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If Children Are Being Crowded Out, It is Being Done by Rich People Print
Monday, 22 September 2014 20:19

There is a well-funded effort (think Fix the Debt and the Peter G. Peterson Foundation) to distract people from the upward redistribution to the rich through claims that the problem is really the elderly living high on Social Security and Medicare. Catherine Rampell contributed to this effort with a column warning the spending on the elderly threatens to crowd out spending on our children. Just about every claim in the column is either seriously misleading or outright wrong.

To begin with we get these two paragraphs:

"Spending on kids as a share of the budget is projected to decline dramatically in the coming decade — to just 7.8 percent by 2024. If you exclude health spending, spending on children falls in raw, inflation-adjusted dollars, too, not just as a percentage of total spending.

"'Kids’ share of federal spending isn’t tumbling because children are suddenly becoming a smaller fraction of the population. Nor is this happening because we live in an “age of austerity”; the sizes of both the economy and tax revenue are at all-time highs, after accounting for inflation, and are expected to keep growing. Federal spending overall is likewise projected to swell in coming years."

Okay, why would we exclude spending on health care for kids, unless we are trying to deceive readers? After all, the piece doesn't exclude spending on health care when it discusses spending on the elderly. Also, we know that the main avenue for spending on kids is education. This is done primarily at the state and local level. Rampell acknowledges this point later in the piece, but then why the histrionics over the age composition of federal spending?

Also saying that we are not in an age of austerity is bizarre. Tax revenues as a share of GDP have fallen to levels not seen since the 1950s. Yes, the economy is growing and the budget is growing along with it, but what matters are the shares of the GDP going to tax revenue.

Then we are told:

"Entitlements that benefit older Americans increasingly dominate the U.S. budget, and not just because the population of older people is increasing. We’re spending way more per elderly person, too. Per capita federal outlays on children rose by about $4,600 in the last half-century (from $270 in 1960 to $4,894 in 2011, after adjusting for inflation); during the same period, per capita outlays on the elderly rose by about $24,000 (from $4,000 to $27,975).

"The chasm between per capita funding received by seniors — even after taking into account all the taxes they have paid — and children looks likely to widen substantially, given the way Social Security, Medicare and child program benefits are structured."

The numbers for spending on seniors might sound dramatic, but it is important to remember that they paid for their Social Security benefits in full. In fact, according to the Urban Institute, which provided much of the basis for this column, the typical senior will have paid somewhat more in taxes to Social Security over their working lifetime than what they can expect to receive back in benefits. Complaining about what seniors get paid out without noting what they paid in would be like complaining about the interest payments that rich people get on their government bonds without noting that they paid for their bonds.



Should We Worry About Economic Stagnation Due to Weak Supply? Print
Monday, 22 September 2014 04:22

Robert Samuelson devoted his column to discussing the argument of Northwestern University economist Robert Gordon, who argues that we are destined for a prolonged period of slow growth. Samuelson argues that this could lead to major conflicts over distribution since people will not be able to enjoy rising living standards due to growth.

There are several points worth noting about Gordon's argument. First our ability to predict productivity growth has been virtually zero. There was a huge slowdown in productivity growth in 1973, a pickup in 1995, and possibly another slowdown in 2005. The profession completely missed the slowdown in 1973 and even forty years later there is no universally accepted explanation of why it occurred. The 1995 speedup also caught most economists by surprise, although there is general agreement that it was due to the spread of computers and the Internet.

The 2005 slowdown is not at all universally accepted. While it could mark the end of the 1995 speedup, it could just be due to the weakness of demand following the collapse of the housing bubble. Here also, no one predicted the slowdown. Given this track record, it is reasonable to question the accuracy of Gordon's or anyone's predictions about productivity growth over the long-term future.

It is also important to point out that this view is 180 degrees at odds with the robots taking all our jobs view. The fact that both views can be taken seriously within the economics profession speaks to the state of economics. This would be like a person going to a doctor for a check-up, with the doctor concluding that the patient is seriously obese and must immediately begin a strict diet and exercise regimen. The patient then goes to another doctor for a second opinion. This doctor is concerned about the patient being too thin and prescribes a high calorie diet to allow the patient to put on weight. This is the state of economics' ability to predict productivity.

There are a few other points worth noting. First, the comparison in Samuelson's piece of projected growth rates to growth in the 1950s and 1960s is somewhat misleading. The population was growing more rapidly in the 1950s and 1960s as the country was experiencing the baby boom. It is per capita growth, not total growth that matters for living standards. If growth slows in line with slower population growth, this does not hurt living standards. In fact, slower population growth would be associated with an improvement in living standards insofar as it means less stress on the natural environment and the physical infrastructure.



NYT Passes Judgment on European Concerns on Sharing Economy Print
Monday, 22 September 2014 04:13

There are many issues raised by Uber, Airbnb, and other major companies that are part of the "sharing economy." For example Uber drivers don't have to pass the same tests, undergo the same background checks, or carry the same insurance as drivers for traditional taxis. Uber cars also don't have to meet rules about being handicap accessible.

