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M.R.I's Are Expensive Because of Government Intervention Print
Monday, 16 July 2012 04:27

Bill Keller used his NYT column today to outline a series of myths about President Obama's health care plan. At one point he tells readers:

"I’m a pretty devout capitalist, and I see that in some cases individual responsibility helps contain wasteful spending on health care. If you have to share the cost of that extra M.R.I. or elective surgery, you’ll think hard about whether you really need it."

The irony here is that under the current system it is government intervention that makes "the cost of that extra M.R.I." expensive. The direct cost of an M.R.I., the electricity, the time of technicians to run the machine and the time of a doctor to read the results are relatively low. The machine itself however is expensive, because of government granted patent monopolies.

If M.R.I.s were sold in a free market, where anyone could copy the technology and sell an M.R.I. device for whatever the market would bear, then the cost of M.R.I. tests would not be a major issue.

 
WAPO's Major Article on the Future of Manufacturing Never Once Mentions the Value of the Dollar Print
Sunday, 15 July 2012 14:26

Wow, you just have to sit back in awe at something like this. Imagine the lead sports story the day after the Superbowl. It talks about who had a good day, the big plays, the big mistakes, and it never once mentions the score of the game. That is pretty much what the Post managed to do in a front page business section piece on the future of manufacturing in the United States.

If the Post noted the value of the dollar, which is the prime determinant of the relative cost of good produced in other countries and good produced in the United States, then it could have worked through some simple logic. The United States as a country will continue to consume manufactured goods. It is likely that thirty or forty years in the future we will still have cars, computer-like objects, houses made of manufactured materials, etc.

If we don't manufacture these items here then we will have to import them. If we will import them, we will either have to export something else to pay for these imports or the rest of the world will have to give us manufactured goods for free. Something like the latter is happening now as China and other developing countries are buying up dollar denominated assets to keep up the value of the dollar against their currencies.

Essentially they are paying us to buy their stuff by making their products cheaper than they would otherwise be. This seems to be a useful development strategy at the moment, both because it helps to harness demand for their products and also because it allows them to accumulate massive amounts of dollar reserves which they believe are essential in an incompetently managed international financial system.

However, it is unlikely that situation will exist forever. China and other developing countries can pay their own people to buy their stuff, so it is not essential for them to indefinitely maintain huge export markets in the United States. Also, at some point they will presumably have enough reserves to get them through an inconceivable financial crisis.

This then raises the issue of how we will pay for the goods we import. While the popular line is "services," this is mostly said by people who have not looked at the data. We would need an incredible a five-fold expansion of our surplus in services to even cover our current deficit. It would need to grow by a factor of ten if we lost all manufacturing in the U.S.

Furthermore, many trends in services point in the opposite direction. For example, we already have a large deficit with India in software services. This will certainly grow larger over time, and Indian software engineers will almost certainly drive us out of third countries as well.

We have a surplus on financial services, but this may slip if taxpayers got tired of subsidizing too big to fail Wall Street banks. One growing area of service exports is fees for royalties on patents and copyrights. This may grow if we have the economic and military power to impose more protectionist trade pacts (called "Free Trade Agreements" in Orwellian Washington newspeak), but that seems unlikely as countries like India are frequently insisting on paying free market prices for drugs.

The one rapidly growing area of surplus in services is tourism. Perhaps the future American workforce will be cleaning toilets and making beds for the rest of the world, since we will no longer be set up to manufacture goods.

Alternatively, the dollar might just fall so that the U.S. is again competitive in manufactured goods. That is the econ 101 story.

 
David Brooks Says Our Elite Is Talented and Open Print
Friday, 13 July 2012 22:17

I really wanted to ignore David Brooks' piece today, but he was saying excessively silly things in criticizing my friend, Chris Hayes. Specifically, he was responding to the main point of Chris's new book, The Twilight of the Elites, that the elites have become corrupt and inbred.

Brooks tells us that Chris is wrong:

"I’d say today’s meritocratic elites achieve and preserve their status not mainly by being corrupt but mainly by being ambitious and disciplined."

Is that so? Perhaps Brooks can tell us what Erskine Bowles did for the $335,000 that he earned as a director of Morgan Stanley in 2008. That year might ring a bell, since that was the year that Morgan Stanley was at the center of the financial crisis. It would have gone bankrupt had it not been for a rescue by Federal Reserve Board Chairman Ben Bernanke.

Bernanke used his emergency powers to allow Morgan Stanley to become a bank holding company in the middle of the crisis. This gave the bank the protection of the Fed and the FDIC, halting a bank run that would almost certainly have wiped out the bank. Did the stockholders of Morgan Stanley get $335,000 (more than ten times the median wage in 2008) of value out of Erskine Bowles for his work in 2008?

Of course Bowles is not the only member of the elite who does not seem to provide value for his money. Robert Rubin pocketed over $100 million in his role as a top exec at Citigroup even as that bank was spiraling toward bankruptcy, until it also was rescued by the nanny state.

