Beat the Press

Is the Washington Post Editorial Board Angry at the Paper's Inadequate Reporting?

A Washington Post editorial this morning criticized efforts in Maryland and other states to force large employers (especially Wal-Mart) to pay for their workers' health care. The article contrasted these efforts with the approach being followed in Massachusetts, which it asserts is "a state that is trying to responsibly address rising health-care costs." This is an interesting assertion. Massachusetts recently passed a law that required all its residents to have health insurance. There were some limited subsidies in the bill plus some restructuring of the insurance market, but there was nothing that would work in any obvious way to control health care costs, or at least nothing that was reported in the Washington Post . So, if we believe (with the Post editorial) that there were important provisions for controlling health care costs in this bill, then we should be furious with the Washington Post for failing to report on them. Alternatively, we could believe that the Post editorial...

Cutting Back I.R.S. Enforcement Staff

David Cay Johnston has a great piece in today's NYT reporting on the Bush administration's plan to halve the number of lawyers who audit estate tax filing. According to the article, these lawyers generate an average of more than $2,000 per hour of work in revenue for the government. This implies, that unless they are paid more than $4 million a year, the government will lose money by laying them off. --Dean Baker

Is the Federal Government Going Bankrupt? Maybe it Should Stop Spending Money Publishing Scare Stories

What would the long-term federal deficit look like if the cost of the country's health care system continued to explode, so that in thirty years it costs four times as much per person as that of other rich countries? Well, if I had nothing else to do with my time, I might calculate these numbers. Fortunately, I have a busy life, so I really don't have a great deal of time for such trivia. Unfortunately, other economists are less busy and do calculate such trivia. Even more unfortunate is the fact that the St. Louis Federal Reserve Board publishes these calculations as though they are serious economics. However, the real problem is that columnists in the Times use this stuff to make the case for cutting Social Security. The story here is real simple. The U.S. has a broken health care system. If it is never fixed, it will have a devastating impact on the economy. It will also lead to severe budget problems. Any competent economist/ reporter would see these projections as another way of...

Bad Advice on Mortgages from the NYT

The Sunday Times has an article reporting that many homebuyers who took out adjustable rate mortgages 3 years ago, are now refinancing to avoid higher mortgage rates. The article (actually the accompanying chart) also adds that many are refinancing with negative amortization loans, under which the outstanding principle increases through time. The chart tells readers that this could make sense, as long as house prices continue to rise. Okay, let's check the numbers here. Three years ago, homeowners were taking out adjustable rate mortgages at rates in the neighborhood of 4.5 percent. Many are now resetting at rates that are 2.0 percentage points higher, or close to 6.5 percent. The article reports that the national average for adjustable rate mortgages is now 6.28 percent. Throw in fees of 0.5 to 1.0 percent and it's hard to find the savings. In other words, simply exchanging adjustable rate mortgages will not in general save homeowners any money. Now, the point may be that homeowners...

Housing Appraisals: The Accounting Scandal of the Housing Bubble

Financial bubbles breed accounting fraud. Those of us who warned of the stock bubble in the late nineties were not surprised by the Enrons and WorldComs that surfaced when the bubble deflated. Bubbles make it possible to paper over all sorts of questionable accounting or outright fraud. When the bubble deflates, these practices can no longer be hidden. The analogous problem in the housing bubble is with appraisals. The basic story is simple. Mortgage issuers make their money by issuing mortgages. Once the mortgage is issued they sell it to someone else (in many cases, the key figure is actually a broker who never holds the mortgage), so they have little interest in accurately assessing the quality of the mortgage. To get a mortgage issued, it is necessary to have a house appraised at a value that justifies the mortgage. The issuer generally chooses the appraiser. Okay, suppose an appraiser comes in with a low number and the mortgage can't then be issued? The issuer is very unhappy, no...

The Problems of Protectionism: Another Prescription Drug Scandal

In econ 101, we teach that when the government intervenes in a market to keep prices above marginal costs, it will encourage all sorts of undesirable and harmful rent-seeking behavior. This is one reason that all right-thinking economists are strong opponents of tariffs and quotas that can raise the price of things like shoes, shorts, and steel by 20-30 percent above the competitive market price. Given what we teach in econ 101, it is very difficult to explain why economists are not more concerned about things like patent protection for prescription drugs. This form of protectionism raises the price of drugs by several hundred percent, or even several thousand percent, above the marginal cost of production. Drugs that would sell for $20-$30 a prescription in a competitive market often sell for $300-$500 per prescription when they have patent protection. When the government creates this sort of opportunity for large rents, economic theory tells us to expect corruption. The NYT gives an...

