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Tell Andrew Gelman: Reducing Inequality Doesn't Have to Mean Raising Taxes Print
Friday, 23 December 2011 05:48

It is more than a little bizarre to read a column on public attitudes to inequality in the NYT which completely equates reducing inequality with raising taxes. In fact, the main reason that inequality has risen so much over the last three decades has been the increase in the inequality of before-tax income.

This increase is attributable to policies like a trade policy that subjects manufacturing workers to competition with low-paid workers in the developing world, while largely protecting doctors, lawyers, and other highly paid professionals from similar competition. Inequality stems in part from the government's too big to fail insurance for large banks that allows them to take large risks with taxpayers bearing the downside.

Inequality is due to the enormous extension of patents and copyright monopolies over the last three decades. The country currently pays close to $300 billion a year for prescription drugs that would sell for around $30 billion in a free market. The difference of $270 billion a year is five times the amount of money at stake with the Bush tax cuts for the rich.

It is likely that the public would reject most of the policies that have allowed the wealthy to seize a much larger share of income over the last three decades if any politician ever had the courage to raise them. Instead, Gelman and many others would like to restrict debate to "Loser Liberalism," where the question is exclusively whether we want to tax the winners to help the losers.



Andrew Gelman has added to his earlier note and indicated that he was only referring to the particular pieces being discussed. He did not intend to restrict a discussion of inequality to tax rates.

Politifact and the Echo Chamber Nation Print
Thursday, 22 December 2011 18:29

Politifact told its readers about the "Echo Chamber Nation" in its follow up to its "Lie of the Year" story, but not quite in the way they intended. To remind readers, the Politifact Lie of the Year was the Democrats' claim that the Ryan plan approved by the Republican House would end Medicare. The Ryan plan would in fact replace the fee for service Medicare that has been in place since the program was created in 1966 with a system of "premium supports," which most people would call vouchers.

This is comparable to replacing a traditional defined benefit pension with a 401(k). Most people would probably say that if a company had done this that they had ended their pension. However, if anyone said this, Politifact would call them a "liar" and possibly even the "liar of the year."

Yes, calling such a person a liar may make sense in some circles. This passes for wisdom in that narrow group of Washington elites who think that they are balanced because they can criticize both Democrats and Republicans without paying any attention to the evidence. Within this Echo Chamber, saying the Republicans voted to end Medicare could be the Lie of the Year, but not in reality land.

And You Thought You Were the Only One Who Read BTP Print
Thursday, 22 December 2011 13:30

We made John Nichols' Honor Roll for "Most Valuable Economic News Source" over at the Nation. I'd like to get a mention for most accurate, but no one gives awards for that.


The Washington Post is Pushing Ideology Again Print
Thursday, 22 December 2011 07:48

Some of us may have thought the dispute over the extension of the payroll tax cut involves maneuvering between politicians who are looking to get re-elected next fall. They all have important interest groups who they rely upon for votes and/or campaign contributions.

However the Post told us that we are wrong to think this. Its lead front page article yesterday told readers that:

"at its heart, the fight over the tax cut is only the latest incarnation of the same ideological clash that has afflicted Congress for the past year, over what the government should fund and how it should be paid for.

Once again, Democrats and Republicans foundered over whether to fund an initiative by cutting entitlements and other spending or by raising taxes on the wealthy."

Isn't it great that the Post can get into politicians' minds and determine the real motives for their actions? Ordinary people would just think of them as people who seek power, who say and do whatever is necessary to advance their careers, but the Post can tell us their innermost thoughts. That is why we need newspapers like the Washington Post.

"Strong" Growth Ain't What It Use to Be Print
Thursday, 22 December 2011 05:25

The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.

It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy's potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.

Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.

NYT Conflates Counterfeits and Unauthorized Copies Print
Thursday, 22 December 2011 05:10

The NYT reported on the Immigration and Customs Enforcement Agency's seizure of unauthorized copies of goods, which it priced at $77 million. (It's not clear whether this is the value of the copies or the price of the goods that were being copied.) The piece repeatedly refers to these goods as "counterfeit."

It is not clear from the article that the goods were in fact counterfeit. If they were counterfeit, then consumers were deceived into believing that they were getting the brand product that was being copied. Often consumers know that they are getting copies of the brand product, not the actual product produced by the company. In this case, the product cannot properly be termed "counterfeit."

This distinction is important because the consumer is being ripped off in the case of an actual counterfeit item. They would presumably cooperate with law enforcement in efforts to eliminate counterfeit items. However, consumers are often happy to buy unauthorized copies of brand products because they sell for much lower prices than the brand product. In this case, consumers will be allied with the sellers in trying to evade law enforcement, since both are benefiting from the transaction.

This piece provides no indication that the products seized were in fact counterfeit. It is only clear that they were unauthorized copies. Reporters should be careful to note this distinction.

Erratic Patterns in Monthly Housing Starts Print
Wednesday, 21 December 2011 14:12

After being the big optimist who was bashing the double-dip gang in the summer and fall, I am now back to being the killjoy who refuses to join in the celebrations over the November data on housing starts reported yesterday. The point that I made in a prior post is that these numbers are highly erratic. This is especially true of the monthly data on starts of multi-family units, which were driving the jump reported for November.

This chart gives the basic picture.

Click for Larger Image


Source: Census Bureau.

This chart shows three important pieces of information. First construction of both single family units and multi-family units has plummeted since the peak of the bubble in 2006. Second, the monthly data on starts are far more volatile for multi-family units than single family units. Third, in the last year, starts of multi-family units have recovered much more than starts for single family units, which are still near their 2009 trough.

Combining points 2 and point 3, we can conclude that the monthly number on starts will be far more volatile now that multifamily units account for around one-third of all starts as compared to the good old days when they accounted for less than one-fifth. So this is why I am not celebrating just yet (except for Hanukkah). 

Protectionism for Lawyers Print
Wednesday, 21 December 2011 06:04

The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.

This sort of restriction should be viewed the same way as a tariff on imported steel. It has all the same negative effects on consumers and the economy. The main differences are that the restrictions on lawyers redistribute income upward to the top 5 percent or even 1 percent and the economic distortions are almost certainly much larger. The other major difference is that the protectionism that benefits lawyers gets much less attention from economists, reporters, and columnists.  

Housing Is Back!!!! Yet Again Print
Wednesday, 21 December 2011 05:35

The Post has another piece showing some pre-mature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell. 

In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, multi-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.

The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.

The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below 1.2 million given the country's current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.

(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)

What Jobs Should Big Government Train Workers For? Print
Wednesday, 21 December 2011 05:20

The NYT reported that the Republicans in the House want the federal government to allow states to use unemployment insurance tax revenue to pay for job training. It quotes Representative James B. Renacci on this topic:

"In this uncertain economy, using unemployment dollars to subsidize the training of a new employee to re-enter the work force is just good public policy."

It would have been worth pointing out that there is no major sector of the economy that seems to be short of workers. Real wages are flat or declining in every major occupational grouping. There is no occupation where job openings are especially high relative to job seekers (the overall average is more than 4 to 1).

If there are not obvious jobs for which to train workers, government training programs sound like a great example of ill-considered social engineering.

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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.