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The Generation War Goes on Parade Print
Monday, 07 April 2014 03:52

Paul Taylor, a vice president at Pew and the author of a new book on generational conflict, took his generation war story to Parade Magazine this weekend. This magazine, which is distributed to millions of people with their Sunday paper, included a piece by Taylor that warned:

"By the time every boomer is collecting Social Security and Medicare, those two programs are projected to eat up about half our entire federal budget—and both the Social Security trust fund and one of Medicare’s two trust funds will be broke. That’s because the ratio of taxpayers to retirees will have fallen to its lowest level ever, about 2 to 1. (When Social Security first went into effect, the ratio was more than 20 to 1.) But renegotiating the social contract between the generations will be a tall order, because these days, young and old in America don’t look alike, act alike, or vote alike."

This comment is fundamentally misleading. First, the ratio of taxpayers to retirees at the time Social Security started has nothing to do with the time of day. Amazon had only a few thousand customers in the first months it was operating. So what?

When Social Security was first created its actuaries knew full well that life expectancies would increase and that the ratio of workers to retirees would decline, and they adjusted the program accordingly. This was done primarily through a series of tax increases that were scheduled decades in advance. In addition, the commission chaired by Alan Greenspan in 1983 increased the age at which workers qualify for full benefits from 65 to 67. This increase is phased in over the period from 2002 to 2022. It is remarkable that Taylor seems unaware of these facts.

While the program is still projected to face a shortfall over its 75-year planning horizon, close to half of this shortfall is attributable to the upward redistribution of income over the last three decades. This upward redistribution has worsened the finances of the program in two ways.

First, it increased the portion of wage income that went to workers who earned more than the wage cap. In 1983, when the Greenspan commission set the cap at its current level (which is indexed to average wages), only 10 percent of wage income was above the cap and escaped taxation. Now it is close the 18 percent of wage income.

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Can You Say "Patent Monopolies?" Print
Sunday, 06 April 2014 07:37

It's hard to believe that patent protection was not mentioned in this useful NYT piece on the high cost of treating chronic diseases like diabetes. The prices of new drugs and devices are high because the government grants companies patent monopolies. It will arrest and imprison potential competitors.

As every intro econ textbook shows, the monopoly profits also provide enormous incentives for corruption. As a result companies routinely misrepresent the safety and effectiveness of their products and lobby politicians to get the government to pay for their products. We would be debating alternative mechanisms for financing drug research if the industry were not so powerful and the economic profession so corrupt.

 

Addendum:

Sorry folks, I should have been clearer. I meant that the issue of patent-supported research was never raised. There are some folks, like Joe Stiglitz, who is a Nobel prize winning economist, who have suggested alternatives to patent protection as a way to finance research into prescription drugs or medical equipment. So the idea that alternatives exist should not be viewed as crazy-talk. And, if you don't bring up alternative to patent-supported research in an article like this one -- which is a careful and thoughtful piece -- where is the issue going to be raised? 

 
If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data Print
Saturday, 05 April 2014 21:52

Tyler Cowen warns us that technology may be making it much harder for less educated workers to get jobs. He highlights a series of changes in the economy then tells readers:

"All of these developments mean a disadvantage for people who don’t like formal education, even if they are otherwise very talented. It’s no surprise that current unemployment has been concentrated among those with lower education levels."

Actually, the data show unemployment has been less concentrated among the less educated in this recovery than was the case twenty years ago. Over the first three months of 2014 the unemployment rate for people over age 25 with at least a college degree averaged 3.3 percent. This is slightly higher than the 3.1 percent average in the first quarter of 1992.

While the unemployment rate for college grads was higher in the most recent period than in 1992, it was lower for both people with just high school degrees and for people who did not graduate high school. For high school grads the unemployment rate averaged 6.4 percent in the most recent quarter, half a percentage point below the 6.9 percent average in the first quarter of 1992. For those without high school degrees the unemployment rate was 9.7 percent in the first quarter of 2014 more than a percentage point lower than the 11.0 percent average in the first quarter of 1992.

There are other measures that may support Cowen's case, but a simple comparison of unemployment rates by education levels shows the opposite.

 

Note: Typos corrected.

 

 
Glenn Hubbard Says We Have a Shortage of Workers Print
Saturday, 05 April 2014 06:40

Glenn Hubbard, the dean of Columbia Business School and former chief economist to President George W. Bush, argued that we have a shortage of workers in a Wall Street Journal column. Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up. (This explanation seems especially plausible since we know that employers generally will not even consider hiring a person who has been unemployed for a long period of time.)

The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment.

The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.

