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Politico Confuses Inflation With Growth Print
Thursday, 14 October 2010 08:43

Politico told readers that: "On Friday, Social Security recipients will learn that they won’t receive higher benefits for the second year in a row because the economy isn’t growing fast enough." Actually, this is not true. The cost of living adjustment for Social Security has nothing to do with the economy's growth rate. It is based on the rate of inflation as measured by the consumer price index. The reason that beneficiaries will not receive higher benefits is because the CPI shows no inflation over the last year.

The difference between inflation and growth is very important and fundamental. Reporters should be able to get it right.


 
Unemployment Claim Numbers: What Do They Mean? Print
Thursday, 14 October 2010 08:19

Weekly unemployment claims jumped by 13,000 to 462,000 last week. The 4-week moving average is at 459,000. This suggests that the economy is still not generating jobs. Following the last downturn, the economy did not start generating jobs consistently until weekly claims had fallen to near 400,000.

It is also worth noting that the unemployment insurance filings may be lower relative to the number of layoffs each week than was true in the past. The reason is simple: because of prolonged high unemployment, many workers who are newly laid off are not eligible for benefits.

Requirements vary by state, but most look back at a workers history over either the prior 4 quarters or the 4 quarters prior to the most recent quarter. To qualify, workers need some minimum number of work hours (e.g. 500 to 600 hours) or minimum earnings (e.g. $2,500 to $3,000) over the relevant 4 quarters.

Either 4 quarter period is a time in which unemployment was quite high. Furthermore, while unemployment has hit everyone, it has hit some groups especially hard. The unemployment rate for workers with just a high school degree has averaged almost 10.5 percent for the last 12 months. For workers without a high school degree it has averaged almost 15 percent. For workers between the ages of 20-24 it has averaged almost 15 percent.

Many of the people who got laid off last week may have just recently been hired after an extended spell of unemployment. This means that they would not qualify for benefits. This is always true for some number of the newly unemployed, but that share would be much larger today than it had been in 2007 when the unemployment rate had been under 5.0 percent over much of the prior 12 months.

It is not clear how much this would affect unemployment claims, which is the number reported each month. This number gives the number of people filing, not the number who are determined to be eligible. It is likely that many ineligible workers go ahead and file, not realizing that they ineligible. 

However, some workers undoubtedly understand the system and don't bother filing. We don't know how large this number is, but if it is 5 percent of the newly unemployed, that would correspond to nearly 25,000 additional claims a week. This implies that the 461,000 claims filed last week would correspond to roughly 485,000 claims filed three years ago, before the long period of high unemployment had set in.

 

 
Steven Pearlstein Doesn't Understand Market Economies Print
Wednesday, 13 October 2010 07:11

In a confused column today, Steven Pearlstein touted the need for wages in the United States to fall. He focused on the wages of autoworkers, but implied that the wages of less-educated workers more generally must fall. At the end of the column Pearlstein told readers:

"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."

Well no, it is not the case that a "market economy" led to the high salaries of investment bankers, corporate executives, and newspaper columnists, while forcing wage cuts on auto workers. In fact, there are a wide variety of government interventions that created this situation.

For example, there was the government bailout of the banks two years ago. By offering trillions of dollars in loans and guarantees the government kept Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and other Wall Street giants in business. In a market economy, the top executives of these companies would be walking the unemployment lines right now instead of getting bonus checks in the tens of millions of dollars.

The executives of these banks also benefit from the "too big to fail" subsidy. This means that creditors will lend to these banks at lower interest rates because they know the government will bail them out if the bank gets into trouble.

Corporate executives get ridiculously high pay in the United States (as opposed to Europe, Japan, or South Korea) because the government's rules of corporate governance allow corporate executives to essentially run companies in their own interest. The CEOs largely appoint the board of directors (a ridiculously plush sinecure) who in turn decide the CEOs' pay. In systems where the corporations are more directly subject to shareholder control, CEOs get paid far lower salaries.

Finally the pay of columnists and highly educated workers is inflated as a result of the fact that these workers are largely shielded from international competition. The laws make it difficult for companies to bring in foreign professionals to undercut the pay of doctors, lawyers, columnists, even if they are every bit as competent as the native born workers they would be replacing.

By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law.

In short, the inequality that Pearlstein notes has nothing to do with the dictates of a market economy. It is the result of the people at the top rigging the rules to their benefit. They got the government to stack the deck in their favor and then hired people like Pearlstein to tell everyone that it was just the natural workings of the market.

 
Former Fed Governor Warns That If Monetary Policy Is Too Loose, We Could Get a Recession That Is Not as Severe as the Current One Print
Wednesday, 13 October 2010 04:41

It would have been useful to point this out in an article that presented the views of former Fed governor Robert Heller. Mr. Heller's views were presented as those of an inflation hawk who was worried that the Fed was going too easy in trying to boost the economy. He noted the inflation of the 70s and the recessions in 1980 and 81-82 that brought the inflation rate down.

