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Washington Post Reports that Most Retired California Public Employees Receive Lower Pensions Than Generally Believed Print
Wednesday, 09 March 2011 06:04

That was not the way that the Post framed the issue, but this is the implication of an article on public sector pensions in California that began with a discussion of the $520,000 a year pension received by the former administrator of a small city. The article cites the claim by the California Foundation for Fiscal Responsibility that more than 15,000 retired state employees receive pensions of more than $100,000 a year. It then cites a spokesperson for the American Federation of State County and Municipal Employees saying that the average pension is just $19,000. 

If both numbers are accurate, then this means that roughly 3 percent of retirees account for almost 20 percent of total benefits (assuming an average pension for the over $100k group of $110k), which means that the average pension for the bottom 97 percent is a bit over $16,000 a year.

The article includes a statement from an economist blaming the public sector employees for not better policing their pension system. While this is a reasonable point, it is also reasonable to ask why the people supervising the pension systems, who are paid six figure salaries for this work, have not called attention to abuses like the one highlighted at the beginning of this article.

News Flash! Western Europe Is Richer Than Eastern Europe Print
Wednesday, 09 March 2011 05:39

The NYT has an article telling readers that Latvian officials working for the European Union bureaucracy earn much higher pay than their counterparts who remain in Latvia. This is of course true. It would be very surprising if it were not the case.

The European Union is dominated by relatively wealthy countries like France, Germany, and the U.K. It would be expected that the pay of its officials would reflect pay scales in these countries. This means that when poorer countries, like Latvia, enter the EU, their nationals can anticipate big pay increases if they move from employment by the Latvian government to employment by the EU, just as a plumber would get a big increase in pay if they moved from Latvia to Germany.

M.I.T. Economist David Autor Shows Soaring Demand for Uneducated Workers Print
Tuesday, 08 March 2011 22:14

David Autor has inaccurately reported that he has found evidence of a hollowing out of the distribution of jobs for men, with increased employment at the top and the bottom ends of the wage distribution and a loss of jobs in the middle. NYT columnist David Leonhardt seems to have largely bought this story as well.

Actually, as John Schmitt, my colleague at CEPR, and former colleague Heather Boushey pointed out, Autor's work shows the opposite. In the most recent business cycle, 2000-2007, there was a relative decline in the demand for all male occupations, except those at the bottom of the wage distribution. There was less of a decline for jobs near the top than for those in the middle, but it would be more than a bit of an exaggeration to call this a hollowing out of the job distribution. Autor's data is essentially showing an increased demand for less-skilled occupations pure and simple.

The story for the prior business cycle is also not quite what Autor describes. Between 1989 and 1999, there actually was a decline in relative employment for all occupations below the median except those near the very bottom (the bottom decile).

A large percentage of the workers in this bottom decile were immigrants. There has been considerable research (e.g. here and here) that suggests that immigrants don't compete directly with native born workers and instead fill a sub-class of occupations in which jobs would have gone largely unfilled in the absence of immigrant workers. Insofar as this is the case, it suggests that the growth in the lowest wage occupations was not a demand-side phenomenon, but rather a supply side story. In this view, if there had been a large influx of immigrants occupying the middle wage occupations, then we would have seen strong growth in employment in these occupations as well (albeit at much lower wages).

In the period from 1979-1989, the first business cycle analyzed by Autor, there is a decline in the relative shares of employment for all occupations below the 60th percentile. This also does not support the hollowing out story.

To summarize, in the first cycle, Autor finds increased relative demand for highly skilled occupations and decreased demand for less skilled occupations. In the second cycle he finds increased demand for highly skilled occupations and decreased demand for all but the lowest skilled occupations, which may be the result of an influx of low-paid immigrant workers. In the third period, there is a decline in the relative demand for everyone but less-skilled workers. In other words, he really doesn't show any evidence of a hollowing out of the job distribution.

Cash Customers: The Big Winners from Debit Card Fee Regulation are Missing from NYT Story Print
Tuesday, 08 March 2011 05:47

The NYT reported on the dispute between retailers and banks over debit card fees. The banks, by their own claim, take advantage of their monopoly power to charge fees that are far above their cost. (We know this because they have threatened to raise the cost of services like maintaining checking accounts if they have to lower their fees on debit cards. They could only do this sort of cross-subsidy if they had some degree of monopoly power in debit cards.) 

The article never discussed the situation of customers who pay in cash. These are likely to be the biggest gainers from lower debit card fees. Retailers are generally required to charge all customers the same price regardless of how they pay. This means that cash customers pay a price that covers the cost of debit card and credit card transactions, even though they do not receive the benefit of these services.

