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Ezekiel Emanuel's Plan to Share the Wealth: Go After the Social Security of School Teachers and Firefighters Print
Sunday, 24 June 2012 20:03

I'm not kidding. We have boys and girls on Wall Street making tens or even hundreds of millions of dollars at banks that enjoy taxpayer subsidies through "too big to fail" insurance. But Ezekiel Emanuel's "share the wealth" NYT blogpost tells us how we can tap the Social Security and Medicare benefits of people who earned $70,000 a year during their working lifetime to make the poor better off. 

It's amazing how much effort the Washington gang goes through to nail workers who earned slightly more than the average, while doing its best to ignore the millionaires and the billionaires who have been the big winners in the economy over the last three decades.

Pearlstein Gets Europe Half Right Print
Sunday, 24 June 2012 13:58

Steven Pearlstein gets half of the story of the euro zone right: it will take renewed spending supported by euro-wide bonds to end the crisis. But that is only half. To restore the competitiveness of the peripheral countries, Germany and other core countries will have to see higher inflation.

We are not going to see prices actually fall in Spain and Italy. This means that if output in these countries is going to become competitive again in a reasonable period of time we will need to see inflation in the 3-4 percent range (possibly higher) in Germany and other core countries.

In keeping with this target, the European Central Bank should be the issuer or guarantor of the bonds. This should help to bring about the higher rate of inflation that is needed to restore balance between the euro zone regions.

Serious People Do Not Use Wealth of People Under Age 35 as a Measure of Their Well-Being Print
Friday, 22 June 2012 22:35

There is a well-funded effort in this country to try to distract the public's attention from the massive upward redistribution of income over the last three decades by trying to claim that the issue is one of generational conflict rather than class conflict. Billionaire investment banker Peter Peterson is the most well-known funder of this effort, having kicked in a billion dollars of his own money for the cause.

However, he is far from the only generational warrior. The Washington Post has often gone into near hysterics screaming about retirees living on their $1,100 a month Social Security benefits and getting most of their health care paid for through Medicare. And, there is no shortage of politicians in Washington who like to think themselves brave because they will cut these benefits for seniors while protecting the income and wealth of the richest people in the country.

David Leonhardt flirted with this disreputable group in a column that focused on the gap between the old and the young. While much of the piece is devoted to political attitudes, it delves into utter nonsense in trying to contrast a "wealthy" group of seniors with a poor group of young people.

Leonhardt picks up on a study done by the Pew Research Center to tell readers:

"The wealth gap between households headed by someone over 65 and those headed by someone under 35 is wider than at any point since the Federal Reserve Board began keeping consistent data in 1989."

That makes you think those oldsters are doing real well, right?

Well, if we look at the Pew study we see that the median household over age 65 has $170,500. Just so everyone understands how rich these people are, that number counts all of their assets. This is every penny they have in a retirement account, bank account, the value of their car and the equity in their home. The median price of a home in the United States is now about $180,000. This means that if the typical retiree took everything they own to pay down their mortgage, they would still owe $10,000. The only thing that they would have left to survive is that generous $1,100 a month Social Security check.

It is also important to note (which this Pew study did not) that the percentage of seniors with defined benefit pension plans (which are not counted in this number) has plummeted. Without factoring in the drop in DB pensions, it is not possible to make a serious comparison of the wealth of seniors over this period.

As an aside, how many people in this debate in Washington make less than $170,000 in a year? Yet, somehow seniors who will have this sum to survive on for the rest of their lives are rich? And by the way, half have less than this.

The wealth of the young is also a silly measure. Young people never have much wealth -- in the good old days they had $11,500 according to Pew. (That would be less than two week's pay for deficit hawk and Morgan Stanley director Erskine Bowles.)  A recent graduate of Harvard Business school may still be paying off her debt at age 35. However no one in their right mind would worry about the financial well-being of a Harvard MBA.

Young people are not doing well right now, but the relevant measure here is their employment and wages. Because our economy is run by people too incompetent to have noticed an $8 trillion housing bubble, many young people are suffering. But this is a story of Wall Street greed, corruption, and incompetence. It has nothing to do with the Social Security and Medicare received by the elderly.

Leonhardt should be ashamed for falling for this tripe.

Are Military Contractors Buying Articles in the Post Now? Print
Friday, 22 June 2012 16:14

Readers of an article that highlighted a study by the National Association of Manufacturers warning of the loss of nearly 1 million jobs due to cuts in military spending are undoubtedly asking this question. They no doubt remember a plan cooked up by the paper's publisher, Katherine Weymouth, to sell lobbyists access to its reporters at dinners at her house. This article essentially lent the paper's authority to a completely misleading study.

The basic story here is very simple, when you are in a severe downturn any spending creates jobs. If we spend money on schools and hospitals that creates jobs. If we pay people to dig holes and fill them up again, it creates jobs. And, if we pay people to build weapons for the military it creates jobs.

There is nothing magical about military spending in this story. In fact, research that was not paid for by the National Association of Manufacturers shows that military spending actually creates fewer jobs per dollar than other types of government spending.

