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Does Everyone Know How Much $2.2 Trillion Is Over the Next Decade? Print
Thursday, 28 July 2011 05:10

It seems unlikely that many people, even among the relatively well-educated readers of the New York Times and Washington Post, have much clue as to how much money is at stake in the battle over the debt ceiling. As some points of reference, the government is projected to spend roughly $46 trillion over the next decade. This means that $2.2 trillion in cuts would be around 4.8 percent of projected spending.

However, the impact is likely to be much larger on specific portions of the budget. If Social Security, Medicare, and Medicaid are left off the table, and most of the cuts come from the discretionary portion of the budget (which includes most government investment in infrastructure, education and research), then $2.2 trillion in cuts would come to 15.2 percent of projected spending. There is also the question of the division of the cuts between domestic discretionary spending and military spending. In the extreme case where all the cuts came from the domestic side of the budget, the cuts would be 32.8 percent of projected spending.

Finally, it is worth asking how large these proposed cuts are relative to the size of the economy. GDP is projected to be almost $200 trillion over the next decade. This means that if the government could raise taxes by an amount equal to 1.1 percent of projected income it would raise enough money to the spending cuts being debated by Congress.

Tell NPR, It's a Debt Ceiling Crisis, Not a Debt Crisis Print
Thursday, 28 July 2011 04:29

NPR misrepresented the nature of the crisis in a comment introducing a Morning Edition segment on the pending default of Jefferson County, Alabama. It referred to the country suffering a debt crisis. This is not accurate.

The problem is one of Congress refusing to raise the debt ceiling. This would be comparable to someone losing their checkbook even if they had still had $20,000 in their account. They may face a problem getting money out of their account until they get more checks (or learn on-line banking), but there is no problem of a lack of a funds.

The United States will be in a comparable situation after August 2. No one thinks that it would have problems getting the money needed to pay its bills by borrowing in financial markets. The only problem is that Congress will have denied the government the legal authority to pay its bills.

Mulligan’s Tale for Older Workers Is Easily Explained by Shifts in Relative Demand Print
Wednesday, 27 July 2011 07:23

I’m glad to see that Casey Mulligan responded to my earlier post responding to his argument that the rise in employment among seniors indicates that the overall drop in overall employment is explained by supply factors, not demand factors.  I countered by pointing out that if this were true, then we would expect that there was decline in earnings for seniors relative to earnings for other workers. The data show the opposite, median weekly earnings for seniors actually rose somewhat more rapidly than for prime age workers (ages 25-44).

Mulligan counters by arguing that if it was a demand shift then it is difficult to explain the fact that the unemployment rate for seniors rose during the recession, albeit not as rapidly as for the population as a whole.

There are two problems with Mulligan’s analysis. First, there need be only a relative demand shift, not an absolute increase in demand to explain the events we are seeing. The idea is that employers are quicker to lay off newer employees, who tend to be younger, and to hold on to older employees. This may be both because they are more experienced and also simply due to institutional factors that lead employers to encourage loyalty.

An analogous situation can be seen with employment patterns among college grads. As can be seen, there has been some increase in employment among college grads since the recession began.


Source: Bureau of Labor Statistics.


However, note also that there unemployment rate has risen, as is the case with older workers.


Source: Bureau of Labor Statistics.

This can easily be explained by a shift in relative demand, where less educated workers are laid off before college educated workers.

The other part of this story for both college educated workers and older workers is that there is a supply issue. There has been a long-term trend of rising employment rates among workers over age 55. Part of this is attributable to the fact that these workers are increasingly educated and are likely to have jobs where they are able and willing to work later in life. And part of the increase is undoubtedly attributable to fact that these workers are less likely to have pensions and retiree health care benefits than in past decades and therefore need to work to pay the bills.

The issue here is what do employment patterns look like relative to the trend. Here it is clear that there has been a falloff in the rate of employment growth. If employment of people over age 55 had stayed on its 2002-2007 trend, it would be about 400,000 higher today. This dropoff is approximately 2.7 percent of current employment among this group.



Source: Bureau of Labor Statistics.

This is consistent with the story that a senior workforce that is more highly educated and more committed to the labor market than was the case in prior years is having trouble finding jobs just like the rest of population. It sure looks like demand to me.

NYT Does PR Push for the Bond Rating Agencies Print
Wednesday, 27 July 2011 05:08

Let's see, if the bond rating agencies lower the credit rating for the U.S. then, if we look at the NYT chart, the interest rate on U.S. Treasury bonds may fall from today's 3.0 percent to 1.1 percent paid by AA- paid by Japan. There is little evidence that the markets pay a great deal of attention to the credit rating agencies. Note that many countries with lower ratings pay considerably less in interest than those with higher ratings.

