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Greg Mankiw Gets It Wrong on the Budget Print
Sunday, 23 October 2011 08:48

Mankiw told readers that:

"to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare."

Actually, all we have to do is to fix our private health care system. If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.

Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.

This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.

New York Times Editorializes on Budget Policy in Pension Article Print
Sunday, 23 October 2011 08:26

The New York Times used an article on Rhode Island's pension system to denounce "the nation’s profligate ways," which it warns will catch up with us. Newspapers are supposed to leave such editorializing to the opinion pages.

In fact there is good reason to believe that the nation's obsession with frugality is now catching up with us. The country lost close to $1.4 trillion in annual demand due to the collapse of the housing bubble. In the short term this can only be replaced by larger government deficits. However, because politicians in Washington do not want larger deficits, the economy is operating at close to 6 percent below its potential GDP and millions of workers are needlessly unemployed or underemployed. Since there is very limited support for the unemployed in the United States, this situation is a disaster for the millions of people facing it. 

The article also gets some of the facts on state and local pensions wrong. It tells readers:

"By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less."

Actually, the conventional measure to impute pension liabilities implies a shortfall of $1 trillion. Many economists are insisting in using a discount rate that implies the larger $3 trillion figure. If state and local governments actually adopted this discount rate and used it to guide policy, then it would mean large tax increases in the present, so that little or no money had to be contributed to pensions in the future. It is difficult to see how this would be good public policy.

The piece then complains that:

"But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent."

This statement is incredible because it is precisely because pensions had a low return in the last decade that it is reasonable to assume a higher return in the future. The big issue in pension accounting is stock returns. These will depend on the price to earnings ratio. At the start of the last decade the price to earnings ratio in the stock market was over 30. This implied that returns would be very low over any long period since stocks cannot possibly give their historic average 10 percent return (7 percent real), when the price to earnings ratio is already at such inflated levels. (This paper that I co-authored with Christian Weller provides a discussion of this issue.)

However, now that the market has fallen sharply relative to trend earnings, it is again plausible that stocks will provide 10 percent nominal returns in the decades ahead. In fact, it is almost impossible to describe a scenario in which the market provides a return that is substantially below this level.

False Paradoxes on Immigration Print
Sunday, 23 October 2011 07:48

The Post's Outlook section featured a piece by Roberto Suro and Marcelo Suarez-Orozco, a public policy and anthropology professor, respectively that purports to examine a paradox on the public's view on immigration. The piece tells readers:

"But our public disagreements are matched by private conflicts. When it comes to immigration, we are not only a divided nation — we have a divided brain.

"The national ambivalence is evident. A Gallup survey this year found that a majority of Americans, 53 percent, said it was 'extremely important' for the government to halt the flow of illegal immigrants at the border. Yet an even larger majority, 64 percent, said that illegal immigrants already in the country should be allowed to remain and become U.S. citizens if they meet certain requirements."

If there is a conflict in these views it is difficult to see what it is. It is difficult to understand how someone could want to see the flow of illegal immigrants continue. The people coming over the border under current conditions risk death in the desert, as well as being robbed or even killed by the coyotes who bring them over. Once in the country they live in an underworld with limited access to health care and education for their children and facing a constant fear of deportation.

If there is a conflict between wanting to see this flow of illegal immigration replaced by a legalized flow, and wanting for the people who have already made lives for themselves in the U.S. to be offered a path to citizenship, it is difficult to see what it is. 

Is the Double Dip Drifting Away? Print
Friday, 21 October 2011 07:12

One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed's manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed's coverage is a relatively narrow slice of the country (mostly eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere.

The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. It doesn't seem that this one received as much attention as the negative reading from last month. It would have been interesting to interview the double-dip forecasters to ask whether they had revised their assessment.

The other important data released yesterday was the weekly unemployment claims number, which again came in just over 400,000. This does not suggest strong growth, but it does suggest some amount of job creation, rather than the job loss we would see in a recession.

None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.

Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn't and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. And the media deserve much of the blame for being suckered.



Do Businesses Consider It Burdensome to Pay the Tax They Owe? Print
Friday, 21 October 2011 04:33

The NYT did some mind reading to better serve its readers telling us that businesses "consider" a law requiring a 3 percent withholding on federal contracts to ensure tax compliance to be "burdensome." The reason for this withholding is that many businesses cheat on their taxes. The government loses tens of billions of dollars a year to businesses who do not pay the income tax they owe.

Some people may be familiar with the requirement for withholding taxes, since they work for a living and employers are obligated under the law to have withholding. This requirement for government contractors is similar, except that it is almost certain to be lower than their actual tax liability.

However, the NYT told readers that businesses consider it burdensome to have to actually pay their taxes. It did not bother to tell readers why this withholding was there in the first place. In fact, the repeal of this provision can be viewed as a shameless pander to small businesses by politicians seeking their support in the next election.

