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Keynes, Hayek, and Rand: NPR's False Symmetry Print
Wednesday, 16 November 2011 05:29

Morning Edition did a three part series featuring segments on Ayn Rand, Friedrich Hayek, and John Maynard Keynes. In addition to the fact that two of these three are extreme conservatives, the pieces create a false symmetry on the influence of these three thinkers.

Keynes' work provides the basis for modern macroeconomics. The vast majority of the economics profession works within a framework that was established by Keynes, regardless of their political leanings. The influence of Rand and Hayek is nowhere near comparable.

Hot Air and the Fracking Jobs Boom Print
Wednesday, 16 November 2011 05:02

Most major news outlets have done pieces touting the jobs boom associated with fracking. The story goes that allowing this relatively new form of drilling will both lower energy prices in the United States and also lead to an employment boom in the regions where the drilling takes place. And, how do we know there will be a boom? Well, the industry said so.

It turns out that the employment boom ain't all it is cracked up to be. The environmental group, Food and Water Watch, released a report yesterday that examined job projections for New York, which is considering ending a ban on fracking. The industry had projected that fracking in western New York would create more than 60,000 new jobs. Food and Water watch looked at the experience in the adjacent Pennsylvania counties, which allow fracking, and concluded that the potential job gains for New York are one-tenth as large, or about 6,000. And, this is before taking account of any jobs that may be lost due to environmental damage (e.g. in tourism associated with fishing, hunting, and camping).

In short, for these counties there is not much of an issue of jobs versus the environment. The number of potential jobs at stake are relatively few and most are likely to go to people living outside the region in any case.

[Disclosure: The researcher for this report was my wife, Helene Jorgensen.]

Do Social Security Costs Have to Be "Soaring" in Washington Post News Stories? Print
Tuesday, 15 November 2011 05:42

That's the question millions are asking. In an article on the supercommittee this morning we find a sentence like:

"Republicans indicated a willingness to do so [raise more revenue], aides said, but only in exchange for additional reductions to soaring Social Security and Medicare costs (emphasis added)."

A real newspaper would have just said that the Republicans were demanding "additional reductions in Social Security and Medicare costs." That would provide the same information as the Post's sentence in less space and without the editorializing.

Why Does NPR Rely On Economic Experts Who Only See Things In Hindsight? Print
Tuesday, 15 November 2011 05:19

Morning Edition included a discussion this morning (no link yet) with WSJ economics editor David Wessel and the Economist's economics editor Zanny Mintos Beddes. When the discussion turned to housing, David Wessel said that in retrospect we underestimated the extent to which housing would be a drag on the economy.

Actually, those who understood the housing market were saying at the beginning of the downturn and before that the collapse of the housing bubble would be a serious and longterm drag on the economy. It was easy to see that the loss of $8 trillion in housing wealth would substantially reduce consumption and that the enormous overbuilding during the boom was going to lead to a prolonged period of depressed construction. Wessel simply failed to study the factors driving the economy. There was no need for hindsight on this one.

At one point Zanny Mintos Beddes held out the possibility that resurgent residential construction might provide a boost to the economy in the near future. That seem unlikely since the vacancy rate is still near record highs.

[I just stumbled onto this one by chance. People who did their homework did not need hindsight.]

Post Goes After the Job Killing Regulation Myth Print
Monday, 14 November 2011 10:29

Two years ago the Republican party adopted a requirement that every time a party member used the word "regulation" it had to be preceded by the phrase "job-killing." Those who failed to comply were thrown out of the party.

The Post has a nice front page piece looking at the evidence that regulations are in fact serious job killers. The piece reports what almost all economists would acknowledge: regulations both eliminate and create jobs. Their net effect tends to be small.

Tell that to your favorite job creator.

Robert Samuelson Misses the Fix to the Housing Market Print
Monday, 14 November 2011 06:17

Some folks are still missing the $8 trillion housing bubble and Robert Samuelson seems to be one of them. In reviewing the housing market it is important to notice that there is a very different story by regions. In many areas (e.g. Las Vegas and Phoenix), bubbles have fully deflated and we should look for house prices to stabilize and even rise some in the years ahead. In other areas, like Los Angeles and Boston, there is likely still some air in the bubble. In these markets, prices are likely to fall in the years ahead. This can be seen as a good thing, since it will make homes more affordable for new buyers.

