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How Did the NYT Decide that 6.75 Percent Pension Returns are "Strong?" Print
Wednesday, 12 November 2014 05:41

That is what millions are asking after reading its piece on the financial status of Detroit's pensions following its bankruptcy. At one point the piece tells readers:

"Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers."

Actually the returns to the pension do not need to be consistent, they need to be on average 6.75 percent a year. Having a year or two of low or even negative returns does not matter as long as they are offset by years of stronger than average returns. The assumed 6.75 percent nominal return is in fact considerably lower than the long-term average for public pension funds, although given current stock valuations, it may be a bit on the high side. (High price to earnings ratios imply lower future returns.)

It would also have been worth noting the extent of the pension cuts that Detroit workers already incurred. Workers agreed to a 4.5 percent across the board cut in pensions. In addition,they gave up a 2.25 percent annual cost of living adjustment. For a retiree who collects her pension for twenty years, this amounts to an almost 18 percent cut in benefits.

 

 
The Postal Service Could Economize by Making Full Use of Its Assets Print
Wednesday, 12 November 2014 05:02

The Washington Post called for further cuts to the Postal Service and implicitly cuts in pay and benefits in an editorial today. There are two points worth noting on its proposed agenda.

First, the Postal Service has already experienced enormous downsizing. It employed more than 900,000 workers in 1999. In the most recent data it employed 587,600, a decline of 35 percent. This downsizing has been associated with substantial gains in productivity, so it is wrong to imply that it has not been changing with the times.

The other point is that the Postal Service could improve its finances by expanding rather than contracting. Specifically, it can return to providing basic banking services, as it did in the past and many other postal systems still do. This course has been suggested by the Postal Service's Inspector General.

This route takes advantage of the fact that the Postal Service has buildings in nearly every neighborhood in the country. These offices can be used to provide basic services to a large unbanked population that often can't afford fees associated with low balance accounts. As a result they often end up paying exorbitant fees to check cashing services, pay day lenders and other non-bank providers of financial services.

A postal banking system would provide competition for the private financial system, which undoubtedly explains why so many politicians are unwilling to consider it as a route to addressing the Postal Service's financial issues. In the past politicians have often intervened to protect the private sector so that it would not lose business to the Postal Service. For example, in 1999 many members of Congress intervened on behalf of FedEx and UPS, who were concerned that they were losing business due to an effective ad campaign by the Postal Service. (They also sued to stop the ad campaign.)

The Postal Service has been placed in a nearly impossible situation where it is expected to be profitable on a strict business basis, but it is prevented from pursuing potentially profitable paths by the political power of the businesses with whom it would be competing. This is the core problem facing the Postal Service which is not mentioned by the Post.

 

Thanks to Robert Salzberg for calling this one to my attention.

 
There Are Other Mechanisms Than Copyrights to Support Creative Work Print
Tuesday, 11 November 2014 15:47

The NYT might have tried to find someone who could have made this point in a Room for Debate segment on Spotify and streaming music more generally. The question being posed is whether these services help or hurt musicians and recording artists.

As several of the comments indicate, most musicians are finding it increasingly difficult to earn any substantial amount of money from their recordings. While some blame Spotify and other streaming services, because of the difficulty of enforcing copyrights in the Internet Age without repressive laws, it is unlikely that these services make much difference in the amount of money available to recording artists. Without streaming services there would simply be more use of unauthorized copies, from which the artist gets zero. They may sell a few more downloads, but the net is unlikely to be very different.

The most logical path going forward is to develop an alternative mechanism for paying recording artists that gives the money upfront and takes advantage of the Internet, rather than trying to bottle it up. My preferred mechanism is a system of individual vouchers, under which people would effectively have a refundable tax credit of some size (e.g $75) to pay to support musicians, writers, movie makers etc. All the work these people produced would then be freely available without copyright protection.

By making it an individual voucher we wouldn't have to fight over the people that the Corporation for Public Broadcasting or National Endowment for the Arts or equivalent government agencies were opting to support. People would be able to make this judgement for themselves as they did when they paid for copyright protected work.

 
David Leonhardt Should Talk to Someone Other than Clintonites for Advice on Wage Growth Print
Tuesday, 11 November 2014 05:59

David Leonhardt had an Upshot piece that discussed the prospects for future wage growth in which the only two "experts" cited were Gene Sperling and Roger Altman, both Clinton administration officials with strong ties to Wall Street.  While the piece includes assurances from Gene Sperling that no mix of the policies he advocates are likely to lead to wage growth any time soon, it is worth noting that a policy he likely opposes is likely to offer near-term benefits.