In effect, the banks impose a sales tax of 1-2 percent on all customers to cover their fees. Debit and credit card users get a benefit in the form of greater convenience for this tax. Cash customers just pay the tax. Of course cash customers also tend to be poorer, since these are largely people who could not get credit cards and may not even have bank accounts. So, these fees are a transfer from the less wealthy to more wealthy.

Fareed Zakaria Is Upset Because the Government Spends So Much More on Each Rich Person Than on Each Child Print
Monday, 07 March 2011 04:56

Actually Zakaria is not upset that the government will give far more money to the average rich person this year than the average child. He is upset that it spends more money on the elderly.

The main reason that the government spends more on the elderly than the young is that we run a public pension program, Social Security, through the government. We also run a seniors' health insurance program, Medicare, through the government. In both cases people pay a dedicated tax for these benefits. (The Medicare tax does not pay for the whole cost of the program.)

Zakaria is upset that seniors are allowed to receive the benefits that they have paid for. By the same logic, he should be upset that billionaires like Peter Peterson can get millions or even tens of millions of dollars in interest each year on the government bonds they own. After all, this money would be far better spent educating our children than being put in the pockets of these incredibly wealthy people. The Zakaria methodology would have us go after these interest payments on the debt, if it were applied consistently.

Failing Drug Research Model: Can't the NYT Talk About Patents? Print
Monday, 07 March 2011 04:15

It seems not. A front page NYT article reported on the drop in profits that the drug industry expects over the next year as many of its blockbuster drugs lose patent protection. The article reports that some of the major pharmaceutical companies may cut back their research spending as a result.

The article never discussed the possibility of alternative funding mechanisms. For example, Joseph Stiglitz, the Nobel prize winning economist, has advocated a prize fund whereby the government would buy up patents and allow all drugs to be sold at their competitive market price. It is also possible for the government to simply pay for the research up front (it already finances almost half of biomedical research through the National Institutes of Health). This also would allow the vast majority of new drugs to be sold for a few dollars per prescription.

This sort of overview of the pharmaceutical industry would have been an appropriate place to discuss the merits of the current patent system for financing prescription drug research.

Robert Samuelson Wants to Take Money from Seniors to Make the Wall Street Boys Richer Print
Sunday, 06 March 2011 21:16

Yes, Robert Samuelson is at it again, spreading inaccurate and misleading claims about Social Security to justify taking money from retirees.

It seems that for some reason he has a hard time understanding the idea of a pension. This shouldn't be that hard, many people have them.

The basic principle is that you pay money in during your working years and then you get money back after you retire. Social Security is a pension that is run through the government. Therefore Samuelson wants to call it "welfare."

It is not clear exactly what his logic is. The federal government runs a flood insurance program. Are the payments made to flood victims under this program "welfare?" How about the people who buy government bonds. Are they getting "welfare" when they get the interest on their bonds? If there is any logic to Mr. Samuelson's singling out Social Security as a source of welfare, he didn't waste any space sharing it with readers.

There are a few other points that deserve comment. He claims that the trillions of dollars of surplus built up by the trust fund over the last three decades were an "accident." Actually, this surplus was predicted by the projections available at the time. If anyone did not expect a large surplus to arise from the tax increases and benefit cuts put in place in 1983 then their judgement and arithmetic skills have to be seriously questioned.

In terms of the program and the deficit, under the law it can only spend money that came from its designated tax or the interest on the bonds held by the trust fund. It has no legal authority to spend one dime beyond this sum. In that sense it cannot contribute to the deficit. Mr. Samuelson apparently wants to use Social Security taxes to pay for defense and other spending.

If we allow for the possibility that we could impose a "Social Security" tax on workers and then use this money for other purposes, the decision to not use it for other purposes can be said to make the deficit larger. But this is sort of like saying that our decision not to steal money from disabled people makes the deficit larger. After all, if we had a policy of stealing from the disabled, then the deficit would be lower. How can anyone argue with that.

Finally Samuelson decided to get a little creative with numbers to press his case. He told readers that:

"In 2008, a quarter of households headed by people 65 and over had incomes exceeding $75,000."

That's not what the Census data show. They put the share of the over 65 population with incomes of more than $75,000 at 15.8 percent. And, almost half of these people had incomes of less than $100,000. In this context it worth remembering that President Obama put his lower cutoff for those subject to tax increases at $200,000.

So, we are reminded yet again that Robert Samuelson really doesn't like Social Security and that he is willing to make up numbers to push his case.

The Post Complains About Congress Soliciting Bernanke's Opinion Print
Saturday, 05 March 2011 09:12

The Washington Post editorial board is upset that members of Congress tried to prompt Federal Reserve Board Chairman Ben Bernanke to weigh in on the merits of Republican proposals for large budget cuts. While they are right to be upset about such childish behavior, the Post missed the main reason.