It would have been worth reminding readers that these downturns were far less severe, measured in duration and increase in unemployment, than the current downturn. If the possible bad outcome is not as bad as the current situation, then there would appear to be little basis for concern about excessively easy monetary policy.

 
New York's Bill for Retiree Health Care: Denominator Please Print
Wednesday, 13 October 2010 04:07

The NYT reported that state, local, and county governments in New York face a liability of $200 billion for retiree health insurance payments. These governments have not budgeted for this liability.

It would have been helpful to include a measure of future income so that readers could assess the importance of this cost. If New York State grows at roughly the same rate as the overall economy, then its total income (discounted at a 4.5 percent rate) would be over $37 trillion. This puts the unfunded liability for health care for New York's public sector employees at approximately 0.5 percent of income. 

It is also worth noting that much of this cost is due to the projection that health care costs in the United States will continue to grow at a pace that is far out of line with growth in the rest of the world. If the country were to adopt free trade policies in health care, then this cost could be drastically reduced. In other words, if U.S. trade policy was not so protectionist in this area, state and local government retiree health care costs would be far more affordable.

The article also includes comments that retirees can get full health care benefits as early as age 55. It would have been worth mentioning that this only applies to workers who have worked 30 years or more, which is not most workers.

 
Foreclosure Moratorium: The NYT Does Not Know What The Obama Administration Fears, Only What It Says It Fears Print
Tuesday, 12 October 2010 04:36

The NYT is a great newspaper with many outstanding reporters, but does it have access to the innermost thoughts of top administration officials? That seems unlikely, which is why readers should be wondering how it knows that "the administration fears it [a foreclosure moratorium] will only delay the inevitable and necessary process of forcing many Americans out of homes they cannot afford."

This particular explanation seems highly unlikely since its HAMP program seems designed to accomplish exactly this. The vast majority of homeowners who enter the HAMP program keep making payments on homes that they will eventually lose. While this does help the banks, it delays the inevitable and necessary process of forcing many Americans out of homes they cannot afford. It doesn't make sense that the administration would be spending tens of billions of dollars on a program whose main impact is to delay having homeowners forced out of their homes if it actually thinks it is important that people be forced out of their homes quickly.

There are other possible explanations for the Obama administrations opposition to a foreclosure moratorium. For example, it could be discovered that the fraud and procedural abuses are widespread. It would likely be very costly for many servicers to construct the proper paperwork to carry through foreclosures. The administration may not want to force banks to incur these costs. That is at least one alternative explanation for the administration's position. 

 
Are Public Sector Workers and David Brooks Overpaid? Print
Tuesday, 12 October 2010 04:06

According to the David Brooks methodology both are. Brooks points out that public sector workers get higher pay than the economy-wide average, which is the basis for his argument that they are overpaid. By this methodology, if Brooks get more than $22.67 an hour, the economy-wide average, then he is overpaid.

Economists usually approach this issue somewhat differently. They consider workers' education and experience. If we adjust for education and experience then we find that public sector workers get paid somewhat less on average than private sector workers. This is partially, but not completely, offset by the higher pensions that upset Brooks so much.

It is likely the case that many state and local governments did not adequately budget for workers' pensions, but this is more an issue of failed accounting and incompetent reporting (newspapers are supposed to be covering such issues) than excessive pensions. Brooks highlights an estimate that the amount of the average unfunded pension for all public sector workers is $87,000.

This does not seem particularly large. If we assume an average retirement of 20 years, this comes to $4,350 per worker pension year. Since many public sector workers do not have Social Security this hardly seems an excessive amount on the workers' part.

Brooks also complains that AFSCME, the public employee's union, was the largest single contributor to political campaigns between 1989 and 2004. While this may be true in the sense that AFSCME gave more money than Robert Rubin or Rupert Murdoch, AFSCME represents more than a million workers. Certainly the million richest Wall Streeters, oil tycoons, or tech entrepreneurs gave far more money to candidates than AFSCME. It is likely that politicians responded to their concerns roughly in proportion to their contributions.

 
Economics 101 For Robert Samuelson: Recessions Are About Inadequate Demand Print
Monday, 11 October 2010 04:21

Robert Samuelson insists that the bond markets are forcing countries to adopt austerity in the middle of a downturn. This is not true. Bad economic policy, by the same people who gave us the Great Recession (how badly do economists have to mess up to get fired?) is forcing countries to adopt austerity in the middle of a downturn.

In fact the bond markets are making money available to countries like Germany, Japan, and the United States at very low interest rates, the exact opposite of the scenario that Samuelson describes. (Samuelson notes these low rates in passing, but doesn't seem to understand their importance.) It is true that countries like Greece, Ireland, and Spain are paying much higher interest rates, but this has little to due with the generosity of their welfare states as Samuelson claims. It is due to the deliberate decision from the Great Recession makers at the European Central Bank (ECB) to squeeze these countries.