If the problem is really on the supply side then we should be seeing a surge in vacancies. In fact, the vacancy rate is still more than 10 percent below the pre-recession level and more than 20 percent below the 2000 level. We should also see an increase in the length of the average workweek. While this is more or less back to its pre-recession level (slightly above in manufacturing), it certainly is not unusually high. And we should be seeing rapid wage growth as firms compete for workers. Wages are now just moderately outpacing inflation.

In short, we have no reason to believe that the problem with the labor force is on the supply side. There remains an incredibly simple story that the housing bubble that was driving demand collapsed. With no source of demand to replace the housing and consumption driven by the bubble we are destined to slog through a prolonged period of slow growth and high unemployment. That one seems straightforward but it is apparently too simple for economists to understand.

 

 

 
CBO Estimates of Affordable Care Act Enrollment Print
Friday, 04 April 2014 05:24

Glenn Kessler provides a useful clarification of CBO projections for enrollment in the exchanges under the Affordable Care Act, pointing out that the numbers refer to enrollment years. This means that a person who signs up for coverage beginning on April 1 will only count as three quarters of an enrolled person since they will only be covered for three quarters of a year. 

However it is important to note that many more people will be signing up through 2014. While open season, in which anyone would enroll, ended on April 1, people who experience "life events" will be able to enroll at any time. "Life event" refers to anything that qualitatively changes your insurance or financial status. The most frequent life event is leaving a job, which happens to roughly 4 million people a month. Divorces, child birth, and deaths in the family are also life events.

This means that tens of millions of people will become eligible to enroll over the course of the year. Most will not be signing up with the exchanges (they will have other insurance options, such as a new job with insurance), but a substantial fraction will enroll through the exchanges. This will raise total enrollment above the level calculated based on the March enrollment numbers. 

 
Would Anyone at the NYT Notice a Loss of 400,000 Jobs? Print
Friday, 04 April 2014 05:13

Just asking, since it seems that the paper missed an unexpected $3 billion rise in the trade deficit in February. This is a big deal for the economy.

On annual basis the February numbers would imply an increase in the deficit of $36 billion, or more than 0.2 percent of GDP. Assuming a multiplier of 1.5, this would reduce GDP by more 0.3 percent, implying a loss of over 400,000 jobs.

Fans of national income accounting know that a trade deficit implies a reduction in demand, it is money that is being spent elsewhere, not in the United States. When the deficit rises, it leads to a fall in output and fewer jobs unless it is offset by larger budget deficits or by increased consumption and investment in the private sector. Since we are not likely to see either, the rise in the trade deficit, if sustained in future months, will mean lower output and fewer jobs. 

(FWIW, the Post noticed.)

 
As Chicago Cuts Pensions, Are Bondholders Also Taking Losses? Print
Friday, 04 April 2014 04:36

The NYT reported that Chicago Mayor Rahm Emanuel is negotiating reductions in pension benefits with the city's workers, including some cuts to retirees. It would have been worth mentioning if the city is also engaged in negotiations with its bondholders to arrange a partial default. Pensions are legal obligations of the city, which enjoy a comparable or higher status than the city's bonds. (In its bankruptcy settlement, Detroit's workers will almost certainly see a higher share of their pension obligations met than its bondholders.)

If Chicago is really unable to meet its pension commitments to retirees, who are now being asked to give back the benefits for which they worked, it would also be reasonable to ask investors to also take some loss. After all, this is what is supposed to happen in a market economy when investors use bad judgement and fail to recognize the risks associated with a loan.

 
David Ignatius Is Wrong: Trade Agreements are Not About Free Trade Print
Friday, 04 April 2014 04:16

David Ignatius' column in the Washington Post touting the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP) is badly mistaken in connecting these deals with free trade. The agreements have very little to do with free trade, rather they are about imposing a business-friendly regulatory structure that would almost certainly not be approved through the normal democratic process in the countries that are parties to the deal.

The reality is that formal trade barriers between the countries in these pacts are already very low. This means the potential gains from further reducing the barriers are quite limited. While Ignatius wants readers to be impressed that one forecast projects the TPP would add $223 billion to world GDP by 2025, this is less than one quarter of one percent of projected GDP in that year. That makes it roughly equal to how much the economy grows in a month. Furthermore, this projection takes no account of aspects of the TTP that would almost certainly slow growth, such as the increase in drug prices that would result from stronger patent related protections.

