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Why Do Senate Republicans Think that Regulations Are Preventing Us from Creating Jobs Now Even Though They Did Not Prevent Us from Creating 3 Million Jobs a Year in the Late 90s? Print
Wednesday, 04 May 2011 04:45

It might have been helpful if the NYT had asked this question instead of just telling readers that:

"But Senate Republicans rolled out their own jobs agenda and took shots at the Obama administration over what they described as undue restrictions on business.

'This excessive regulation is really seriously inhibiting our effort to get out of this economic recession and create jobs,' said Senator Mitch McConnell of Kentucky, the Republican leader."

Since there have been few important changes in regulation under President Obama it might have been useful to give readers some idea of what the Republicans are talking about. Otherwise, it sounds like they are complaining that Lake Michigan is inhibiting our effort to get out of recession. It could in principle be true -- for example if the Lake had enormous floods -- but since the Lake has been there a long time, it is not obvious why it would suddenly cause a problem. The same is true for regulation.

Ryan Plan Raises Medicare Costs So Much that Reporters Cannot Even Understand It (Never Mind: See Note) Print
Tuesday, 03 May 2011 16:46

According to the Congressional Budget Office's (CBO) analysis, Representative Paul Ryan's plan for privatizing Medicare would raise the cost to the country (the combined cost to the government and beneficiaries) of providing Medicare equivalent policies by $34 trillion over the program's 75-year planning horizon. This is a number that is so huge that it difficult for many people to understand it.

This number comes to roughly $110,000 for every man, woman, and child in the country. It is almost 7 times as large as the projected shortfall in Social Security that has so many people in Washington terrified.

It turns out that even health care reporters have a difficult time understanding how much the Ryan plan is projected to raise costs. The Kaiser Health News Service told readers that CBO's projections show that the Ryan plan would raise the portion of the health care premium paid by beneficiaries in 2030 from 25 percent to 68 percent.

Actually, those looking at the CBO projections (Figure 1) will see that under the Ryan plan beneficiaries do pay 68 percent of the cost of a Medicare equivalent policy in 2030. They will also see that the baseline projection shows them paying just 25 percent of the cost. Except the figure also shows that the baseline Medicare policy only costs 60 percent as much as the Medicare equivalent policy under the Ryan plan.

This means that to make an apples to apples comparison, we would have to multiply the beneficiary's 25 percent contribution by 60 percent, to get that they would pay 15 percent of the cost of a Medicare equivalent policy under the Ryan plan. While the increase in the beneficiary's contribution reported by Kaiser might have sounded like a huge burden, it actually understates the change. If we use the cost of a Medicare equivalent policy under the Ryan plan as the denominator, the beneficiary's contribution goes from 15 percent under the existing system to 68 percent under the Ryan plan.



Actually, looking at this with better eyes, Kaiser did report the CBO numbers correctly. They expressed the beneficiary's contribution under the existing Medicare program as a percent of the cost under a Medicare equivalent policy under the Ryan plan. There was a slight misstatement, since the payment would be 41.7 percent of the cost of the policy to Medicare, but for purposes of the analysis it is appropriate to show the payment as a share of the cost under the Ryan plan so that readers can make an apples to apples to comparison.

The chart accompanying this piece does get the issue confused. According to the CBO analysis, beneficiaries currently pay 39.3 percent of the total cost of a Medicare policy provided through the traditional Medicare system. This would be equal to 35 percent of the cost of a Medicare equivalent plan provided through a privatized system. This shares rises to 68 percent of the cost of a Medicare equivalent plan by 2030.

The U.S. Treasury Bonds Held by China are Not "Risky," They Are a Guaranteed Loss for China Print
Tuesday, 03 May 2011 04:58

This article discusses the possibility that China may allow the value of its currency to rise relative to the dollar. At one point it notes that China has an enormous trade surplus with the current valuation (according to economic theory, a fast growing developing country should have an enormous trade deficit). It then points out that the dollars obtained with this surplus are used to buy Treasury bonds, that "some Chinese argue [are] risky."

It is worth noting that this is little real risk to China in holding these bonds, they are virtually guaranteed to lose money. There is no way that they can hope to ever sell off their huge holdings without seeing a large reduction in the value of the dollar (and therefore the value of their holdings). The Chinese government is presumably willing to see this loss in order to maintain its export markets in the United States and elsewhere. 

