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Erskine Bowles Is Back and Still Pushing Austerity Print
Wednesday, 11 February 2015 08:08

Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to "put our fiscal house in order." He apparently hasn't been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)

Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.

Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.

In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don't earn enough to provide them with a comfortable upbringing.

Robert Samuelson Is Unhappy that Seniors Get Social Security and Medicare Print
Monday, 09 February 2015 06:05

Yes, it's Monday morning at the Washington Post and Robert Samuelson wants to raise the retirement age and cut Social Security and Medicare benefits. How else would one begin the week?

He apparently thinks he is being clever by claiming that because the government is meeting these obligations to its seniors, it is failing elsewhere. Somehow, it doesn't occur to Samuelson that if we want to get extra money for other areas of government spending we could

1) raise taxes,

2) cut government payments for doctors, drug companies, and medical equipment suppliers in Medicare, Medicaid, and other government programs;

3) shoot for lower unemployment rates by not having the Fed choke off the recovery with higher interest rates;

4) default on the national debt.


The first point is straightforward. We have raised taxes many times in the past. If this were 1970 and we projected forward budgets for a decade with no increases in Medicare or Social Security taxes, the budget would have shown very large deficits. The same would have been true in 1980. This is what we are doing now. This is not to say that a tax increase would be politically easy, but cutting Social Security and Medicare are not exactly politically easy either. Apparently Samuelson is prepared to go after seniors, but not wealthy people who presumably would disproportionately bear the brunt of any tax increase.

The second point is straightforward also. We pay close to twice as much per person for our health care as people in other wealthy countries. This is not because we get better health care, but because our drug companies, medical equipment suppliers, and physicians get twice as much money as their counterparts in other wealthy countries. We could take steps to bring our costs into line, such as medical trade, but again Samuelson would rather hit seniors than these high income folks.

The third point is hugely important and under-appreciated. We got budget surpluses at the end of the 1990s not because of budget cuts and increased taxes; we got budget surpluses because the Fed allowed the economy to grow more and the unemployment rate to fall far lower than was thought possible by most economists.



Actually the Personal Saving Rate Is Very Low Print
Saturday, 07 February 2015 13:50

Robert Schiller had an interesting piece in the NYT on how uncertainty about the economy may be leading to extraordinary low long interest rates. However, he adds in the strange comment that savings is not low, in spite of the very low return available to savers:

"Yet according to the Bureau of Economic Analysis, personal saving as a fraction of disposable personal income stood at 4.9 percent for the United States in December. That may not be an impressive level, but it’s not particularly low by historical standards."

This comment is strange, because in fact a 4.9 percent saving rate is in fact quite low by historical standards.


The only periods in which the saving rate was lower than it is today were when the wealth effects from the stock and housing bubble led to consumption booms at the end of the 1990s and the middle of the last decade. The current saving rate is far below the average for the 1960s, 1970s, and 1980s.

It is worth noting that the actual saving rate out of income may be even lower than the data indicate. There is currently a large negative statistical discrepancy in the GDP accounts (@ 0.8 percent of GDP), which means that measured income is larger than measured expenditures. My explanation for this unusual gap is that capital gains income is showing up as normal income, leading to an overstatement of true income. (Capital gains are not supposed to count as part of income for GDP accounting purposes.) if this is true, then actual saving rate could be as much as a percentage point lower than the reported rate.

Why the Monthly Change in the Hourly Wage Tells Us Nothing Print
Saturday, 07 February 2015 12:10

Okay, we'll try it with pictures this time. I have been trying to explain that the monthly wage data are erratic. If we accept the numbers at face value then we would have to believe that workers go from getting healthy pay gains one month to pay cuts the next. To me that seems pretty implausible, but apparently many reporters and some economists think this is the way the economy works.

So today we do it with pictures. The folks who believe that the monthly wage data released by the Labor Department are giving us real insight into the movement in wages think that monthly wage changes look like this.


Percent Change in Average Hourly Wage

average hourly wage

Source; Bureau of Labor Statistics.

That doesn't look like the economy I see, but hey, what do I know?

257,000 Jobs Are Great, but Those Wall Street Boys Are Really Smart Print
Friday, 06 February 2015 18:21

The celebrations over the economy's strong performance are really getting out of hand. That makes it incumbent on those of us who have access to government data and know arithmetic to work harder to set the record straight.

The basic point is a simple one. The economy is recovering, and at least recently, at a relatively rapid pace. I say "relatively" because if we saw the same job growth rates as we did after steep recessions in prior decades we would be seeing 500,000 to 600,000 jobs a month, but hey 257,000 is better than we had been seeing until 2014.