When the economy is not in a downturn, then military spending destroys jobs. An analysis done for CEPR by Global insights showed that a long-run increase in military spending of 1 percent of GDP (roughly the amount spent on the war in Iraq in its peak years) would reduce the number of jobs by almost 700,000. The hardest hit sectors would be construction and manufacturing.

If the Post wanted to inform rather than mislead its readers, it could have just run a piece pointing out that cutting government spending at this point in the business cycle will cost jobs. (Raising taxes will also cost jobs, but not by as much, especially if the tax increases target higher income people who would not change their spending much in response to a decline in disposable income.)

In short deficit reduction right now will cost jobs. The politicians in Washington may not understand this fact, but the Post's reporters and editors should.

Reporting on the Housing Market: Do We Need Drug Testing for Economists? Print
Friday, 22 June 2012 05:04

We all know that economists aren't very good when it comes to understanding the economy. This is exactly what economic theory predicts.

When economists completely mess up, for example by missing an $8 trillion housing bubble, they do not risk any sanction, such as being fired. This means that they have little incentive to get things right. If waiters had no incentive to get orders right and bring food to customers quickly, then people would have to wait a long time for their dinners and frequently get the wrong dish. Since economists aren't held to same standard as waiters, we typically get wrong economic analysis.

Thus we had numerous stories telling us about the bad news on existing home sales. That is not what the data show. May sales were down 1.5 percent from April levels, but this is hardly bad news. We had just seen four months of relatively strong sales, which were spurred in part by unusually mild winter weather. (Remember sales typically take place 6-8 weeks after a contract is signed. The homes sold in May were mostly contracted in March and early April.)

If people buy a home in January or February, they will not rush out and buy another one in March and April. In other words, the relatively strong sales through the winter should have led us to expect weaker sales in the spring. The 1.5 percent falloff is relatively mild. If we look back over a longer period, May sales were 9.6 percent above the year-ago level.

Looking further back, May's sales are roughly 30 percent higher than average monthly sales from the mid-90s, before the housing bubble distorted the market beyond recognition. Since population has only risen by a bit more 10 percent over this period, we are actually seeing a very high rate of sales.

Furthermore, May sales indicated a sharp rise in prices. Monthly price data on existing homes sales are always erratic and are typically driven much more by a change in the mix of homes being sold rather than a rise in the price of homes. Nonetheless, this is the third consecutive large monthly rise in the price of existing homes. The median price of a home sold in May was 17.3 percent above its February level and 7.9 percent above its year-ago level. The price increases show up in every region indicating that this is not a story of high-priced regions seeing an increase in sales relative to low-priced regions.

This report should have been seen as very positive news on the housing market. Unfortunately, the economists who missed the bubble still don't seem to know much about the housing market. While house prices are not going to return to their bubble levels (which no one in their right mind should want), they have bottomed out and will likely be rising modestly through the rest of 2012 and beyond. Furthermore, we are seeing higher rates of construction as the backlog of unsold homes has been whittled away in many areas. Housing is now making a positive contribution to the recovery.

Operation Twist Poses the Same Risk of Causing Inflation as Printing Money Print
Thursday, 21 June 2012 04:46
That's basically zero right now (and higher inflation would be good -- reducing the debt of homeowners and lowering real interest rates), but if Operation Twist boosts growth and increases employment then it threatens inflation in the same way as printing money. Someone has to straighten out the Post.
The Regulation Monster and the Confidence Fairy Print
Thursday, 21 June 2012 03:45

Paul Krugman introduced the world to the "confidence fairy," the creature that proponents of austerity think will cause investment and growth because governments cut budget deficits. Only people with the right eyes, and a well-respected perch in policy making, are able to see the confidence fairy.

In the same vein, we should also recognize the "regulation monster." The regulation monster is the creature that strangles businesses in bureaucratic paperwork and red tape so that they can't invest and hire people. The NYT had a great piece documenting the work of the regulation monster in western Pennsylvania.

Those following Mitt Romney's presidential campaign or listening to Republicans in Congress have heard their complaints that President Obama's regulations are bottling up domestic energy production. These regulations are unnecessarily leaving the United States at the mercy of foreign oil producers, obstructing job growth and forcing us to pay more for energy.  

Having heard these stories, Jonathan Weisman went to western Pennsylvania, which is at the center of the Marcellus Shale, in search of the regulation monster. While the piece includes comments from industry people who complain about regulation, the people who live in the area all report no evidence of any regulation whatsoever. They seem to believe that the industry gets away with pretty much whatever it wants.

The evidence on natural gas prices would seem to support the residents' case. The current spot price is down by more than 40 percent from what it was when President Obama took office. In fact, there have been many reports in the business press of gas companies scaling back drilling plans because prices are too low.

In short, there is about as much evidence for the regulation monster in the energy industry as there is for the confidence fairy in the macroeconomic picture. Yet, these mythical creatures seem destined to have enormous importance in national politics and policy debates. Better get to know them.