Copyright Harassment: Where are the Economists or Proponents of Small Government? Print
Tuesday, 03 May 2011 04:33

A NYT article about a company, Righthaven, that enforces copyrights on the web should have included some comments from economists and conservatives who oppose big government. The specific case highlighted in the article involves a college blogger who posted a picture of an airport security agent doing a pat-down. The Denver Post claims copyright ownership of the picture.

A honest economist would have called attention to the enormous waste in this action. The use of the picture had a value that was almost certainly less than a thousand of a cent, yet this suit could involve thousands of dollars of economic costs in the form of legal fees and court time. It would be difficult to imagine a more wasteful form of government action. (This is a government action, because it is the government that is assigning control over use of this image to the copyright holder.)

Proponents of small government should also be appalled. In this case the government is authorizing private individuals to harass college kids over their efforts to make a point about an issue they care about.

However the NYT did not point out either aspect of this issue. Of course there are far more efficient ways to support creative and artistic work than the copyright, which have their roots in the late Middle Ages. Unfortunately, the NYT and other media outlets almost never mention any alternative mechanism of support.

Why Can't the NYT Drop the Deficit Morality Tales? Print
Monday, 02 May 2011 05:16

What is wrong with news outlets who can't report on the deficit/debt without giving us silly morality tales? The NYT tells us this morning that:

"Republicans see the vote over raising the debt limit as leverage for immediate and concrete progress in their efforts to cut spending and reduce the size and reach of the government."

Really? How does the NYT know how the Republicans "see" the vote over raising the debt limit. It would be equally valid to say that:

"Republicans see the vote over raising the debt limit as leverage for cutting spending on broad-based social programs like Social Security and provide more tax cuts to the wealthy as part of their efforts to redistribute income upward."

Is there any evidence that upward redistribution on income is the Republicans' goal? That certainly is the impact of their policies (actually of many of the Democrats' policies also) so a newspaper could with considerable validity make this assertion.

Serious newspapers don't pretend to know what politicians' motives are. They just tell their audience what they do and say.

New Car Prices Are Up by 1.6 Percent Over the Last Year and Robert Samuelson Is Very Concerned About Inflation Print
Monday, 02 May 2011 04:35

Washington Post columnist Robert Samuelson is concerned that Federal Reserve Board Chairman Ben Bernanke is insufficiently concerned about inflation. This might seem a strange concern to those of us in the real world. After all, core prices have risen by 1.2 percent over the last year. That's nearly a full percentage point below the Fed's target rate.

Low inflation creates serious problems for the economy. It prevents the real interest from being as low as would be desired given the weakness of the economy. (The real interest rate is the nominal interest rate minus the inflation rate. Since the nominal interest rate cannot fall below zero, the inflation rate sets the extent to which the real interest rate can turn negative.) Low inflation also leaves a large debt burden on households who have large debts due to the collapse of the housing bubble. These are the reasons that most economists would like to see a somewhat higher rate of inflation.

However Samuelson argues the opposite, he is concerned that inflation is already too high. He notes the run-up in oil and food prices. Of course these prices are determined in a world market, it is difficult to see how anything Bernanke could do, short of crashing the U.S. economy, could have more than a marginal impact on them.

Samuelson then turns to other prices. He notes rapidly rising airline prices. Samuelson apparently didn't know that airlines use jet fuel, which is made with oil.

His other example is car prices. He tells readers that:

"Car 'incentives' (a.k.a. price discounts) are shrinking — which means prices are rising."

Yes, and the Bureau of Labor Statistics tells us that car prices have risen 1.6 percent over the last year. Yep, that's Zimbabwe-style hyperinflation. They don't call it "Fox on 15th Street" for nothing.

Is NPR Unable to Get Access to Data on Health Care Costs? Print
Sunday, 01 May 2011 16:58

It seems that NPR is unable to get access to data from the OECD or even the Center for Medicare and Medicaid services. If it were, it would not have so badly misinformed listeners about Medicare costs yesterday.

NPR told listeners that Medicare's costs are unsustainable and that the reason is that patients do not see the cost of their treatment. Actually, private sector health care costs have risen as rapidly on an age-adjusted basis as Medicare. Furthermore, health care costs in the United States average more than twice as much per person as costs in countries like the United Kingdom and the Netherlands where patients see a much smaller share of their costs than they do under the Medicare system. If the United States paid the same amount per person for health care as these or any other wealthy country it would be looking at huge budget surpluses in the long-term, not deficits. 

