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Ezekiel Emmanuel Doesn't Like Social Security and Medicare Print
Monday, 21 May 2012 04:25

That is what he told us in his New York Times column that was ostensibly about out of control Social Security and Medicare spending. Emmanuel begins by telling readers:

"If nothing is done about entitlement spending, and if our current tax breaks continue, then by 2025, tax revenue will be able to pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else."

There are two big problems with this story. First there is the old trick of conflating Social Security with Medicare and Medicaid. This is a great trick for those who want to deceive people into believing the budget problem is primarily a demographic story. However, it is highly misleading. The retirement of baby boomers is projected to increase Social Security spending by 0.9 percentage points of GDP or roughly 20 percent between now and 2025.

By comparison, military spending increased by more than 1 percentage point of GDP between 2000 and 2005. In other words, the projected increase in Social Security spending over the next 13 years is relatively modest and easily affordable. It also is fully covered by projected Social Security revenue and assets in the trust fund.

The projected increase in health care spending is considerably larger, however this depends on using the Congressional Budget Office's "alternative fiscal scenario" rather than the baseline projection. The difference is that the baseline projection assumes substantial cost controls that were in the Affordable Care Act. These cost controls, if left in place, would substantially reduce the rate of growth of Medicare costs.

This point is important for two reasons. First it shows directly that the issue is not primarily one of demographics but rather one of exploding health care costs. Second, it is in principle possible to control these costs if the political power of health care providers can be held in check.

Per person health care costs in the United States are hugely out of line with costs anywhere else in the world. If our costs were comparable to those in any other wealthy country we would be looking at long-term budget surpluses rather than deficits. If it is too difficult politically to directly fix the U.S. system we could achieve enormous savings simply by allowing more trade in health care services. We will only see the explosive growth in health care costs described in the alternative fiscal scenario if health care providers and insurance companies are both powerful enough to prevent domestic reform and to maintain protectionist barriers that prevent people in the United States from taking advantage of lower cost care elsewhere. 

It is also worth noting that Emanuel's proposed cuts in these programs would hit people with average lifetime earnings of $40,000 and above. It might make more sense to place more burden on people earning $250,000 and above by raising their taxes.

The Arithmetic of the Minimum Wage and the Earned Income Tax Credit Print
Monday, 21 May 2012 03:58

The NYT had an article on efforts to raise the minimum wage in New York state. At one point the piece gives the views of Russell Sykes, a senior fellow at the Empire Center for New York State Policy, who is identified as an opponent of a higher minimum wage. According to the article, Sykes argued that:

"raising the minimum wage would not be helpful to most poor families. The earned-income tax credit was more beneficial to them, he said, and an increase in the minimum wage could make some families ineligible for the credit."

If a higher minimum wage makes a low-income family ineligible for the earned income tax credit (EITC) it is due to the fact that it has raised their income above the level where they qualify for the EITC. It seems a bit strange to argue that low-income family is hurt by raising their income. The highest EITC rate is 45 percent, meaning that a worker at below the peak (in 2010, $12,549 for a single parent with three children) would get an additional 45 cents for each additional dollar of earnings. If a higher minimum wage raises a worker's income from a point below this level, it is actually increasing the amount of money they get through the EITC, possibly by as much as 45 percent of the increase in the minimum wage.

The EITC then plateaus, meaning that additional earnings neither add to or subtract from the size of the tax credit. For income above $16,450 the EITC is phased out at the rate of 21 cents on the dollar. This means that in a worst case scenario, a worker may lose 21 cents from the EITC for every dollar in additional pay they get as a result of a minimum wage hike.

[This is corrected from an earlier version. Thanks to Robert Salzberg for calling attention to my error.]

Thomas Friedman Presents Evidence of a Skills Mismatch in His NYT Column Print
Sunday, 20 May 2012 08:47

Thomas Friedman did his usual Sunday morning stretch, waxing eloquently on a new era in:

"in which to be a president, a governor, a mayor or a college president will be, on balance, to take things away from people."

