Beat the Press

The Washington Post's Social Security Fantasies

When it comes to Social Security, the Washington Post editorial page and the truth never enter the same room. The editorial page is probably the country�s main promoter of the �entitlement� problem. This is the trick in which Social Security is lumped together as an entitlement, with Medicare and Medicaid, and then pronounced a huge problem. As the Post editorial board surely knows, the real story is that we have a broken health care system with rapidly rising costs. If the system is never fixed, then health care costs will devastate the economy. Insofar as we pay for health care through the public sector, exploding health care costs will also lead to serious budget problems. Honest people see these facts as demonstrating the need to fix the health care system. The Washington Post editorial board sees these projections as a basis for cutting and/or privatizing Social Security. The Post �s edit includes the inaccurate assertion that President Bush�s Social Security plan was not...

The Long-Term Deficit Trap

It is fashionable in many circles to warn of the impending bankruptcy of the federal government ( see USAToday ). Be warned � this is not a story about the evils of Bush�s tax cuts for the rich. These tax cuts are just a footnote. The real villain in the bankruptcy story is the projected explosion in the cost of Medicare and Medicaid. This cost explosion is not due to aging; Social Security costs inch up in these projections � just like they have been doing for the past seventy years. Medicare and Medicaid costs explode in this story because the U.S. health care system is broken and the projections assume that we never fix it. Being an optimist, I think that American politicians are not so much more incompetent and corrupt than politicians elsewhere in the world. Every other wealthy country manages to provide health care for its people at a fraction of the price of the U.S. system. Per person health care expenditures in other rich countries average less than half as much as in the...

Paulson Supports Large Trade Deficit

That's what the headlines should have read after Treasury Secretary Henry Paulson's speech in New York on Tuesday. While the fact apparently escaped the attention of the reporters covering the testimony, Mr. Paulson effectively endorsed continued large trade deficits when he announced his support for a strong dollar. In the non-voodoo economics world, a strong dollar means a large trade deficit. The logic here is straightforward. A higher dollar makes imports cheaper for people in the United States. That means we buy more imports. It also makes U.S. exports more expensive for people living in other countries. That means that they buy fewer U.S. exports. If we import more and export less, then we get a larger trade deficit � pretty simple stuff. The press has printed a lot of nonsense on this issue, in which people blame the trade deficit on the budget deficit. There can be a connection between the two, but only insofar as the budget deficit is responsible for higher U.S. interest...

The Slow Motion Train Wreck

This is the first posting as a TAP blog, so I thought I would mark the occasion with a comment on the housing bubble. We have enough data at this point (lower sales, rising inventories, falling median prices) that I feel confident in saying that the crash has begun. We don't yet know the speed of the decline or the full repercussions in terms of the financial havoc or the extent of the economic downturn. Of course, the housing crash, like the stock crash, was entirely predictable. Housing prices had never risen like this in the past and NO ONE has identified anything that made the period after 1996 different from the period prior to 1996. The press can be given a bit of a pass on this one ?- as with the stock bubble, most of the blame lies with my profession. In both cases, economists were more worried about the possibility that we might have to raise Social Security taxes in 50 years or tariffs on imported shirts, than trillions of dollars of paper wealth disappearing with the...

Cheap Tip

Last quarter the markets were surprised by a stronger than expected number for personal consumption expenditures in March. I commented that the surprise was surprising because March personal consumption expenditures were embedded in the first quarter GDP data that had been released the prior week. Here's a chance to look for more surprising surprises. The consensus number for June personal consumption expenditures is an increase of 0.4 percent. My arithmetic puts the figure at over 1.0 percent. There is always the possibility of a substantial upward revision to the April and May data, but absent a large revision, June expenditures should come in much higher than "expected." Will the markets be surprised? --Dean Baker

Can You Say "Lower Profit Margins?"

Apparently the reporters at MarketWatch can't. An article noting the uptick in labor compensation reported in the second quarter Employment Cost Index reported that Fed Chairman Ben Bernanke said that higher labor costs need not lead to inflation, if they are offset by rising productivity. Well, in the very next sentence Mr. Bernanke also said that higher labor costs could be offset by lower profit margins: "Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs." But that part didn't make it into MarketWatch . Thanks go to my friend Jared Bernstein for this tip. --Dean Baker

House Moves to Boost Defenses Against Martians

The House came up with the brilliant idea of linking the partial repeal of the estate tax with raising the minimum wage. In the words of West Virginia Representative Shelley Moore Capito, this linkage made sense because, "the sustaining of small businesses by keeping their vital assets will allow those making the minimum wage to continue working. This is a jobs bill." I'm sorry, this is nuts. Only a tiny percentage of small businesses will ever be liable for the estate tax and it is paid out after they are dead. It has no obvious effect on how they would operate their business. It is hard to see how cutting the estate tax will save even a single minimum wage job. How could a reporter just put these words in print and not talk to an economist to get a comment on this statement? Surely any economist, regardless of their political leanings, would explain that a district in West Virginia is represented in Congress by a crazy person. --Dean Baker

