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Germany Does Not Have the Second Highest Tax Rate in Europe and the European Central Bank Is Incompetent Print
Tuesday, 20 September 2011 06:48

The Washington Post has a lengthy article on Germany which touts the austerity measures the country imposed in the last decade. It tells readers that Germany has the second highest tax rate on ordinary workers based on a chart that strangely excludes Denmark and Sweden, the two highest tax countries in Europe.

The article also never mentions the role of the European Central Bank (ECB) in the current economic crisis hitting most of Europe. The crisis was the result of the failure of the ECB to take steps to counteract housing bubbles before they grew to dangerous levels.

It has been made worse by the relatively restrictive monetary policy pursued by the ECB after the collapse of the bubble. While the Fed pushed its short-term rate to zero and engaged in several rounds of quantitative easing to bring down long-term interest rates, the ECB never allowed its overnight rate to fall below 1.0 percent and actually raised the rate to 1.5 percent in the spring. This has both slowed growth and increased the borrowing cost of heavily indebted countries.

The failure to mention the role of the ECB might lead readers to believe that the excessively generous social benefits are responsible for the European economic crisis. They are not.  

 
The Loss of Middle Class Jobs Is By Design Print
Tuesday, 20 September 2011 08:53

Marketplace radio had author Don Peck on this morning to tell listeners that middle class jobs are disappearing because of globalization and automation. This is not true.

The reason why factory workers lose their jobs to people in developing countries rather than doctors and lawyers is that we designed trade rules to make our factory workers compete with low-paid workers in China, Mexico and other developing countries. We largely protect our doctors and lawyers from the same sort of competition.

If we had designed our trade policy to put our highly educated professionals in direct competition with their counterparts in the developing world, they would be no more successful than our factory workers. The difference is that professionals have enough political power to mostly preserve the barriers that protect them from such competition.

The over-valued dollar also worsens the situation for U.S. factory workers. If the dollar adjusted to a level that allowed for balanced trade we would have more than 4 million additional jobs in manufacturing.

 
The NYT Lumps Together Social Security and Medicare Again Print
Tuesday, 20 September 2011 05:10

The NYT did the old "entitlements" bashing in a budget piece today. In the Congressional Budget Office's Alternative Fiscal Scenario, which most analysts are using as the basis for budget debates, Social Security outlays are projected to increase by 25 percent as a share of GDP over the next two decades, from 4.8 percent to 6.0 percent. And all of this increase in spending will be covered by the bonds held in the Social Security trust fund.

By contrast, Medicare outlays are projected to increase by almost 70 percent, measured as a share of GDP, from 3.6 to 6.0 percent, in the Alternative Fiscal Scenario. The Medicare trust fund could only cover a small fraction of this projected rise.

These are qualitatively different situations and it is misleading to lump the two programs together as this article does.

 
Austerity and Growth Are Contradictions: Tell the NYT Print
Tuesday, 20 September 2011 04:58

The NYT missed much of the story in its report on the likelihood of a default by Greece. One of the main factors exacerbating the plight of Greece and other heavily indebted countries in the euro zone is the relatively contractionary policies pursued by the European Central Bank (ECB), ostensibly to fight inflation.

If the ECB had a more expansionary monetary policy, the additional growth would increase tax collections in Greece and other countries. It would also reduce payments for unemployment benefits and other transfer programs.

In addition, an easier monetary policy would reduce the interest burden on heavily indebted countries. For example, if the ECB followed the example of the Fed, the Greek government would be able to borrow at a near zero interest rate.

Finally, if the ECB allowed the inflation rate in the euro zone to rise to 3-4 percent it would facilitate the necessary adjustment process that would allow Greek goods and services to become more competitive in the euro zone. If prices and wages in the euro zone were rising at a slightly faster pace then Greece can improve its relative position by keeping its wage and  price growth near zero.

By contrast, with very low inflation, wages and prices in Greece must actually decline for it to increase its competitiveness. It is very difficult and costly to bring about this sort of deflation. It usually requires many years of high unemployment. 

The NYT neglected to mention these ways in which the policies of the ECB have contributed to the crisis in Greece and other heavily indebted countries.

 
New Oil Isn't Quite the Transformation the NYT Implies Print
Tuesday, 20 September 2011 04:40

The NYT implied that shale oil production and new oil sources elsewhere in the western hemisphere will transform oil production and use in the United States. For example, it notes that production from shale oil could exceed 2 million barrels a day by 2020 and then adds:

"The United States already produces about half of its own oil needs, so the increase could help it further peel away dependence on foreign oil."

Actually, this oil will largely replace declining yields from older fields in Alaska and elsewhere. The United States was not especially dependent on Middle East oil even before the new production in the hemisphere cited in this article. Only a bit over 20 percent of the oil imported in the United States came from the Middle East even a decade ago.

 
David Brooks Has Not Heard About the Affordable Care Act Print
Tuesday, 20 September 2011 04:20

That's what readers of his column complaining about President Obama's speech on the budget must conclude. He is upset that Obama:

"whispered about seriously reforming Medicare but then opted for changes that are worthy but small."

If Brooks has heard about the Affordable Care Act (ACA), he would know that it actually provides for large cost controls in Medicare. According to the Medicare trustees report, these cost controls would eliminate almost 80 percent of the long-run deficit projected over the program's 75-year planning horizon.

