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Umm, Representative Ryan's Plan Does Turn Medicare Into a Voucher Program Print
Thursday, 02 June 2011 05:16

The Washington Post reported that House Budget Committee Chairman Paul Ryan won applause from the Republican freshman caucus when he criticized President Obama for saying that Ryan's Medicare plan would turn the program into a voucher system. The Post should have reminded readers that Ryan Medicare plan does turn the program into a voucher system.

Ryan's plan gives beneficiaries a fixed amount on money that they can use to buy insurance in the private market. This is what most people would consider a voucher system. The Congressional Budget Office's projections indicate that it would raise the cost of buying Medicare equivalent policies by $34 trillion, approximately 5 times the size of the projected Social Security shortfall.

 
To Whom Did the Economy "Seemed Poised to Finally Strengthen?" Print
Thursday, 02 June 2011 05:01

That's what readers of the Washington Post front page article on the economy are asking. Those who know economics saw that house prices were falling and would continue to fall. This decline has eliminated close to $1 trillion in housing wealth since the peak reached last July. It will likely eliminate another $1 trillion by the end of the year. The winding down of the original stimulus package, coupled with state and local government cutbacks, was expected to be another major source of drag on the economy.

The boost provided by the Fed's QE2 policy was generally anticipated to be limited, lowering 10-year Treasury rates by perhaps 20-30 basis points. The net stimulus from the tax cuts was very modest, with the 2 percentage point cut in the Social Security tax providing only marginally more stimulus than the Making Work Pay credit that it replaced.

The problem appears to be the Post relies on experts who are poorly informed about the economy. This is the reason it failed to notify its readers of the dangers created by the growth of the housing bubble. It continues to be a major problem with its economic reporting.

It is also worth noting one other potential source of stimulus not mentioned in this article: a lower valued dollar. A lower dollar would make U.S. goods more competitive in world markets. This would stimulate the economy by reducing imports and increasing exports.

In the longer run it will be necessary to have the dollar fall to bring the trade deficit closer to balance. Until the trade deficit is brought down, then by definition the country must either have a large government deficit or negative private savings, or some combination of the two. This is implied by the fact that the trade deficit is equal to net national savings so that if the country is running a deficit, then the public and/or private sector must have negative savings.

 
Applying Arithmetic to the Mortgage 5 Percent Retention Rule Print
Wednesday, 01 June 2011 20:49

The bankers are warning of Armageddon if a rule from the Dodd-Frank bill is left in place that requires that retain a 5 percent stake in mortgages where the owner puts less than 20 percent down. In effect, that if the bank sells a loan into a security pool that had a down payment of less than 20 percent, it will be liable for at least 5 percent of the losses incurred on the mortgage if there is default.

While the bankers are portraying this as an ominous restriction that will prevent them from making loans to moderate-income homeowners, a little arithmetic suggests otherwise. Before the bubble, Freddie Mac estimated that its average loss on a foreclosed property was 25 percent of the mortgage's value.

If we assume that the mortgages in question will have the same 25 percent loss rate once the market becomes more normal, then this would imply a loss of 1.25 percent of the mortgage's value, given the bank's 5 percent stake. If one in ten of these mortgages go bad, then this implies an average loss of 0.125 percent on loans in this category.

However, this calculation assumes that the bank can sell off a mortgage with less than 20 percent down at the same price that it can sell off a mortgage with 20 percent or more down. Since this is almost certainly not true, then the loss to the bank from this provision would be somewhat less than 0.125 percent of the price of the mortgage. If this loss were fully passed on to homebuyers then the impact of this provision would at most be equivalent to raising the cost of a mortgage by 0.13 basis points, and almost certainly considerably less. Given this arithmetic, it is not plausible that this 5 percent rule will have any noticeable effect on the access of moderate-income families to mortgages.

 
Ruth Marcus Blames Private Medicare Insurers for the Lack of Innovation in the Pharmaceutical Industry Print
Wednesday, 01 June 2011 07:15

Of course she probably did not know that this is what she is doing in her hypothetical conversation between "Paul" and "Barack," but that is exactly what she is doing when she touts the lower than expected cost of the Medicare drug benefit. The main reason that the drug benefit cost less than expected is that drug prices in general have gone up less than expected. And, the reason that drug prices have gone up less than expected is that there have been very few new blockbuster drugs in last decade.

This means that even though the industry claims that it is spending more than ever on research, it has much less to show in the form of new drugs than it did 20 years ago. It seems a stretch to blame this lack of innovation on the private insurers offering the Medicare drug benefit, but we can't question a very serious person with a regular column in the Washington Post.

The rest of this hypothetical discussion is equally confused. Contrary to what it asserts, the vast majority of Democrats did not think it was okay to have just private insurers in the exchanges set up under the Obama plan. They pushed hard to include a good public option. However, they did not have the 60 votes to get a public option through the Senate.

