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A Really Really Stupid Health Care Tax Break Doesn't Cover Breast Pumps Print
Wednesday, 27 October 2010 04:40

The NYT devoted a major article to tell readers that flexible health spending accounts, the stupidest tax break anyone has ever been able to design, do not cover breast pumps. This is kind of like devoting an article to the fact that the rapidly growing Flat Earth Society holds meetings on the Jewish holidays.

Of course the real story would be the fact that a nutball organization is rapidly growing and the real story here is that an incredibly poorly designed tax break is continuing in this era of health care reform. Flexible spending accounts are wasteful from almost any perspective.

First the cost of administering the credit for companies is almost as large as the amount of the savings. Many organizations pay close to $100 per worker to administer the accounts. If a person puts $1000 a year into the account and is in the 15 percent bracket, like most workers, the tax savings are $150. If a worker puts the maximum $2,500 in an account and is in the 25 percent bracket, then the savings are $625. In this case, the administrative costs are still more than 15 percent of the tax savings.

This of course does not count the time spent by beneficiaries dealing with their accounts. There is often considerable paper work associated with these accounts. Often companies refuse to make payments, requiring participants to spend hours going back and forth with clerical workers in order to get reimbursements. 

Flexible spending accounts also have an absurd use it or lose it provision. Extra money in an account at the end of the year is lost to the participant. This causes many participants to stock up on items like prescription glasses or over the counter medicines in order to avoid losing their money. Much of this spending is wasteful, since these are items that are not really needed.

Finally the credit is very regressive, since the largest benefits go the highest income individuals. It also is small business unfriendly since the administrative costs make it uneconomical for many small businesses. This puts small businesses at a disadvantage in trying to attract workers who might care about this benefit.

It is remarkable that such an incredibly poorly designed tax credit survived health care reform. (This is probably explained by the fact that most of the people who worked on designing the bill benefit from it.) It leads to more economic distortions that most of the forms of protectionism that get major news attention and cause columnists and editorial writers to hyperventilate (e.g. the "buy America" provision in the stimulus). The continued existence of these accounts merit attention, since it is a major scandal.


[Addendum: Several comments correctly point out that contributions to FSAs are also exempted from payroll taxes. This would add another 15.35 percent to the tax savings. So a person in the 15 percent bracket who puts $1,000 into an account would be saving herself and her employer a combined total of 30.35 percent of this amount or $303.50.]

President Obama Underestimated the Severity of the Downturn Print
Wednesday, 27 October 2010 04:28

David Leonhardt has an interesting discussion of public attitudes towards President Obama and the Democrats on the eve of the elections. He notes that the stimulus helped, but the economy is not where President Obama's advisers expected it to be right now.

It is worth noting that President Obama's advisers seriously underestimated the severity of the downturn. They had projected that even without any stimulus package the unemployment rate would peak at just over 9.0 percent. In fact, the unemployment rate peaked at 10.1 percent last fall, even with the stimulus in effect. It had already reached 9.4 percent in May, just as the first effects of the stimulus were being felt. A major reason for the inadequacy of the stimulus was this failure to fully appreciate the severity of the downturn.

The Cost of the TARP: Yet Again Print
Tuesday, 26 October 2010 04:42

NPR told us yet again that we should be happy about the TARP because it really didn't cost us very much. Since the notion of the TARP free lunch continues to be promulgated widely let's look at it from a slightly different perspective.

In the past, I have made the point that the government made loans and guarantees to huge banks like Goldman Sachs and Citigroup at well below the market price during a financial crisis. This allowed these banks to survive and prosper. If the market had been allowed to work its magic, the shareholders of these banks would have lost all their holdings, their top executives would be walking the unemployment lines, and many of their creditors would have been forced to accept less than 100 cents on the dollar for their debt. This would mean that they would not have claim to trillions of dollars of the economy's wealth which they now have.

The costless TARP argument says that this should not concern us since the TARP did not add significantly to the national debt. So, let's try another approach.

Suppose that in October of 2008 we saw Goldman, Citi and the rest were in big trouble. Instead of the trillions in loans and guarantees from the Treasury and the Fed, we told the banks to just print up money. The government said that the banks should print as much money as they need to survive. The counterfeit money would then be circulated through the economic system just like real money, allowing the banks to survive. At the appropriate time the Fed would withdraw enough reserves from the system to ensure that the counterfeit money did not lead to inflation.

Okay, did the bailout cost us anything? Well, it certainly did not add to the deficit, we never gave the banks any public money. However, the decision to allow the Wall Street banks to freely counterfeit money for a period of time gave them a claim to the economy's wealth that they would not otherwise have. As a result, they are richer than they otherwise would be.