So this is good news. The problem is that the Wall Street boys (e.g. Robert Rubin, Alan Greenspan, etc.) created a really really deep hole. So things are getting better, but we have a very long way to go to get back to anything we can consider a normal labor market and economy.

There are many different measures that can be cited to make this point. The employment to population ratio for prime age workers (between the ages 25-54) is almost three full percentage points below its pre-recession level. (This gets around the claim that the problem is baby boomers retiring. These people are not leaving the labor force to retire.) The number of people who report working part-time involuntarily is still close to 2 million (@50 percent) above pre-recession levels.

But my favorite measure is the quit rate, the percentage of unemployment due to people who voluntarily quit their jobs. This is very useful because it is a real measure of people voting with their feet. The quit rate is telling us the extent to which workers have enough confidence in their job prospects to tell their asshole boss to get lost and then walk out the door.

In a good labor market people are willing to do this. In a bad labor market the risk is just too great. Workers are worried that it may be months, or longer, before they get a new job. So what do the data say?

Well, the quit rate is up a great deal from the troughs of the Great Recession. It had been as low as 5.6 percent in the middle of 2009 just after the economy had shed almost 8 million jobs. In the January data it was up to 9.5 percent. But this only looks good by comparison. The quit rate had been hovering just under 12.0 percent in the two years prior to the recession.

And for those old enough to remember, that was not exactly a great job market. Wages were at best inching ahead of inflation. if we go back to the late 1990s, which really was a good job market, the quit rate was over 13.0 percent and even got as high as 15.2 percent in April of 2000 Here's the picture.

                        Voluntary Job Leavers as a Percent of the Unemployed


                                          Source: Bureau of Labor Statistics.

So the moral of this story is that yes, things are definitely getting better, but no things are not good. And we know this, not because some overpaid economist or pundit says so, but because workers are voting with their feet.

So it's your call. You can believe the expert (who couldn't see an $8 trillion housing bubble) on your favorite news outlet, or you can believe the people who actually have their jobs on the line.

The Unfairness of a $3.4 Million Cap on IRAs Print
Friday, 06 February 2015 07:59

Allan Sloan is a reasonable conservative, which means that he usually makes reasonable arguments, even if some of us to his left may disagree with them. Today's piece criticizing President Obama's proposal to cap the amount in a tax sheltered IRA at $3.4 million isn't up to the usual standards.

The gist of Sloan's argument is that $3.4 million would not be enough to generate the same retirement income in annuity as President Obama will get in his pension when he retirees. By Sloan's calculation, the $3.4 million will allow a couple to get a dual-life annuity of roughly $100,000 a year, half the size of President Obama's pension of $200,000 a year. He considers this unfair.

I'm a bit at a loss at seeing the unfairness. President Obama gets paid $400,000 a year. This puts him well into the top 1 percent of wage earners. Is that unfair? Of course his paycheck is less than one-twentieth the average for CEOs of Fortune 500 companies, many of whom probably lack the skills needed to operate a lemonade stand.

It's not clear exactly what sort of yardstick President Obama's is supposed to provide. He is obviously at the top of his field, so is it surprising that he would get paid relatively well and also enjoy a comfortable retirement?

Just to be clear, no one is preventing people from accumulating more than $3.4 million to support their retirement. They just won't enjoy a taxpayers' subsidy for the amount in excess of $3.4 million. To those of us who will never have anything close to $3.4 million in a retirement account, the unfairness works in the opposite direction.

If most of us want to have an income of $100,000 plus in our late sixties and seventies then we will have to get the bulk of it by working. This means we will be paying income taxes of 15 to 25 percent, in addition to a payroll tax of 15.35 percent. The person who has accumulated $3.4 million tax free in a Roth IRA and then able to get $100,000 a year in tax free income in an annuity looks like they are doing pretty well. President Obama and his wife may be doing better, but it's hard to have too much sympathy.  

Higher Interest Rates Will Quickly Alleviate That Debt Burden Print
Thursday, 05 February 2015 15:37

There has been concern expressed in some circles about the growing ratio of debt to GDP in countries around the world. Neil Irwin has a piece on this issue in today's Upshot section of the NYT.

Such concerns are seriously misplaced for a simple reason: the market value of debt is inversely related to the interest rate. The point here is a simple one. Imagine an infinitely lived bond that pays $50 a year in interest. If the prevailing interest in the market for long-term debt is 5 percent, the price of this this bond will be $1,000. However if the interest rate were to rise to 10 percent, the price of the bond would be just $500.

At present, interest rates worldwide are very low by historical standards. This has created a situation in which the market value of debt is very high. However if interest rates were to rise, then the market value of this debt would plummet.