Specifically a lower valued dollar could reduce the trade deficit by making our goods and services more competitive internationally. This could get us back to full employment which would allow workers at the middle and bottom of the wage distribution to share in the gains of economic growth.

The Clinton administration explicitly pursued a high dollar policy which led to a massive trade deficit. This deficit created a gap in demand which could only be filled with the demand generated by the stock and housing bubbles. Wall Street tends to prefer a higher dollar both because it increases its power internationally and reduces inflation.

It is amazing that Leonhardt relied on such a narrow range of sources when so many experts with differing views were readily available to speak on this issue.

 
The Trans-Pacific Partnership Could Reduce Trade Print
Tuesday, 11 November 2014 05:47

The NYT told readers misled readers in its description of the Trans-Pacific Partnership (TPP). It told readers:

"The American plan [the TPP] would require each country to open even some of its most fiercely protected markets to foreign goods and services, which could produce a surge in trade."

While the agreement is pursuing some trade openings, notably in agriculture, it is not clear how far they will go since there is much political resistance to these openings. On the other hand, it also calls for increased protectionism in the form of stronger patent and copyright monopolies. These will raise prices; they are equivalent to privately imposed taxes.(Generic drugs can sell for less than one percent of the patent protected versions, implying a tax equivalent of more than 10,000 percent on the free market price.)

By raising prices and reducing purchasing power the result can be a reduction in trade. Without seeing the final deal, the NYT has no ability to assess whether the trade increasing aspects to the deal will be larger than the trade impairing aspects of the deal. In other words, the "surge in trade" is just making stuff up.

 
In Terms of Covering People on the Exchanges, There May Not Be Much Difference Between the Uninsured and the Previously Insured Print
Tuesday, 11 November 2014 05:31

The NYT likely misled readers in the concluding paragraph of an article on projections for enrollment in the health care exchanges next year. It concluded:

"In a brief analysis of coverage trends, the Department of Health and Human Services said Monday that 'most of the new marketplace enrollment for 2015 is likely to come from the ranks of the uninsured,' rather than from people who previously bought insurance on their own outside the exchanges."

Actually, people routinely go between being uninsured and insured primarily because they find and leave jobs that provide insurance. Every month roughly 4.4 million workers leave a job. Many of these workers are leaving jobs with insurance and becoming uninsured. If these people sign up for the exchanges after going two or three months without insurance, should they be viewed as uninsured or as people who previously had insurance from another source? It's not clear that this distinction is very meaningful.

 
The It's Hard to Get Good Help Crowd Promotes Population Growth Print
Sunday, 09 November 2014 10:07

Tyler Cowen is worried that rich countries won't have enough people to do the work. This concern seems more than a bit off the mark given that almost every rich country continues to have large numbers of unemployed and underemployed workers, but I suppose pondering this question can at least create some jobs for economists. Anyhow, two of the countries Cowen highlights are Japan, which he tells us has seen a declining working age population since 1997 and China, where he warns about the difficulties that working couples will face supporting four parents as well as their own children.

Taking these in turn, a key part of the story that Cowen leaves out is hours worked. These vary hugely across countries and across time within countries. For example, the OECD reports the average work year in Germany at 1388 hours in 2013. By comparison South Korea, which has a comparable per capita income, had an average work year of 2163 hours in 2012.

This means that in terms of hours worked, each worker in Korea puts in 55 percent more hours than a worker in Germany. If Germany felt it was short of workers, obviously they could try to encourage their workforce to put in more hours. If they just made up half the difference with Korea it would be equivalent to a 28 percent increase in their workforce. That is equivalent to an awful lot of additional kids.

This is directly relevant to the Japan story, since the OECD reports that the average work year in Japan has declined by 7.0 percent since 1997, the year its working age population began to decline. This doesn't suggest that a shortage of workers has been a major problem for Japan.

Turning to China, we should first recognize that Cowen is using a bit of hyperbole. He doesn't really think that the typical Chinese couple will be supporting four parents. However China is seeing a rapidly aging population, so somewhere in the next two decades, the ratio of workers to retirees may fall to near two to one, which will also be the ratio in the United States at that time.

The key issue in this story is the standard of living at which China's elderly will be supported. The International Labor Organization reports that real wages in China have been growing at double digit rates. This means that workers have seen enormously rapid increases in living standards over their working lifetime. Over a five year period, real wages would have increased 60 percent, assuming a 10 percent rate of annual wage growth. This means if a person has been retired five years, and had a standard of living equal to 80 percent her last working year (this is much better than most U.S. retirees can expect), it would be just half of a current workers' pay. At this rate of wage growth, sustaining this retiree's standard of living would require 30.8 percent of the worker's pay after 10 years, and less than 12 percent after 20 years.

