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Thomas Friedman Talks Dumb Print
Saturday, 19 March 2011 22:39

That was his word, but since he brought it up, the term can be rightly applied to his reference to the "unsustainable deficit." Of course people who are not dumb know that the story of exploding budget deficits is a story of exploding private sector health care costs. The United States already spends more than twice as much per person as the average for other wealthy countries, with little obvious benefit in outcomes.

This is why people who are neither dumb nor dishonest talk about the need to fix the country's health care system, not the budget deficit. If the U.S. health care system were as efficient as the system in Canada, Germany, the Netherlands or more than 2 dozen other countries, there would be no long-term deficit problem.

 
News Flash!!!! Prices Rose Last Month! Print
Saturday, 19 March 2011 08:26

CNBC and USA Today told readers the shocking news that:

"A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008."

The piece later went on to present a comment from Stephen Weiss, who is identified as being with Short Hills Capital:

"This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs."

Actually this story is incredibly confused in almost every dimension. Prices rise almost every month with this "special index" and every other consumer price index as can be seen in the chart below.

CCPI

Source: Bureau of Labor Statistics.

 

There was an extraordinary surge in commodity prices at the beginning of 2008 which was reversed when the world economy sank into recession. Now that the economy is starting to recover and developing countries like China and India are growing rapidly, prices for commodities are recovering from their recession slump. It was entirely predictable that prices would reach a "record high" again as they did in 1999, 2000, 2001, 2002, etc.

This news also provides no reason whatsoever why the Fed should shift its focus from core inflation, which excludes food and energy prices, to the broader measure that includes these prices. The Fed's actions will have virtually no effect on food and energy prices. These will be determined by world demand. The Fed could raise rates and slow growth in the U.S., but this would have only a marginal impact on the price of food and energy worldwide. Unless we can find a way to slow growth in China, India, and Latin America, we are not likely to see much reduction in food and energy prices.

 
The Post Tells Readers that Brave People Do What the Rich Tell Them to Do Print
Saturday, 19 March 2011 07:43

In an article reporting on a letter from 64 senators urging president Obama to work on the recommendations from the co-chairs of his deficit commission, the Post described President Obama's own smaller budget cuts as "timid." (The sentence appears in the print version, but not in the on-line version.)

This is an interesting perspective. Politicians and policy workers around Washington and the country are being paid billions of dollars by wealthy people like investment banker Peter Peterson to support cuts to programs like Social Security and Medicare. It is interesting the Post apparently thinks that it is brave to harm poor and middle class people to benefit the wealthy, while it is "timid" to support the less privileged.

It is also worth pointing out that the Post wrongly refers to the recommendations from the deficit commission's co-chairs, former Senator Alan Simpson and Erskine Bowles, as the recommendations of the commission. The commission never voted on their proposals which almost certainly would not have been approved given the stated opposition of several commission members. 

 
Buffett Tells Country, TARP Gave Over $1 Billion to Goldman Sachs Print
Friday, 18 March 2011 17:12

At a time when all the tough guys in Washington are making plans to cut Social Security and Medicare benefits for high-living seniors and to cut Head Start for low-income kids, it was generous of Warren Buffett to point out that we taxpayers gave over $1 billion to Goldman Sachs through TARP. Buffett probably didn't intend to point out this fact to the country, but it is an unavoidable implication of his $2 billion profit on his loans to Goldman. 

Buffett made his $5 billion loan to Goldman about a week before the Treasury lent $10 billion to Goldman through the TARP program. Buffet got 10 percent interest on his loans, while the Treasury got 5 percent on its loans. In addition, Buffett got a much more generous commitment of stock warrants, which is the basis of the $2 billion in profits that he is now set to pocket.

The Treasury boasted of getting a $1.1 billion profit on its loans to Goldman, but as Mr. Buffet showed, this was far below the market rate of interest on loans to Goldman at the time. The difference between the return received by Buffett and the return received by the Treasury was in effect a gift from taxpayers to the top executives at Goldman and their shareholders. When Treasury Secretary Geithner and other officials claim that the government made money on the TARP loans it is either due to their ignorance of the workings of financial markets or a deliberate effort to deceive the public.

It is also worth noting that the TARP money was only a portion of the extraordinary assistance that the taxpayers have given Goldman's top executives and shareholders. The FDIC also guaranteed tens of billions of loans to Goldman. Goldman was allowed to borrow tens of billions of dollars from the Fed at below market interest rates. And it was allowed to become a bank holding company, and thereby gain the protection of the Fed and the FDIC, at the peak of the crisis, averting a run that which would almost certainly have been fatal.

In addition, Goldman benefits from the implicit subsidy of its "too big to fail" status, the belief that the government will bail it out if it gets into trouble. This allows it to borrow in credit markets at a lower cost than if it did not have implicit government protection.

 
It's Friday and Charles Krauthammer Is Confused On Social Security Again Print
Friday, 18 March 2011 05:47

Charles Krauthammer still does not understand the concept of government bonds. He badly wants the government to default on the bonds held by the Social Security trust fund. It seems that the main reason is that these bonds are effectively wealth to ordinary workers, not rich people or banks.

Krauthammer complains that the government bonds held by the trust fund are "special issue" bonds. He must know of a meaning for "special issue" that the rest of us don't. These are non-marketable bonds. That doesn't mean that the government can just default on them as Krauthammer wants to do. The implication -- actually the assertion -- of Krauthammer's piece is that because he doesn't like the people to whom these bonds are owed, the government can default and there would be no consequence.

