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David Brooks Denounces Economics, Is Biology Next? Print
Tuesday, 14 February 2012 05:19

David Brooks is upset that liberal economists keep harping on the loss of middle class jobs as the main factor behind the disruption of working class families and communities. In expressing his anger he creates a caricature, since there probably is no economist who would claim that the problems of working class people are exclusively their poor employment prospects.

Bad economic prospects lead to a variety of ills that cannot be simply reversed when the economy turns around. This is why many of us left-wing economic types are angry with the Brooks types who think it is just fine if we wait until 2020 to get back to normal levels of employment. 

Brooks also has an interesting theory on the loss of skills. He tells readers:

"The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them."

Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column.

Rising Disability Claims and Higher Productivity Growth Print
Monday, 13 February 2012 06:25

Robert Samuelson is unhappy that so many people without jobs are getting Social Security disability benefits. He notes the sharp rise in the number of beneficiaries over the last two decades. 

He misses one reason that the number of beneficiaries could be rising. Many companies have striven to downsize to save money and increase their productivity. This downsizing effort is often touted as one of the factors behind the uptick in productivity growth in 1995.

However an implication of this downsizing is that less productive workers will lose their job. A worker who is downsized out of a job at age 50, who may actually have serious mental and/or physical problems that limit their ability to work, will have a very difficult time finding a new job. Such a person may well end up getting disability whereas in prior times a company may have been willing to keep them on the payroll until retirement.

Insofar as this is the case, the rise in disability recipients may be a direct outgrowth of faster productivity growth. The alternatives would be slower productivity growth (leaving these people on company payrolls) or letting them slip into abject poverty. 

Fred Hiatt's Accountability Liberals Don't Know Arithmetic Print
Monday, 13 February 2012 05:50

It's always good to get a silly caricature to begin the week and Fred Hiatt at the Washington Post is happy to supply one. He presents us with the divide between "nostalgia liberals" and "accountability liberals."

The story is that nostalgia liberals are opposed to means-testing Social Security while accountability liberals say "the only way to protect benefits for the poor is to scale back expected benefits for the wealthy." Nostalgia liberals support traditional public schools, while accountability liberals support charter schools and testing. More generally, "accountability liberals put more stock in market forces and individual empowerment." Of course the picture of "nostalgia liberals" is a ridiculous caricature by someone who is a charter member of the "accountability liberals" masquerading as a neutral voice.

Starting with Social Security, those familiar with arithmetic know that almost no money can be saved by cutting benefits for the wealthy. The only way to save substantial money is by extending a means test down to people earning $30,000 a year, which does not ordinarily pass for wealthy.

Also, contrary to what Hiatt claims, Social Security is not a subsidy to middle class and wealthy people, it is a government-run insurance system. The middle class and wealthy pay for their benefits.

Hiatt also seems to think that an aging population is a new story. It isn't. Fifty years ago there were five workers per retiree, today there are three. In spite of the declining ratio of workers to retiree, we still enjoy higher living standards today than we did 50 years because of productivity growth. Productivity growth is of course continuing which is why we will have no difficulty supporting a larger population of retirees and still have rising living standards, assuming that the gains from productivity growth are shared widely.

The real problem is of course our broken health care system, as every analyst knows. If the United States paid the same amount for its health care as any other wealthy country, then we would have budget surpluses in the long-term, not deficits.

The point about schools also misrepresents reality. The accountability liberals have been calling the shots in school policy for two decades and have little to show for it. It is hard to see this drive as anything more than a glorified effort to bash teachers' unions, which is the one area where it clearly has been successful.

Contrary to Hiatt's caricature, there are plenty of ways in which some who he dubs "nostalgia liberals" would be happy to embrace market forces, such as ending too-big-to-fail banks that enjoy implicit government protection, less stringent patent protection for prescription drugs, and more open trade for highly paid professionals like doctors and lawyers. But acknowledging this fact would undermine the caricature, so Hiatt would not venture into this territory.



