The Meltdown Lowdown, No. 3

Dean Baker
The American Prospect Online, April 24, 2008

See article on original website

This week in economic news: McCain has a very odd definition of economic progress, Bush is confused about the definition of recession, and a massive new foundation takes aim at Social Security and Medicare.

If By "Progress" You Mean "Collapse"

What was Senator McCain thinking when he recently boasted about the "economic progress" that we have seen over the last seven years?

It's not clear what "progress" Sen. McCain had in mind, but it's hard to find data that would support his case. Start with the unemployment rate. It has increased from 4.2 percent when President Bush took office in 2001 to 5.1 percent and rising today. Even more striking, in 2001, 64.4 percent of the population was employed, but, by March of this year, employment had fallen to 62.6 percent. Four million fewer people are employed today than in 2001.

Adjusted for inflation, the average hourly wage is 3 percent higher today than in January of 2001, but an annual growth rate of 0.4 percent isn't much to brag about. Even this progress is illusory, however. The 3 percent gain was a result of momentum from the late 1990s and occurred entirely between 2001 and 2002 -- wages actually declined from 2002 to 2008.

Furthermore, the percentage of people without health insurance has risen substantially during the Bush administration (as has the absolute number). The Census Bureau reports that in 2006, the most recent year for which data is available, 15.8 percent of the population (47 million people) was uninsured. In 2000, the figure was 13.7 percent (38.4 million people).

It is not clear what measures Sen. McCain had in mind when he praised the economic progress of the Bush years, but he clearly was not referring to the measures that most of us care about.

If by "Recession" You Mean "Economic Boom"

President Bush says that the economy is not in a recession. He's wrong. According to the Bureau of Labor Statistics, the economy has lost jobs for three consecutive months while the private sector has lost jobs for four consecutive months. This has never happened except in periods associated with recessions. The private sector has now lost 320,000 jobs since November.

Need more evidence? The unemployment rate is up 0.7 percentage points from a year ago, residential construction continues to fall, and nonresidential construction is now falling as well. Consumption, which accounts for 70 percent of gross domestic product, has been flat since November. Despite all this, President Bush still doesn't think we're in a recession? I guess that's no surprise coming from someone who thinks that things are going well in Iraq.

Attack of the Demographic Fear-Mongers

A few weeks ago, a group of highly respected budget-wonk types gathered at the Brookings Institution to warn of the threat "entitlement programs," (i.e., Medicare, Medicaid, and Social Security) pose to the long-term health of the budget. This crew wants to make Congress reapprove funding levels for these programs at five-year intervals, in the hope that some future Congress will impose serious cuts.

The folks who took a beating on their 401(k)s a few years back in the stock crash and are now seeing the equity in their homes disappear with the collapse of the housing bubble, may not find the wonks' efforts to take away their Social Security and Medicare too amusing. The wonks' priorities are deeply warped -- they were unconcerned when multitrillion dollar bubbles in the stock and housing markets develop but are immensely worried about the long-term projected cost of government programs.

More importantly, the attack on entitlement spending is misdirected, as has been repeatedly argued by Peter Orszag, superhero of the current economic slump (apologies to Frank Zappa) and the director of the Congressional Budget Office. The aging of the population will impose costs on the budget, but the costs associated with aging will not be qualitatively different over the next 40 years than they were over the last 40 years. The real threat is the projected explosion of health-care costs, which will cause Medicare and Medicaid spending to go through the roof.

The moral of the story is that we should be focused on getting health-care costs under control. If our per-person health-care costs were similar to those in England, Germany, Canada, or any other wealthy country (all of which enjoy longer life expectancies than we do), the budget wonks would have nothing to be scared about.

What Are They Doing With Your Money?

The budget wonks can, however, take heart now that Peter G. Peterson, investment banker and commerce secretary under President Nixon, has founded the Peter G. Peterson foundation, which he promises to fund with $1 billion of his own money over the next several years. The foundation will, among other things, advocate for cuts in Social Security and Medicare.

Peterson's dollars count as "your money" because he was one of the biggest beneficiaries of the fund managers' tax break. Unlike schoolteachers and firefighters, who must pay a 25 percent tax rate on much of their income, Mr. Peterson paid just a 15 percent tax rate on much of his enormous earnings. He obviously has better lobbyists than the teachers or firefighters do. This is why, as Mr. Peterson is fond of saying, he doesn't need his Social Security.

Capital Gains Taxes and the ABC Debate Clowns

Those of you who managed not to throw heavy objects at your TV during ABC's gossip session (aka the Democratic presidential debate) may recall that, near the end, co-anchor Charlie Gibson claimed that reducing capital gains taxes increases government revenue. Of course, a large body of evidence indicates that this is not actually true. But what if it were?

Presumably the greater tax collections are supposed to come from people selling their stock or other assets more frequently. This means more fees for the financial industry, but is that what we really want to promote? The fees from these trades are a drain on people's investments and research shows that on average, active traders lose money. Promoting active trading, like so many other policies promoted by the right, isn't actually a good idea unless you work on Wall Street.

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 ( 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.