Shame and Pain: The "Medicare and Social Security" Line Again

I believe that the Washington Post has a copyright on combining the words "Medicare" and "Social Security" in a single sentence. Anyone who writes on these issues on their editorial pages always seems to do it . Again folks, the numbers are real clear. Medicare is a big problem because U.S. health care costs are projected to explode, which means that Medicare costs will explode. The moral is fix the health care system. Social Security is not a problem. The story on aging is not very different in the future than in the past. We are living longer, that has always been true. I assume that some of the editorial and op-ed writers actually do look at the projections occasionally. This makes you wonder why they are so insistent on ignoring the projections when they discuss these issues. --Dean Baker

The Washington Post's Happy Face Version of the Fed

There is plenty of room to debate what the Federal Reserve Board's monetary policy should be, but the necessary prerequisite for a serious debate is the knowledge of how monetary policy works. Readers of the Post would be badly misled on this topic by an article in today's paper. The article correctly reports that the Fed adjusts interest rates to prevent inflation from getting too high, explaining that "when inflation is a concern, it raises borrowing costs to cool economic growth, which weakens businesses' power to raise prices." Well, not exactly. The immediate target of the Fed's anti-inflation policy is wages, not prices. In fact, many macro-models have prices being a fixed mark-up over wages, which implies that the only way to control prices is to control wages. The Taylor rule, the standard guidepost for Fed policy, is based in part on the gap between a definition of full employment (the non-accelerating inflation rate of unemployment) and the current level of unemployment...

NYT Discovers "Ghetto Tax"

The NYT had a good article this morning highlighting a new Brookings report that details how people living in inner city areas often pay far more for goods and services than people living in more affluent areas. The report is worth reading and the NYT gets credit for calling attention to it. Unfortunately, the report suffers from a serious lack of imagination in its proposed remedies, highlighting greater public-private cooperation in bringing lower cost services to the poor. I have nothing against cooperation, but I always worry that these efforts end up being more of a subsidy to the industries involved than the poor people that they are supposed to help. My model nightmare is the accounts established to receive electronic payments from the government (e.g. disability or veterans benefits) for low income people. They cost the government a great deal in subsidies to the financial industry, and do very little for their intended beneficiaries. In some cases, I prefer good old fashioned...

Drug Companies Gone Wild: Medicare Part D

The NYT had a very good piece about how the shift of 6 million Medicaid beneficiaries into the Medicare drug benefit program may increase drug company profits in 2006 by $2 billion. According to the article, under the new program the drug companies get to sell the same drugs at higher prices. It doesn't get much better than this! --Dean Baker

Monopolies Breed Corruption: Medical Supplies Industry

The NYT had a good piece this morning reporting on how the medical supply industry pays top hospital executives thousands of dollars for advice on how to market their products. This is what you expect to happen when government patent monopolies allow these firms to sell their products at prices that are several hundred percent above the free market price. --Dean Baker

NPR Doesn't Believe in Markets

NPR had a piece this morning warning of a shortage of agricultural workers in California. It reported that some crops may rot in the field, if farmers there can't get more workers by the end of the summer. Those of us who believe in markets would suggest that the farmers try raising wages. It is possible that some of the crops being farmed now in California would not be profitable, if farmers had to pay the wage necessary to attract workers in the current market (or if they had to pay the market price for water). In a market economy, that means that the farmers made bad choices on crop choices. That's unfortunate for the farmers, but that's how markets work. I would like to be able to get a lawyer for $20 an hour, but because we have a lawyer shortage, that is not an option. Maybe NPR will be able to find some folks who understand markets to help with their reporting on economic issues. --Dean Baker

Soviet Style History in the New York Times

Back in the days of the Soviet Union, key facts were often excluded from historical accounts in order not to put the regime in a bad light. The NYT seems to be experimenting with this journalistic style. Today's article on the G-8 summit in St. Petersburg included a passing reference that described Russia's 7-year long economic recovery as "oil-fueled." Well, the rise in oil prices certainly has helped Russia over this period, but it is probably at least as important that Russia abandoned the economic straightjacket that had been imposed on it by the I.M.F. and then U.S. Treasury Secretary Robert Rubin (with help from his deputy Larry Summers). Until the summer of 1998, Russia had tied its currency to the dollar. In order to sustain this link, it was forced to raise interest rates to ever higher levels. The over-valued ruble, coupled with high interest rates, was strangling Russia's economy, bringing growth to a halt. The I.M.F. and the U.S. Treasury both insisted that Russia maintain...

Reassurances on the Housing Bubble

The Times had an interesting piece discussing the impact of more than $1.2 trillion in adjustable rate mortgages resetting in the next two years. The article points out that many homeowners may find their rates increasing by as much as 2 full percentage points when their lock-in period ends on an adjustable rate mortgage. The article notes that this increase in mortgage payments may cause serious distress for many homeowners and may even lead some to give up their house, especially if it has lost value since the mortgage was issued. However, the article assures us that the situation will not pose any problem for the mortgage banking industry. How do we know it won't pose a problem? Well the industry said so. That pretty much settles the case. After all, if they were seriously worried, the representatives of the industry would no doubt be anxious to have their concerns prominently displayed in the New York Times . I have written on the housing bubble at length (see our site ), but I'll...

The Conservative Nanny State: LIVE in NYC!

I will be giving a talk on my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer , at Demos next Thursday at noon. The talk is free, as is the book, if you want to download it. You can the details on their website . --Dean Baker

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