Ignatius also tells readers that the forecast shows the deal will "boost U.S. exports by $124 billion. That means jobs, here and abroad." This is not true. Many of the exports that will likely result from this sort of deal take the form of exporting components of products to be assembled outside of the country to take advantage of lower cost labor elsewhere. For example, engines and other car parts that may previously have been assembled in Ohio will instead be exported to Mexico to be assembled there into a car. The car will then be brought back to the United States as an import.

In this case the exports created no new jobs, since all of the products exported were already being produced in the United States. This is why economists always talk about net exports (exports minus imports) when discussing the job impact of trade. Currently the United States imports roughly $500 billion a year (@ 3 percent of GDP) more than it exports. Assuming a multiplier of 1.5, this trade deficit implies a loss of more than 6 million jobs.

In addition to increasing protection for prescription drugs, the deal is also likely to lead to longer copyright protection, more government control over the Internet and could sharply restrict environmental and safety standards in many areas. In addition, these agreements will create a legal structure, investor-state dispute settlement, that over-rides domestic legal systems. There is an arguable case for such extra-judicial entities in countries without well-established judicial systems. It is far more difficult to argue for the need such a system in the European Union, Canada, and the United States, where businesses can generally count on their interests being treated fairly in the courts.   

 

 
NYT Reports Republican Misrepresentations Without Comment Print
Thursday, 03 April 2014 04:12

It is not responsible reporting to report without comment statements from prominent politicians which are almost certainly not true. For example, if President Obama said that Speaker Boehner has blown up the Washington monument, it would be irresponsible to simply report the assertion without noting that the president has no evidence for this assertion and that the Washington Monument is still standing.

In the same vein, it was irresponsible for the NYT to quote without comment Speaker Boehner saying:

"The president can go out there and tout all the people he’s signed up, but how about the young man I talked to last week out in California whose premiums have doubled? His co-pay and deductibles tripled, and his wife’s hours got cut to 29 hours. .. My insurance premiums nearly doubled. My co-pays and deductibles tripled under Obamacare."

The Republicans have produced a number of Obamacare horror stories about people facing soaring premiums or losing good insurance policies that on subsequent investigation turned out not to be true. It is highly impluasible that the Speaker Boehner actually talked to a young man in California who both saw premium double and his deductibles triple. Insurance companies were not in the business of losing money prior to Obamacare. It is unlikely that they were offering policies that were much better and cheaper than the ones now being offered under the program.

The assertion about cutting hours to 29 per week has nothing to do with Obamacare. Presumably Boehner is referring to the employer sanctions which apply to large employers who do not insure employees who work more than 30 hours a week. Since this will not take effect until 2015, if an employer actually cut back a worker's hours this year to 29 per week it was not due to Obamacare. A serious news article would have pointed this out to readers.

The piece later tells readers:

"It [the Ryan budget] cuts Medicaid by $1.5 trillion over 10 years, food stamps by $125 billion, education programs by $145 billion."

Of course these numbers are almost completely meaningless to the vast majority of NYT readers as the paper has itself acknowledged. This is a silly fraternity ritual that budget reporters do that has nothing to with informing readers.

If the point was to inform readers it would have said the Ryan budget would cut Medicaid by roughly a third over the next decade. As noted in BTP's comment on the NYT's April Fool's Day budget piece, the cuts to the food stamp amount to 16.4 percent of projected spending on the program. Since Ryan's proposed cuts are first applied to years after 2019 they amount to 33.3 percent of projected spending on food stamps in these years, reducing total spending by 0.5 percent in these years. The cuts to education would reduce spending by roughly ten percent over the next decade.

 

Note: linked added, thanks to John Wright.

 

 
High Speed Trading and Slow-Witted Economic Policy Print
Tuesday, 01 April 2014 05:03

Michael Lewis' new book, Flash Boys, is leading to large amounts of discussion both on and off the business pages. The basic story is that a new breed of traders can use sophisticated algorithms and super fast computers to effectively front-run trades. This allows them to make large amounts of money by essentially skimming off the margins. By selling ahead of a big trade, they will push down the price that trader receives for their stock by a fraction of a percent. Similarly, by buying ahead of a big trade, they will also raise the price paid for that trade by a fraction of a percent. Since these trades are essentially a sure bet (they know that a big sell order or a big buy order is coming), the profits can be enormous.

This book is seeming to prompt outrage, although it is not clear exactly why. The basic story of high frequency trading is not new. It has been reported in most major news outlets over the last few years. It would be nice if we could move beyond the outrage to a serious discussion of the policy issues and ideally some simple and reasonable policy to address the issue. (Yes, simple should be front and center. If it's complicated we will be employing people in pointless exercises -- perhaps a good job program, but bad from the standpoint of effective policy.)

The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.

On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.

By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.

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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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