That obviously is what Krauthammer wants, but that does not make it true. If the government were to default on its debt to Social Security then workers would justifiably be outraged. This could have both political and economic consequences. The disrespect this might cause for the government may lead to a surge in tax evasion and ignoring of other laws (perhaps even copyright). After all, why should workers respect the laws of a government that steals from them while protecting the wealthy?

Workers may also use their power as voters to decide that if the government can default on the debt it owes to them through Social Security that it can also default on the debt held by wealthy individuals like Peter Peterson as well as Wall Street banks. There certainly is no moral argument for honoring the bonds held by the latter group of investors if the government has defaulted on the bonds held by the trust fund. As an economic matter, it may also be better for most workers to see the government default on its debt in this situation, even recognizing the incredibly disruptions this would cause in world financial markets. (The money going to debt service could instead be used to pay Social Security and other benefits for working people.)

At a more concrete level, the assertion by Krauthammer that the bonds held by Social Security are not counted in the calculations of the government debt is just wrong. It is easy to find examples where it is included in calculations of the ratio of debt to GDP, as we find in the Economic Report of the President. There is also no shortage of deficit hawks who eagerly use the $14 trillion measure of the gross debt to make their argument, including for example, Charles Krauthammer, a Washington Post columnist [thanks to Joe].

It would also be nice if Krauthammer could take 2 minutes to understand something about means testing so that he would realize that this is not a practical way to solve Social Security's projected long-term shortfall.

 
Everyone Should Read Floyd Norris Print
Friday, 18 March 2011 05:16

Floyd Norris has a good piece about how overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan's nuclear power plant. The piece makes the essential point that seems to have escaped great economic thinkers here, that there is no way Japan can default on its debt.

Even though Japan's debt is more than twice its GDP (about three times the size of the U.S. debt), there is no risk of default since its debt is in its own currency. In this way Japan is like the United States and the United Kingdom, and unlike Greece and Ireland.

In the worst case scenario, Japan or the United States would print lots of money and see inflation. Given that Japan has been flirting with deflation for almost two decades this doesn't seem like a plausible scenario, but in any case it is not the story of Greece being held at the mercy of the bond vigilantes who will not buy its debt.

The people who hold up Greece's crisis as a possible scenario for Japan and the United States deserve our contempt if they are deliberately misleading their audience or our empathy if their mistake stems from their problems with understanding basic economics. However their arguments do not deserve serious consideration by people involved in policy debates.

 
Governor Walker Tells Post Readers That He Doesn't Understand Basic Economics Print
Thursday, 17 March 2011 05:33

It's always scary when someone in a position of responsibility doesn't understand some of the basics of their job. Apparently this is the case with Wisconsin Governor Scott Walker.

In a column in the Washington Post this morning Walker noted that under his new compensation package for public sector employees in Wisconsin, workers in the state will still be paying a far smaller portion of their health care benefits than most workers in the private sector or federal employees. He then comments:

"It’s enough to make you wonder why there are no protesters circling the White House."

Actually, it's enough to make you wonder what Governor Walker could possibly be thinking.

Employer payments for pensions, health care coverage and other benefits are part of a total compensation package. It makes little difference to an employer whether they pay another dollar for health care or for wages. Public employees in Wisconsin had bargained for a compensation package that gave them lower wages than their private sector counterparts, but more generous benefits. Their total compensation package was still somewhat lower than for private sector workers with the same education and experience. When Governor Walker increased the amount that workers had to pay for their pensions and health insurance, he cut their pay pure and simple putting them further behind their private sector counterparts.

Governor Walker seems not to understand this simple fact. According to the logic of his column, a worker getting a salary of $40,000 a year with full health care benefits and an employer-provided pension would be better off than a worker getting $200,000 a year and no benefits. Obviously this makes no sense. It would be good if one of Governor Walker's aides could explain this to him.

 
The Japanese Central Bank's Holding of Government Debt Also Reduces Its Interest Burden Print
Thursday, 17 March 2011 05:23

The Post noted that Japan's central bank is buying government debt in order to hold down interest rates. While this is true, it is also worth noting that its holding of debt reduces the interest rate burden on the government.

Interest on debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. Under some circumstances, this can lead to inflation. However, Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.

 
NYT: It's Already Been Decided, Social Security Will Be Cut Print
Thursday, 17 March 2011 04:47

The NYT told readers this morning:

"Once this year’s budget battle is settled, Congress will move on to potentially bigger fights over whether to raise the national debt limit and how to rein in the costs of Medicare, Medicaid and Social Security."

Wow, huge majorities oppose cuts to Social Security (Medicare also), but the only debate in Congress is over "how" to cut the program. So much for democracy in America.

 
Power Breakfast: Presents Debate on Evolution and the Shape of the Earth Print
Thursday, 17 March 2011 04:37

The Power Breakfast segment this morning on WAMU, my local NPR affiliate, told listeners that the debate on reducing the country's dependence on foreign energy was between people who wanted to increase supply by increased drilling and those who favored conservation. This is not true. There is not enough reserves of oil or gas to make more than a small difference in U.S. dependence on imported energy.

A news organization would point this fact out, since it is the job of reporters to know this fact. Unlike listeners, they are paid to know this information. Unfortunately, Power Breakfast led listeners to believe that the country has an option of being energy independent if it were only willing to put its environment at risk. While increased drilling may be able to wreck the environment it can have no noticeable effect on the country's need for foreign oil. Reporters old enough to remember the BP spill in the Gulf understand what is at issue.

 
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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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