Generational Battles and Politically Connected Construction Companies In Japan Print
Monday, 13 February 2012 05:33

The NYT had an article reporting on the rebuilding following last year's earthquake and tsunami in Japan. The article is devoted to what it describes as a generational conflict where older residents wanted even the smallest villages rebuilt whereas many younger residents preferred to save money by consolidating some of the smaller villages into large ones.

At one point the piece describes the rebuilding as a boon to "politically connected" construction companies. It would have been helpful to include more discussion of the impact of these construction companies on the rebuilding process. The more money is spent, the more they would stand to profit. For this reason, it seems likely that they would be opposed to plans to save money by consolidating villages. It would be interesting to know the extent to which they played a role -- as oppose to older citizens -- in pushing the decision to rebuild all the villages.

Thomas Friedman Shows Some Low Imagination, or At Least Low Comprehension Print
Sunday, 12 February 2012 09:28

Thomas Friedman gives the Republicans some well-deserved bashing in his column today, but he also unthinkingly repeats his standard lines:

"The second of our great long-term challenges are our huge debt and entitlement obligations."

Of course our debt has expanded substantially due to the economic devastation caused by the collapse of the housing bubble. It is not at a level that poses any great harm to the country as witnessed both by the fact that financial markets are willing to lend the United States money at very low interest rates and also that the United States and other countries have been able to sustain much larger debt burdens for long periods of time.

The part about entitlement obligations is misleading since the real problem is the broken U.S. health care system. We pay more than twice as much per person for our health care as people in other wealthy countries. This gap is projected to rise rapidly in the decades ahead. If we paid a comparable amount for our health care we would be looking at long-term budget surpluses, not deficits.

It is ironic that Friedman unthinkingly repeats cliches about entitlements when the point of the article is adopting policies to ensure that the United States is among the HIEs (high-imagination-enabling country) rather the LIEs (low-imagination-enabling countries).

Ross Douthat Demands That Progressives Restrict Themselves to Loser Liberalism Print
Sunday, 12 February 2012 09:13

In a column discussing Charles Murray's new book, Coming Apart, Ross Douthat decries the fact the choices posed are between Murray's do-nothing libertarianism and the "liberal view" that:

"there’s nothing wrong with America’s working class that can’t be solved by taxing the wealthy and using the revenue to weave a stronger safety net."

Of course there is a more obvious progressive response that involves reversing the policies that have led to the massive upward redistribution of income over the last three decades. This would include opening up highly paid professions (e.g. doctors, lawyers, economists) to trade in the same way that we have opened up manufacturing to trade. This would put downward pressure on the wages of these professionals. That in turn would lower the cost of health care and the other services they provide, thereby raising the wages of ordinary workers.

We could also look to alternatives to patent protection to supporting research in prescription drugs. We pay close to $300 billion a year (2.0 percent of GDP) for drugs that would cost $30 billion in a free market. The difference of $270 billion a year is roughly five times as large as what is at stake with extending the Bush tax cuts to the wealthy.

The country could change rules on corporate governance so that CEOs don't get to effectively write themselves huge paychecks at the expense of other corporate stakeholders. If executives in the United States were paid in line with executives in other wealthy countries it would free up tens of billions of dollars for increased investment and higher pay for ordinary workers.

And, the government could end various forms of public subsidies for Wall Street banks, such as too-big-to-fail insurance. This would also save tens of billions of dollars a year.

There are many things that could be done to improve the situation of the white (and African American and Hispanic) working class that have nothing to do with tax and transfer policy. However, folks like Douthat want to restrict progressives to a loser liberalism agenda which he quite correctly points out is not very attractive.

The Post Carries Protectionism to a New Level Print
Sunday, 12 February 2012 08:48

The Washington Post is widely known as a hotbed of Neanderthal protectionism, strongly supporting measures that shield highly educated professionals from international competition. This has the effect of redistributing income from autoworkers, textile workers and other people who have been subjected to international competition by deliberate policy to the highly educated workers who enjoy protection.