If the economy ever gets back to full employment, their wealth will reduce the resources available to the rest of us. Because the CEOs at Goldman, Citi and the rest have their hundreds of millions in wealth, as do their shareholders, they can command resources (e.g. homes, cares, labor) and thereby prevent the rest of us from enjoying the same resources. In short, the government's authorized counterfeiting cost us some of our wealth, even though it did not involve a single taxpayer dollar. This is the same story with the TARP/Fed bank bailouts.

The Return of the TARP Lie About the Commercial Paper Market Print
Monday, 25 October 2010 12:11

In September of 2008 Federal Reserve Board Chairman Ben Bernanke deliberately misled Congress. He told them that they had to approve the $700 billion TARP bailout because the commercial paper markets were shutting down.

A shutdown of the commercial paper markets would genuinely have been disastrous for the economy since most major corporations are dependent on issuing commercial paper for meeting payroll and other ongoing expenses. If even healthy companies couldn't raise money through the commercial paper market then we would be looking at an economic collapse in fairly short order.

Bernanke was deceiving Congress with his discussion of the commercial paper market because he single handedly possessed the ability to support the commercial paper market. In fact, the weekend after Congress voted for the TARP he announced that he would create a special Fed lending facility to directly buy commercial paper from non-financial companies.

If Bernanke had been honest with Congress he could have told them of his plans to create such a facility before they voted on TARP and explained that the commercial paper market could be sustained whether or not they approved the TARP bailout.

This is worth mentioning now because this hoary lie keeps popping up. Let's be clear, it was important for the Fed/government to take steps to sustain a working financial system. But these steps could have included conditions that made Wall Street pay a huge price and change its mode of operation forever.

The decision to give the money essentially without conditions was a political decision that was attributable to the banks' political power. As a result, these parasites are more economically and politically powerful than ever. The public should know the truth even if they lack the money to do anything about it.

AP Follows Fox and Washington Post in Surrendering Commitment to Objectivity Print
Sunday, 24 October 2010 15:20

AP appears to be following in the steps of Fox and the Washington Post as it joins the crusade for deficit reduction and ignores normal journalistic standards of objectivity. The first sentence of an article that asserts that the Obama administration will make deficit reduction the top priority of his second term describes the country as "a nation sick of spending." There is zero evidence to support this position in the article. There are also no sources within the Obama administration cited for an article titled "Obama likely to focus on deficit in next two years."

At one point the article tells readers that the country wants to see reduced spending, then lists a number of small programs which voters are willing to see cut if it is necessary to get deficits down. It would have been worth pointing out that these programs taken together would have only a very modest impact on spending even if they were eliminated altogether.

The article tells readers:

"Moving to the fore will be a more serious focus on how to balance the federal budget and pay for the programs that keep sinking the country into debt." In fact, it is not "programs" that keep sinking the country in debt, but rather the recession, as can be easily shown. The main cause of the run-up in debt associated with the downturn was a falloff of tax revenue and an increase in spending on automatic stabilizers, like unemployment compensation.

The article then tells readers:

"In other times, that discussion might seem like dry, Washington talk. Not now. People are fed up with federal spending, particularly as many remain jobless." Of course the reason that the federal government is spending more is because "many remain jobless." The statement would be like saying that people are upset with the fire department's use of water, especially at a time when the city is seeing so many fires. In the old days, reporters would have investigated how people could be so confused, if in fact they are, instead of trying to propagate such confusion.

The article later tells readers that:

"Obama defends the huge economic stimulus plan and the bailout of U.S. automakers, and doesn't blame people for getting tired of all the spending." A real reporter would have written this sentence without the word "huge." It is an especially bizarre adjective since the size of the net stimulus from the government sector was about $150 billion a year, a bit more than one-tenth of the size of the lost private sector demand.

Finally, the article gets billions and trillion confused when it tells readers:

"The yearly budget deficit stands at $1.3 billion."

This level of confusion is typical for this article which clearly is intended to promote a deficit reduction agenda rather than inform readers about the issues involved.

Thomas Friedman Argues That There are Still Good Paying Jobs for Workers Without Skills Print
Sunday, 24 October 2010 08:06

Friedman argues by example of course. He argues for rebuilding the country's infrastructure, which would of course be a great thing. However, he wants the country to pay for it with more taxes on the middle class and cutting Social Security benefits.

A skilled columnist would know that the U.S. Social Security system is already among the least generous of the OECD countries. A skilled columnist would also know that most near retirees will have almost nothing to support themselves in their retirement other than Social Security because the people who Friedman thinks of as experts (economists) are not very good at their jobs (i.e. they allowed the housing bubble to grow to a level where its collapse would inevitably wreck the economy and destroy the savings [mostly home equity] of near retirees).

