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When Germany Spends Money It Helps Its Neighbors Print
Wednesday, 13 August 2014 04:57

NPR harshly criticized a change in Germany's social security system which allows workers to collect benefits at age 63, rather than the previous age of 65, if they had contributed to the retirement system for 45 years. The piece repeated claims that this expansion of the retirement system was hypocritical, since Germany is demanding austerity from other members of the euro zone. It also implied that it would be a large expense, telling listeners that 50,000 workers are taking advantage of the reduction in the retirement age.

It would have been worth noting that increased spending by Germany helps it neighbors. Since the euro zone is suffering from inadequate demand, when Germany spends more money it helps Italy and Spain since it will create more demand for their goods and services.

These countries may resent that Germany has the money to spend, just as poor people may resent that rich people have the money to spend, but in the context where the rich do have the money, the poor are better off if they spend it than if they don't. While people in the rest of the euro zone have plenty of grounds for resenting the austerity demanded by Germany, which is causing mass unemployment and costing the region trillions of dollars in lost output, if they really don't want Germany to spend more on its retirees, then they must want higher unemployment and less growth in their own countries.

It would also have been useful to put the numbers here in some context. Germany has a labor force of a bit under 43 million, or roughly 28 percent of the size of the U.S. labor force. This means that this flood of new beneficiaries would be equivalent to an addition of 200,000 retirees to the U.S. Social Security system. That would be an increase of approximately 0.6 percent.

The piece also claimed that Germany is facing a labor shortage as more workers retire. It is difficult to know what this is supposed to mean. In a market economy if there are fewer workers, people switch from less productive jobs to more productive jobs. This means that there might be fewer people working in convenience stores, or as housekeepers, and kitchen workers. What's the problem?

 

Note: Typos corrected.

 
Japan's First Quarter Growth is Relevant to Its Second Quarter Contraction Print
Wednesday, 13 August 2014 04:13

The NYT ran an AP article on the contraction in Japan's economy in the 2nd quarter of 2014. The article noted the 6.8 percent annual rate of contraction and told readers that this posed a real problem for Abenomics.

While this rate of decline is undoubtedly a cause of concern, it would have been worth mentioning that its economy grew at a 6.7 percent annual rate in the first quarter. The big factor in this seesaw was a sharp rise in the consumption tax that went into effect in April. This tax increase led many people to pull major purchases forward. As a result, they bought cars, appliances, and other expensive items in the first quarter that they would have otherwise bought in the second quarter.

The modest net contraction over the two quarters taken together should still be cause for concern, but it is a very different world than one in which an economy is sinking at close to a 7.0 percent annual rate.

 
Maybe the Housing Market in DC is Slow Because Prices Are Too High Print
Tuesday, 12 August 2014 07:02

The Washington Post had an article dedicated to uncovering the reason that the housing market in Washington has been slow in recent months. While it runs through several possible explanations it leaves off the most obvious one: prices are too high.

Inflation adjusted house prices are more than 50 percent above their pre-bubble levels. Back in good old econ 101 we always taught that if supply exceeded demand then the price should fall. The fact that prices in DC are so far above their pre-bubble level would be good evidence that this is the problem.

 
The Fed's Vice Chair Still Doesn't Know About the Housing Bubble Print
Tuesday, 12 August 2014 04:51

News apparently travels slowly in the nation's capital. The New York Times reported on a speech by Stanley Fischer, the vice chair of the Fed, in which he expressed confusion over the causes of the weak recovery.

It would have been helpful to express the views of economists who could have expressed surprise over Fischer's confusion. When the housing bubble collapsed, there was a massive loss of demand. Spending on residential construction fell back by more than 4.0 percentage points of GDP. With the loss of $8 trillion in housing wealth, consumption fell back by close to 3.0 percentage points of GDP. This created a total gap of 7 percentage points of GDP, which is close to $1.2 trillion in today's economy.

Residential construction has recovered to some extent, but it is still well below its bubble peaks. Unless we see another bubble, there is no reason to expect construction to get back anywhere near its 2005-2006 share of GDP. Consumption has also recovered to some extent, but without the bubble wealth that drove it, there is no reason to expect it to reach the same share of output as in the bubble years.