It would be foolish to envision a single national housing market since different regions have very different dynamics. As a result, it would be very wrong-headed to try to design a single policy -- for example promoting higher prices -- for the nation as a whole.

Do the Washington Post's Analysts Have Names? Print
Monday, 14 November 2011 06:01

A front page Washington Post article told readers:

"Analysts, however, said the United States could risk another downgrade of its credit rating and do further damage to business and consumer confidence if the supercommittee process implodes in a chaotic display of partisan rancor — for example, if a deal is approved by the supercommittee but is killed on the House floor. And analysts are deeply concerned that lawmakers could 'de-trigger' the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt."

It would be interesting to know who these analysts are so that readers could know if these are the same people who could not see the $8 trillion housing bubble that collapsed and wrecked the economy. It would be also worth knowing if these analysts were among the group who claimed two years ago that large deficits would send interest rates on Treasury bonds soaring. Readers should be told if the experts whom the Post relies upon for its stories are primarily known for their misunderstanding of the economy.

The piece also includes the unsupported assertion that:

"the numbers obscure a larger ideological divide. Democrats are willing to trim spending on health and retirement programs in exchange for an overhaul of the tax code that would generate significantly more revenue, with most of the burden borne by the nation’s wealthiest households.

"Republicans want to overhaul the tax code but lower the top rate from 35 percent to 28 percent and leave preferential rates untouched for capital gains and dividends. Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, said that approach would almost certainly guarantee lower taxes for the wealthy."

There is no evidence whatsoever in this statement or elsewhere in the article of any ideological divide. The evidence is that the Republicans are more directly responsive to the demands of the wealthy whereas Democrats feel the need to also be responsive the interests of other segments of the population. If there are ideological issues here, the piece offers no insight as to what they might be.

Ayn Rand Is Not a Supporter of Free Markets Print
Monday, 14 November 2011 05:43

It is misleading to imply, as Morning Edition did, that Ayn Rand's philosophy was about free markets. The idea of promoting oneself at the expense of others, advocated by Rand, is consistent with taking advantage of whatever support one is able to get from the government in this process.

For example, the top executives of Wall Street banks are happy to take advantage of the implicit government guarantee given to too-big-to-fail banks as well as the explicit guarantee that is given through deposit insurance in addition to the support given by the Federal Reserve Board through access to its discount window and other facilities. It is politically advantageous for people who benefit from these and other types of government support to claim that they are advocates of free markets even if it is not true.  

The Supercommittee Looks to Impose a Much Bigger Hit to Seniors Than the Wealthy Print
Monday, 14 November 2011 05:20

The NYT reported that the supercommittee remains deadlocked on taxes. It reports that Republicans are willing to agree to $250-$300 billion in tax increases by eliminating loopholes in exchange for reducing the top tax rate to 28 percent instead of allowing it to rise back to the Clinton era level of 39.6 percent. While the piece notes that this would be a windfall for high income taxpayers, it would have been worth reminding readers that the sums being proposed are less than 2 percent of the projected $17 trillion adjusted gross income of the richest 1 percent over the next decade. By contrast, there is bi-partisan support for cutting the annual Social Security cost of living adjustment by an amount that would reduce average benefits by close to 3 percent.

The piece including comments from Morgan Stanley director Erskine Bowles without identifying his association with the giant Wall Street bank.

Dealing With the Budget Deficit: Does the Middle Class Have to Take the Hit? Print
Sunday, 13 November 2011 08:42

Adam Davidson has a piece in the NYT magazine about how the middle class will have to take a hit to deal with the country’s deficit. It’s a bit quick to reach this conclusion.  

First, the piece too quickly dismisses the possibility of getting substantial additional tax revenue from the wealthy. It presents the income share for those earning more than $1 million as $700 billion, saying that if we increase the tax rate on this group by 10 percentage points (from roughly 30 percent to 40 percent), then this yields just $70 billion a year.

