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Hey Stupid Seniors! The Post Says a 9 Percent Cut In Social Security Benefits Won't Hurt Print
Friday, 27 May 2011 05:16

It's amazing what you can learn reading the Washington Post. Today it's lead editorial told readers that reducing the annual cost of living adjustment for Social Security by 0.3 percentage points won't hurt. This would come as news to most seniors who rely on Social Security for most of their income.

This 0.3 percentage point cut is cumulative. After a person has been retired for 10 years benefits would be roughly 3 percent lower than would otherwise be the case. Benefits would be almost 6 percent lower after 20 years, and almost 9 percent lower after 30 years, when most beneficiaries will be in their 90s.

The poverty rate is highest for the oldest seniors, most of whom are women living alone. Most people think cutting benefits for this group by 9 percent would hurt, thankfully we have the Washington Post to tell us otherwise.

(This is a newspaper that has run front page stories warning that raising taxes by less than 1 percent [of income] on people earning $300,000 a year would inflict real pain.)

The rationale for the benefit cut is the use of an alternative measure of inflation, the chained consumer price index, that assumes substantial substitution between consumption items in response to prices changes. The Post asserts that this index is a more accurate measure of inflation.

Actually, the Bureau of Labor Statistics has an experimental elderly index that measures the rate of change in the basket of goods and services consumed by people over age 62. This index shows that the inflation rate experienced by the elderly increases by an average of 0.3 percentage points more than the overall CPI to which Social Security benefits are indexed.

While this is an experimental index that does not track the actual purchasing patterns of the elderly (e.g. examining the specific retail outlets where they shop and the items they purchase), those who are interested in an accurate cost of living adjustment would advocate a fuller elderly index. Those who want to cut Social Security benefits advocate using the chained consumer price index, which we know will show a lower measured rate of inflation.

People Are Retiring Leads to Downward Pressure on Wages Print
Friday, 27 May 2011 04:52

That's what Marketplace radio told listeners this morning in reference to to Japan. It explained Japan's deflation this way:

"The underlying problem in Japan is that the country is getting older. More and more people are retiring so there's downward pressure on wages."

Let's see, retiring workers reduce supply, therefore wages fall. Hmmm, lower supply therefore lower wages. What are we missing here?

Actually, the larger point of this story, that the inflation caused by higher prices for energy and other unusual costs last month, was a good thing for Japan, also doesn't make sense. Japan will benefit from a situation in which there are broad based wage and price increases that erode the real value of debt and reduce real interest rates. Having the price of a small subset of goods rise (especially imported goods like oil) is bad news since it erodes workers' purchasing power.

David Brooks Calls for Improved Defenses Against Martians and Cutting Medicare Print
Friday, 27 May 2011 04:09

It's pretty brave of the NYT to routinely feature a columnist who is completely out of touch with reality. David Brooks has another tirade today in which he lays out his, "Medicare Survival Guide."

Brooks is very upset that the Democrats won the special congressional election in New York by telling people that the Republicans want to end Medicare. Apparently, Mr. Brooks has not read the Medicare plan that was put forward by Representative Ryan and approved by the House with the support of all but 4 Republicans. This plan replaced the current Medicare system with a voucher, which seniors would use to buy health care insurance. That certainly sounds like ending Medicare. It would be interesting to know what Mr. Brooks would consider ending Medicare.

According to the Congressional Budget Office's assessment of the Ryan plan, it would increase the cost of buying Medicare equivalent policies by $34 trillion (5 times the projected Social Security shortfall) over the program's 75-year planning horizon. Adding in the $5 trillion in costs shifted from the government, the Ryan plan would increase the cost to beneficiaries of buying Medicare equivalent policies by $39 trillion.

In pushing the defense plan against Martian attacks Ryan tells the Republicans:

"They need to lay out the facts showing that Medicare is unstable and on a path to collapse, as Representative Paul Ryan is doing."

Actually, this is not what the facts show. The projections in the Medicare Trustees report, as well as the CBO baseline budget, show that the program faces a relatively modest long-term shortfall. The amount of money needed to balance the program over its 75-year planning horizon is less than 0.3 percent of GDP, approximately one-fifth of the increase in the rate annual defense spending between 2000 and 2011.