The same sorts of issues arise with rooms rented through Airbnb. These rooms don't have to meet the safety and accessibility standards imposed on hotels. Also, many people living in apartment buildings rent out rooms, creating a nuisance for their neighbors who didn't expect to be living in a hotel.

These and other issues have been raised by people concerned about the spread of the sharing economy in both Europe and the United States. The NYT has however determined that these concerns are not real, telling readers:

"As in the United States, where tech start-ups have also faced legal challenges, the wide-ranging response in Europe often comes down to whether lawmakers view the companies as a threat to local businesses or an opportunity to improve economic growth."

Apparently the NYT believes that people who raise concerns about hotels being accessible to people with disabilities or that they should not be fire hazards are actually only interested in protecting existing businesses. That's an interesting position to express in a news article.

Calpers Ends Its Wall Street Support Program, Stops Investing in Hedge Funds Print
Sunday, 21 September 2014 08:38

Gretchen Morgenson had a good piece on the decision by the California Public Employees Retirement System (Calpers) to stop investing in hedge funds. She pointed out that such investments have been big losers for pension funds since the money transferred to the managers vastly exceeded any investment gains.

Interestingly, just last week the NYT praised to the sky Rhode Island's Treasurer and now Democratic gubernatorial candidate Gina Raimondo for a pension "reform" strategy that put much of the state's pension funds into hedge funds. Apparently, public subsidies for Wall Street still rank as an important policy goal in some circles.

The Costs of Protectionism: Health Care Rip-offs Print
Sunday, 21 September 2014 08:00

The NYT had a fascinating piece on medical care freelancers: health care professionals of various types who show up at hospitals and pass along huge bills to patients undergoing treatment. According to the article these contractors generally do not make their employment status known to patients at the time, so they would reasonably assume that they are hospital staff who would be covered under normal billing procedures. Patients often first discover that this is not the case when they get bills for services, which can run into the tens or hundreds of thousands of dollars.

The piece explains that there have been some efforts to regulate these practices, but the industry has been largely successful in blocking serious restrictions. This presents another case of the enormous potential gains from free trade in health care. Other wealthy countries do not have medical scammers running around in their hospitals. If people could arrange to go to Canada, Europe, and many of the top notch facilities in the developing world, they could save a huge amount on their procedures, even after covering the cost of travel for themselves and their family members. Large-scale trade would likely put the medical scammers in the United States out of business quickly, since hospitals that did not bar them would not be able to get any patients.

Unfortunately, protectionists largely dominate public debate so freer trade in health care is almost never discussed. Economists like to help the protectionists in this respect by politely agreeing not to discuss trade in medical services. This makes it easier for them to say silly things about inequality being due to globalization and technology. They get to conveniently ignore the fact that our doctors make twice as much as doctors in other wealthy countries, not because of technology and globalization, but because they enjoy protection from international competition.


Canada, The Conservatives' Model Country, Has Single Payer and a Housing Bubble Print
Sunday, 21 September 2014 07:46

Josh Barro has an interesting article noting how conservatives in the U.S. appear to have a love affair with Canada, based on its tax cuts and promotion of fossil fuel production. Barro points out that a big part of Canada's low-cost government is its single payer, or universal Medicare, system. According to the OECD, Canada spends 10.4 percent of its GDP on health care (mostly from the government) whereas the U.S. spends 16.2 percent of GDP (a bit more than half from the government). The difference would come to more than $1 trillion a year in the current U.S. economy.

The housing bubble is the other striking story of the Canadian economy. The ratio of house prices to rent has more than doubled since the turn of the century. When this bubble bursts, Canada is not likely to look very pretty.

Should We Get Really Excited About a 0.04 Percentage Point Increase In GDP Growth? Print
Saturday, 20 September 2014 16:24

People often confuse percent and percentage points. (I've even done it myself.) It makes a big difference. The Wall Street Journal told readers about G-20 plans to increase growth by 2 percent.

If this is accurate, then the goal is to have growth that is 2.0 percent faster than the baseline. In the U.S. case the baseline projections for annual growth are a bit more than 2.0 percent. The G-20 plans would then raise this figure by 0.04 percentage points. That would be nice, but not a terribly big deal. After a decade, GDP would be 0.4 percent higher than in the baseline scenario, a bit less than the economy grows in a normal quarter.

Alternatively, the article could have meant increasing growth by 2.0 percentage points. That would raise growth from the baseline of 2.0 percent to 4.0 percent. That would be a big deal, but doesn't sound very plausible. A big stimulus could perhaps do this for a year or two, but no one seems to be talking about increasing the deficits by $300 billion or $400 billion.

Anyhow, it is difficult to understand what the agenda of the G-20 is supposed to be. Perhaps the use of percent is correct, but if so, we are probably wasting our money sending our leaders to focus on such small stakes.

