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Are English Conservatives Threatening War Against an Independent Scotland? Print
Friday, 14 February 2014 08:56

That's what people must be wondering after reading a Post piece reporting Chancellor of the Exchequer George Osborne's threat that an independent Scotland would not be able to use the pound. The Post quotes Osborne as saying that the pound is not something that you can divide like a CD collection.

It is difficult to understand the possible meaning of this threat. It could mean that England would not negotiate the terms of a monetary union with an independent Scotland, however it is hard to see why an independent Scotland would want to have a monetary union with an England run by the conservatives. Their policies have helped to give the UK a downturn that is worse than what it experienced in the Great Depression. Presumably breaking free from these policies is one of the main motivations for seeking independence.

Of course if Scotland chose to use the pound as its national currency, as countries like Panama and Ecuador have adopted the dollar as their currencies, it is difficult to see what England could do to stop them, short of going to war. In other words, it's not clear what Osborne was threatening.

Comcast-Time Warner Merger Could Reduce Competition Print
Friday, 14 February 2014 08:51

Timothy Lee has a good piece explaining to those of us who already thought competition was dead in the cable industry that yes, it could get worse. The point is that cable is also a buyer, not just a seller. If Comcast and Time-Warner are allowed to merge they will have enormous market power as a buyer of both content and new technologies. This means that even if their merger does not directly affect the market for consumers (they mostly don't overlap in service areas) it will still mean significantly less competition and presumably innovation in the industry.

The Low Bar for Good News in Greece Print
Friday, 14 February 2014 06:47

The NYT reported that preliminary estimates showed GDP shrank 2.6 percent in the fourth quarter compared with the fourth quarter of 2012. This would make the decline in GDP 3.7 percent for 2013 compared with 2012, which it tells readers was smaller than the 4.0 percent decline expected by the I.M.F. While the piece notes that Greece's cumulative decline since the beginning of the downturn is 23 percent, leading to a 28 percent unemployment rate, it might have also been worth pointing out that the 3.7 percent drop is larger than any decline the U.S. economy has experienced in the last 60 years.

Obamacare Needs Invincibles, It Doesn't Matter If They Are Young Print
Thursday, 13 February 2014 17:54

The persistence of the myth that the future of Obamacare depends on young healthy people signing up shows how reporting on key policy issues can be completely removed from reality. The tiny kernel of truth in the story is that the premium structure is somewhat tilted against young people. An actuarial fare structure (meaning premiums are proportional to costs) would have the oldest age group (55-64) paying about 3.5 times as much as young people on average. However under Obamacare the ratio is just 3 to 1.

However this makes relatively little difference in the overall finances of the program as an analysis by Kaiser Family Foundation showed. Even if the sign-up is hugely skewed toward older people, it would only raise costs by 2.0 percent, hardly the sort of increase that would lead to the widely feared death spiral.

On the other hand if there is a skewing by health conditions, it will matter hugely. To think about this, consider that someone in the older age group will pay an average premium of around $6,000 a year. By comparison, the premium for younger people will be around $2,000. If both are healthy so that they make no claims on their insurers (this will be true of a large percentage of people in both groups, albeit larger among the young), then the healthy 55-64 year-old is worth three times as much as the young invincible.

Anyhow, there has been some good coverage making this point, but somehow Bloomberg still has not gotten the message. Come on folks, look at the numbers and don't just repeat gossip as news.


Thanks to Aaron Beeman for calling this one to my attention and Robert Salzberg for correcting typos.

Exporting U.S. Crude Oil: What Is At Issue Print
Thursday, 13 February 2014 06:05

The NYT had an article on the battle between oil producers and refiners over removing restrictions on the export of crude oil that included some misleading comments. At one point it presented the claims from a producer that a domestic glut of crude oil is lowering prices and could lead to a shutdown of less productive fields.

"'Nobody wants the collapse of the oil industry,' Mr. Sheffield [the oil producer] said in an interview. 'You would be importing crude oil from the Middle East all over again.'"

