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Public Employee Pensions: Does the Worst Case Provide the Best Guidance for the Future? Print
Friday, 24 December 2010 08:39

How many state or local jurisdictions have lost 40 percent of their population in the last four decades and have their top elected officials convicted of corruption? While this may fit the bill in some places, it is not typical for the country as a whole. Populations are continuing to rise in most areas and the number of elected officials who are convicted for corruption is still a relatively small minority. 

This might lead one to wonder why both the New York Times and Wall Street Journal were so anxious to tell readers that the city of Prichard, Alabama foretells the future for their public employee pension plans. The city has stopped making pension payments to 40 retired workers who have earned them.

According to the articles, it appears that the pension funds have long been drained, at least partly through corruption. Due to its depressed economy the city is now finding it difficult to make ends meet.

It is worth noting that the pension obligations do not appear to be quite the crushing burdens implied in these articles. The NYT reports that the average pension is $12,000 a year. This means that if the full payment were made out of current tax revenue it would imply a tax of approximately $18 per capita on the town's 27,000 residents. This is less than 0.14 of the city's per capita income.

 
Incompetent Economists, Not Pensions, Push Property Taxes Higher Print
Friday, 24 December 2010 08:10

The Wall Street Journal told readers today that "pensions push property taxes higher," in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.

Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.

 
The New York Times Comes Out Against Free Trade in China Print
Friday, 24 December 2010 06:47

That was the topic of its lead editorial which complained that China did not respect U.S. style intellectual property. Patents and copyrights are government granted monopolies that allow items like prescription drugs to sell at prices that can be several thousand percent above their free market price. This leads to the same sorts of economic distortions that would be predicted from tariffs of this size. As a result of this protection, software and recorded music and movies, which would otherwise be available at no cost over the Internet, can instead command high prices.

Given the enormous costs associated with patent and copyright protection it is not surprising that China would not be anxious to impose these costs on its economy. There are more efficient mechanisms for financing research in prescription drugs and creative and artistic work. It is understandable that China will only agree to accept these costs that it will demand something important in exchange, for example the option to maintain a seriously over-valued exchange rate that gives its goods a huge advantage in international trade. In effect, a policy that imposes U.S. style intellectual property rules on China is redistributing income from manufacturing workers and non-college educated workers (who disproportionately work in manufacturing) to companies like Pfizer and Microsoft and their highly educated workers.

 
On NPR is the Deficit Officially "Crushing"? Print
Thursday, 23 December 2010 06:05
The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the "crushing deficit." Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be "essential," since demand and therefore GDP would plummet if the country were to balance its budget.
 
Inventories and the Wonders of GDP Accounting Print
Wednesday, 22 December 2010 09:06

The news stories are coming out on the Commerce Department's release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite.

While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.

The reported rate of inventory accumulation in the 3rd quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.

It is very unlikely that this pace of inventory growth will be sustained. Suppose that in the 4th quarter the rate of accumulation falls back to the pace of the second quarter. This would mean that inventories would subtract 1.6 percentage points from the growth rate. If final demand growth is 2.5 percent in the quarter (higher than it has been in any quarter of the recovery so far), then GDP growth would be just 0.9 percent.

In short, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy's growth prospects.

 
Giving Tax Breaks to the Rich Will Add to the Deficit Print
Tuesday, 21 December 2010 16:57

Okay, I was going to ignore this one. After all, it is in an opinion piece in the Washington Post, so a lot of leeway is granted, but give me a break.

This sentence is given as an example of "obfuscation through language distortion," in a column by Kathleen Parker. She goes on to say:

"Pardon? How does money in someone's own pocket add to another's debt?"

Umm, is this one really hard? I owe my bank $200,000 for my mortgage. I don't pay the money. Is it hard to understand that my decision to keep the $200,000 in my own pocket adds to the bank's financial woes?

More practically, the deficit is the difference between spending and tax collections. Anything that reduces tax collections adds to the deficit just as anything that increases spending adds to the deficit. We all may not like certain taxes just as we don't like some areas of spending, but that doesn't change this accounting identity.

One would hope that accounting identities held true even on the opinion pages of the Washington Post, but apparently not.

 

 
CBS News Joins the Attack on Public Employees Print
Tuesday, 21 December 2010 05:53

Way back in the last decade the United States had a huge housing bubble. The Wall Street banks made money hand over fist making and selling the loans that fueled this bubble. The economic policymakers and regulators who were supposed to prevent the growth of such dangerous bubbles, people with names like Greenspan, Bernanke, Paulson, and Geithner, assured the public that everything was just fine. When they were proved horribly wrong, they then congratulated themselves for avoiding a second Great Depression.