The situation of these countries is similar to that of individual states in the United States. They do not print their own currency and therefore are constrained in their ability to spend in a period of a downturn. The ECB does print money and could easily extend support to these countries during the downturn, but it has made a conscious choice to only do so insofar as they cut back on their welfare state benefits. Note this will not create inflation in the current situation; the economy's problem is inadequate demand, not too much demand.

It is not the downturn that is forcing cutbacks, it is the people controlling policy at the ECB. These policymakers do not like to be publicly associated with their policy decisions so they no doubt appreciate columns like Samuelson's that hide their role.

As a basic principle, there is no reason for general cutbacks in the welfare state. Societies are getting richer because of something called "productivity growth." The cutbacks in the welfare state are simply part of the upward redistribution that policymakers in the U.S. and elsewhere have been pushing for the last three decades.

 
If The Bush Tax Cuts on the Rich Expire, Will Gregory Mankiw Write Less? Print
Sunday, 10 October 2010 21:49
Gregory Mankiw, formerly President Bush’s top economist, raised this question in his NYT column this week. I’ll resist the obvious temptation to pronounce this a win-win and deal with the issue at hand.

Mankiw explains in his piece that the various tax increases (income, capital gains, and estate taxes) would substantially reduce the percentage of any additional income that he could pass onto his children, which he says is his main motivation in earning money. Therefore higher taxes will give him less incentive to write. His point being that many other high-income workers will be in the same boat.

Brad DeLong ably dealt with the basic issue as to whether taxes can be separated from spending over the long-term, as Mankiw’s discussion seems to imply. (They can certainly be separated in periods of high unemployment like the present.) But, there are several other issues to raise.

First, the relevant factor determining work effort is after-tax income, not tax rates. As a result of a number of policy decisions (e.g. protecting highly educated workers from unrestricted international competition, strengthened patent and copyright protection), Mankiw is likely to enjoy a higher after-tax wage even with the repeal of the tax cuts than he would have earned 30 years ago if Bush era tax rates were in place.

If taxes on gambling were applied to gambling on Wall Street, in the form of a modest financial speculation tax, it would drastically reduce the volume of trading. This would substantially reduce the demand for workers with advanced degrees in the financial sector.

Since the financial sector employs a high percentage of the workers with advanced degrees, a financial speculation tax would likely put downward pressure on the wages of people with advanced degrees across the board. An unfortunate aspect of the debate on tax policy is that it leads the public debate to focus on tax rates while ignoring the much more important policy decisions that determine the distribution of pre-tax income.

The second point is that the income/wealth effect of lower taxes may cause Greg and/or his children to work less. This effect is difficult to measure. In any given year, a lower tax rate may cause people like Greg to work more, but this could be different if they accumulate substantial additional wealth as a result of lower tax rates. Greg tells us that his main motivation is to accumulate enough wealth to ensure that his three children can enjoy a comfortable standard of living.

Suppose that he had already accumulated enough wealth for this purpose because the tax rates had been low for a long time. How many columns would Greg be writing then? Alternatively, can we expect as much work out of Greg’s well-educated kids if he provides them with a substantial inheritance as opposed to a situation where they had to work to make ends meet like the rest of us? Or, taken the other way, would Greg be writing as many columns today if his parents had handed him enough money so that he did not have to work to ensure a comfortable standard of living for himself and his children? We don’t know the answer to this one, but Greg certainly gives the issue short shrift in his discussion.

Finally, there is the issue of quality that Brad raises in his blognote, but doesn’t pursue sufficiently. If we pay writers by the word, then we would expect writers to write long books and articles. That’s great if we want long books and articles, but it is not necessarily a way to get good books and articles.

If economists, and others like them, are motivated primarily by money then they will do work that gets them money. This does not necessarily correspond to good economics. Many of the most creative workers received very little if anything in compensation for their work. Think of Vincent van Gogh, Charlie Parker, and Franz Kafka. Suppose we offered these great artists large sums of money for each piece they produced. Would they have produced better work?

I don’t know the answer to that one. I am not arguing that creative workers should live in poverty, only that many of the most creative people in history were motivated first and foremost by a commitment to their work, not by money. It certainly is not obvious that they would have been more creative if they thought there was more money at stake.

 
And Here's Timothy Geithner to Tell You How Much the Post Supports the TARP Print
Sunday, 10 October 2010 13:55

The TARP is one of those issues like Social Security, where the Washington Post has displayed considerably less diversity in opinions than Pravda back in the days of the Soviet Union. Just in case you hadn't seen their TARP is great line enough, the Post invited Treasury Secretary Timothy Geithner to invent some myths that he could attack in the Outlook section.

Readers were no doubt looking for the line about how TARP and related bailouts used trillions of dollars of loans and loan guarantees from the Treasury, Fed, and FDIC to keep the largest financial institutions from going into bankruptcy, protecting the wealth of their shareholders, many of their creditors and top executives. But of course that is not a myth.

 
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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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