The article also mentioned Representative Ryan's plan without pointing out that the Congressional Budget Office's projections show that it would hugely raise the cost of providing care to retirees. The CBO projections imply that the Ryan plan, which was passed by the Republican-controlled House of Representatives last month, would raise the cost of buying Medicare equivalent insurance policies by $34 trillion over Medicare's 75-year planning period. This is almost 7 times the size of the projected Social Security shortfall.

In this context it is probably worth mentioning that the Republicans in Congress have targeted NPR for budget cuts.

Is George Will On Amazon's Payroll? Print
Sunday, 01 May 2011 09:33

That might speak better of him than the possibility that he wrote this column out of ignorance. The column is a criticism of Illinois and other states for trying to apply sales tax to Internet sales. As it stands now, many Internet retailers do not collect state and local sales taxes on most of their sales since they are only required to collect the tax in states where they have a physical presence.

This creates an enormous loophole whereby individuals who mostly shop at traditional retailers (who are less wealthy on average) subsidize individuals who shop frequently on-line. In particular, it provides an enormous subsidy to on-line retailers who split the gains with their customers. Amazon, as the country's largest on-line retailer, is the biggest beneficiary of this subsidy, which is why it is often known as the "Jeff Bezos public welfare program."

There is no rationale that passes the laugh test for this subsidy. It would be comparable to saying that businesses that have addresses ending in the number "6" don't have to collect sales tax. This would imply higher taxes on other businesses to subsidize the lack of tax collections on businesses with addresses ending in the number "6." This particular story is somewhat worse than giving a random subsidy since the current policy subsidizes a huge Internet retailer at the expense of mom and pop retailers. It is difficult to see why anyone would want to weaken local businesses as a matter of public policy.

Will's arguments against taxing Internet sales look like Amazon press releases since they make no economic sense. He argues that Internet retailers don't benefit from the police and fire protection and local schools in the same way as traditional brick and mortar retailers. Actually, the UPS drivers that deliver Amazon's products do depend on publicly maintained roads, as well as police and fire protection.

It is an arguable, but irrelevant, point as to whether the ratio of public benefit to sales volume is greater for the products that Amazon typically ships than a retailer in which most of the value-added takes place elsewhere, like a car dealership. The more fundamental point is that the sales tax is primarily a tax on the consumer, who typically bears the vast majority of the sales tax. This is simply a way to get consumers to pay for the public services that they get from the government. The current system allows consumers who buy from Amazon to avoid paying their fair share.

The next step for Will in this argument is to point out that Wal-Mart, Target and other major retailers are doing a big push to tax away Jeff Bezos' welfare check and make Amazon pay the same sales tax as everyone else. It is quite a sight to have Will, who has repeatedly argued for the beneficial effects of money in politics, suddenly troubled by the fact that major retailers are acting in their own interest. In this case, they also happen to be acting in the public interest as well.

Finally Will gives us the horror story that making Amazon pay taxes will cost JOBS!!!!!! His poster child is Tim Storm, the owner of an Internet retailer who had been based in Illinois. The retailer was an Amazon affiliate. Under a new state law, Amazon was supposed to pay sales tax on its Internet sales in Illinois because its affiliates gave it a physical presence in the state. Amazon responded by cutting ties to any businesses that were located in Illinois so that it would not have to collect Illinois state sales tax.

Will's hero moved his business with 54 employees five miles north across the Illinois border into Wisconsin. He made this move even though less than 1 percent of his business is with Amazon. Will then tells us that Illinois's decision cost the state jobs and tax revenue.

Actually Will's story shows nothing of the sort. First, if the claim that less 1 percent of Storm's business was with Amazon, then Storm's decision to move was motivated by politics or factors other than the economics of the Internet tax. It is very costly to move a business. There is no way that the profits earned on Storm's Amazon sales will make up for these costs. Politicians would be fools to base public policy on political motivated decisions by business people.

Furthermore, Storm's move almost certainly did not cost jobs, or at least not the 54 jobs that Will implies. In the United States people are allowed to cross state borders to work. It is likely that the vast majority of Storm's 54 employees followed the business north of the state border. And the revenue loss may not be substantial either, since those workers who lived in Illinois (some probably already lived in Wisconsin) will still be paying taxes on their wages from Storm's business.

Finally, Will gives us a picture of Illinois as a state that is horribly mismanaged and being taxed to death. He tells is that"

"A study by the Illinois Policy Institute, a market-oriented think tank, concludes that between 1991 and 2009, Illinois lost more than 1.2 million residents — more than one every 10 minutes — to other states."

