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Robert Samuelson's Confusion on Real Interest Rates Print
Monday, 15 November 2010 06:02

Robert Samuelson is beating up on Japan in his column today. While its economy has certainly had troubles in the last two decades, the picture is not quite as bleak as he seems to believe. Its rate of productivity growth (the most important measure of economic dynamism) since 1995 has been almost identical to the average for the OECD and within 0.2 percentage points of the rate in the United States. Furthermore, since depreciation is a large and growing share of U.S. output (primarily because computers become obsolete quickly) it is likely that a net measure of output would show Japan and the United States having virtually the same productivity growth over this period. Net productivity is the measure that is relevant for living standards, since you can't eat depreciation.

It is also worth noting that Japan's unemployment rate is just 5.0 percent. It never rose above 6.0 percent over the last two decades.

However Samuelson's biggest error is that he fails to understand the problem that deflation, or more correctly low inflation, poses for Japan's economy. While he rightly ridicules the idea that consumers would delay purchases to buy items of like cars to buy them at a price that is 0.5 percent lower the following year, this is not the main way that low inflation harms the economy. 

In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment. This means that the cost of borrowing is low relative to the return on investment. Because interest rates can't go negative, it is impossible for real interest rates to fall as much as would be desired given the weakness of Japan's economy. It would be ideal if it could keep its nominal rates at their current near zero level, while inflation rose to 3.0 or 4.0 percent.

The other reason why inflation would be desirable is that it would allow homeowners to get out from under their debt burdens. If wages rose 3.0-4.0 percent annually in step with inflation, the burden of a fixed mortgage debt would be eroded through time. Also, if house prices rose in step with inflation, consumers would gain equity in their homes.

However, the problem in both of these cases is that the rate of inflation is too low. The fact that it crosses zero and is negative is of no special importance. The problem is low inflation, not deflation.

 
Correcting Ross Douthat in His Attack on Progressives Print
Monday, 15 November 2010 05:09

Ross Douthat denounced progressives who attacked the Bowles-Simpson proposals for cutting Social Security and Medicare to help finance lower taxes on the hard-pressed wealthy. He got a few things wrong in the process.

First, Douthat complains that businesses in the United States have to "labor under one of the higher corporate tax rates in the developed West." While the marginal tax rate in the United States is somewhat higher than the average, because of the extensive loopholes in the corporate tax, the effective tax rate in the United States is lower than the average for the OECD. There certainly is no general opposition among liberals to reform that would reduce the tax rate while offsetting the lower rates with fewer deductions.

He complains that in the liberal/progressive's world, "the Social Security retirement age never budges, no matter how high average life expectancy climbs." Mr. Douthat apparently has not heard that the Social Security retirement age is rising already. The age at which workers collect full benefits has already risen from 65 to 66. It will rise to 67 for workers who reach age 62 after 2022. Also, although life expectancy has been rising, this is mostly due to increases for workers in the top half of the income distribution. The increase in the retirement age already in law will eat up most of the increase in life expectancy over the last 40 years for workers in the bottom half of the wage distribution.

He also appears to believe that Social Security is a subsidy for middle class workers. This is not the case. Because of its progressive benefit structure, most middle income workers will get a real return of less than 2.0 percent on the money they paid in payroll taxes.

Douthat also complains about the government warping the health care marketplace. While this is true, the main distortions are not being primarily protected by liberals. Patent protection for prescription drugs cause them to be sold at prices that are several hundred percent above their competitive market price, however conservatives tend to be the biggest proponents of stronger patent protection. Increased international competition would also go far toward bringing our health care costs more in line with the rest of the world.

Douthat also compares the views of liberals in the United States unfavorably with Europe, noting that many European countries are cutting back on the generosity of their welfare states. Apparently Mr. Douthat didn't know that their welfare states are currently far more generous than the welfare states in the United States. This means that the cutbacks will still in most cases leave the welfare states in these countries considerably more generous than in the United States. For example, the recent hotly contested law in France raised its early retirement age to 62 and its age for full benefits to 67, the levels already in law in the United States. And, French workers have seen a much more rapid increase in life expectancy than workers in the United States over the last four decades.

Finally, Douthat apparently is a Neanderthal protectionist who fears international competition. He argues that the United States could have higher tax rates and a more generous welfare state in the early post-war period because its competitors had been destroyed by the war. Actually, in economic theory, the United States benefits from having wealthy countries from whom it can buy goods and services more cheaply than they can be produced domestically. It is not clear why Douthat thinks that this is a problem.

 

 
The NYT Doesn't Know That We Have 15 Million People Unemployed Print
Saturday, 13 November 2010 18:19

That is the only thing that readers can conclude from its heroic efforts to balance the budget in 2030. This exercise is utterly mind-boggling. We have more than 25 million people unemployed, underemployed, or who have given up work altogether. This is a real crisis. Furthermore, it is worth noting that these people are largely suffering as a result of the incompetence of the budget balancers. (The budget balancers were the same people who dominated economic debate in the years before the crash and could did not see the $8 trillion housing bubble that wrecked the economy and gave us the huge deficits that now have them so obsessed.)