The United States Owes China So Much Money Because China Is Keeping Down the Value of Its Currency Print
Thursday, 20 October 2011 07:06

The Washington Post has to find economics reporters and/or editors who know some economics. Then it would not print without comment a statement like:

"'The problem for the U.S. is they owe China so much debt,' he [Shi Yinhong, director of the Center on American Studies at Beijing’s Renmin University] said, referring to the Chinese government’s vast holdings of U.S. Treasury bonds, estimated at about $1.5 trillion."

This statement appears in the context of a discussion of whether the dollar is over-valued against the Chinese yuan. The way that China keeps up the value of the dollar is by buying up U.S. debt. The United States government would owe China exactly zero, if the Chinese government did not decide to buy up U.S. government debt with its dollar earnings instead of just selling them in international currency markets.

This is exactly what advocates of a lower dollar are complaining about. It is absurd for someone to say that the problem is not an over-valued dollar, but rather U.S. debt to China. These are the same problem -- and reporters and editors at major newspapers should know this.

The article also wrongly tells readers:

"China is well known as the home of counterfeit products — from imitation iPads and iPhones to fake software to pirated CDs and DVDs."

Actually, the vast majority of these products are not counterfeits, consumers know that they are not getting the brand name product. The products are unauthorized copies of brand products.

This is an important distinction. Consumers benefit from buying unauthorized copies at lower prices than the brand versions. Consumers are defrauded by counterfeit products. Consumers will assist law enforcement officials in exposing counterfeit operations, they will not help in shutting down sellers of unauthorized products.

If U.S. corporations succeed in excluding the sale of unauthorized copies in China's markets then it will lead to higher prices for Chinese consumers. This will reduce real wages and incomes and slow growth. The Post should have interviewed an economist who could have explained this to readers.

Post Invents Longstanding Problem of the Debt Print
Thursday, 20 October 2011 05:22

The Post wrongly implied that the problem of a large national debt has been longstanding. It told readers that the Congressional supercommittee is trying to "break the impasse over taxes that has long blocked aggressive action to tame the national debt."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

The NYT made the same mistake earlier in the week. The budget reporters and editors at these paper should familiarize themselves with the official deficit projections so they do not continue to make this mistake.

Spain's Growth Is Worse Than Expected Because It Is Reducing Its Deficit Print
Thursday, 20 October 2011 05:12
The NYT left this important fact out of a discussion of the state of the debt crisis in Europe. It noted that lower than projected growth is likely to cause Spain to miss its deficit target. The predicted result of cuts in government spending and increases in taxes in the middle of a severe downturn is lower growth. (GDP is equal to consumption, investment, government spending, and net exports. If government spending falls in the middle of a severe downturn, there is no obvious mechanism through which one of the other components would grow to fill the gap.) 
Social Security Tax Base Depends on Wages, Not Prices Print
Thursday, 20 October 2011 04:59
CNNMoney wrongly told readers that the rise in prices that provided the basis for the 3.6 percent cost of living adjustment for Social Security beneficiaries will also cause 10 million workers to pay more in Social Security taxes. The reason it gave was that this rise in prices would increase the cap on wage income subject to the tax (currently $106,800). Actually, the cap on wage income subject to the tax is determined by the increase in average wages, not the increase in prices.
NYT Does Name Calling on Europe Print
Thursday, 20 October 2011 04:35

An NYT news story told readers that it doesn't like Europe. That is the only thing that readers can conclude from an article that said Europe is "in economic and demographic decline."

While the collapse of the housing bubbles in Europe have impaired growth, just as they have in the United States, and the drive to austerity has further slowed growth, there is no reason to believe that Europe's economy will be condemned to permanent stagnation if it gets competent people at the European Central Bank and other policy positions.

Prior to the downturn, productivity growth in Europe had been little different than in the United States. If Europe can ever get competent economic managers, there is no reason to believe that its growth would not return to this path. Lower population growth (or decline) will actually help Europe since it will increase the ratio of capital to labor and reduce the stress on Europe's infrastructure and natural resources. In other words, the story here is really a failure of the people designing economic policy for Europe, not a failure of Europe.

This fact is reversed in an article that seems to be trying to tell readers that Europe is fundamentally broken. To make this point, it includes the bizarre assertion that:

"Technologically, it is behind the United States, but its pay scales are too high to be an easily competitive exporter."

The United States is running an annual trade deficit of roughly $600 billion, or 4 percent of GDP. By contrast, the European Union's trade is roughly in balance. It is not clear how the NYT has determined that Europe is having trouble competing, but it clearly is not using a market measure.

The article also misleads readers on the importance of China, saying that the EUs GDP is three times the size of China's. In fact, on a purchasing power parity basis, China's GDP is $11.3 trillion, roughly two-third's the size of Europe's.

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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.