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When it Comes to Cutting Medicare and Social Security High Income Ain't What It Used to Be Print
Wednesday, 09 November 2011 05:51

In an article on the deliberations of the supercommittee the NYT told readers that a Republican plan would raise money by charging "higher Medicare premiums for high-income people." While the article does not give an exact cutoff for high income, it is likely that it is no higher than $80,000 and possibly as low as $40,000. (Many proposals for reducing Social Security benefits for "high income" beneficiaries would lower benefits for people with incomes of just $30,000.)

It is worth noting that "high income" can mean something very different when the topic is the benefits that workers get in retirement than when the topic is income taxes. Most major media outlets have run pieces questioning whether $250,000 (the floor set by President Obama for people subject to tax increases) is really wealthy.

The reason that the cutoffs for benefits cuts are fairly low is that there are few elderly households with high incomes and per person benefits are not very different for the highest income household and the lowest income household. If $250,000 were set as a floor for subjecting seniors to benefit cuts, it would save almost no money. The only way to save substantial money from this sort of means-testing is by cutting benefits for seniors who anyone would view as middle class.  

The Sovereign Debt Crisis and the Problem of Political Culture In Europe Print
Tuesday, 08 November 2011 08:31

The New York Times has a front page piece that discusses the debt crises facing Greece and Italy and discusses them in the context of "unresponsive political cultures." While both countries have serious problems with tax evasion and political corruption, this is not the political culture that most immediately threatens the financial stability of the euro zone and the world.

The most obvious threat stems from the political culture in Germany, which is driving the policy coming out of the European Central Bank (ECB). While it has long been obvious to observers across the political spectrum that the solution to the debt problem involves restructuring of the debt of most heavily indebted countries, guarantees of the sovereign debt of the other heavily indebted countries, and a strongly stimulative monetary and fiscal policy to allow countries to grow as they make reforms, Germany's political culture is preventing the ECB from adopting a reasonable policy toward the situation.

Instead, it has been fixated on trying to punish the debtor countries. This has made matters worse, as austerity measures slow growth both within the heavily indebted countries and across the continent. Slower growth leads to larger deficits, causing these countries to consistently miss their deficit targets. 

The German political culture also seems to include a bizarre paranoia about inflation. This paralyzing fear can be incredibly damaging in the current situation. If the NYT wants to explain how political culture is worsening the crisis in the euro zone it has focused on the wrong countries.

Housing Vacancies Still Near Record High Print
Tuesday, 08 November 2011 06:34

Perhaps I missed it, but I didn't see any coverage of the Census Bureau's release of data on vacancy rates for the third quarter. It's a mixed picture.

The vacancy rate for rental units had fallen sharply in the second quarter from 9.7 percent to 9.2 percent. However this was completely reversed in the latest data, which showed a 9.8 percent vacancy rate. This is still down from the 11.1 percent peak reached two years ago, but far above historic vacancy rates. The vacancy rate for ownership units was little changed at 2.4 percent. This is down from a peak of 2.9 percent in the fourth quarter of 2008, but almost a full percentage point above the average from the pre-bubble period.

The vacancy data certainly suggest that any hopes of an upturn in housing any time soon are seriously misplaced. There is along way to go before the excess supply is depleted.
David Brooks Has Not Heard of Medicare Advantage Print
Tuesday, 08 November 2011 05:22

That is what readers of his column touting Mitt Romney's Medicare plan would likely believe. Romney's plan calls for allowing people to opt for private insurers instead of the traditional Medicare system. This is already allowed, with beneficiaries being allowed to sign up with private insurers under the Medicare Advantage program. The Congressional Budget Office estimates that Medicare Advantage raises the per person cost by 5-10 percent.

The main difference between the existing Medicare Advantage program and the plan being pushed by Romney is that Romney would provide a voucher that would not be large enough to cover the full cost of the existing Medicare program.

All Things Considered Falls for Pew's Phony Generational War Story Print
Monday, 07 November 2011 21:12

All Things Considered did a major piece on a study from the Pew Research Center which showed substantial increase in the median wealth of people over age 65 from 1983 to 2009, while wealth among those under 35 actually fell. The Pew study was seriously misleading for several reasons.

First, the wealth of all groups except the young rose. In other words, it is not just the wealthy who saw an increase in their wealth over this period. The Federal Reserve Board's Survey of Consumer Finance (a different survey) shows that the median wealth of households aged 35-44 rose by almost 25 percent over this period, median wealth for households between the ages of 45 to 54 rose by 60 percent, and more than 100 percent for people between 55 and 64. Of course much of this wealth is simply defined contribution pensions (which do get counted) displacing defined benefit (DB) pensions,
which don't get counted.

