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David Brooks on Wisconsin: Flaunting Ignorance of Economics Print
Tuesday, 22 February 2011 05:38

Let's all have a hearty round of laughter at David Brooks' expense. He doesn't know that employer side payments for benefits like pensions and health care come out of workers' wages. In his column today, he tells his readers that public employees in Wisconsin should have to pay for these benefits just like private sector. Apparently he doesn't know that they already do.

Go into any economics department and tell the faculty that you think employers should have to pay more for workers' Social Security benefits. The ridicule with which that suggestion would be greeted should be heaped on Mr. Brooks for failing to understand basic economics. And of course, we actually have data that show that the higher benefits received by public sector workers in Wisconsin are more than fully offset by lower pay.

Of course the bigger mistake in Brooks' column is the assertion that we are looking at a decade of austerity. This may prove true, but this is a policy choice. We had unbelievably incompetent economic policy in the last decade. The Fed and the Bush administration allowed (arguably encouraged) the growth of an $8 trillion housing bubble. It was fully predictable that it would collapse and lead to a serious recession.

Unfortunately, economic policy continues to be guided by people who were too incompetent to recognize this bubble and the danger it posed. The route out of this downturn is simple: the government needs to spend money to create demand. This is the economy's problem at the moment, not a scarcity of resources. However, the incompetents control the debate and are now promising us a decade of austerity rather than taking the simple steps that would be needed to get back to full employment.

 
The NYT Puts Its Desire for Public Sector Workers to Take Pay Cuts in Its News Section Print
Monday, 21 February 2011 07:50

A NYT article on President Obama's relationship with unions in Wisconsin referred to the "need for public employees to sacrifice." There is no "need" for public sector workers to sacrifice.

As virtually all economists acknowledge, the economy's current problems stem from a lack of demand. If there were more demand, then the economy would grow more and it would generate more jobs. If public sector workers "sacrifice" by accepting cuts in pay and benefits then they will have to cut their spending. This will mean less demand, less growth, and fewer jobs.

For this reason, there is certainly no "need" for public sector workers to sacrifice. The NYT and others may feel better seeing them take cuts in pay, but this has nothing to do with the needs of the economy.

 
House Prices and the Economy Print
Monday, 21 February 2011 06:06

The Washington Post, which completely missed the $8 trillion housing bubble whose collapse wrecked the economy, is still having a hard time understanding house prices. It notes that the Case-Shiller 20-City index is a moving average of sales closings for the prior three months. And, there is typically a 6-8 week period between when a contract is signed and when it closes. It therefore tells readers that the December data to be released on Tuesday:

"should reflect the autumn lull in the economy. The question is whether the improved economic outlook over the past few months will translate into a firming up of home prices in early 2011."

Actually no. Short-term ups and downs in the economy will not be reflected in house prices. The main factor pushing house prices lower right now is the end of the homebuyers tax credit. This credit, which could be used for homes contracted before April 30th (and likely closed before the end of June) pulled many sales forward from the second half of 2010 and even 2011 into the first half of the year. Prices began to fall as soon as the credit ended.

It is easy to see from the data that the credit was driving the housing market, not short-term economic fluctuations. House prices stopped falling and actually rose somewhat in the second half of 2009, a point where the economy was still losing jobs, as people rushed to buy homes before the expiration date of the initial credit in November of 2009.

 

cs-20_city_nov_6361_image001

 

The main factor in the housing market is the further deflation of the housing bubble. People who understand the housing market expect prices to continue to drop until the bubble is deflated. This means a price decline of another 10-15 percent over the next year.
 
Does Robert Samuelson Worry About Monsters Under His Bed at Night? Print
Monday, 21 February 2011 05:54

That's what readers of today's column must be wondering. After all, we have a government where the big banks can count on bailouts whenever they get in trouble, where pharmaceutical companies can makes tens of billions every year based on government-granted patent monopolies, where health insurers can protect themselves from competition with a more efficient government agency (i.e. Medicare), and where the rich more generally can count on Congress to fill their pockets and whose power does Robert Samuelson worry about? The AARP.

Let's note a couple of quick facts that Mr. Samuelson apparently doesn't have access to over at Fox on 15th Street. First, Social Security and Medicare are not just supported by AARP. They are supported by the vast majority of voters of all ages. In other words, Mr. Samuelson's foe in his quest to cut these programs is the public as a whole, not this one lobbying organization.

Second, the story of massive huge future budget deficits has little to do with aging. It is a story of a broken private health care system. If the United States paid the same amount per person for health care as any other wealthy country we would be looking at huge budget surpluses, not deficits. Of course we can't lower our costs because of the enormous power of the health care industry.