The piece also includes a bizarre paragraph stating:

"But in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year, analysts warn.

Macroeconomic Advisers said the country’s gross domestic product could slow in the second half of this year to 2.6 percent from a forecasted 3.2 percent, and that the jobless rate could end the year at 9.6 percent, above the 9.2 percent expected."

This sounds bad, but then we hear:

"Joel Prakken, chairman of Macroeconomic Advisers, said any change in interest rates would probably be small and not felt for several years."

Okay, so the impact on interest rates and will be small and not felt for several years, but yet we have the same outfit projecting sharply lower growth in the second half of 2011. These are not consistent.

The piece continues with the quote from Prakken:

"'The real story is whether the uncertainty will cause consumers and companies to stop spending,' he said.

On that front, some analysts noted that corporations stopped spending long before the debt-limit debate hit the news.

'Companies clearly have had record cash on the books for a year and a half now,' said Alec Young, an equity strategist at Standard & Poor’s Equity Research. 'Yes, they’re not spending the money, they’re not hiring, but is it because of this issue?'”

No, this ain't what the data show. New orders for non-defense capital goods rose 5.8 percent in May from April. For the year to date they are running 14.0 percent above last year's levels.

The deference in this article to the judgement of the credit rating agencies shows a remarkable ignorance of recent events. At this point, these outfits are one step ahead of the law. They should hardly be dictating fundamental political decisions to the nations.



Is Thomas Friedman Impervious to Facts? Print
Wednesday, 27 July 2011 04:55

The evidence suggests that he is. He gives yet another of his diatribes about the need to cut Medicare, Medicaid, and Social Security in order to advance his grand agenda for the country. Of course Social Security is financed by its own designated tax and is projected to be fully solvent for the next quarter century, so it is a bit bizarre to have this one on the list.

More importantly, the entire budget problem is the result of a broken health care system. This is why serious people point to the need to fix the health care system, which is the real source of the country's projected long-term budget problem. Of course the current shortfall is the result of the collapse of the housing bubble. But Friedman has not heard about that.

Is NPR Doing PR Work for the Credit Rating Agencies? Print
Wednesday, 27 July 2011 04:12

The major credit rating agencies, Moody's, Standard and Poors, and Fitch are best known for rating hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. (They got paid tens of millions of dollars for these ratings.) They are also famous for missing the shipwrecks at Bear Stearns, Lehman, Enron and many other major corporate bankruptcies.

This is important because NPR told listeners this morning that President Obama had to fear not just a default, but also a downgrading from the credit rating agencies. It then had a quote from Jim Kessler, the vice-president of Third Way, a Wall Street-backed think tank. Kessler told listeners that a country with a second-rate credit rating is a second rate country and that a downgrading would be a serious liability for President Obama in his re-election campaign.

This one is pretty far removed from reality even for a major news organization. No poll has ever showed a credit rating to be a major factor in determining voters' decisions. It is difficult to imagine that people who would have otherwise voted for President Obama would instead vote for his Republican opponent because one or more credit rating agencies has downgraded the country's debt.

As a practical matter, the financial markets completely ignored the downgrading of Japan's debt in 2002. It can still pay less than 1.5 percent interest on its 10-year bonds. It is likely that the financial markets respect for the credit rating agencies' judgment has not increased since the collapse of the housing bubble. It is also worth noting that the credit rating agencies are seeking politicians' support in minimizing the impact of the regulations in the Dodd-Frank bill.

This piece also bizarrely asserted that a debt reduction package that included "changes" to Social Security, Medicare, and Medicaid would help President Obama in his re-election campaign. First, the proposals on the table involve cuts to these programs. Politicians use the term "changes" to try to conceal the fact that they want to cut these extremely popular programs. Serious news organizations try to inform their audiences, they are not supposed to use politicians' euphemisms to help conceal what is at issue.

This raises the second point. NPR presented no evidence whatsoever that President Obama would gain electorally if he were to cut programs that draw overwhelming support not only from Democrats, but also Independents and Republicans. If it has some basis for this assertion, it would be interesting to know what it is.

The Housing Bubble Was Visible in the National Data Print
Tuesday, 26 July 2011 12:20

Paul Krugman picks up on a blogpost by Mark Thoma, where the latter argues that academic economists should occasionally listen to those outside the temple. Thoma uses the example of the housing bubble as one case where those outside the temple got it right.

Krugman correctly notes that Robert Shiller, who as a Yale economics professor certainly qualifies as an academic economist, was one of the first (after me) to get the bubble right. He also reminds readers that he also had warned of the bubble. (As I recall, the first time was in 2002, after some other economist raised the issue.) However, he adds that it was necessary to look at local data focusing on areas where the bubble was concentrated.