It carried its protectionist agenda a step further in a lengthy front page business section piece that told readers that:

"It is no exaggeration to say that the success of the health-care law rests on young doctors choosing to do something that is not in their economic self-interest."

This view is also pounded home in the headline to the print version of the article:

"The health-care overhaul depends on primary-care doctors. They work more and earn less. Who'd sign up for that?"

Remarkably the piece never once mentions the possibility of filling any potential shortage of primary care physicians with an increased number of foreign doctors. The article reports that the median compensation for primary care physicians is $208,700 a year.

There is no shortage of smart people in countries like China, India, Mexico and elsewhere who would be happy to train to U.S. standards, become completely fluent in English and work for half of this wage. The gap in wages between the United States and these countries is so large that doctors from these countries would be far ahead of what they could earn in their home countries even if they only made $100,000 a year.

It is also simple to design systems that would repatriate a portion of the earnings of immigrant doctors to their home countries so that they can train 2-3 doctors for each one that came to the United States. This could ensure that the countries sending doctors to the United States also saw improvements to their health care systems.

Unfortunately the Washington Post, like most of the political elite, is so committed to its protectionist agenda that it does not want such possibilities to even be discussed. 

NYT on Future of Government Safety Net, Misses Growth and Health Care Stories Print
Sunday, 12 February 2012 08:20

The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn are the main factor behind the current deficit:

"Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt."

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a sudden urge on the part of politicians to increase the generosity and scope of these programs.

A second point that deserved more emphasis is the extent to which the projected budget problems in future years are the result of a broken health care system. The United States already spends more than twice as much per person for its health care as do people in other wealthy countries with little obvious benefit in outcomes. This gap is projected to grow rapidly in the decades ahead. If U.S. health care costs were in line with costs in other countries then the country would be looking at long-term surpluses, not deficits.

A third factor that provides an important backdrop to this discussion is the path of wage growth. The people interviewed for this piece expressed concern for their children and grandchildren's living standards based on the possibility that they would face higher taxes. However, the extent to which taxes impose a burden depends hugely on workers' before-tax income.

If workers get their share of projected productivity growth, then real wages will rise by roughly 1.3 percent a year, even assuming a higher portion of compensation going to pay health care benefits. This growth rate implies that wages will be nearly 40 percent higher after 25 years, roughly a generation. This would mean that if most workers got their share of productivity gains, then after-tax wages would be far higher for the next generation than for current workers even if the tax rate they paid increased substantially. 

This brings home the point that the real problem faced by the people interviewed for this piece and elsewhere in the country is that they have not been sharing in the gains of economic growth. If the current policies that enforce this pattern of income distribution persist, then workers in the future will find their taxes to be a serious burden, however the core problem is the set of polices (e.g. trade, Fed policy, patent policy etc.) that lead to an upward redistribution of income, not taxes.

Patents are Not Free Trade, #24,567 Print
Saturday, 11 February 2012 09:37

The Washington Post has an interesting piece about opposition to a trade pact between the European Union and India which could limit the ability of India to supply generic medicines for treating AIDS and other diseases. The article repeatedly refers to the agreement as a "free-trade" pact.

This is 180 degrees wrong. Patent protection is the opposite of free trade. It is a government-granted monopoly. Patent protection is a government policy for supporting innovation. Just as trade protection in other areas is a form of industrial policy.

Patent protection leads to the same sort of distortions as economists criticize from other types of protection except the magnitudes are much larger with patent protection. In the case of prescription drugs, it often raises prices by many thousand percent above the free market price. Most tariffs only raise the price of products by 20-30 percent. There are arguably more efficient mechanisms for supporting research on prescription drugs.

Trade Deficits and National Income Accounting for Deficit Hawks Print
Saturday, 11 February 2012 09:12

The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.

It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:

                               X-M = (S-I)+ (T-G)

This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.

That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.

That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villain the story.)

But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.

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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.