Unless Fischer has some very novel theory of the economy, there would have been no reason to expect a more rapid bounce back of the economy than what we saw, especially after the federal government turned to austerity in 2011. It would have been helpful if the NYT had focused on the seeming confusion in Fischer's thinking.

 

Addendum:

Having read Fischer's speech, I think the confusion is more in the reporting than in the speech, which seems largely on the mark on the current state of the economy. The spelling of "Fischer" has also been corrected.

 
The Postal Service Would Have Broken Even Without Accounting Charges Print
Tuesday, 12 August 2014 04:36

The NYT reported that the Postal Service lost $2.0 billion in the third quarter of its 2014 fiscal year. While the piece did note that much of this loss was attributable to a requirement imposed by Congress that the system prefund its retiree health benefits, it would have been useful to also point out that a change in the accounting of liabilities in its workers' compensation fund added $0.6 billion to its losses this quarter. By contrast, in the third quarter of last year the accounting for this fund increased profits by $0.8 billion. Without the charges for workers' compensation and the prefunding of retiree health benefits, the system would not have shown a loss for the third quarter. Excluding these charges it would have shown a profit of $1.0 billion for the first three quarters of the year.

It is also worth noting that the prefunding requirement has little or no precedence in the private sector. It targets an extraordinarily high level of prefunding (many companies pay benefits as current expenses), to be reached in a short period of time. It also uses assumptions on health care cost growth that are far above recent growth rates. 

 
Robert Samuelson Says Economics Is An Inexact Science, Except When He Wants to Cut Social Security and Medicare Print
Sunday, 10 August 2014 19:47

Regular readers of the Washington Post have grown fond of Robert Samuelson's repeated calls for cuts to Social Security (e.g. here, here, here, here, here, here, here, here, here , and here). At the core of Samuelson's complaints are long-term projections from the Congressional Budget Office (CBO), and other sources, that the country will have large deficits 15 years, 25 years, or further in the future.

He likes to say that these deficits are due to Social Security and Medicare, although the main driver is the fact that U.S. health care costs are vastly out of line with costs in the rest of the world. If our doctors, drug companies, and other health care providers got paid the same as their counterparts in other wealthy countries, the projections would show huge surpluses, not deficits. But Samuelson prefers to go after poor and middle class seniors rather than highly paid people in the health care sector.

But this is secondary to the big issue with today's column. Samuelson's repeated hyperventilations about Social Security and Medicare are based on budget projections made for the distant and very distant future. For this purpose Samuelson apparently is willing to accept that economics can be a very precise science even though the past track record of budget forecasters has been atrocious. (For cheap thrills check out these projections for large deficits in the year 2000, big surpluses in 2003, or modest deficits in 2010. In each case the overwhelming source of error was in the economic projection, not policy changes.)

But for today's column arguing that the Fed should be looking to raise interest rates sooner rather than later Samuelson has serious reservations about the quality of economic predictions:

"Although economists are arguing furiously over this [whether the Fed should be raising interest rates], there’s no scientific way to measure slack. Economic policymaking is often an exercise in educated guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences. This is an instructive case in point."

He concludes the piece:

"The Fed is expected to begin raising rates in 2015, but the time and pace are unknown. The danger of waiting too long or going too slow is that inflation, now controlled in the market and in Americans’ thinking, will escape these convenient bounds. Once that happens — as the double-digit inflation of the 1970s and early 1980s showed — inflation takes on a life of its own and becomes self-fulfilling. It can be suppressed only through tight credit, recession and high unemployment. We don’t want to go there."

Read more...

 

 
In Connecticut, If Businesses Are Upset By Rising Wages, It Doesn't Matter What the Facts Are Print
Sunday, 10 August 2014 08:26

That's pretty much what David Treadwell, the spokesperson for the state's Department of Economic and Community Development told an AP reporter. The article reports on a subsidized loan from the state to a German company to finance a training center for its workers. The piece then cites the views of several economists that there is no evidence that Connecticut has a shortage of trained workers. Among other things, a shortage would generally be associated with rapidly rising wages, which the state is not seeing.

It then concludes with a quote from Mr. Treadwell:

"She's hearing from the businesses and they're saying it is a problem, ...  It doesn't necessarily matter what the economists are saying."