Obviously it is politically popular in Washington to be obsessed by the deficit, but we are supposed to have an independent press in this country. It is utterly loony to be focused on the projected deficit in 2030, when we have tens of millions of people who are seeing their lives ruined today by the downturn. This is like debating the colors to paint the classrooms when the school is on fire with the students still inside. Given economic reality, it would make far more sense to use the effort devoted to construct an elaborate game like this to designing a route toward restoring full employment.

It would also be worth pointing out to readers and participants in the NYT game that the long-term deficit is 100 percent a health care story. If the United States paid the same amount per person for health care as any of the 35 countries with longer life expectancies, we would be looking at huge budget surpluses for the indefinite future. Pointing out this simple fact would at least get people to focus on the real long-term problem facing the country: a broken health care system.

 

 

 
The Origins of "Unsustainable" Public Pension Obligations Print
Saturday, 13 November 2010 08:51

The NYT and other major media outlets have continually referred to public pensions as being "unsustainable" or out of control. The implication is that public sector workers get exorbitant pensions.

In fact the main reason that the public pensions are underfunded at present is not the generosity of the benefits, but rather the plunge in financial markets that followed the collapse of the housing bubble. If public pensions had earned just a modest 5.0 nominal annual rate of return since 2007 their assets would stand at $3.6 trillion today, 41.3 percent above current levels. This would eliminate most, if not all, of the their reported shortfall.

 

 
Does Ruth Marcus Want President Obama to Apply the Post's Censorship to His Lecture Series Print
Saturday, 13 November 2010 08:14

For years the Post has used both its editorial and news pages to push the idea that Social Security and Medicare are unaffordable burdens for the U.S. economy. The paper almost never lets readers hear from any of the expert voices who question this assessment or shows any of the evidence that exposes it as being wrong.

Today, Ruth Marcus suggested that President Obama have a lecture series to explain to the American people that these entitlements are unaffordable. She also suggested that he offer his podium to dissenters, like Republican Congressman Paul Ryan who wants to privatize both Medicare and Social Security.

The question that millions are asking is does Marcus envision that President Obama would allow dissenters who oppose its austerity vision, or does she want him to be as one-sided as the Post? For example, should President Obama give his podium to someone who would show that there would be no budget problem if per person health care costs were the same in the United States as in any other wealthy country? Should podium users be allowed to point out that Medicare could save trillions over its 75-year planning period by just giving people the option to get care from countries with more efficient health care systems? Will the public be exposed to the idea that we could save trillions of dollars over the next decade by adopting a more efficient mechanism for developing prescription drugs.

It would be great if President Obama used his platform to educate the public about major economic issues. Unfortunately, I think that Ms. Marcus's intention was that this platform only be used to highlight Post approved views.

 
European Economic Growth: Can We Make Reporters Multiply by 4? Print
Saturday, 13 November 2010 08:07

In the United States economic growth numbers are almost always presented as annual rates. In Europe and much of the rest of the world they are typically presented as quarterly rates. This means that if a reporter simply presents the official rate from a government agency, as the Post did in an article on the debt crises in Ireland and Portugal, they will be giving readers a quarterly growth rate. This will likely leave a large portion of the paper's readers confused as to actual growth rate.

It is a very simple matter to convert a quarterly growth rate into an annual rate. The proper way is to take the 1 plus the growth rate to the fourth power, an operation that could be done in far less than a second by almost any calculator produced in the last 15 years. However, for small numbers, like the 0.4 percent growth figure reported for the euro zone last quarter, it is just fine to multiply the quarterly rate by 4 to get a 1.6 percent annual rate.

 
The Impact of Expiring Tax Cuts: Can We Get Names? Print
Saturday, 13 November 2010 07:50

The Post told us about the prospect that the Bush tax cuts would expire in January:

"The stakes are enormous. Millions of taxpayers could see hundreds of dollars sliced from their paychecks in January unless Congress acts. Economists say expiration of the tax cuts would deal a devastating blow to the fragile U.S. economy, and has the potential to push it back into recession."

There can be little doubt that the impact of pulling money out of the economy at this point will be negative, and given that the economy is scraping against zero growth already, it would not take much to throw it into another recession. But it might be a bit much to describe this as a "devastating blow." The expiration of the Make Work Pay tax credit and other parts of the stimulus will also pull money out of people's pockets and slow growth. The Post has never issued similar warnings about this prospect.

It would have been appropriate to refer to actual statements of specific economists rather than present overblown adjectives as being the considered judgment of the economics profession. In the same vein the article later describes the $4 trillion cost of continuing all the credits for a decade as a "budget buster." This assessment should come from a participant in the debate, not the newspaper.

 
Erskine Bowles' Conflict of Interest -- Why Is the NYT's Tobin Harshaw Upset That People Mention It? Print
Friday, 12 November 2010 22:15

I have a general policy at BTP of not mentioning articles that directly refer to me or CEPR. I am making an exception here because I think there is a very important point that deserves attention.