It is remarkable that the researchers at Pew did not make a point of discussing the role of DB pensions since it is likely that the decline of DB pensions likely offsets much of the rise in wealth. It is also very misleading to highlight the percentage decline in the wealth of the young, since they had very little wealth even in 1983. If the median young household had $10 in wealth in 1983 and this fell to $1 in 2009, this would be a 90 percent drop in wealth. However, it would be foolish to highlight this decline. The basic story is that young people had little wealth in both periods. 

Why Does Robert Samuelson Have Such a Difficult Time Dealing With Reality Print
Monday, 07 November 2011 06:00

Robert Samuelson gave us a true Washington Post (a.k.a. Fox on 15th Street) classic in his column today. He tells us that the right is unrealistic because it thinks that it can solve the deficit problem by cutting government waste. The left is unrealistic because they think they can solve the deficit problem by cutting the military and taxing the rich. This means ..... drumroll please .....


Okay, as we know, the Post always looks for what they identify as the center of the political spectrum, which it substitutes for the truth. While Samuelson concludes that all right-thinking people support cuts to Social Security and Medicare and increased taxes on the middle class, let's try looking at the evidence instead of hunting for the political center.

First, the evidence suggests that there is no deficit crisis, there is a jobs crisis. We have more than 25 million people unemployed, underemployed, or out of the workforce altogether. This is causing us to lose nearly $1 trillion a year in potential output in addition to the enormous strain it imposes on the unemployed and their families. And the effect of prolonged unemployment is likely to leave many of these people permanently unemployed.

Meanwhile the bond markets keep yelling at us to borrow more money. The interest rate on 10-year Treasury bonds is just a bit over 2.0 percent. In other words, the evidence is that we need not do anything about the deficit any time soon. What we need to do is spend money on jobs programs, assisting state and local governments, infrastructure, retrofitting buildings to make them more energy efficient and on other important needs.

Okay, but one day we will have a deficit problem if the Congressional Budget Office's projections are correct. If the folks who looked for truth in the center instead looked for truth in the data, they would see the whole shortfall is due to our broken health care system. If we paid the same amount per person for our health care as people in other wealthy countries then we would be looking at huge budget surpluses, not deficits.

Sure, it's not easy to fix health care, but is that an excuse for not talking about it? And some things may not be all that difficult. What's wrong with a little free trade in health care? Does the center have to be so protectionist?

In terms of other deficit issues, if we got our military budget to the same share of GDP as it was in pre-September 11th days we would save more than $2 trillion over the next decade. If we imposed a tax on financial speculation, like the one that the UK currently has on stock trades and the European Union is considering for a wide range of assets, then we can get as much as $1.5 trillion in revenue over the next decade.

And we can have the Federal Reserve Board simply hold all those bonds that it has been buying the last few years as part of its quantitative easing program. The interest paid on these bonds is refunded from the Fed to the Treasury, meaning that it has no net cost to the government. That could save us around $800 billion in interest over the decade.

In short, if we look at the evidence rather than hunt for the political center, we see a very different world. We see first that there is no current deficit crisis. Then we see that there are many possible solutions to whatever deficit problem may exist in the long-term that do not require whacking middle class and lower income workers who have been the victims of national economic policy over the last three decades.

WAPO Book Section Reviews Michael Brown on Disaster Relief and Bill Clinton on the Economy Print
Sunday, 06 November 2011 08:06

Given where we are today, Bill Clinton should be the second to the last person in the world (after Alan Greenspan) to be offering advice on the economy. During his presidency he set in motion the forces that led to the economic disaster that we are living through today.

Clinton gloried in the stock market bubble that led to a massive consumption boom (i.e. discouraged savings). News Flash! Bubbles burst, and the collapse of the stock market bubble gave us the recession in 2001. In terms of job creation, this was at the time the worst hit to the economy since the Great Depression. We didn't pass the pre-recession level of employment until February of 2005.

The other part of this mix was the massive trade deficit created by the Rubin-Clinton high dollar policy. The value of the dollar is the overwhelming determinant of the trade balance. The trade agreements and "competitiveness policies" that DC-types spend all their time on don't amount to a hill of beans by comparison.

By saddling the country with an over-valued dollar, Clinton guaranteed a large trade deficit. This trade deficit in turn guaranteed that we would have either large budget deficits or negative private savings. We had the latter in a big way in 2004-2007 with near zero household savings and a bubble driven building boom. And now we are living with the fallout.

Of course President Bush cannot escape blame since he had plenty of opportunity to turn the economy from this course and instead looked the other way. However it is remarkable that the Post could review Bill Clinton's book without ever noting the disastrous outcome from the policies he promoted while in office. Undoubtedly Michael Brown looks forward to the Post's review of his book. Heckuva job Post!

The New York Times Still Has Not Heard About the Recession Print
Sunday, 06 November 2011 07:33

It sometimes hard to get news about the economy over in the middle of New York City. Communications ain't what they used to be. That is what people might conclude after reading David Leonhardt's piece telling us that our big problem is that the United States and governments in Europe have promised too much to their populations.