Brooks could read about these changes in the Congressional Budget Office's (CBO) long-term budget projections. CBO projects that future deficits will be manageable if the controls in the ACA are allowed to take effect. However, CBO concluded that Congress will reverse itself and not allow the controls to bite. However, it seems odd to blame President Obama for the fact that future Congresses might reverse the cost controls that he put into the Medicare program and it is simply wrong to claim that he did not do anything to restrict costs.

It is also worth mentioning that Brooks misrepresents the relative tax burdens of the wealthy and the middle class. He excluded payroll taxes from his calculations, which are extremely regressive. Also, there are a small number of very wealthy people who do in fact pay very low tax rates because the bulk of their income comes from capital gains. This is exactly the situation that President Obama described.

 
NPR Tells Us How Much Deficit Reduction We Need Print
Monday, 19 September 2011 05:11

NPR told listeners that the $1.2 trillion in deficit reduction being sought by the congressional super committee is inadequate, that in fact we need $4 trillion. It's great that they got the word from God on this one.

Those of us who look at numbers might think otherwise. The financial markets are saying loudly that there is no problem with current deficits, otherwise they would not be lending money to the United States for 10 years at interest rates of just 2.0 percent. The numbers also offer many examples of countries with (including the United States) which have had much larger debt to GDP ratios and have had no problem borrowing in financial markets.

The piece concluded by telling listeners that we may end up going 14 months until the next election without getting much done. Actually, for people who pay attention to the economy, the main way in which we are not getting much done is in reducing the unemployment rate. This is far and away the most important problem facing the economy in the minds of the vast majority of the public, even if not at NPR.

It is also worth noting that the failure to reduce the unemployment rate will reduce capacity and employment in the long-term. This was pointed out by Paul Krugman in a column today and by David Rosnick in a blogpost last week.

 
Patent Monopolies Lead to Enormous Economic Waste Print
Monday, 19 September 2011 04:13

It would have been useful to include the view of an economist in this article that reports on how China and India are now able to produce low-cost versions of bio-tech cancer drugs. These drugs sell now for several thousand dollars per dose as a result of government granted patent monopolies.

Patent monopolies lead to enormous market distortions in the same way as other barriers to trade. However, the impact of patents is much larger since they have a much bigger effect on prices. It is rare that tariffs raise the price of goods by more than 20-30 percent. By contrast, patents often raise the price of protected drugs by several thousand percent.

The huge profits created by patent rents are the cause of kickbacks to doctors, misleading information on the safety and effectiveness of drugs, and government corruption that extends the length and scope of patent rents. These distortions lower the quality of health care and raise its cost. There are far more efficient mechanisms for supporting medical research.

This article also errs in asserting that countries can only issue compulsory licenses for drugs in cases of emergencies. The terms of the WTO allow for compulsory licensing under fairly general conditions.

 
Paul Volcker's Recollection of the History of Inflation is a Bit Weak Print
Monday, 19 September 2011 03:54

Former Federal Reserve Board Chairman Paul Volcker lectured readers on the dangers of inflation in a NYT column today. He warned that a little bit of inflation invariably grows to a lot of inflation, which then carries a huge cost to contain.

Actually this has not in general proven to be the case. The one time in the post-war period where inflation clearly became excessive in the United States was in the 70s. This was due to a number of extraordinary events, including large oil price increases associated with the formation of OPEC and the Iranian revolution, a huge wheat deal with the Soviet Union, and a mis-measurement of the rate of inflation that got directly translated directly into wages and other prices as a result of wide-spread indexing. 

Even in this case, the cost of bringing inflation down with the 1981-82 recession was minor compared to the costs that the country is now enduring as a result of the current prolonged downturn. It is hard to see how any careful analysis of risks and costs would support Mr. Volcker's warnings on inflation.

It is worth noting that the financial sector might view the equation differently. Its assets are directly devalued by even modest rises in the rate of inflation. For this reason, the financial industry tends to be strongly opposed to inflation even at the cost of high unemployment.

 
Republicans Are Not Being Truthful When They Blame "Uncertainty" for Lack of Hiring Print
Monday, 19 September 2011 03:11

The Washington Post has a front page article outlining President Obama's plans for deficit reduction. It then quotes Representative Paul Ryan blaming "uncertainty" for slow growth and high unemployment.

If it were the case that firms would actually be hiring except for uncertainty then we would expect to see firms increasing the average number of hours worked per workers and also turning to temporary workers. The argument here is that firms are seeing demand for labor, but they are scared to take on the commitment of hiring another worker because they think that President Obama would regulate them to death. This means that they would seek to fill this demand through alternative routes.

The data contradict the uncertainty story. Average weekly hours worked is still about 1 percent below its pre-recession level when firms presumably did not suffer from uncertainty.

avg.hours

Source: Bureau of Labor Statistics.

The data on temp employment is even less friendly to the uncertainty story. Temp employment is still down more than 15 percent from its pre-recession level.

temp_emp

Source: Bureau of Labor Statistics.

In short, the evidence does not support Representative Ryan's assertion that uncertainty is a major obstacle to hiring and recovery. It would have been appropriate to call readers attention to the fact that the data contradicts Ryan's assertions. Post reporters have the time to evaluate the evidence, the vast majority of its readers do not.

Serious news stories, unlike this one, do not include in their first sentence a reference to "the nation’s rocketing federal debt." Such phrases are best left for the opinion pages.

 
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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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