In an NYT blogpost ("A Deficit of Respect") Tobin Harshaw discusses the response of liberals and progressives who attacked Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission. He concludes by criticizing those who:

"have begun the battle with ad hominem attacks on the commission’s chairmen as unserious, ill-intentioned, mentally unbalanced, avatars of the “money party.”

I would certainly fit as one of those who described at least one of the co-chairs (Erskine Bowles) as an avatar of the money party, even if I did not use exactly these words. The fact is that Mr. Bowles is a director of Morgan Stanley, one of the bailed out Wall Street banks. He gets $335,000 a year for his work with Morgan Stanley. This may be one of the reasons that the co-chairs report did not mention a financial speculation tax as a possible source of revenue, even though financial sector taxes have been widely advocated by policy analysts around the world, including even the I.M.F.

The exclusion of any new taxes on the financial sector is especially striking since Senator Simpson boasted at their joint press conference about having "harpooned every whale." The financial industry is a pretty big whale to overlook.

When I first came to Washington I worked at the Economic Policy Institute, a think tank that gets 20-25 percent of its funding from labor unions. Media outlets, including the New York Times, routinely felt the need to notify readers of this source of funding with the idea that it could have bearing on my work and that of my colleagues. Given this practice, it certainly would seem reasonable to note that Mr. Bowles is currently getting huge amounts of money directly from a major Wall Street bank. Readers can decide for themselves whether this money affects his views on the best way to deal with the budget deficit.

Since we are on the topic, given his behavior, it hardly seems out of line to describe the other co-chair, Alan Simpson, as "as unserious, ill-intentioned, mentally unbalanced." Mr. Simpson has sent several late night e-mails to his critics (I was one recipient), which displayed extraordinary ignorance of the finances of the Social Security program, contempt for its beneficiaries, as well as a serious misunderstanding of bovine anatomy. One e-mail was also openly sexist, implying that the head of a major national women's organization was too dumb to read a simple graph.

People can make their own judgment as to whether or not these e-mails and Mr. Simpson's other erratic actions (he once cursed out a reporter for asking him his views on Social Security) are evidence of being unserious, ill-intentioned or mentally unbalanced. However, it hardly seems inappropriate to raise the question.

Mr. Harshaw obviously approves of the thrust of the recommendations of the co-directors. That is fine and it would be good to have an open debate on the need for and merits of these recommendations. Wall Street investment banker Peter Peterson and other wealthy supporters of the co-directors agenda are doing their best to stack the deck, spending hundreds of millions of dollars to push their agenda, to ensure that nothing resembling a fair debate occurs.

However, the questions raised by the critics of the co-directors, including issues about conflict of interest and erratic conduct, are typical of the sort of questions that the NYT and other media outlets routinely raise in their news reporting. Insofar as Harshaw objects to such questions being raised about Bowles and Simpson he is asking that they be granted special protection. That is a request that does not deserve to be treated seriously. 

 
The Washington Post's Name-Calling On Trade Print
Friday, 12 November 2010 06:15

Everyone knows that the Washington Post abandons any pretext of objectivity when it comes to trade. It once even famously claimed that Mexico's GDP had quadrupled from 1988 to 2007 in order to tout the benefits of NAFTA. (The actual increase was 82 percent.) So, it is hardly surprising that it resorted to name-calling in denouncing the opponents of the trade pact with South Korea.

It referred to these opponents as "protectionist voices" within the Democratic Party. Of course everyone involved in trade debates is protectionist, the only issue is who is being protected. This trade agreement would actually increase protections for items like copyrights and patents, increasing the cost to consumers of items like prescription drugs and recorded music and videos. This will slow growth and reduce jobs. The deal also does little or nothing to reduce the barriers that protect highly paid professionals like doctors and lawyers from international competition.

This is why it inappropriate to refer to the Korean pact as a "free-trade" deal. Does the Post require that reporters refer to every trade deal that it likes as a "free-trade" pact, instead of increasing accuracy and saving space by referring to it simply as a "trade" deal?

The Post also repeats the silly old trick of telling readers that the pact will help the economy creating 70,000 jobs in firms exporting goods to South Korea. Of course, the real story on job creation depends on both exports and imports. (Come on, does the Post really think it can fool readers with this one?) The country's trade deficit has increased with most of the countries with whom it has signed trade pacts in the last two decades, implying that by this crude measure the deals have been job losers. 

So, the main information that readers get from this front page article is that the Washington Post really likes the proposed trade pact with South Korea. But regular Post readers already knew this.

 
David Brooks' Apocalypse Print
Friday, 12 November 2010 05:35
"Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come.

It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain"

I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT. No one expects that people will be reading this stuff 1500 years from now.

Anyhow, let's take a closer look at Mr. Brook's apocalypse. The U.S. will be spending $1 trillion a year just to the pay the interest on the national debt." Pretty scary, huh?

Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?

Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020 [thanks Jeff]. This means that Mr. Brooks scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.

But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)

If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.

If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.

This doesn't leave much for Mr. Brook's apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.

This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn't even have to wait for 2020 to talk about this picture.

 

 
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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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