A skilled columnist would suggest a tax on the people who have profited from and caused the economic decay of the last three decades. Specifically a financial speculation tax, which could raise more than $150 billion a year while discouraging financial speculation and reducing the drain of resources that the financial sector imposes on the economy.

A skilled columnist would also know that the real source of the long-term budget problems projected for the United States is health care. A skilled columnist would focus on the need to get U.S. health care costs in line with the rest of the world as the only way to fix the country's long-term budget problems as well as removing an enormous source of strain on the private economy.

But Friedman shows that the U.S. economy still has good paying jobs for people without skills by writing a column that addresses economic issues with no apparent awareness of most of the relevant facts. If the NYT had more op-ed positions it could go far toward reducing inequality. 

In France, Age 60 Is an EARLY Retirement Age Print
Saturday, 23 October 2010 08:42
How can reporters have been covering the debate in France for weeks and still not know that age 60 is an early retirement age, not the normal retirement age? It is comparable to the early retirement age of 62 for Social Security benefits. The normal retirement age in France is currently 65. In France, as in the United States, most workers start collecting benefits shortly after reaching the early retirement age. It would have been useful to make this distinction so that readers would understand what is at issue.
For the 645,546th Time, We Can Put Conditions on Bank Bailouts Print
Saturday, 23 October 2010 08:14

Joe Nocera has a nice discussion of the foreclosure scandal in the NYT. However at the end he decries the fact that if we require Bank of America and other big banks to adhere to the law, then the losses could be so large that we would need to bail them out again.

The part missing from this story is that we could have bailed the banks out with conditions that were so onerous the banks would not be happy about the bailouts. We could have wiped out the shareholders, forced the creditors to take large haircuts and also put real caps (instead of the idiot versions intended to fool gullible reporters) on executive compensation.

The reason that these conditions were not imposed in 2008 is because the of the power of Wall Street, not the underlying dynamics of the situation. Nocera should have figured this one out by now.

The New York Times Uses Its News Section to Express Its Dislike of the Welfare State Print
Saturday, 23 October 2010 07:33

A NYT news article described the strikes in France over the increase in the retirement age as being:

"a cents-and-euros struggle to avert the inevitable moment when decades of cumulative benefits — from short work weeks to long vacations, from state health care to early retirement — begin to unravel."

The article presents no evidence as to why it is inevitable that "decades of cumulative benefits begin to unravel." Nor does it present any statements from any expert who supports this view.

In fact, since productivity in France is growing through time (i.e. it is producing more in each hour of work), there is no reason whatsoever that its benefits need unravel. Workers can continue to enjoy increases in after-tax wages while maintaining the welfare state at its current level.

The comment about the "inevitable" unraveling of the French welfare state is an expression of distaste on the part of the NYT that should be left to the opinion pages. 

The Washington Post STILL Has Not Noticed the $8 Trillion Housing Bubble Print
Friday, 22 October 2010 05:26

News apparently takes a long time to reach downtown Washington, D.C. That is the only conclusion that Washington Post readers can have after seeing the paper attribute the economic downturn to: "the ways the subprime mortgage crisis that began in 2007 would ripple through the economy."

Of course the downturn was not due to subprime mortgage crisis, it was due to the collapse of a housing bubble. Residential construction would not have been cut by more than 50 percent if the issue was just the subprime crisis. It fell by 50 percent because the bubble led to enormous overbuilding of housing.

Similarly the saving rate has risen by more than 6 percentage points, leading to falloff in annual consumption of more than $600 billion. This is not the result of the subprime crisis. This is the result of the loss of $6 trillion in housing bubble wealth, along with the loss of $6 trillion in stock market wealth which was supported by housing bubble driven growth.

The subprime crisis was a triggering event. Had there not been an enormous housing bubble in the process of bursting the subprime crisis would have had little macroeconomic consequence. This news may at some point reach the Post. 

The article also includes a strange analysis of the current housing market:

"If the foreclosure process is slowed down too much, it could lead people to hold off on home purchases as they wait for a new, cheaper supply of homes to hit the market. In that sense, it could further delay a recovery in the long-ailing housing market."

If the foreclosure process is slowed then it reduces supply. If people delay purchases, then this reduces demand. In principle, this doesn't move prices in either direction, unless there is a reason to believe that one effect is markedly larger than the other.

As a practical matter, banks are sitting on a huge inventory of foreclosed homes so a moratorium is likely to have very little impact on the supply of foreclosed homes coming on the market. The dire warnings of the consequences of such a moratorium don't really have a basis in reality.

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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.