Leonhardt tells us:

"On the most basic level, affluent countries are facing sharply increasing claims on their resources even as those resources are growing less quickly than they once were.

"The increasing claims come from the aging of the population, while the slowing growth of available resources comes from a slowdown of economic expansion over the last generation."

The problem that we have too many demands on our scarce resources seems more than a bit otherworldly when both the U.S. and European economies are operating way below potential output. The Congressional Budget Office (CBO) puts the United States GDP at about 6 percent below its potential output. This means that the country has the "available resources" to produce about $900 billion more a year, if only we had the demand for it.

In fact, CBO's projections put the cumulative loss from this downturn at over $6 trillion. This is more than the projected 75-year shortfall in Social Security that we hear about so much in the media. It certainly seems more than a bit bizarre that at a time when the country faces a massive shortfall in demand, the NYT is lecturing us about too many demands on our resources.

It is also worth noting that, at least in the U.S. case, the projected long-term budget problem is due to our broken health care system. If our per person health care costs were comparable to those in any other country then we would be looking at long-term budget surpluses, not deficits.

While the health care industry is incredibly powerful in the United States, making cost reductions difficult, it is in principle possible to open the sector to trade, which would allow people in the United States to take advantage of the more efficient health care systems in other countries. Unfortunately the NYT and most other major media are such hardcore protectionists when it comes to the health care industry, they do not allow the topic of freer trade in health care to even be discussed.

Finally, this piece tell us that at its core this debate is about philosophy:

"Everywhere, though, the debate is about much more than just partisan advantage or the next election. It is a philosophical debate."

The only evidence for this assertion is a quote from Republican Senate leader Mitch McConnell. There is nothing obvious philosophical about this debate. The issue is whether we are going to cut benefits like Social Security and Medicare that the overwhelming majority of the working population depends upon now or expects to in the future. The protection of these programs is supported by large majorities of every demographic and ideological group. Even large majorities of self-identified conservatives and Tea Party supporters are opposed to cuts in these programs in poll after poll.

Of course paying for the programs will require some amount of additional tax revenue (presumably mostly from upper income taxpayers) and also restructuring of the health care system in ways that will hurt the incomes of insurers, drug companies, medical instrument manufacturers, and doctors. These powerful interest groups will fight the effort to reduce their incomes in any way they can.

Since they are a small minority of the population it is understandable that they would want to confuse matters by turning this into a debate over philosophy. However there is nothing obviously philosophical about whether we should pay more than necessary for prescription drugs and medical equipment so that some people can get very rich.

Houses Can Be Rented Print
Saturday, 05 November 2011 12:29

I hate to take issue with someone making an argument that I essentially agree with, but Joe Nocera's case for principal reduction does have a major flaw. The gist of Nocera's argument is that people are losing their homes and that because of tighter lending standards, new buyers will not be able to replace them. He argues that this will lead to massive oversupply and therefore further downward pressure on prices.

Okay, boys and girls, you have 3 minutes to figure out what's wrong with this picture.

Time up? Okay, can you say "rent?" You see, if it really proves to be the case that we get the promised glut of ownership units then something magical happens to them. They become rental units. In the story described here we should see rents rising sharply relative to sales price since so many more families are now restricted to the rental market.

And, if rents are rising and people can't sell their homes, then they rent them out: horrible problem solved. (Those who think this doesn't happen should look at the data. Almost one third of rental units are already single family homes.)

So banks should be persuaded and pressured to do principal reductions. They should also be persuaded and pressured to allow people to stay in their homes as renters following foreclosures. Nocera is right on the policy, but he's stretching a bit in making the argument.

Bill Clinton, the Person Who Set the Economy on Its Bubble Driven Path, Has Economic Advice for the Country Print
Saturday, 05 November 2011 08:02

The Post reports on a new book by President Clinton which offers economic advice to the country. While the book notes in passing that Clinton's policies contributed to the economic crisis by deregulating Wall Street, it failed to point out that Clinton's policies were actually central to the disaster the economy is now facing.

Clinton promoted both the growth of the stock bubble and the over-valuation of the dollar. The latter came about when his administration organized the "saving" of East Asia following its financial crisis in 1997. The harsh terms of the bailout required the countries of the region to run huge trade surpluses in order to meet their payments. This meant raising the value of the dollar against their own currencies.

Other developing countries wanted to avoid ever being in this situation so they too began to accumulate reserves at a huge pace after 1997 by keeping down the value of their own currencies against the dollar. This led to the huge run-up in the dollar and therefore the large trade deficit that we saw in the last decade and continue to see today.

The demand gap created by the trade deficit was filled by the housing bubble in the last decade. With the bubble now burst it can only be filled by government budget deficits until the dollar falls enough to bring trade closer to balance. Given the enormous disaster that resulted from his economic mismanagement (which could have been reversed had anyone in the Bush administration been awake), it is highly ironic that President Clinton would write a book offering economic advice to the nation.

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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.