There you have it.

 

 
The Cost of Sovaldi Would Not Pose Problems If Elites in the United States Believed in Free Trade Print
Saturday, 09 August 2014 07:07

The Washington Post treated us to another hand wringing piece on Sovaldi. The deal is that we could virtually eliminate a major disease in 10-20 years if only we were prepared to bite the bullet and pay Gilead Sciences $84k a head for Sovaldi. 

Those are not the only options. Gilead Sciences charges $84,000 for Sovaldi but it doesn't actually cost $84,000 to produce the drug. Generic manufacturers make the drug available in Egypt for less than $1,000 per person and Indian generic manufacturers believe they could produce it for even less. If we allowed people in the United States to go these countries to get treatment, covering the cost of travel for themselves and immediate family, it would be possible to provide treatment for a small fraction of this cost.

If this were done on a large scale it would undermine the model of financing research through granting patent monopolies, however it is long past time that this 16th century mode of financing be re-examined. There is a vast literature in economics on the waste and corruption that results from policies like tariffs that raise the price of products above the cost of production.

In the case of Sovaldi, the patent monopoly has a distortionary effect that is similar to a 10,000 percent tariff. Predictably it leads to a huge amount of corruption, with companies routinely misrepresenting the safety and effectiveness of their drugs. The secrecy that companies rely upon to ensure themselves the ability to capitalize on the value of their research also slows the pace of drug development. Unfortunately the industry is so powerful (it is a major source of advertising revenue for the Post), that it can prevent alternatives to patents from even being raised in public debate.

 
WaPo Does Mind Reading on President Obama's Motive for Privatizing Fannie and Freddie Print
Friday, 08 August 2014 04:57

It's great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business. 

However the Post told readers:

"To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector."

Since the bill doesn't actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill,  the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment. 

 
The Amount of Government Money Going to the Old, the Young, and the Rich Print
Friday, 08 August 2014 04:18

Catherine Rampell used her column to give readers a short quiz on government spending. There are a couple of questions that could use a bit further examination.

The first question asks readers:

"An elderly person receives about how much in federal spending for every $1 received by a child?"

The correct answer is $7 according to Rampell. There are two problems with this question. First, the most important government program for the young is education, which is prmarily a state and local expense. So it is wrong to simply focus on federal spending as a measure of public priorities.

More importantly, the main reason for this ratio is that we have a retirement program (Social Security) and a senior health insurance program (Medicare) that are run through the government. These are benefits that people have paid for during their working lifetime.

In the logic of the Rampell quiz we could say that something like $100 in federal spending goes to the very rich (the top 0.1 percent) for every $1 received by a child. This would be based on the assumption that 10 percent of their $6.4 million annual income comes from interest on government bonds. Of course the rich paid to buy these bonds, but the elderly also paid for their Social Security and Medicare. If we're ignoring that fact in talking about benefits from Social Security and Medicare, then we should also ignore it when talking about interest on government bonds. (According to the Urban Institute, the discounted value of Social Security benefits received by current and future retirees is slightly less than the taxes they paid into the program.)

The possibility of a privatized Social Security system demonstrates the illogic of Rampell's quiz. Suppose we required that workers pay an amount equal to their current Social Security taxes into a private account which would then pay them a benefit comparable to their currently scheduled benefit. The situation of the elderly will not have been changed (ignoring the problems of a privatized system), but now we would not have the same inequality between federal payments to the elderly and the young.  

There is also a serious problem with question 5 in which readers are supposed to answer there is a $127,000 difference, "between what you paid in Medicare taxes and what you can expect to receive in Medicare benefits." The problem with this description is that the gap is due to the fact that we pay health care providers about twice as much as they receive in other wealthy countries. In other words, people get back more in Medicare benefits than what they pay in Medicare taxes because are doctors are very rich (average earnings @ $250,000, net of malpractice insurance), drug companies are very rich, and medical supply companies are very rich. If we paid our providers the same as providers in Canada or West Europe then the value of benefits would be close to what people pay into Medicare in taxes. By the logic of question 5, every time we up what we pay doctors and drug companies, the elderly are better off.

 
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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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