In other words, Camp's bill would hardly mitigate the desirability of breaking up the big banks.

It is also worth noting that the financial sector as a whole is hugely under-taxed compared with other sectors, a point that has even been acknowledged by the International Monetary Fund. It recommended a tax of roughly 0.2 percent of GDP (@ $400 billion over the next decade) to redress this imbalance. The financial transactions tax proposed in a bill by Senator Tom Harkin and Representative Peter DeFazio would pretty much hit this target according to the calculations of the Joint Tax Committee. Anyhow, the point here is that Camp deserves credit for attempting to address some of the special privileges granted to the financial sector, he doesn't come close to solving it.

A second related point is that his proposal would not address one of the main sources of tax gaming that allows the Mitt Romneys of the private equity industry to get extremely rich. Specifically, it doesn't limit the deduction for interest paid by corporations. This is important to private equity because one of their standard tricks is leverage up the mid-size companies they purchases in order to increase after-tax profits. This incentive to make firms highly indebted serves no public purpose (it hugely increases the risk of bankruptcy), but it can make private equity partners enormously wealthy. Camp's plan does nothing about this distortion.

Finally, people should be aware that the proposal to end the tax deduction for state and local income taxes is a direct attack on states like New York and California which have high tax rates on their wealthy residents in order to provide a higher level of services to their citizens. These tax rates will be considerably harder to maintain politically, if they were not deductible against federal income taxes. This is a reason why many opponents of state level social spending want to end this deduction. (Those wondering why the rest of the country should subsidize services in these states might want to consider the fact that these states are still huge net payers of tax -- their tax payments exceed their receipt of revenue -- to the federal government.)

 

 

 

 
Washington Post Complains That Bill Gates' Riches Come at the Expense of Everyone Else Print
Wednesday, 26 February 2014 06:05

The Washington Post complained that the people of San Jose California are suffering because the city has to pay higher prices for computers and software because  of the patent and copyright monopolies the government has given to Microsoft and other tech companies. Okay, the Post would never write such a piece, but it has no problem headlining a news article:

"In San Jose, generous pensions for city workers come at the expense of nearly all else."

The central item in the piece is the complaint of San Jose's mayor about the money he must pay to support the pensions of retired city workers. Of course the pensions for city workers are based on contracts that the city signed and are part of their pay. This piece makes no effort to assess the size of city workers' total compensation packages compared to private sector workers, so it really has no basis for its assertion that the pensions are generous. If public sector workers sacrificed substantial pay and/or made large contributions for these pensions, then it would be highly misleading to describe them as generous.

Furthermore, cities usually are not allowed to go back on contractual obligations short of bankruptcy. San Jose undoubtedly sold off many plots of property at prices that were far too low. If the city still possessed these properties and could sell them at the current market price then San Jose's mayor would have plenty of money to meet the needs that he complains he cannot address. But the Post apparently does not want readers to question the legitimacy of land sales, just workers' contracts.

Interestingly, the piece discusses the financial industry's efforts to derail a proposal for the state to offer a voluntary low-cost retirement plan to all its workers. The industry is complaining that it doesn't want the competition with the public sector. In effect the industry is demanding that people should be taxed -- paying more than necessary in fees -- in order to ensure that the financial industry can make profits on their retirement accounts. "The financial industry wants to tax Californians to ensure profits," would have been a more interesting and accurate headline for this piece.

 

Note: Original post modified slightly (7:45) and typo corrected -- thanks Robert Salzberg.

 

 

 
NYT Says Homeownership Advocate Doesn't Realize House Prices Are High Print
Wednesday, 26 February 2014 05:53

The NYT had an article on Bruce Marks, a housing advocate, and his push to extend credit for home buying to moderate income households who are now being excluded because of bad credit ratings. At one point the piece tells readers;

"He [Marks] says low interest rates and housing prices have created a second chance — an opportunity to help lower-income families buy homes, but this time on terms they can afford."

Actually, house prices are not low. While they have not returned to bubble peaks, they are well above trend levels. This means that people buying into the current market have a substantial risk of losing money on a home. This risk will be especially high if interest rates rise in the years ahead, as is almost universally predicted. 

 
For Fred Hiatt, the Point of "Entitlement" Reform Is to Hurt Middle Income and Moderate Income People Print
Tuesday, 25 February 2014 02:32

That's what readers of his column attacking President Obama for failing to cut Medicare and Social Security would conclude. The piece includes several quotes from Obama in 2009 and 2010 about the need to slow the growth in the cost of Social Security, Medicare, and Medicaid. He then complains that Obama has not followed through by pushing for cuts in these programs.

In fact, Obama did actually propose cuts repeatedly for these programs as part of a deal with Republicans that would include more tax revenue. The Republicans have consistently rejected such a deal. However if the point was to reduce the cost growth in these programs, that has happened. In 2009 the Congressional Budget Office projected that the Medicare and Medicaid together would cost 7.0 percent of GDP in 2024. Their most recent projections show these programs costing just 6.2 percent of GDP in 2024 even with the higher Medicaid costs due to the Affordable Care Act. The savings of 0.8 percentage point of GDP would be more than $200 billion in 2024.

If the point was to save money, this would look a pretty big deal. Of course since most of these savings came from lower health care cost growth rather than reduced benefits, then it wouldn't make anyone happy whose goal was to inflict pain.

Hiatt gets a couple of other items wrong in passing. He complains:

"In 2011, Obama cold-shouldered the fiscal commission he himself had appointed; Democrats feared that embracing its recommendations could hurt in 2012."

Actually the commission made no recommendations since no report captured the necessary majority to be adopted by the commission. What is widely referred to as a report of the commission is actually the report of its co-chairs Alan Simpson and Erskine Bowles.

The piece also refers to former Senator Max Baucus as "pro-trade." This is inaccurate. Baucus has been a consistent supporter of trade agreements. This has been true even when the deals involved increased patent and copyright right protections which reduce trade.

 
NYT Continues Its War on Public Sector Pensions Print
Monday, 24 February 2014 08:07

The NYT has devoted considerable print space to the problems of public sector pensions, often seriously exaggerating the size of the problems. It has also often overstated the generosity of the benefits, for example by failing to note that many public sector workers do not get Social Security, which means that their pensions will be their entire retirement income.

Today it went long on the exaggerating problems side of the picture telling readers that:

"The difference, $63 billion, is Nycers’s [New York City's main public employee pension fund] shortfall. That money has to be made up before today’s city workers retire — within 14 years, on average. As a result, New York’s contributions to Nycers are rising every year, squeezing the city budget and making it harder for the city to provide public services."

This is not true. There is no legal requirement that city make up this shortfall over the next 14 years. Also, as the article itself points out, this calculation of liabilities is based on the use of risk-free discount rate. The pension fund is of course free to use whatever discount rate it likes to calculate its liabilities. But if the fund gets the return as would be expected from the mix of assets it holds, it would need roughly $23 billion today to make up its shortfall, just over one third of the amount advertised in the article.

 
Did Political Considerations Affect the Fed's International Bailouts? Print
Monday, 24 February 2014 06:09

The NYT's article on the Fed's decision to enter dollar swap agreements with other central banks at the peak of the financial crisis in 2008 strangely did not ask this question. The piece notes that swap lines of credit had been extended to Mexico, Brazil, South Korea, and Singapore. It also points out that several countries applied for lines of credit but were turned down.

The article asserts that these decisions were made exclusively over concerns about the impact of these countries' problems on the U.S. economy. While this could be true, it is also possible that political considerations played a role. It would have been interesting to know if the State Department played any role in the decision on the countries to which the Fed extended credit. It's strange that this question is not raised.  

 
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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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