There are important issues as to whether the assumptions underlying these projections will prove accurate, importantly limiting the increase in doctors' compensation under Medicare. However, this is a question of whether Congress will adhere to the current law, not a need to change the law.

The Brooks piece also contains the wonderful line:

 "Many Democrats don’t want to go down in history as the people who did nothing while bankruptcy loomed."

Actually, they already will go down in history that way. Apparently no one told Brooks about the economic downturn. (He has probably been too busy preparing the defense against Martians.)

The Democrats, like their Republican counterparts, completely ignored the run-up in the housing bubble. The collapse of this bubble is likely to cost the country more than $5 trillion in lost output. It is also the reason for the large deficits that concern Brooks so much. Unless the Democrats can ensure that people like Brooks write the story, they are destined to go down in history as people who did nothing while economic disaster (I have no idea what Brooks means by "bankruptcy" and most likely he doesn't either) loomed.

The Democrats Don't Have a Plan To Cover A Medicare Shortfall Arising in Just 13 Years That Is Equal to One-Fifth of the Increase in Annual Defense Spending Since 2000!!!!!!! Print
Thursday, 26 May 2011 05:04

The Wall Street Journal tells us that:

"Republicans argue that Mr. Obama and the Democrats have no plan to rescue Medicare, despite estimates that it will be unable to pay out full benefits beginning in 2024."

It then gives us the Democrats' response, making it a he said/she said. It would have been helpful to inform readers about the projected gap in Medicare funding so that readers know what it would mean to "rescue" Medicare from a shortfall that it is first expected to face 13 years in the future.

The Medicare Trustees put the projected shortfall at 0.79 percent of payroll, which is approximately 0.27 percent of GDP over the program's 75-year planning horizon. By comparison, the increase in annual spending on the military between 2000 and 2011 was more than 1.6 percentage points of GDP. This increase in spending did not cause serious harm to the economy, therefore increased spending of one-fifth this size will presumably not be a major problem.

Is It a Fact That the U.S. Deficit Is "Ballooning?" Print
Thursday, 26 May 2011 04:26

The Congressional Budget Office actually projects that the deficit is on a downward path, but the NYT still felt the need to tell readers that the deficit is "ballooning" in an article on the agenda for an upcoming meeting of G-8 leaders. The article also felt the need to describe the deficit as "giant."

These comments reflect the reporters or editors political views. They do not inform readers about facts in the world.

Bill Clinton, Who's Known for His Plan to Cut Social Security Print
Thursday, 26 May 2011 03:56

In an article reporting on how the Republicans are backing away from the Ryan plan for privatizing Medicare. the NYT quoted former President Bill Clinton on the need to cut Medicare spending. Mr. Clinton was speaking a daylong conference of the deficit sponsored by Wall Street investment banker Peter Peterson.

It would have been worth reminding readers that Clinton is a big proponent of cuts to Social Security. At the deficit conference that Peterson sponsored last year, Clinton boasted that he had wanted to cut Social Security but congressional leaders from both parties blocked him. The cuts that he wanted would have reduced benefits by approximately 1 percent a year. This means that retirees in their 70s, 80s, or 90s, would be getting almost 15 percent less in Social Security benefits today, if President Clinton had gotten his way.

His desire to cut Social Security puts Clinton far outside the mainstream in the Democratic Party. In fact, it puts him far to the right of the majority of the Republican Party. It would have been appropriate to remind readers of this fact so they could put Mr. Clinton's interest in cutting Medicare in context.

The Wall Street Journal Tells Us It's All About Philosophy Print
Wednesday, 25 May 2011 22:03

The news media keeps trying to tell us not to worry about who gets the money, the issue is one of philosophy. The WSJ picks up the task today telling readers that the difference between conservative and liberal budget plans:

"The big takeaway is this: The debate over how to reduce the deficit is truly a philosophical one about the size of government."

Is that so? The Congressional Budget Office tells us that it will cost $34 trillion (5 times the size of the projected Social Security shortfall) more to provide Medicare equivalent policies through private insurers than through the traditional government Medicare program. This would be additional money paid by taxpayers and beneficiaries to insurers and providers. Is the desire to hand this money over to these groups a question of philosophy?