The Deflation of the Housing Bubble Continues

The weak second quarter GDP numbers were driven in part by the housing sector as noted in the NYT . See also the separate piece on the housing market. In addition to the GDP data, the Commerce Department also released data on vacancy rates for the second quarter. The vacancy rate for ownership units hit a new record. Cheap tip for the months ahead -- watch for credit card debt to soar. People who can't borrow against their homes, now that prices have stopped rising, will turn to credit cards. It isn't pretty, but that's what desperate people will do to hold onto their homes in a collapsing bubble. --Dean Baker

The Inverted Yield Curve and Other Economic Fads

Remember the inverted yield curve and the hoola hoop? A few months back, the prospect of an inverted yield curve was seen as an ominous warning sign of bad times ahead. An inverted yield curve was supposed to signal an upcoming recession. This seems worth mentioning now because the yield curve is becoming seriously inverted as long-term rates have edged downward, even as short-term rates remain relatively high. For those who have better things to do with their time, an inverted yield curve refers to a situation in which short-term interest rates are higher than long-term interest rates. This reverses the normal course of events, typically investors expect to get a higher rate of return if they agree to lock up their money in a long-term bond or time-lock account rather than keeping it in a checking account where they can get immediate access. A few months back, as the Fed was raising short-term interest rates, without much increase in longer term rates, many market analysts raised the...

Adjust for Inflation -- Minimal Demand on Minimum Wage Reporting

Reporters should always use inflation adjusted numbers when making comparisons of dollar values at substantially different points in time. A dollar is worth much less today than it was 20 or 30 years ago. While most readers may know this, they do not typically have ready access to the consumer price index tables, so they will not generally be able to adjust the numbers themselves. Reporters, who write news stories for a living, do have the time to adjust numbers for inflation and should routinely do so in their news stories. This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved. --Dean Baker

Medical Tourism: The Response to Protectionism

If we use protectionist barriers to artificially prop up health care prices in the United States, then people go overseas for health care. It's extremely wasteful (it's much cheaper and better for people's health to have the medical procedures done here), but that is what happens when you have protectionism. --Dean Baker

Confusion on "Free Trade"

Several comments and e-mails on my last post on trade expressed confusion about restrictions on highly educated foreign workers in the United States. (There was one complaint about repetition, as long as the press repeats the error, I will repeat the complaint.) These restrictions take two forms. The first is formal licensing restrictions. The highest paid professionals, like medicine, law, dentistry, and accounting all have licensing requirements. These requirements present a confusing patchwork (in most areas, each state has its own requirements) that makes it extremely difficult for foreign professionals to get licensed to practice their profession in the United States. If we applied the same rules to these professions as "free traders" did to manufacturing, we would set a single national standard in each profession that would be based exclusively on legitimate health and safety considerations, just as the W.T.O. and other trade pacts require in the case of safety standards for...

Is the Housing Bubble Bursting?

The latest numbers certainly show a slowing. Existing home sales are down by 10 percent from their peaks last year. Prices have stabilized on a year over year basis (down slightly after adjusting for inflation), and inventories are building. It is worth noting in the latest report that the inventory of unsold condos stood at 8 months of sales in the June report. Also, it is important remember that the existing homes data refers to sales closed in June. Since it typically takes 6-8 weeks to close a contract, the June sales are most showing information about contracts signed in April and May. --Dean Baker

The WTO is Not Free Trade

It would be nice if reporters were forced to read what they write before it appears in the paper. What do they mean when they say "free trade?" What makes increasing patent and copyright protection (an essential part of recent U.S. trade agreements) free trade? These are government granted monopolies. Isn't that obvious? Yes, they serve a purpose in providing incentives for innovation and creative work, but ALL forms of protection serve a purpose, that doesn't mean that they are not protectionism. Also, it really is infuriating that reporters cannot recognize the protectionism that sustains relatively high salaries for professionals and reporters. If we had free trade for doctors, lawyers, accountants, etc. we would have standardized licensing requirements so that smart students anywhere in the world would have the same opportunity to train and get a job in these professions in the United States as a kid born in New York. Any economics reporter who thinks we have this situation now...

The Washington Post Doesn't Believe in Market Incentives

I was going to give this one a pass, since it's a column in the Post Outlook section, not a news story, but even opinion pieces should be able to pass the laugh test. The basic point of the piece is that the public and media are wrong to be concerned about the fact that researchers who do research and report findings, as well as the regulators who assess them, often get money from the drug companies that stand to make billions. The article assures us that these people are dedicated professionals, committed to bettering human life, who would not let money affect their behavior. It's great to know that the Washington Post would be willing to print a diatribe arguing that individuals act out of concern for society rather than for monetary gain, first socialist tract I've seen the Post since I've been in town. Of course, if anyone really believed what the column argues, then we should just take the money out of drug research altogether. If the scientists are high-minded individuals who...