However, if we lower our bar slightly and look to the top 1 percent of households, with adjusted gross incomes of more than $400,000, and update the data to 2012 (from 2009), then we get adjusted gross income for this group of more than $1.4 trillion. Increasing the tax take on this group by 10 percentage points nets us $140 billion a year. If the income of the top 1 percent keeps pace with the projected growth of the economy over the decade, this scenario would get us more than $1.7 trillion over the course of the decade, before counting interest savings. Of course there would be some supply response, so we would collect less revenue than these straight line calculations imply, but it is possible to get a very long way towards whatever budget target we have by increasing taxes on the wealthy.

There are also other ways to address much of the shortfall. In the case of defense, the baseline projects that military spending will average 4 percent of GDP over the next decade. We had been spending 3 percent of GDP on defense in 2000, and the share had been projected to drop further over the course of the decade. If military spending averaged 3 percent of GDP over the next decade, that would save us $2 trillion before interest savings. There are reasons that people may not want to go that low (also reasons to go lower:  CATO used to advocate a budget about half this size), and it may take time to reduce Defense Department budgets, but it should not be absurd to imagine that we could get by with the same sort of military budget (relative to our economy) that we actually had a decade ago.

Another way in which we could have substantial savings that would be relatively painless is to have the Fed simply keep the bonds that it has purchased as part of its various quantitative easing operations. It currently holds around $3 trillion in bonds. The interest on these bonds is paid to the Fed and then refunded to the Treasury. Last year it refunded close to $80 billion in interest. The projections show that the Fed will sell off these bonds over the next few years so that these interest earnings will fall sharply. However, if it continued to hold the assets, over the course of a decade it could save the government around $800 billion in interest payments. The Fed might have to take other measures to contain inflation (the immediate reason for selling the assets would ostensibly be to raise interest rates and slow the economy), but it has other tools to accomplish this goal, most obviously raising reserve requirements. (The Chinese central bank uses reserve requirements as a main tool for controlling inflation.)

Finally, the big story in any serious discussion of the long-term budget is health care. We pay twice as much per person as people do in other wealthy countries. Since more than half of the tab for our health care is paid by the government, our broken health care system becomes a budget problem. If we paid the same amount per person for our health care as people in other wealthy countries, we would be looking at long-term budget surpluses rather than deficits. The reason that we pay so much more is not that we get better outcomes – we don’t generally. Rather it is that we pay too much to drug companies, hospitals, medical specialists, and others in the health care industry.

We can’t keep on this course on either the public or private side. The real question is whether we look to save money by having people get fewer services or we look to save money by paying providers less. The former could mean, for example, giving seniors a Medicare voucher that we know will not be sufficient to cover the cost of care for most people. In this case, they will just have to do without some amount of care.

The other route involves restructuring the health care system. This is incredibly difficult politically as was seen in the debate over President Obama's health care plan. Nonetheless, in the long-run serious reform is the only option, since the alternative is that large numbers of people (including very middle class people) will not be able to get decent care.

One route to get around the political obstacles is to rely on trade. (Here is a short piece I wrote on trade in health care with Jagdeesh Baghwati.) If we make it easy for people to go abroad for health care and open our doors to qualified foreign doctors, we will eventually be able to undermine the ability of the providers’ lobbies to block reform.

Even before trade has much impact on the structure of the health care industry there are enormous opportunities for large budget savings in health care costs that focus on reducing payments to providers (e.g. lower prescription drug prices in Medicare). These payment cuts would not in any obvious way lead to reduced services.

In short, there is little reason to be talking about imposing increased burdens on the middle class any time soon. For the near term, the budget deficit is clearly not a problem. The financial markets are willing to lend the country large amounts of money at very low rates. Over a longer term, the deficit will pose more of an issue, but most of this pressure will come from health care costs. If these costs can be contained, and we get additional revenue from the top 1 percent and restrain the military budget, then the need for the middle class to bear additional burdens can be pushed out well into the future.

At some point, we likely will need more revenue from the middle class since we will probably want to increase government spending in some areas like infrastructure, education, and research and development. However, this is not a near-term prospect and quite possibly not even something that will be necessary over the course of a decade. Furthermore, if the need for additional revenue comes at a time when the unemployment rate is again down in a 4-5 percent range and real wages are rising, it will be much easier for the middle class to bear.

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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.