Anyone who has ever been to Washington knows the town is chock full of 6-figure buffoons: people with no obvious skills who manage to get paychecks that are 5-10 times as high as those of people who work for a living. These people are ambitious and disciplined in that they know to avoid saying anything that will jeopardize their paychecks, but it is hard to see anything else that would justify their salaries.

 
The Washington Post Throws a Barrage of Non Sequiturs at Readers in Fed Editorial Print
Friday, 13 July 2012 10:03

The Washington Post editorial board is firmly non-committal on the question of whether the Fed should take more steps to boost the economy. On the pro side we have the fact that the economy is well-below full employment and growing slowly. Furthermore, the Post acknowledges that there is no threat of inflation. Given the Fed's twin mandates for full employment and price stability, it seems like we have a clear answer here.

But no, that would be too easy. The Post tells us:

"The Fed may also need to save ammunition to help deal with a financial collapse in Europe."

That sounds profound and important. Let's see, the Fed must save ammunition in case something really bad happens in Europe. But wait, isn't the Fed's ammunition the reserves it can issue? And, isn't the only real limit on the amount of reserves it can issue the concern about inflation? In other words, if it throws too much money out there and we don't have the ability to produce the goods and services to meet the demand, then we would get inflation.

However, the Europe disaster story is one where we are seeing a further hit to demand as Europe's economy implodes. How does it help in that situation that the Fed restrained itself in boosting the economy today? In fact, any boost to the U.S. economy will help, at least modestly, to boost European economies, thereby making an implosion less likely. Therefore concerns about an imploding Europe should provide yet another argument for more stimulus from the Fed.

Finally the Post tells us:

"Rather, slow growth may reflect structural factors, such as the huge household debt burden, which is declining but still equal to 83.6 percent of GDP. Then there’s the federal government’s out-of-whack tax and entitlement policies, and the uncertainty they generate.

"By effectively transferring much private and government debt onto its own balance sheet, the Fed bought time for the U.S. economy to rebalance under relatively benign conditions. Companies and households have used the time so far to deleverage significantly. More monetary easing now might buy the economy even more time to heal. But soon it will be government’s turn to adjust; the Fed can prop up growth, not engineer a permanent escape from fiscal reality."

Read more...

 

 
Birthday Boasts Print
Thursday, 12 July 2012 22:27

Okay folks, today is my birthday so I’m going to be a bit self-indulgent here. Below is list of a number of important policy areas where I have been right at a time when the bulk of the economics profession was wrong. Yes, this is old-fashioned “I told you so” stuff. It can be seen as a bit arrogant and a bit obnoxious, but you have been warned.

I also understand that being right against the economics profession is not a terribly high bar. But hey, that is the competition.

1) The NAIRU Ain’t 6.0 Percent or Anything Like It

The conventional wisdom in the economics profession in the early and mid-90s was that if the unemployment rate fell much below 6.0 percent then inflation would accelerate out of control. This view was held not only by conservatives but also by more liberal voices within the mainstream like former Federal Reserve Board governors Alan Blinder and Janet Yellen.

Even Paul Krugman got this one wrong, comparing the economists who questioned the NAIRU theory to the scientists who questioned the existence of a hole in the ozone layer ("Voodoo Revisited." The International Economy. November-December, 1995, pp 14-19). I argued the case against the NAIRU in Chapter 16 of Globalization and Progressive Economic Policy. The book was published in 1998, but the first draft was in early 1996 when those of us who questioned the 6.0 percent NAIRU could still bank on a heavy dose of ridicule. For those who need reminding, the unemployment rate fell below 5.0 percent in 1997 and eventually hit 4.0 percent as a year-round average in 2000. There was virtually no uptick in inflation through this period, until a rise in commodity prices in 2000 finally began sending the rate of inflation somewhat higher

2) The Consumer Price Index Does not Substantially Overstate Inflation

Another big craze of the mid-90s was the claim that the consumer price index (CPI) substantially overstates the true rate of inflation. This sentiment peaked with the verdict of the Boskin Commission, consisting of five eminent economists who were appointed by the Senate Finance Committee to evaluate the accuracy of the CPI. In December of 1996 they came out with their report claiming that the CPI overstated the true rate of inflation by 1.1 percentage points. This was intended to be used as a rationale to reduce the size of the annual cost of living adjustment to Social Security. (Note that the cut is cumulative: after ten years it is roughly 11 percent, after 20 years it is roughly 22 percent.) It also would have changed the indexation of tax brackets in a way that would have led to higher tax rates for most people. Almost no economists were prepared to publicly challenge the Boskin Commission while many were happy to jump on the bandwagon.

Read more...

 

 
Spanish Government Takes New Steps to Increase Unemployment Print
Thursday, 12 July 2012 05:24
That is the reality, it would have been an appropriate headline.
 
Defense Industry Lobbyists Buy Attention in the NYT Print
Thursday, 12 July 2012 04:46

The NYT had a piece on the potential impact that uncertainty around the extension of tax cuts and the imposition of legislated spending reductions might be affecting the economy. At one point it tells readers that:

"Outside the military contracting industry, the fiscal cliff has not received the same amount of attention."