It's not clear why this would be the case. After all, productivity is growing at a rate of 2.0-2.5 percent annually. This should mean that we are getting richer, not poorer, through time. But Thomas Friedmanland bears little resemblance to the world of gravity and arithmetic that the rest of us inhabit.

It's also not clear how he thinks the future will be different from the past in this respect. In 1980, non-defense government spending at all levels was 14.3 percent of GDP. It was the exact same share in 2007 before the recession hit. There have been no big government give-aways for the last three decades.

Friedman begins by celebrating the developments in technology that are allowing individuals to produce books, music, videos and other creative work and directly distribute them without the mediation of publishers, the recording industry or movie companies. He then comments:

"The leading companies driving this trend — Amazon, Facebook, Microsoft, Google, Apple, LinkedIn, Zynga and Twitter — are all headquartered and listed in America. Facebook, which didn’t exist nine years ago, just went public at a valuation of nearly $105 billion — two weeks after buying a company for $1 billion, Instagram, which didn’t exist 18 months ago."

The rest of the piece then warns us that such companies may not be headquartered in the United States in the future. It's a bit hard to follow the story line here.

First, it is not entirely clear how much U.S. companies have driven this trend. Important innovations such a Skype and Linux have been developed elsewhere.

And, the success of several of these companies does not necessarily stem from being innovative. For example, most of Amazon's profits have been attributable to its effective lobbyists. They have managed to exempt most of its sales from state and local sales tax in most of the country. This enormous subsidy, at the expense of traditional retailers, has often exceeded its profit margin.



Washington Post Calls a Free Market in Prescription Drugs "Radical" Print
Sunday, 20 May 2012 08:06

The Washington Post showed that it clearly does not believe in free market fundamentalism. It ran an article on a bill proposed by Vermont Senator Bernie Sanders to replace patent monopolies for prescription drugs to treat AIDS with a prize system. The headline and second sentence of the piece described the system as "radical."

Under this proposal, the government would pay to buy the patents for successful drugs. These drugs would then be placed in the public domain so that the drug could be produced as a generic in a free market. In most cases eliminating the patent monopoly would reduce the price of the drug by more than 99 percent. Drugs that would sell for tens of thousands of dollars a year with patent protection would sell for a few hundred dollars in a free market.

It is not clear why this idea would be viewed as "radical." Usually the Post and other pillars of the political establishment are major proponents of free market economics. (There are other mechanisms that can be used to replace the funding that comes from patent monopolies. For example, the government could increase the $30 billion that it already spends each year on biomedical research through the National Institutes of Health.)

The article included some peculiar comments that may have misled readers. For example, it noted that an AIDS drug that sells for $25,000 a year here can be purchased for $200 a year in sub-Saharan Africa. It then told readers:

"The huge price gap is a result of a deal struck with brand-name U.S. drugmakers under the President’s Emergency Plan for AIDS Relief, which provides anti-retroviral drugs to 3.9 million people in developing countries. In 2003, to reach more patients, brand-name drugmakers agreed to let overseas drugmakers sell generic, low-cost versions of their patented AIDS drugs outside the United States."

Actually, the price gap is due to patent protection in the United States. Generic manufacturers have the right to produce drugs without patent protection in large parts of the developing world. They don't need permission from U.S. drug companies. (They are losing this right in the next decade.)



What's a "Financial Recession?" Print
Sunday, 20 May 2012 08:01

I hate to be picky, but this seems like a rather bizarre term to include in this Washington Post piece on the G-8 meeting on Saturday. The full sentence is:

"Obama, who has pushed for additional fiscal stimulus in the United States, said the new agreement affirmed the course his administration pursued during the financial recession at home."