News for New York Times: Affordable Care Act Affects Women Print
Friday, 19 September 2014 04:41

We are used to politicians making bizarre distinctions, but we expect a little better from the NYT. Therefore many readers were probably surprised to see the NYT imply that the Affordable Care Act (ACA) does not affect women in an article reporting on former Secretary of State Hillary Clinton's campaigning for Democratic candidates.

"Democrats in several key Senate races have attempted to shift the debate from President Obama and the Affordable Care Act to issues affecting the key constituency of women, whose votes could sway close races."

Separating the ACA from issues that affect women is really almost otherworldly, given the importance of health care, especially to mothers of young children. In fact, our analysis of changes in voluntary part-time employment showed a sharp jump in the number of young parents in this category in 2014 compared with 2013. The implication is that many parents of young children prefer to work part-time in order to spend more time with them. The ACA gave them this opportunity since they can now get insurance through Medicaid or the exchanges and therefore are not dependent on employer provided health insurance. Generally workers have to work full-time to qualify for employer provided insurance.

None of the policies that the NYT refers to as affecting women are likely to have as much impact on the lives of most women as the ACA. The Democrats may for whatever reason not want to talk about the ACA, but the NYT should not play along with their silliness.

The Fed and Inequality Print
Thursday, 18 September 2014 06:49

Charles Lane has a column in the Washington Post arguing that the Fed has contributed to inequality with its low interest policy. Essentially the argument is that low interest rates have helped to push up asset values, most importantly stock prices. Since the rich have stock and most people don't, this means the rich are getting richer relative to everyone else. Since a lot of people who should know better have made this argument, it is worth addressing.

First, it is important to understand the nature of the inequality. If we're looking at wealth, the issue is pretty clear. Higher stock prices mean people who own stock are wealthier relative to the population as a whole. (Remember this when you hear reporters tell you the good news that the stock market is up.)

But note the nature of the increase implied here. Grabbing our old "other things equal," lower interest rates mean higher stock prices. However, this also means that higher interest rates will mean lower stock prices. Most people expect that at some point interest rates will rise due to a strengthening economy. (Many economists want the Fed to raise interest rates now.) So we can expect the wealth inequality the Fed has created with its low interest rate and quantitative easing policies to go away once the economy is approaching its potential level of output.

In that case we are looking at an explicitly temporary increase in inequality. Should we be upset by this?

The situation is even more striking if we look at income. If we count the capital gains in the stock market as income, then we have seen a huge increase in income inequality as stock prices roared back from their 2009 lows. Here also part of this will be reversed as the rich have capital losses when interest rates go back up. (Some of the increase is just a reversal of a market that was depressed due to fears of economic collapse.)

It's difficult to see the big problem here. Remember, the economy's problem is too little demand. Let's say that a few more times just in case anyone in a policy position in Washington is paying attention. The economy's problem is too little demand.  The economy's problem is too little demand. The economy's problem is too little demand.



Europe Is Already Suffering From the Bad Story With Deflation Print
Thursday, 18 September 2014 04:14

The NYT gave us another article from the cult of zero, which highlighted a modest upward revision in the year over year inflation rate from 0.3 percent to 0.4 percent. The piece told readers:

"The revised figure for August suggests that inflation may have stabilized, but is unlikely to end a debate among economists about whether the eurozone is at risk of deflation — a broad, sustained decline in prices that is associated with depression and high unemployment."

Actually Europe is already facing a period of very low inflation associated with depression and high unemployment. The low inflation rate makes it difficult for the European Central Bank (ECB) to push down the real interest rate so as to boost demand. Even at 0.4 percent the inflation rate is well below the ECB's 2.0 percent target. And given the weakness of the euro zone economy, a higher inflation rate in the range of 3-4 percent would be desirable.

As the piece notes, many countries in the euro zone now actually have deflation. This is the only way they have to regain competitiveness with Germany, as long as Germany maintains a very low inflation rate. If Germany had a higher inflation rate, it would be possible for countries like Greece and Spain to gain competitiveness with moderate positive inflation. As it is, they have no choice but to endure massive unemployment in order to force wages and prices downward.

The piece is also mistaken in telling readers:

"When deflation takes hold, consumers delay major purchases because they expect prices to fall further. Corporate sales and profits suffer, which forces companies to lay off workers, creating a vicious circle of falling demand."

Actually at low rate of inflation many prices are already falling. The overall inflation rate is simply an average of all price changes. When the inflation rate is near zero, many prices will be falling. The positive rate just means that somewhat more prices are rising, or that some prices are rising more rapidly.

Furthermore actual market prices may still be rising even if the measure of prices used in the government data shows falling prices. Statistical agencies use quality adjusted prices. The measures of quality improvement may more than offset a nominal increase in prices. Quality improvements are the main reason that computer prices have shown sharp price declines in government data over the last three decades. They are also the reason that car prices have been virtually unchanged from their level of 18 years ago.



                                  Consumer Price Index, New Vehicle Component

car prices

                                   Source: Bureau of Labor Statistics.

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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.