Of course the reason that the impact of spending cuts on the military contracting industry has received attention is that the industry has paid lobbyists to hype its impact. They have circulated studies making outlandish claims about the jobs impact. 

While cutting spending on the military in the middle of a downturn will lead to job loss, cutting spending on anything, even if the cuts were on totally pointless spending, would lead to job loss. In fact, since military spending is more capital intensive than most other sectors of the economy, cuts in this sector are likely to lead to less job loss than cuts in other areas of government spending.

As far as the general contention that uncertainty is slowing growth, this does not seem to be supported by recent data that shows a substantial uptick in new capital goods orders. If businesses are uncertain about the future, this is the most obvious place that the uncertainty would appear. If uncertainty were affecting employment we should expect a sharp rise in the ratio of new temp workers to new workers overall. We don't see this.

 
Meatpacking Didn't Always Have Bad Pay Print
Thursday, 12 July 2012 04:23

The NYT Magazine has an interesting piece on Postville, Iowa, a small town whose major employer is a meatpacking plant. Postville gained notoriety in 2008 because of a raid on the plant by immigration authorities that resulted in dozens of undocumented workers being arrested and deported.

At one point the article notes the low pay and bad working conditions in the industry and explains that only immigrants would be willing to take these jobs. Actually the pay in the meatpacking industry was not always bad. In the 70s the meatpacking industry was heavily unionized. The jobs were fairly well paying for workers with relatively education and generally had pensions and health care insurance.

During the 80s, many union plants were closed, driven out by lower paying non-union facilities that often operated with immigrant workers. While meatpacking may inevitably be an unpleasant job, there is nothing about the work that necessitates that it pay poorly. 

 
Drug Patent Monopolies Lead to Corruption #23,462 Print
Thursday, 12 July 2012 03:55

Economic theory predicts that when the price of a product substantially exceed its marginal cost that we should expect corruption. Economists usually use this prediction to complain about trade barriers that can the price of protected products by 15-20 percent above their free market price. Somehow they ignore the implication of this prediction when it comes to patent monopolies for prescription drugs that raise prices by many thousand percent above their free market.

This is the basis for the NYT series "Patent Monopolies Lead to Corruption" which documents instances where the market performs as predicted and drug companies or other actors rip off patients, insurers, or the government to maximize their profit from these monopolies. Today's installment is about how doctors can charge ten times as much for pills dispensed in their office as would be charged by a pharmacy. As with all the other pieces in this series, there is no discussion of the importance of patent monopolies in this story or that we might have more efficient ways to finance development of new drugs.

 
Outsourcing, Offshoring, and the Presidential Campaign Print
Wednesday, 11 July 2012 05:01

It appears that both President Obama and Governor Romney are going to be accusing each other of being offshorers in the fall campaign. Both have a case, even if not exactly the one they are making.

Obama's case on Romney being an offshorer is that the companies owned by Bain Capital shipped many jobs overseas. Romney counters that the offshoring began after he had given up his role as a top executive at Bain, although he did still have a substantial stake in the company. He said that while he was running things the company only did domestic outsourcing, they did not ship jobs overseas.

As a practical matter, this would have a similar effect on the wages of the workers affected. Most workers in the economy probably earn some economic rent. This means that if we were to put their position up for competitive bidding to the whole world, there would be someone who was willing to the do their job for less money.

Fortunately for most of us, our jobs generally don't come up for competitive bidding so we can continue to enjoy this wage premium in bliss. Bain Capital's outsourcing put workers' jobs up for this sort of competitive bidding. Whether the auction was purely domestic, as Romney contends, or whether it involved the whole world, is secondary. Ordinary workers would see their pay cut.

Romney has focused his attack on President Obama on the claim that some stimulus dollars went overseas. This is surely true, since it would have been impossible to ensure that all stimulus spending remained in the United States. (Congress did include a "buy America" provision in the stimulus bill, which would have had the effect of reducing the portion of the stimulus spent outside of the country.) The more important question has been the general direction of President Obama's trade policy and the extent to which it imposes some groups of workers to competitive bidding for their jobs.

This is where Romney has the better case, although it is not clear that he would pursue any different policy. The trade policy of President Obama, like that of his immediate predecessors Presidents Bush and Clinton, has been focused on placing manufacturing workers in direct competition with low paid workers in the developing world. This has the effect of depressing their wages since firms can either directly or indirectly hire workers in developing countries who are paid a fraction of the wages of workers in the United States.

At the same time, his trade policy has done little or nothing to expose highly educated professionals like doctors and lawyers to the same competition. This policy has the predicted and actual effect of depressing the wages of less educated workers relative to the most highly paid workers. This policy is exacerbated by maintaining an over-valued dollar, which further depresses the wages of those workers exposed to international competition to the benefit of those who are largely protected.

President Obama has also done nothing to combat the corruption in the corporate governance structure whereby corporate board members are paid hundreds of thousands of thousands a dollars a year to look the other way as top management pillages the company. A policy that subjects less educated workers to the most vigorous possible competition, while maintaining protection for those at the top will redistribute income upward, as we have seen over the last three decades. Both candidates seem to largely support such policies. 

 
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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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