The Meltdown Lowdown, No. 18

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Dean Baker
The American Prospect Online, August 14, 2008

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This week in economic news: McCain supports privatizing social security, The Washington Post is in denial about the housing bubble, and Wall Street jobs are now being outsourced.

It's Social Security Day, Is Your Retirement Safe?

Today marks the 73rd anniversary of Franklin Roosevelt’s signing of the bill that created Social Security. It might be a good time to pull the presidential debate away from issues like Barack Obama’s celebrity status and whether or not his name is too foreign-sounding to be president.

Obama and McCain have very different views of Social Security. Obama has repeatedly committed himself to keeping the current structure in tack and said that, insofar as the program faces a long-term funding shortfall, he would look to increase taxes on people earning over $250,000 to fill the gap.

Since the nonpartisan Congressional Budget Office projects that the program will be able to pay full benefits until 2046 (and more than 75 percent of projected benefits long after this date), there certainly is no need for hasty actions to shore up Social Security. After all, the date when it first is projected to face a shortfall is almost three full decades after the last possible date when the next president will leave office. (I will not comment on how old Sen. McCain will be 2046.)

Sen. McCain has been a longtime supporter of Social Security privatization and supported President Bush’s effort to privatize Social Security in 2005. Such a plan would almost certainly both cut benefits for future retirees and make the benefits they receive less secure, since they will depend on the fluctuations in the stock market.

Social Security provides more than half of the retirement income for two-thirds of the elderly. It is likely to be even more important in the years ahead, due to the collapse of the defined benefit-pension system and the massive loss of wealth for older workers due to the collapse of the housing bubble. It would be nice if the media cared that one candidate wants to undermine it.


Will The Washington Post Ever Discover the Housing Bubble?

During the years of the housing boom, the most frequently cited authority on the housing market in The Washington Post was David Lereah, the chief economist of the National Association of Realtors (NAR) and the author of the 2006 best seller, Why the Real Estate Boom Will Not Bust and How You Can Profit From It. It seems that the Post is still partial to those who argue that everything is just fine in the housing market.

Last week, it published an op-ed column claiming that the widely cited Case-Shiller index, which shows that nominal house prices are already down by more than 16.2 percent from their bubble peaks, is overstating the true rate of price decline across the nation. The column notes that a different index shows that house prices have fallen by more than 4 percent in just four states (California and Florida are two of the ill-fated four).

If I were being picky, I would point out that a completely independent index, the NAR’s existing home sales series, also shows a double-digit price decline from its 2006 peak, but that is beside the point. As the bubble grew to ever more dangerous levels in the years from 2002 to 2006, The Washington Post almost completely excluded from its pages the voices of those raising the alarm. Now, even as the bursting bubble is leading to record rates of foreclosure, the destruction of trillions of dollars of housing wealth, and the worst financial crisis since the Great Depression, the Post can still find room on its op-ed pages for the “everything is just fine crowd.”


Globalization Comes to Wall Street

The New York Times reports that the pace of offshoring of Wall Street jobs to India is accelerating. According to the article, the jobs being moved to India are for highly educated workers but still mostly near the entry level. These are jobs that are “paid in the low- to mid-six figures.”

Now this is globalization that anyone should be able to get behind. It should lead to large cost savings that will be passed on to businesses looking to issue stock or state and local governments making new bond issues. And, the redistribution goes in the right direction, with the loss of jobs putting some downward pressure on the wages of the most highly paid workers.

Of course, if we treated offshoring of investment-banking jobs in the same way that we treated the offshoring of jobs in textiles or apparel, then the government would be helping along the process. The Commerce Department would make low-interest loans available to banks that wanted to set up shop in India. They would facilitate contacts with local business schools in order to ensure an adequate supply of workers and run interference with the Indian government to ensure that no unnecessary obstacles slowed things down.

But, we can be compassionate toward those investment bankers who lose their jobs. We can have government programs that will help to give them the skills they need in the new global economy. And, we can have wage insurance that will make up one-fourth of the difference between their old pay and the pay on their new jobs, up to $500 a week. See, we can have globalization with a human face.


Unemployment Claims Up, Trade Deficit Down

New claims for unemployment insurance hit 455,000 last week, the highest level of the current downturn. This is higher than the monthly rate at any point in the 2001 downturn, with the exception of October 2001, when hundreds of thousands of workers in the airline and related industries lost their jobs in the immediate aftermath of the September 11 attacks. Weekly numbers are erratic, but there were 448,000 new claims the prior week, so this uptick looks real. This could mean that the rate of job loss is accelerating.

On the positive side, the June trade deficit fell to $56.8 billion from $59.2 billion in May (originally reported as $59.8 billion). The deficit has shrunk at a very impressive rate over the last year, keeping the gross domestic product growing. These are the fruits of the lower dollar.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.