It is difficult to see what is added by including the word "financial." The point is that we are still suffering from the effects of the recession that officially began in December 2007. If the concern is that the recession officially ended in June of 2009 so that it is improper to refer to the current period as a "recession," then the word "downturn" should do the trick.

It is hard to see what including "financial" in the description does except confuse people. We have a downturn in the real economy, not just a few problems in the financial sector.

The Washington Post Tells Us What the White House "Believes" About Financial Transactions Taxes Print
Saturday, 19 May 2012 22:13

In a blogpost discussing the push by many groups to get a financial transactions tax the Post told readers:

"The White House believes it would be easy to evade, could hamper economic growth, and might make markets more volatile, not less so. Instead, Obama has proposed a new 'financial crisis responsibility fee' on big banks, which would raise about $61 billion. "

While it is not clear how the Post knows what the White House really believes, what we know is that financial transactions taxes are apparently not that easy to evade. The tax in the UK, which applies only to stocks (not derivative instruments like credit default swaps, options, and futures) raises between 0.2 and 0.3 percent of GDP annually. This would be between $30-$45 billion a year in the United States. Unless we assume that the Obama administration thinks our tax collectors are much less competent than those in the UK, then they presumably do not really "believe" that the tax will be easy to evade.

The reference to economic growth refers to outdated research by the European Commission (EC). The most recent study by the EC shows that a tax would lead to somewhat more rapid growth if the money was used either to reduce other taxes or finance public investment.

If the White House has any evidence that the tax would increase volatility they are keeping it secret from the world. The tax would simply raise transactions costs back to where they were 10-15 years ago. Financial markets were not obviously more volatile in 1995 than they are today.

Finally, the "financial crisis responsibility fee" proposed by the Obama administration would raise an order of magnitude less tax revenue than the financial transactions taxes of the size generally being proposed. The Obama administration surely understands that they are pushing a tax that will have much less impact on the financial sector and will raise much less revenue than a financial transactions taxes.

The Post does not know what the White House "believes" about financial transactions taxes. It knows what it says about financial transactions taxes. While what it says may reflect what it believes, it may also reflect the fact that the administration is hoping to raise money for its re-election campaign from Wall Street. Also, many officials in the administration may hope to work on Wall Street after leaving the administration. These are the facts that we know.

Gretchen Morgenson Makes the Case for an Accurate Accounting of Bailout Costs Print
Saturday, 19 May 2012 15:15

The methodology that the Treasury Department is using when claiming that we made money on the TARP would imply that the government could make money by issuing a 30-year mortgage at 1.0 percent interest to every homeowners in the country. The vast majority of these mortgages would of course be paid off with interest, therefore the taxpayers would come out ahead.

This is ridiculous accounting, as Gretchen Morgenson points out in her column today. There is an opportunity cost to this money and if that is not taken into account, there is no way to say whether this lending is profitable. In the case of the TARP and related Fed lending programs, financial institutions were able to borrow trillions of dollars at far below market interest rates.

These programs may have been justified given the situation in financial markets at the time, however it is ridiculous to say that we made a profit on the lending based on the fact that most of the money was repaid with interest just as it would be ridiculous to claim a profit on 1.0 percent 30-year fixed rate mortgages issued by the government.

In the FWIW category, anyone saying that we would have had a second Great Depression absent this lending should be immediately ignored. The first Great Depression was caused by 10 years of inadequate policy response, not just the mistakes made at the onset. There was nothing that we did or did not do in 2008-2009 that would have necessitated a decade of incompetent policy.

Argentina was able to recover from a full-fledged financial collapse in less than 18 months. There is no reason to believe that Ben Bernanke and other leading policy makers are very much less competent than the people determining economic policy in Argentina.