As a practical matter, the issue of imports is the exact opposite of what Mr. Sheffield claimed. If we needed oil domestically, the shutdown wells could resume production again. If we are worried about the security of our oil sources, it would make more sense to leave the oil in the ground so that we can get to it if we are cut off from imports at some future point. 

The piece later holds out the prospect of driving down the world price of oil to the domestic U.S. price as a benefit to U.S. consumers.

"The producers argue that if they could freely export, they would increase world oil supplies, forcing down the international Brent benchmark crude price, which in turn would reduce the price of gasoline at the pump. 'The American consumer is held captive by the restrained market,' said Jack Ekstrom, a vice president at the Whiting Petroleum Corporation, a major producer in the North Dakota Bakken shale field. 'When you have additional supplies coming on to market, the price naturally comes down.'"

This doesn't make any sense. The price in the United States for gas will be first and foremost dependent on the price in the United States for oil. Consumers in the United States will not be especially benefited by having the price of oil fall elsewhere.

The real issue here is simply who will profit from the difference between world prices and U.S. domestic prices. If producers can't export but refiners can, then the refiners will be the beneficiaries of the price gap. If the producers are allowed to export then they will be the primary beneficiaries. Either way, the more oil is exported, the higher the price will be for the domestic consumers.

Tennessee Republicans Don't Believe in a Free Market Print
Wednesday, 12 February 2014 07:32

The NYT has a fascinating piece about threats that Tennessee Republicans are making against Volkswagen if they recognize a union formed by its workers. Apparently, these politicians believe they are better able to run a car company than the Volkswagen's managers. This is an interesting view coming from people who usually claim to be supporters of a free market and to believe that the government should not interfere in the running of a business.

Not Everyone is Confused by Housing Bubbles Print
Wednesday, 12 February 2014 06:53

Eduardo Porter tells readers about confusion among central bankers about how to deal with international capital flows and asset bubbles like the housing bubble in the United States. While there has been considerable confusion among central bankers, this appears to be more linked to their lack of qualifications than the intrinsic complexity of the subject matter.

For example, Porter notes how Greenspan was confused by the inflow of foreign capital that kept long-term interest rates low even as he was raising short-term interest rates.

"It was a wave of money that — to the confusion of Alan Greenspan, the Fed chairman at the time — the Fed seemed powerless to manage."

This was Greenspan's famous "conundrum." Of course it was not a conundrum to those who closely followed the economy at the time. It was easy to see that China and Japan's central banks were buying up long-term U.S. bonds, directly lowering long-term interest rates, while Greenspan was trying to affect long-term rates indirectly by raising short-term rates. (This was in effect a form of quantitative easing, but by foreign central banks.) Needless to say, directly acting in the market had more of an impact than indirectly acting.

The low interest rates that fuel asset bubbles should be good for the economy. The priority of the central bank should be to use its regulatory powers to prevent credit from flowing to markets that are experiencing dangerous bubbles.

It can also explicitly warn that it will take measures to bring down asset prices if they continue to grow further out of line with fundamentals. This would in effect be a form of forward guidance. While economists routinely deride the idea that such warnings could impact the behavior of investors, many of these same economists believe that central bank statements about future interest rates can have a large effect.

It is difficult to see the logic whereby central bank statements in one area will affect investors' behavior while it will have no effect in another area. It is also very difficult to see the downside from issuing such warnings. Comparing the Congressional Budget Office's projections of GDP from 2008 with actual GDP and its current projections, the collapse of the housing bubble will have cost the country more than $24 trillion in lost output through 2024 ($80,000 per person). Given the enormous potential gains from measures to stem the growth of such dangerous bubbles, it is hard to see any remotely offsetting downside risk.

Pew Research Finds Almost No Gains for Young College Grads Over Last Quarter Century Print
Wednesday, 12 February 2014 06:15

Most NYT readers probably would have missed this fact, since the blog post highlighted the growing gap between the pay of recent college grads and those with less than a college degree. While Pew did find a large increase in the gap, almost all of this was due to a fall in the year-round pay of less-educated workers.