Near Record Vacancy Rates Weigh on Home Prices Print
Wednesday, 25 May 2011 21:22

Nearly all economics reporters missed the housing bubble on the way up. They still seem determined to ignore it even after its collapse wrecked the economy.

The Wall Street Journal has a piece that emphasizes the effect that foreclosures are having on house prices. While foreclosures are lowering house prices, the more fundamental issue is that we have enormous excess supply. The country still has near record housing vacancy rates, although the level is down slightly from the peaks hit in 2009-2010.

This extraordinary vacancy rate puts downward pressure on house prices, since it means that there is excess supply of housing. (Those who took intro econ might recall the concepts of "supply" and "demand.") One of the predictable results of excess supply and falling prices is a rise in foreclosures, since falling house prices will put many people underwater in their mortgage. As a result of having zero equity, it is harder for people to pay their mortgage (they can't borrow against equity) and they have less reason to do so.

Anyhow, the key part of this story is the excess supply which was the result of the massive overbuilding of the last decade. It is reasonable to expect that prices will have to fall at least back to their pre-bubble level (@10 percent more) in order to bring the market back into balance.

If Senator Simpson Started Muttering Incoherently, Would the Media Sill Cover Up for Him? Print
Wednesday, 25 May 2011 20:44

At Peter Peterson's daylong conference on the deficit, former Senator Alan Simpson, who was also the co-chair of President Obama's deficit commission, once again insisted that Social Security was not intended as a retirement program. He also insisted that the arithmetic for the program doesn't add up and that therefore there have to be major cuts.

Of course everyone involved with the establishment of Social Security understood it to be a retirement program. It's not clear what Senator Simpson has been reading that led him to think otherwise.

In terms of the arithmetic underlying the program's finances, this is performed regularly by the actuaries at Social Security. With the trustees current assumptions, the program can pay all benefits through the year 2036 and almost 80 percent of scheduled benefits for the rest of Social Security's 75-year planning period. The projected shortfall could be almost completely eliminated with the cap on the payroll tax was removed.

Put another way, if there had not been a massive upward redistribution of wage income over the last three decades, most of the current projected shortfall would not be there. This is the simple arithmetic that apparently Senator Simpson does not understand.

It is incredible that no media outlet other than Huffington Post thinks it is newsworthy that the co-chair of President Obama's deficit commission is completely uninformed about the country's most important social program. While these news outlets have been anxious to tout comments by minor administration officials that had little to with their jobs (e.g. Van Jones' pejorative reference to Republicans), they have consistently covered up Mr. Simpson's repeated demonstrations of ignorance on the finances of Social Security.

The Public Fears the Consequences of Going Long Periods of Time Without Eating More Than it Fears Starvation Print
Wednesday, 25 May 2011 06:50

That is what the Washington Post told readers this morning in an article headlined:

"in poll, debt is scarier than default."

Of course fearing debt more than default makes no sense just like fearing the consequences of not eating more than starvation makes no sense. The government will always have the option to default on its debt. The consequences would of course be enormous, but there is no reason to think that the consequences of default would be greater 10 or 20 years from now. If the public is prepared to default on its debt, it is difficult to see why it would not want to in effect borrow for free for another 10-20 years and then default to its creditors.

As a practical matter, it is obvious that almost no one has any understanding of what default means nor do they have any idea of the size of the debt and its consequences. One of the main reasons for this confusion is that politicians have sought to build up fears about the debt and they have been allowed to do so with the assistance of major news outlets like the Washington Post and National Public Radio.

When politicians (including political figures like Peter Peterson and his employees) make obviously false statements about the deficit and debt these outlets have routinely passed them on to their audience as plausible arguments. They have rarely treated them as gaffes, like for example then Senator Obama's comments about guns and religion during the Pennsylvania primaries.

There has been a serious effort (strongly supported by the Washington Post) to hold teachers accountable for what their students learn. Teachers whose students do not learn are supposed to be fired. By this standard, a high percentage of the reporters and editors who deal with budget issues would be out looking for work today.

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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.