If we look at population changes between 1990 and 2009, we find that Indiana, Will's low tax hero state saw population growth of 15.6 percent, while Wisconsin had growth of 15.3 percent. This is somewhat higher than Illinois's 12.7 percent rate. However the gap does not suggest the mass flight from high taxes that Will implies. Illinois's growth was still considerably faster than the 8.1 percent rate in Iowa, its western neighbor. So the data do not quite fit the story.

In short, Will does not have much of a case here. Is it better that he knows it and gets paid to say otherwise or that he simply has no clue on the things he writes about? This is the great philosophical question of the week.

$34 Trillion In Waste is Not Worth Talking About at the Washington Post Print
Sunday, 01 May 2011 08:12

The Washington Post managed to completely ignore the Congressional Budget Office's projections showing that Representative Ryan's privatized Medicare system would increase the cost of providing Medicare equivalent policies by $34 trillion over the program's 75-year planning period. This sum is nearly 7 times the size of the projected Social Security shortfall, a topic that has received an enormous amount of attention in the Washington Post. It comes to roughly $110,000 for every man, woman, and child in the country.This additional cost is money that would be transferred from households to private insurers and health care providers.

Failing to mention the enormous waste that CBO projects would result from the Ryan plan is like writing a history of the 1940s and neglecting to mention World War II, only in the Washington Post.

Has Anyone at the Washington Post Heard of National Income Accounting? Print
Sunday, 01 May 2011 07:47

It seems that the answer is no. The Post ran a major front page article about the switch from the huge budget surpluses projected in 2000 to the large deficits that we are now seeing today. It never once discussed the implications of such surpluses for the economy.

National income accounting is helpful for understanding items like budget deficits because it provides a simple framework in which their impact can be examined. National income accounting has the advantage that it is by definition true -- there is literally no way around these accounting identities. National income accounting is also taught in every introductory economics class so it is reasonable to expect that the people who deal with economic issues at major news outlets would be familiar with it.

One of the identities in national income accounting is that the trade surplus (actually current account surplus, but these can terms can be used pretty much interchangeably for the United States) is equal to the net national savings. Net national savings in turn is equal to the government budget surplus (public savings) and the excess of private savings over private investment (private savings).

As a conscious policy under the Clinton administration (pushed by his second Treasury secretary, Robert Rubin) the United States begin to push for a high dollar. It used its control of the IMF in dealing with the East Asian financial crisis and subsequent crises in the developing world to put muscle behind the high dollar policy.

The high dollar in turn led to a large trade deficit. If the dollar is over-valued by 25 percent it has roughly the same impact as imposing a 25 percent tariff on all U.S. exports and giving a 25 percent subsidy to all imports. In other words, we expect a high dollar to be associated with a large trade deficit. This is exactly what happened in the late 90s, the high dollar sent the trade deficit soaring to record levels.

Using national income accounting, if the United States has a trade deficit of 4.0 percent GDP (roughly the 2000 level), then it must have negative national savings equal to 4.0 percent of GDP. There is no way around this, it has to be true.

If it has negative national savings equal to 4.0 percent of GDP then some combination of budget deficits and negative private savings must sum to 4.0 percent of GDP. In a context in which the country has a large trade deficit, if the government runs large budget surpluses, as it did in 2000 and CBO projected at the time would continue over the next decade, it would imply that there would be large negative private savings.

This could come about because of an investment boom, it is very hard to raise non-residential investment by much. Even at the peak of the Internet bubble in 2000, non-residential investment was up by only about 1.0 percentage point of GDP from its peak in the 80s cycle and was below its 70s level. This means that the huge budget surpluses projected by CBO in 2000 implied either extremely low private savings or a boom in residential construction. The last decade gave us both.

If the Post knew national income accounting it would have realized that it is pointless to discuss the budget deficit without reference to the trade deficit. This in turn means a discussion of the value of the dollar. Those who know national income accounting knew that the surpluses projected in 2000 were not plausible and furthermore would not have been desirable even if they were plausible. Without a large fall in the dollar, they implied a whole generation approaching retirement with almost no savings, since their failure to save was a logical implication of the budget surplus.

The real problem facing the economy is a hugely over-valued dollar. For some reason the Post, like most of the media, refuses to discuss this issue, instead distracting readers with phony morality tales about the budget deficit.

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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.