Read more...

 

 
WaPo's Factchecker Grades Obama Harshly on Obamacare Print
Sunday, 09 November 2014 09:39

Washington Post Fact Checker gave President Obama three Pinocchios for claiming in a press conference that the Affordable Care Act was responsible for the slowdown in health care costs overall and the slowdown in Medicare costs in particular. This seems more than a bit harsh.

First, there are some clear misstatements, Obama referred to savings on Medicare and Medicaid, even though he just said "Medicare." Also, he was referring to projected savings in 2020, even though his comments implied that these were the savings that we are seeing today. However these were off the cuff comments in a press conference, as Kessler notes. In prepared speeches Obama has presented these number accurately.

However Kessler's main complaint is that Obama seems to be implying that the ACA is responsible for the slowdown in health care cost growth when at most it was an important contributor. The point is reasonable, but the question is whether this is a three Pinocchio misrepresentation.

After all, the vast majority of health economists do believe that the ACA has been an important factor in slowing cost growth. The main competing explanation is the recession. That is a plausible explanation for slowing growth in 2008, 2009, and possibly even 2010, but it really is not plausible in more recent years. People may put off care when they lose their jobs, which would explain a one-time reduction in cost growth. However this can't explain continued slow growth. After all, we don't think more people are putting off care in 2014 than in 2010.

Furthermore, health care cost growth has continued to undercut projections even in more recent years when the projections were made with the full knowledge of the recession. In this respect, it is worth noting Kessler's reference to a projection that health care costs in 2014 would rise 5.6 percent from their 2013 level. In the first three quarters of 2014, spending on health care services (roughly 90 percent of spending) is up by 2.8 percent from 2013 levels. Plausible projections of fourth quarter spending are likely to push the year over year increase slightly above 3.0 percent, but this is still well below the growth rate that was projected last year.

It is fair to call President Obama on the carpet for claiming the ACA did more to contain costs than is actually the case, but can anyone doubt that if health care costs had risen more rapidly than in the past that the ACA would get the blame in the public mind, even if other factors were clearly more important? In the context of modern politics, President Obama's claims about the cost-savings from the ACA seem like relatively minor exaggerations, not a three Pinocchio offense.

 
The Size of Detroit Workers Pension Cuts Print
Saturday, 08 November 2014 09:55

The articles reporting on the cuts to Detroit city workers pensions resulting from its bankruptcy have not generally conveyed the true size of the cuts to readers. The pieces usually note an immediate cut of 4.5 percent to pensions and then point out that the agreement ends the cost of living adjustment to pension.

This latter provision is likely to prove far more important. If the workers' contracts had provided for full indexation, and we assume that inflation averages 2.0 percent in the years ahead, a worker who lives on their pension for twenty years will see a cumulative cut in benefits of around 15 percent as a result of the ending of the cost of living adjustment (COLA). In the twentieth year their pension will be one-third less than in the current year. If they collect their pension for thirty years their pension will be cut by more than 45 percent as a result of the ending of the COLA.

Their sacrifice will be far larger than that demanded of the executives of Wall Street banks, which were effectively bankrupt during the financial crisis.  

 
Washington Post Misrepresents Issues in Obamacare Supreme Court Case Print
Saturday, 08 November 2014 08:21

The Washington Post fundamentally misrepresented the issues in a front page piece on the decision by the Supreme Court to hear a case contesting whether people in the federal exchanges created by the Affordable Care Act (ACA) qualify for subsidies. The case stems from awkward wording in one part of the law that describes subsidies going to people in the exchanges created by the states. The opponents of the law argue this means that people enrolled in the exchanges created by the federal government are not eligible for subsidies.

While the piece points out that supporters say that the subsidies are an essential part of the ACA, it should have also pointed out that other parts of the law are clearly written as though subsidies would be paid out to be people in the exchanges created by the federal government. Their point is that when the law is read as a whole there is no ambiguity that subsidies are supposed to go to people in the federal exchanges.

In this respect it is also worth noting that when the Congressional Budget Office and other independent observers tried to project the cost of the ACA they all assumed that people in the federal exchanges would be getting subsidies. It seems that no one had any confusion about the intent of the law in this respect.

The Post should have clearly presented the legal argument of the supporters of the ACA.

 
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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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