But Samuelson doesn't mention this lobby. He is busy looking under his bed for monsters and the AARP lobby.

 
Good Piece in the Post on the State of the Economy Print
Sunday, 20 February 2011 09:04
The Post deserves credit for an outstanding front page piece that did a serious analysis comparing how African Americans, Hispanics and whites are experiencing the downturn and view the future of the economy. Its polling had the unsurprising result that African Americans tend to be faring worst in the downturn, but interestingly were the most optimistic about the future.
 
Fox on 15th (a.k.a "The Washington Post") Goes All Out to Push For Its Deficit Agenda Print
Sunday, 20 February 2011 08:47

The Washington Post took its unbalanced treatment of the budget to new extremes today with a whole page devoted exclusively to deficit hawks telling us how we should rein in deficits. The lead piece is by Senator Alan Simpson and Erskine Bowles, the co-chairs of President Obama's deficit commission. This is followed by 5 pieces from deficit hawks.

There was no one pointing out the obvious truths that all budget experts acknowledge:

1) The explosion of the deficit in the last few years was the result of the downtown caused by the collapse of the housing bubble.

2) If the government reduced its deficit any time soon the main result would be slower growth and higher unemployment.

3) The main factor driving the horror stories of an exploding deficit in the long-run is the growth of private sector health care costs. If we paid the same amount per person for health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits.

 
WSJ Asserts That Deficit Hawks Are Actually Just Hoping To Get High-Paying Lobbying Jobs Print
Saturday, 19 February 2011 11:47

The WSJ told readers that: "in the hopes of gaining a high-paid lobbying position after leaving the Senate, six senators including Mr. Durbin are negotiating a deficit-reduction framework." The piece then went on to explain another deficit hawk who recently left the Senate, former Indiana Senator Evan Bayh, just took a job with a major Washington lobbying firm.

Actually, this is not quite what the WSJ told readers. The paper said:

"responding to public unease about the country's fiscal standing, six senators including Mr. Durbin are negotiating a deficit-reduction framework. They are betting that worries about federal red ink—expected to exceed $1.6 trillion this fiscal year—will put once-untouchable factors, such as entitlement spending and tax increases, into the mix."

Of course the WSJ has no idea what motivates these senators. Are they really responding to public unease about the deficit? How come they aren't responding to public unease about 9.0 percent unemployment? Can the WSJ assure readers that these six senators have not at all considered their career prospects after leaving the Senate and that this is not a factor in their actions?

Since reporters do not know the real motives of politicians, good reporters do not ascribe motives. They report what people say and what they do, they let readers figure out motives for themselves.

 
Why Do "Free Traders" Never Talk About Free Trade When the Losers Are Likely to Be People Like Them? Print
Saturday, 19 February 2011 09:40

David Leonhardt is one of the country's more thoughtful economic columnists who often has insightful pieces in his columns at the NYT. This makes his interview with two economists who recently wrote a book on college costs even more disturbing. He doesn't ask the tough questions.

His interviewees argue that one of the main reasons that college tuition has risen so much more rapidly than other prices is that college provides a service and that productivity growth in services is less rapid than productivity growth in goods production. They explicitly note that a college education is like haircuts in this respect.

The data don't support this case. Below we have graphs for the price increases in haircuts and college tuition since 1997 (as far back as BLS has data for haircuts). The price of haircuts increased by 40 percent over this period, while the price of college tuition increased more than 120 percent. Clearly the service story does not get us very far.

 

                                              Price of Haircuts -- 1997 = 100

haircuts

 

Source: BLS

                                               College Tuition

College

 

If the fact that a college education is a service does not explain its high price then what does? Well, part of the answer is touched on in the discussion: "they don’t face competition from low-wage countries like China." 

This is true, but that is not an accident, this is by design. Trade agreements like NAFTA were explicitly designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. Business executives from companies like General Electric were brought in on the design of the treaty. They were asked what were the obstacles that prevented them from setting up operations in Mexico. The treaty was then constructed in a way to remove these obstacles.

The United States has not adopted the same route with universities (nor hospitals and law firms). Trade negotiators do not invite university presidents to meetings where they explain all the obstacles that prevent them from taking more advantage of the vast potential pool of high quality faculty from the developing world. (The word "potential" is important. The pool would be much larger if university students in places like India and China knew that it would be as easy for them as native born Americans to get jobs as university professors in the United States.) Given the huge gap in living standards, university professors in developing countries would be willing to work for much lower pay than university professors in the United States, just as auto workers in developing countries work for much lower pay than auto workers in the United States.

In short, one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy. Of course this is not the only reason.