Microsoft and Apple: The History Casey Mulligan Doesn't Know Print
Wednesday, 20 June 2012 20:21

Casey Mulligan used his NYT blogpost this week to tell readers:

"there is no such thing as a monopoly in the computer industry."

The rest of the piece is devoted to criticizing the foolishness of the Justice Department in having brought an anti-trust suit against Microsoft. The rise of Apple is at the center of the story, with Apple having surged past Microsoft in profits and market value and Microsoft now struggling to maintain its position with a new tablet computer.

This is a great story of the dynamism of the market in the computer industry. But there is some history that Mulligan apparently does not know. Back in 1997 Apple was in the intensive care ward with its survival very much in doubt. At that time, it was just a computer company. There were no iPads, iPhones, or even iPods, just Apple computers and it didn't seem that many people wanted to buy them.

The big question facing Apple was whether Microsoft would continue to design its office suite to be compatible with Apple computers. After all, Apple had a relatively small share of the market at the time, why should Microsoft go through the effort and expense of making Word, Excel and the rest compatible with Apple's silly system.

Here's what the NYT had to say at the time about Microsoft's decision to throw $150 million Apple's way and to continue to produce Apple compatible software:

"Odd or not, the bailout is good for both. Apple users are assured that their beloved company gets desperately needed cash and that Microsoft will continue to supply them up-to-date word processing and other applications software. Many would-be Apple buyers had been turning away out of fear that as Apple's market share shriveled, so would the programs made available for use on Apple machines.

"The bailout is also good for Microsoft because it preserves a demand for its software programs designed to be compatible with Apple machines. But some suspect a more Machiavellian purpose by Microsoft as well. Microsoft can now fend off antitrust charges by pointing out that Apple's continued existence will prevent Microsoft from acting as a monopolist. If Apple dies, Microsoft will appear nakedly monopolistic, the only major producer of operating systems for personal computers."

Of course there is no guarantee that the NYT's assessment is correct (others in the business press had a similar view) but if it is, we get a very different picture of the impact of the government's anti-trust suit. The implication of the NYT's assessment is that the threat of anti-trust litigation forced Microsoft to be less predatory even to the point of working to keep a competitor alive. In this case, the competitor in question turned out to be an enormously innovative company that now produces great products that consumers value immensely.

That story makes the government's anti-trust case against Microsoft look pretty damn good. Of course the benefits may even go well beyond the survival of Apple. Would Google have had the space to develop a first-rate search engine and subsequent products like the Android phone system if Microsoft had continued its practice of broadening its scope into other areas? (The immediate focus of the anti-trust case was the decision by Microsoft to add a browser to its operating system that essentially wiped out Netscape.) 

Of course this doesn't establish that the Justice Department was necessarily right in going after Microsoft in the 90s, but the slam dunk case going in the other direction that Mulligan thinks is demonstrated by Apple's success requires a major re-write of history.

Context Lacking on PBS Newshour Discussion of Pensions Print
Wednesday, 20 June 2012 11:37

The PBS Newshour last night included a segment on state and local pension liabilities. While it included Josh Rauh, one of the people who has been most visible raising alarms about the condition of state pensions, it did not include the voice of anyone who was prepared to defend the financial situation of state pensions.

This meant, for example, that when Rauh told viewers that unfunded liabilities came to $9,000 for every U.S. household, there was no one to point out that this comes to less than 0.3 percent of projected household income over the next 30 years, the relevant time frame for paying off this unfunded liability. It is likely that listeners would be less concerned if they were given this additional piece of information.

There was also no one to point out that pension funds are simply assuming that their asset mix will get their historic rate of return when they assume an 8.0 percent. Contrary to Ruah's statement:

"Anybody who's looked at their own accounts lately know that that's very difficult particularly in an environment where bonds, 10-year Treasury bonds are yielding 1.6 percent."

A knowledgeable person could have reminded readers that the price to earnings ratios for stock have now fallen back to their long-term average. While it was in fact foolish for pensions to assume 8.0 percent returns when the PEs were inflated in the 90s and the last decade, as some of us pointed out at the time, it is difficult to construct a plausible scenario now where pension assets will provide a return that is much below 8.0 percent.

Unfortunately, because the show did not have a balanced panel, there was no one to make these points to viewers.

Operation Twist Threatens Inflation In the Same Way as "Printing Money" Print
Wednesday, 20 June 2012 05:03

The Post told readers that with the Federal Reserve Board's "Operation Twist" (selling short-term debt to buy longer term debt):

"the Fed is able to bring down more stubborn long-term rates — from corporate loans to mortgages — without “printing more money” to do so. Increasing the money supply increases the chance of inflation, which invites political criticism."

This is not true. Anything the Fed does to boost demand in the economy increases the risk of inflation. As a practical matter, the idea that there would be a problem of inflation in an economy with so much excess capacity is almost absurd on its face. But if printing money raises fears of inflation, then so should another round of operation twist.

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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.