And the comparison of the cost of the Ryan plan to the existing Medicare plan is not a hypothetical. The additional $34 trillion cost that CBO projected for buying Medicare equivalent policies is based on the actual history with Medicare Plus Choice and Medicare Advantage. How many times must this experiment be repeated before its results are accepted?

It is worth noting that there is a simple mechanism for saving large amounts of money under the Medicare system. The government could give beneficiaries a voucher that would allow them to buy into the health care systems of other countries with longer life expectancies than the United States. The beneficiary and the government could split the tens of thousands of dollars in projected annual savings. If the Post was not such an ardently protectionist paper it would support this program

 
The WSJ Gets Scary With Debt Print
Wednesday, 01 June 2011 05:09

The WSJ had a chart alongside an article on the House vote on raising the debt ceiling. The chart shows the debt ceiling through time. The ceiling is shown in nominal dollars. By not adjusting for the growth in the economy or even the rate of inflation, the chart makes the ceiling look hugely out of line with past levels.

That's a good practice if the point is to scare readers about the size of the debt. It is bad journalism. The debt ceiling was higher relative to the size of the economy during World War II and its aftermath.

It's also worth commenting on its reference to credit default swaps (CDS) as a reference to the risk that investors assign that the U.S. could default on its debt. In fact, the price of CDS on the U.S. debt imply nothing of the sort. If the government actually defaults on its debt, the issuer of a CDS on the debt will almost certainly be bankrupt, so the CDS would itself be worthless.

Rather than being a bet on the government defaulting on its debt, the price of a CDS on U.S. government debt should be viewed as a bet on how much people will be willing to pay for the CDS tomorrow. In this way the price of a CDS on U.S. debt can be viewed as comparable to the price of an awful painting by a very famous artist. No one actually wants the painting, but it may hold great value because other people are willing to assign it great value.  

 
The Washington Post Still Has Not Heard About the Housing Bubble Print
Wednesday, 01 June 2011 04:54

If the Washington Post sent reporters through northern Japan they would note the wrecked roads and buildings, the large number of deaths, the crisis at the nuclear power plants, but they would never notice the earthquake/tsunami that caused it all. That is what one can assume from its continued failure to notice the housing bubble.

Anyone who followed trends in house prices should not have been at all surprised by the drop in prices reported for March (the "double-dip"). Nationwide house prices are still close to 10 percent above their long-term trend.

No one -- as in not a single economist anywhere -- has presented a remotely plausible reason as to why we should expect house prices to diverge from their 100-year long trend. Given the continued near-record vacancy rates, and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling any time soon.

The Post should try to find at least one person who recognized the housing bubble (the largest asset bubble in the history of the world) for its articles on the housing market, instead of relying exclusively on people who were caught by surprise by its collapse.

 
NYT Tells Readers That a Mother "Seems" Delighted That Her Daughter Was Elected to Congress Print
Tuesday, 31 May 2011 05:14

This is worth noting because the NYT is so anxious to tell readers what politicians actually believe about the deficit, Social Security, and other issues. It is much easier to accept that Pat Courtney was actually delighted about her daughter Kathy Hochul's election to Congress than that most politicians believe the things they say about government policy.

(Hat tip to Ben Ross.)

 
The NYT Still Hasn't Heard About the Housing Bubble Print
Tuesday, 31 May 2011 04:31

The NYT had a front page article on the prospect that house prices will hit a new post-bubble low with the release of new data from the Case-Shiller index. (This refers to nominal house prices. Real house prices are down by about 4 percent from their low in 2009.) The article does not make any reference to the housing bubble.

At this point the bubble is mostly deflated, but real nationwide house prices still must fall back by about 10 percent to get back to their 100 year-long trend. It would have been worth mentioning this trend in this article.

The article also includes a misstatement by Douglas Yearley Jr., the CEO of the builder Toll Brothers. Yearley is quoted as saying, "no one ever renovated the kitchen or redid a room for the kids in a rental."

This is not true. In cities that give security of tenure to renters, meaning that it is difficult for landlords to kick them out, it is not uncommon for tenants to pay for major repairs/renovations to their units.

 
David Brooks Wrecked the Economy Print
Tuesday, 31 May 2011 04:18

No, I don't have any evidence for that assertion, but neither does David Brooks have any support for the assertion that today's graduating college seniors, "inherit a ruinous federal debt."

It's apparently a day for throwaway lines and I wanted to play too. 

 
NPR Misinforms Listeners About German Unemployment Print
Tuesday, 31 May 2011 04:07

In its top of the hour news segment (no link) Morning Edition told listeners that the unemployment rate in Germany had fallen to 7.0 percent. This is misleading. The 7.0 percent figure is the official German measure of unemployment. This measure counts part-time workers desiring full-time jobs as being unemployed.

By contrast, the OECD calculates a harmonized unemployment rate that uses a methodology that is comparable to the methodology used in the United States. By this measure, the Germany unemployment rate had already fallen to 6.3 percent by March.

News outlets should present the OECD harmonized measure to their audiences. If they use the German government measure, at the very least they should point out that it is not directly comparable to the U.S. rate.

 
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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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