WAPO Provides Important Misinformation on Greece's Choices Print
Saturday, 19 May 2012 08:08

A front page Washington Post article discussed the choice that people in Greece must consider, of either staying in the euro and facing perhaps a decade or more of double-digit unemployment, or leaving the euro and facing the uncertainty of going back to its own currency. The Post misrepresented the tradeoffs involved when it presented the views of Nikas Niakaros, an exporter of feta cheese:

"But instead, Niakaros is sweating bullets. Like many Greek exporters, he depends on a supply chain of imported goods — from specially enriched feed for his sheep to the natural gas used to power his factory — that would spike in price if Greece left the euro. Business loans, meanwhile, would be far more expensive and harder to get. Add unpredictable jumps in inflation as happened during the era of the drachma, and, Niakaros said, the cost benefits of a cheaper currency would disappear."

While this may accurately present Mr. Niakaros' assessment, he happens to be wrong. If the Greek currency falls by 20 percent relative to the euro, this could mean that the price that Mr. Niakaros pays for his imported inputs will rise by 20 percent. It should also mean that the price he can sell his feta will rise by roughly 20 percent measured in the new Greek currency. However, the amount that he pays in wages to Greek workers and rent for his property will almost certainly not rise by 20 percent. This should mean that he will hugely increase his profits on the portion of his output that he exports.

While it is interesting to get the views of the people of Greece on how they would be affected by an exit from the euro, the Post should be careful not to present inaccurate information unchallenged. Most of its readers probably will not know that Mr. Niakoros's assessment of the situation is wrong.

Front Page WAPO Story on Jaywalking by Government Employees Print
Saturday, 19 May 2012 07:50

It wasn't quite that bad, but it was pretty close. A front page Washington Post story told readers that:

"The overpayments, discovered in an inspector general’s audit, boosted the annual pay of some of the employees [some of four employees] by as much as $64,000."

I will be the last person to defend people ripping off the government, but we do need some context here. Assuming a worst case scenario, the amount of overpayments to these government employees amounted to less than $200,000 a year. That comes to less than 0.000006 percent of federal spending. Is this worth a front page story in the Washington Post?

My guess is that if we looked at any major defense contractor (e.g. Lockheed Martin, Boeing, Northrup Grumman) we could probably find overpayments that are at least ten times as large with a careful examination of every major contract. Such stories can rarely be found on the front page of the Washington Post.

Readers might ask why the Post thinks it is so important to highlight overpayments to a small number of government employees that, for all practical purposes, have zero consequence for the budget while neglecting much larger abuses by government contractors.  

Matt Miller Celebrates the Stinking Corpse of Americans Elect Print
Friday, 18 May 2012 04:54

Matt Miller is the perfect embodiment of the Washington punditry. In his weekly column in the Washington Post he complains about being a victim of the "False Equivalency Police." These would be the people who point out that many of the assertions that he and other professional centrists make about the Democratic and Republican parties being taken over by extremists are not true.

It is only the Republican Party that has moved to the extreme right, the Democratic Party has actually moved towards the center. Apparently the people who have the gall to call attention to this fact and undermine the story of the professional centrists, have sufficiently angered Miller that he now thinks of them as a type of police force. Life is tough for WAPO columnists.

I will always have fond memories of Matt Miller as the one person who left me completely speechless in a debate. The year was 1996 or 1997. Miller and I were on a public radio show debating the proposal, which was then popular in Washington, of reducing the annual cost of living adjustment for Social Security by roughly 1 percentage point.

Their argument was that the consumer price index (CPI), which is the basis of the indexation, overstated the true rate of increase in the cost of living. I was pointing out that the evidence for this claim was actually quite weak. Furthermore, such cuts would be a substantial hit to an elderly population that was already not doing very well.

One of the other guests on the show was Wyoming Senator Alan Simpson. In his usual tactful way, Simpson went on a tirade saying that the estimate that the CPI overstated inflation by 1.0 percentage point was way low. He said that it was more like 1.5 percentage points and that he has economists who say that it is more than 2.0 percentage points. He concluded by saying that pretty soon our grandchildren will all be living in chicken coops.



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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.