After Alan Greenspan, Ben Bernanke is the person most responsible for the economic collapse the country is now recovering from. He was one of Fed governors from 2002 to 2005, before having a brief stint as President Bush's chief economic advisor. He then returned as Fed chairman in January 2006. During this period, he stood by and did nothing as the housing bubble grew to ever more dangerous levels and in fact publicly insisted that it was no big problem. It would be hard to imagine a more disastrous mistake.

Given Mr. Bernanke's track record he is very lucky to have a job (and indeed a well-paying one) at a time when so many workers do not. It is hard to see why the opinion on economic policy of someone who didn't see any problem with an $8 trillion housing bubble would be especially valuable.

February Jobs Report: How Big is "Big?" Print
Saturday, 05 March 2011 08:51

The headline of the NYT article on the February jobs report told readers about the "big jump" in private sector jobs reported for the month. While the 222,000 increase in private sector jobs was indeed good compared to the anemic growth that we have been seeing, it is a bit misleading to describe this as "big." In the four years from January 1996 to January 2000 the economy generated an average of almost 240,000 jobs a month.

In past recoveries from serious downturns the economy generated jobs at a far more rapid rate. In the year following the end of the 1981-82 recession the economy created private sector jobs at the rate of more than 280,000 a month, in a labor market that was almost 40 percent smaller than the current market. In the year from November 1976 to November 1977 the economy created more than 290,000 private sector jobs per month in a labor market that was just a bit more than half as large as today's.

It is also important to remember, as noted in the article, that the February number was in part a bounceback from a weather-weakened January number. Firms that put off hiring because of weather conditions in January ended up doing their hiring in February. The average growth in private sector jobs for the last two months was just 145,000.

Given the ongoing decline in public sector employment due to state budget crunches (@15,000-20,000 per month), this is only a bit more rapid than the 90,000 growth rate needed to keep pace with the growth of the labor force. At this rate, the economy will not return to normal levels of unemployment until well into the next decade.

Economists on Stock Returns: It Depends on the Weather or Maybe Politics Print
Friday, 04 March 2011 05:46

It would be nice if the answers that economists gave us on economic issues did not change when the political environment changed. Unfortunately, we don't live in such a world. This can be seen very clearly in the current debate over the assumption on rates of return that public pensions should make for the assets they hold in stock.

Most economists today seem to be lining up on the side that pensions should only assume that stock will provide the same rate of return as Treasury bonds. Even though the expected nominal return on stocks might be 10 percent, these economists argue that because of the risk associated with stock returns public pension funds should only assume the rate of return on risk free Treasury bonds, roughly 4.5 percent.

The counter-argument is that state pension funds can essentially be indifferent to the risk of market timing. If the market is depressed for a few years, the state pension fund would still have adequate assets to pay all benefits. There would only be a problem if the market remained permanently depressed, which is not plausible if the widely accepted projections for long-term economic growth prove accurate.

This lower rate of return makes a huge difference in the size of pension liabilities. This change in accounting, coming at a time when state budgets are hard-pressed due to the recession, would create substantial pressure to reduce pension benefits and possibly eliminate defined benefit pension plans altogether.

It is interesting to note that the economists' concern with pension fund accounting just happens to coincide with a major push by the right-wing to attack public sector workers and especially public sector pensions. State pensions have been assuming 10 percent nominal returns on their pension's stock holdings for decades. This fact never seemed to trouble economists previously.

Interestingly, many economists had argued the exact opposite position in the context of Social Security privatization. Andrew Biggs, one of the economists who has been very prominent in the debate for lowering the return assumptions on public plans, explicitly argued for assuming a high rate of return for the stock held in privatized Social Security accounts. Other proponents of privatization took the same perspective, which was the main benefit of their proposal.

Even advocates of preserving the current Social Security system wanted to assume a higher rate of return for money held in stock, albeit for stock held in the Social Security trust fund. Two of the country's leading experts on Social Security, Henry Aaron and Robert Reischauer, both explicitly called for putting part of the Social Security trust fund in the stock market to take advantage of the higher rates of return offered by stock. President Clinton made the same proposal.

It is worth noting that these plans for putting Social Security money in the stock market were made near the peak of the stock bubble, when price to earnings ratios were approaching 30. In this context, they were making absurd assumptions about the prospect for future returns, as some people pointed out at the time. By contrast, now that the market has plummeted from its bubble peaks and price to earnings ratios are close to their long-term average, it is plausible that the market will provide its historic rate of return.

If economists were consistent, they would apply the same methodology for assessing stock returns in the context of Social Security privatization in the late 90s as they apply to public pension funds in the current crisis. This does not appear to be the case.

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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.