Consider the case of Japan, which can now issue 10-year bonds paying just 0.3 percent interest. If the interest rate on 10-year debt rose to 3.0 percent (still a very low level) the market value of this debt would fall by close to one-third (the exact decline would depend on the timing of the increase). The decline in the market value of longer term debt would be even greater.

The same story applies to private debt. if interest rates were to rise and companies were troubled by the amount of debt they had outstanding they could just issue new bonds and buy up the existing debt at large discounts, thereby reducing their debt burden.

If we want to take a serious look at the extent to which debt is imposing a constraint on economies around the world we should look at the ratio of interest to GDP. That doesn't look very frightening in the U.S. and I suspect there is a similar story in most other countries around the world.



I should also point out that high debt burdens are actually in part a direct outcome of low interest rates. Low interest rates mean it's cheap to borrow, therefore governments, businesses, and households will borrow more. That is actually what we should want to see in a downturn, it means more demand in the economy.

Ideally, governments would take advantage of low interest rates to invest in infrastructure, research and development, and education. Businesses are taking advantage of low interest rates in part to invest and in part to buy other companies. It's cheap, why shouldn't they borrow to buy up shares? Households aren't borrowing against home equity like they did in the bubble years, but undoubtedly many are taking advantage of low interest rates to pay their kids' education or other spending.

Anyhow, we can look to arithmetic and logic to see the impact and cause of higher debt to GDP ratios. Alternatively, we can ignore arithmetic and logic and yell about the debt and the sky falling. It's your choice.

Quick, Another Story on the U.S. Economic Boom, Before December Trade Data Gets Around Print
Thursday, 05 February 2015 08:40

Economists and economic reporters are fortunate they don't work in an occupation like dishwashing or truck driving where job security and promotion depend on performance. If they did, most of the folks currently employed would be on the street after missing little things like an $8 trillion housing bubble.

But no reason to recount old history. Remember all those stories of the booming U.S. economy? Well, they are likely to be just memories. The December trade data was released today. It showed a monthly deficit of $46.6 billion, up from an originally reported $39.0 billion in November (revised up to $38.8 billion in this report).

This will likely push the revised 4th quarter GDP growth to below 2.0 percent. Weak durable good shipments for December reported yesterday will also lower 4th quarter GDP. In short, it don't look like much of a boom.

For fans of national income accounting (i.e. people who live in the real world), the rise in the trade deficit is very troubling. This is the core cause of secular stagnation. This is U.S. generated demand that is creating demand elsewhere. There is no easy mechanism to replace it. We could have larger budget deficits, but that goes against the fashions in Washington policy circles. That means, in the absence of another bubble, we can look to an underemployed economy persisting for some time.

AP Is Upset that the Housing Bubble Has not Returned Print
Thursday, 05 February 2015 08:06

That is the logical conclusion that would be drawn from an article headlined that "U.S. home price gains weakened in December on slower sales."

The piece begins:

"U.S. home values rose at a modest pace in December, a sign there are too few potential buyers to bid up prices.

"Real estate data provider CoreLogic says home prices rose 5 percent in December from 12 months earlier. That is down from the 5.5 percent price gain recorded in November. It’s much lower than the double-digit gains that occurred last year."

Actually, since U.S. house prices are already above their trend level, this is a sign that the market is stabilizing, as one might expect following a sharp tumble and a rapid upswing in prices. Over the long-term house prices have risen roughly in step with the overall rate of inflation. Since inflation was around 1.0 percent in 2014, house prices are still rising considerably more rapidly that would be expected based on their long-term trend. This is the opposite of the story conveyed in this article. 

Debt Forgiveness in Greece: It's Easier Than the NYT Leads Readers to Believe Print
Thursday, 05 February 2015 07:53

The NYT led readers to believe that meeting Greece's demand for changing the terms of its debt is far more difficult than is actually the case. It told readers:

"Writing down government debts, or stretching out when they need to repaid, causes losses for the institutions and individuals that hold the securities. Banks hold billions of euros in government bonds and, to make sure the banks remain stable, money would need to be found to replenish the big losses that the banks would suffer. Richer countries would have to agree to provide such funds. Taxpayers there may object, adding support to political parties that oppose much of what the European Union stands for and wants to achieve."

In fact, well over 80 percent of Greece's debt is held by the I.M.F., European Central Bank, and other official institutions. Concessions made by these entities could hugely reduce Greece's debt burden while leaving private debt holders unaffected. These concessions need not cost taxpayers a euro, since the European Central Bank knows how to print euros, which it can and is doing.

If taxpayers are upset it is because they have not learned basic economics which speaks to the quality of the European educational system, not Greece's debts. It is also worth pointing out that in lending Greece money, the official institutions effectively bailed out incompetent bankers who made bad loans to Greece.

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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.