Actually, it was easy to see the bubble in the national data. Local data could be helpful (obviously prices were more out of line in some areas than others), but there are cases of real house appreciation in locations that become more popular for whatever reason. In principle, an examination of the fundamentals of these markets should be able to reveal a bubble, but the national market provides a very useful anchor. When real house prices nationwide had risen by 30 percent in real terms, after a century of just tracking inflation (I could only trace this pattern for 43 years back in 2002), there was a very good reason to believe that there was a bubble.

Chris Matthews Wants to Make the Guy Who Gave Us the Stock Bubble, the Housing Bubble and the Huge Trade Deficit Treasury Secretary Print
Tuesday, 26 July 2011 11:04

Yeah, we're approaching the debt ceiling deadline, so folks are getting silly. And Chris Matthews is taking the lead. I guess he never heard about the bubbles or the massive trade deficit caused by the over-valued dollar. I suppose you don't have know much economics to be a news show host at MSNBC.

I suppose the know-nothing crowd might admire Bill Clinton's economic record, but I will always remember him as the guy who lectured the country on how enforcement of trade deals will create manufacturing jobs, apparently without bothering to check that we lost manufacturing jobs in each of the last three years of his administration. But hey, in Washington you just get to make it up.

Wealth Losses, Percentages Do Not Tell Everything Print
Tuesday, 26 July 2011 05:01

The NYT wrote a piece based on a new study from Pew that finds that Hispanic families were the ones hardest hit by the economic downturn. The basis for this assertion is that they experienced the largest percentage decline in median wealth. 

This is somewhat misleading. According to the study, the median wealth for Hispanics was just $18,400 prior to the downturn. The collapse of house prices led this to fall to just $6,200 in 2009, a 66 percent decline. However, it is possible to have such a large percentage decline because the median family had so little wealth to begin with. A family with $18,400 in wealth is not in a very different situation than a family with $6,200 in wealth. In both cases, such families are probably looking to a retirement where they are almost entirely dependent on Social Security or other pension programs. 

By comparison, the wealth of the median white family fell by almost $32,000 from $135,000 to $113,100. The median Asian family saw their wealth decline by more than $90,000, from $168,100 to $78,100. These declines are likely to have much larger impacts on living standards. The median wealth for African Americans fell from $12,100 to $5,700. This also is a large percentage decline, but one that is likely to have a limited impact on living standards since the initial wealth was already so low.

The New York Times Bemoans the Lost Opportunity to Cut Social Security and Raise the Age of Medicare Eligibility to 67 Print
Tuesday, 26 July 2011 04:26

That's right, you can read about the "unique opportunity" that was lost right here. The New York Times complains that the likely deficit deals to be produced in the days ahead will not feature:

"significant future savings from Medicare, Medicaid and Social Security — the entitlement programs whose growth as the population ages is driving long-term projections of unsustainable debt."

As every budget analyst knows, Social Security is not a major driver of the deficit. Under the law, it cannot contribute to the deficit. It can only spend money that was raised from its designated tax or from interest earned on the Treasury bonds bought with this revenue. If the trust fund lacks the money to pay benefits then full benefits will not be paid. Furthermore, the projected increase in Social Security benefits over the decades ahead is relatively modest.

The projected increase in the cost of the Medicare and Medicaid is much larger but this is attributable to the projected explosion in private sector health care costs. If the United States faced the same per person health care costs as any other wealth country we would be facing long-term budget surpluses, not deficits.

This fact is important, since it suggests that the more obvious way to reduce the costs of these programs is to fix the U.S. health care system. This would imply lower payments to drug companies, hospitals, doctors and other providers. Alternatively, Medicare beneficiaries could be given the option to buy into the more efficient health care systems in other countries. If these options were presented to the public it is likely that most would find it preferable to denying care to patients as the NYT advocates in this piece.

It is also worth noting how this "unique opportunity" came about. The deficits exploded due to the incredible incompetence of the Federal Reserve Board which allowed the $8 trillion housing bubble to grow unchecked. The collapse of this bubble gave the economy its worst downturn since the Great Depression. High levels of unemployment are projected to persist for a decade.

This economic collapse led to the large deficits that the government is currently running. While tens of millions of people are suffering from the effects of high unemployment and the wealth lost with the collapse of the housing bubble, the NYT views this crisis brought on by Wall Street greed and economic mismanagement as a unique opportunity to cut Social Security and Medicare. Of course, the vast majority of people from all demographic groups (including Tea Party Republicans) strongly oppose cuts to these programs.

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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.