In the 27 years from 1986 to 2013, Pew found that the median wage for full-time workers between the ages of 25-32 with college degrees increased from $44,770 in 1986 to $45,500 in 2013, a rise of 1.6 percent. This comes to an increase of 0.06 percent a year. By comparison, productivity rose 72.5 percent over this period, an average of 2.0 percent per year over this period.

It is also worth noting that the unemployment rate for college educated workers of all ages was 3.7 percent in 2013. This is higher than for any year prior to the recession since this series was started in 1992. 

While those without college degrees have been big losers, the Pew study shows that young people with college degrees have not been big winners in the economy over the last quarter century.


Note: 1986 wage corrected, thanks Michiganmitch.

$85 Million Would Be About 2.2 Percent of Arkansas' State Budget Print
Tuesday, 11 February 2014 08:06

That may not have been obvious to some of the readers of a NYT article that discussed the impact of the state rejecting an expansion of the Medicaid program under the ACA. The article told readers that this rejection would create a hole of $85 million in the state's budget. Just in case some readers haven't checked in on spending levels in Arkansas recently, the 2.2 percent number might have been useful information to include in the article.

Marc Thiessen Says Last Year's Stock Market Run-Up Led to a Huge Cut in Pay Print
Monday, 10 February 2014 14:58

Many people who have retirement funds in the stock market are able to retire this year as a result of the big run-up in the stock market last year. According to Washington Post columnist Marc Thiessen this means that these people will see a big cut in their pay. After all, retired people won't be collecting paychecks.

I'm not making this up, that is the argument in Marc Thiessen's latest column, cleverly titled, "Obamacare's $70 billion pay cut." Thiessen's basis for claiming that the Affordable Care Act will lead to a $70 billion cut in pay is the Congressional Budget Office's assessment that it will lead to a reduction in aggregate compensation of 1.0 percent between 2017-2024.

He tells readers;

"How much does that come to? Since wages and salaries were about $6.85 trillion in 2012 and are expected to exceed $7 trillion in 2013 and 2014, a 1 percent reduction in compensation is going to cost American workers at least $70 billion a year in lost wages."

"It gets worse. Most of that $70 billion in lost wages will come from the paychecks of working-class Americans — those who can afford it least. That’s because Obamacare is a tax on work that will affect lower- and middle-income workers who depend on government subsidies for health coverage."

Sounds really bad, right?

Well first let's go back to the CBO report cited by Thiessen.

"According to CBO’s more detailed analysis, the 1 percent reduction in aggregate compensation that will occur as a result of the ACA corresponds to a reduction of about 1.5 percent to 2.0 percent in hours worked. (p 127)"

We checked with Mr. Arithmetic and he pointed out that if hours fall by 1.5 to 2.0 percent, but compensation only falls by 1.0 percent, then compensation per hour rises by 0.5-1.0 percent due to the ACA. In other words, CBO is telling us that for each hour worked, people will be seeing higher, not lower wages. That is the opposite of a pay cut.

However because people may now be able to afford health insurance either without working or by working fewer hours than they had previously, many people will choose to work less. That is worth repeating since it seems many folks are confused. Because people may be able to afford health insurance either without working or perhaps by working less than they had previously, many people will choose to work less.

Yes, just like people will opt to retire because they have more money in their retirement accounts, some people will opt to work less because Obamacare has made it easier to afford health care insurance. This is a voluntary decision that CBO is calculating people will make.

Now Mr. Thiessen is apparently convinced that the decision to work less will be the wrong decision for these people:

"most of that $70 billion in lost wages will come from the paychecks of working-class Americans — those who can afford it least"

but apparently the working-class Americans making the decision believe otherwise. Obviously the answer here is for Mr. Thiessen to go around to all the people who quit their jobs or cut back their hours because of Obamacare and explain to them why they have made a bad choice. Maybe he will change some minds and get people to work harder, but on its face, it seems likely that these working class people would be better positioned to judge how much they need to work than Mr. Thiessen. 




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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.