It is now common for university administrators to get high 6-figure and even 7-figure salaries. This is partly as a result of the fact they are following the bloat in private sector pay for top executives. In this sense the process through which top executives now run companies in large part for their interests has affected the pay structure at colleges and universities.

There is also the issue that much of the responsibility of college presidents now is squeezing money from the small group of incredibly wealthy people who make large donations to colleges. This is likely best done by someone who is at least marginally in their ranks rather than someone who works for a living. In this sense, the explosion of inequality in the last three decades has fundamentally altered the role of a university president so that it now primarily involves the ability to cater to the ultra-rich. 

 

[Addendum: Several comments claim that there are no restrictions on the hiring of foreign born professors based on the fact that a substantial number of faculty actually are foreign born. This is known as the "Mexican avocado theory of international trade." Under this theory, because it is possible to go the supermarket and find avocados grown in Mexico, we have free trade in agricultural products.

Of course we are very far from having free trade in agricultural products. There are a whole array of tariff and non-tariff barriers that it make it difficult to import items grown in other countries. In the same vein, we do have many outstanding academics in the United States who were born in foreign countries. These academics were able to overcome the hurdles that make it difficult (not impossible) for foreign born academics to work in the United States.

It is not legal, for example, for a university to hire dozens or even hundreds of non-citizens/non-green card holders explicitly because they are willing to work for a lower wage than their U.S. born counterparts. This restriction limits the extent to which foreign born faculty will put downward pressure on the wages of U.S. faculty. This doesn't mean that there is zero competition, just that the competition is deliberately limited by protectionist barriers imposed by the government.]

 

[Second Addendum: I see that my blogpost brought a response from David Feldman, one of the co-authors of the book that was the basis of Leonhardt's interview. He may have missed the addendum added above clarifying the nature of international competition that does occur in academia. The point here should be simple.

This is not a zero/one proposition. There is clearly competition. However, it is also a clear violation of the law for a university or college to dump its faculty and replace them with highly English speakers from India or elsewhere who would be willing to work for 40 percent less. If universities had this option, and offered tuition that was $15k-$20k a year less than their competitors would it affect the market? David Feldman says no, I think it likely would, but to argue that precluding this option is not protectionism is just silly.] 

 
The Washington Post, Whose Parent Company Operates Kaplan For-Profit Schools, Uses the Industry's Line In a News Story Print
Saturday, 19 February 2011 08:51

Did the Washington Post call the imposition of work requirements for TANF an increase in government regulation? Does it call restrictions on funding for Medicaid abortions an increase in government regulation? This is not the framing that the Washington Post typically uses for rules governing access to federal programs. The federal government is giving out the money, it gets to set the rules.

One then has to ask why the Washington Post chose to use this convoluted framing to discuss the Obama administration's effort to impose limits on the schools for which students can get federally subsidized loans. The limits require that to be eligible to receive federal loans through this program, a school would have to maintain a minimal record of placing its graduates in jobs.

This is a measure designed to protect both students, who will be on the hook to pay off their debt, and also the taxpayers who will have given money to the school for no obvious public goal if it does not help graduates get jobs. In the absence of this sort of restriction, schools like the one operated by the Washington Post's parent company, will be profiting at the taxpayers' expense, effectively getting public money for nothing.

In this respect it is worth noting that the regulations would impose no restriction whatsoever on where students could go to school. They would only restrict the schools for which they could get federally subsidized loans. If Kaplan and other for profit colleges think that their schools are good investments for students then there is nothing to stop them from making loans to the students themselves.

It is understandable that the for-profit college likes to frame this issue as one of government regulation, but it is hard to see why an independent newspaper would adopt this framing of the issue.

 
David Brooks Can't Get Access to Budget Documents Print
Friday, 18 February 2011 06:44

That is the only thing that readers of his column can conclude. Or, alternatively perhaps he missed the debate over health care reform during the last two years.

Brooks is very upset that President Obama is not doing more to deal with the growing national debt. If Brooks had access to budget documents he would know that the main reason for the large current budget deficits is the downturn caused by the collapse of the housing bubble.

If he is upset about these deficits he should be angry at the people who failed to warn of the dangers of the housing bubble. Certainly Mr. Brooks belongs on that list since he has a semi-weekly column that often deals with economic issues.

If Brooks had access to budget documents he would also know that the main driver of the deficit over the longer term is health care costs. If the United States paid the same amount per person for health care as any other wealthy country we would have huge budget surpluses, not budget deficits.

One of the goals of health care reform was to reduce the rate of growth of health care costs, which would also lower the deficit in the long-term. Brooks seems to be unaware of this aspect of the debate.

 
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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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