This background is important to any story on the financial problems facing state and local governments, since it is 90 percent of the picture. It also would be good if the public remembered this history, since many of the people who either profited from the bubble or failed to take measures to counter its growth are now at the forefront in demanding that state and local governments sharply reduce their budgets and that public sector employees take big cuts in pay and benefits.

On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that:

"in the two years, since the 'great recession' wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes."

That's not what the data show. If we look to the Commerce Department's National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the "nearly half a trillion" number.

It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.

Another way to think about the size of the state and local government shortfall is that we could envision the Federal government giving state and local governments trillions of dollars in loans at below market interest rates as they did with the Wall Street banks through TARP and the various Fed special lending facilities. If the state and local governments got $3 trillion in loans at rates that were 4 percentage points below the market rate, and then they relent this money at market rates, it would largely make up for the shortfall in revenue they have faced. (It would provide them with $120 billion a year in additional revenue.)

When the governments repaid their loans, plus the below market interest, the Treasury and the Fed would then get all their money back, plus a small premium. This would allow people like Treasury Secretary Timothy Geithner and the Washington Post editorial board to declare that they made a profit, just as they have with the TARP. This would be one possible solution to the fiscal problems faced by these governments.

The piece also told viewers at the onset:

"There is also a trillion dollar hole in their public pension funds."

In fact, this shortfall is overwhelmingly attributable to the plunge in the stock market that followed in the wake of the collapse of the housing bubble. According to Federal Reserve Board data (Table L.119) if pension fund assets had increased at just a 5 percent nominal rate since the 4th quarter of 2007, they would have $935 billion more money at the end of the third quarter than is currently reported.

While some of us did try to warn of the risks that the housing bubble posed to the economy and financial markets (we were not featured on 60 Minutes, which was busy touting deficit stories even then), the primary fault of state and local officials was listening to Wall Street and the mainstream of the economics profession, not excessive pensions.

It would also be useful to provide a basis for assessing this "trillion dollar hole" since it is virtually certain that almost none of CBS's viewers regularly deal with such numbers. The discounted value of GDP will be more than $400 trillion over the next 30 years (roughly the period in which this shortfall will have to be addressed). This implies that additional revenue equal to 0.25 percent of GDP over this period should be sufficient to cover this projected shortfall. By comparison, the increase in annual defense spending associated with the wars in Iraq and Afghanistan is approximately 1.8 percent of GDP, more than 7 times larger than amount of revenue needed to cover the projected pension shortfall.

Another point of comparison is the revenue that could potentially be raised from a financial speculation tax. Such a tax could easily raise more than 1.0 percent of GDP, four times the projected shortfall, with the incidence being born almost entirely by Wall Street banks and speculators.

The segment also includes assertions that imply state and local workers are overpaid. In fact, after adjusting for education and experience state and local workers earn slightly less than their private sector counterparts. Public sector workers do get higher pensions on average than workers in the private sector, but this does not offset the pay difference. It is also important to remember that many public sector workers are not covered by Social Security so that their pension is virtually all of their retirement income.

Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.

While such an approach may be an effective short-term strategy it is absolutely disastrous in the long-term. At any point in time it will be difficult for long-time workers to leave their jobs with the state and find comparable employment elsewhere, especially in the midst of the worst downturn in 70 years. However, as new workers come into the labor force, lower pay and worse benefits in the public sector will make these jobs less attractive. This means that New Jersey's schools and other public agencies will have less choice in selecting their workforce, which is likely to lead to a deterioration in the quality of education and other public services. This is not obviously far-sighted thinking.

 
The Expensing Investment Tax Break Might Be Less Effective, Since We Are Already Half Way There Print
Monday, 20 December 2010 10:15
USA Today touted the portion of the recent tax package that allowed for 100 percent expensing of new investment. The piece neglected to mention the fact that the stimulus package already allowed for 50 percent expensing. This is likely to reduce the impact of going to 100 percent expensing.
 
Does Iran Really Spend 30 Percent of Its GDP on Energy Subsidies? Print
Monday, 20 December 2010 05:40
That doesn't seem quite right. But the NYT reported that Iran's president, Mahmoud Ahmadinejad, claimed that the country spends $114 billion a year on energy subsides. This would imply that the country spends almost one-third of its GDP on energy subsidies. That doesn't seem plausible.
 
Temporary Help and Structural Unemployment: The Unskilled Can Always Become Economists Print
Sunday, 19 December 2010 21:27

The NYT showed that there were still good paying jobs for unskilled workers in the economics profession by citing two economists who touted the growth in temporary employment as evidence for the growth of structural unemployment in the economy. Structural unemployment results when there is a mismatch between skills and the available jobs.

Economists with skills would have noted that temporary employment plummeted in the downturn and is only now beginning to recover lost ground. After the recent gains in hiring in temporary employment the number of jobs in the sector is still down by almost 20 percent from its pre-recession level. In the real world, this is not evidence of structural unemployment.

 

 
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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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