Commissions Composed Of Cretins?

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Published on Tuesday, November 9, 2010 by FireDogLake.com

The Deficit Commission Tsunami

by Dean Baker

During the mass unemployment of the Great Depression, Keynes once quipped that if we couldn't find any productive work that needed to be done, in order to reduce unemployment we could just pay workers to dig holes and fill them up again. Keynes was being sarcastic, but it seems that the Washington crew picked up on this suggestion. This is the only plausible explanation for the proliferation of deficit commissions in our nation's capital.There are three separate deficit commissions prepared to share their wisdom with the American people before the end of the year. These three commissions all have two important features in common: not one member of these commissions warned of the catastrophe that would be created by the collapse of the housing bubble, and they all think it is a good idea to cut Social Security.
The country is currently experiencing its worst economic downturn in 70 years with more than 25 million people unemployed, underemployed or having given up looking for work altogether. It might have been appropriate for a commission that purports to be giving advice on the future of the country's most important social programs, as well as the overall budget, to include at least one person who was awake enough to notice the $8 trillion housing bubble that wrecked the economy.
But these commissions that want to tell the public what is best for us don't feel that they need to bother with trivialities like the economic collapse. In fact, the commissions include many of the people who had helped guide our economy off the cliff. They see their credentials in this capacity as lending to their credibility. This is sort of like an officer from the Titanic using this experience as a basis for being appointed ship's captain.
In fact, these commissions don't have much other than their credentials to support their recommendations for cutting Social Security and Medicare. While the media have been hyperventilating at length to try to build fears about the budget deficits, it is easy to show that these fears are unwarranted.
In the short term, the United States has large budget deficits for the simple reason that private sector spending collapsed. The arithmetic is straightforward. The collapse of the bubbles in residential and nonresidential real estate led to a plunge in annual construction demand of more than $600 billion a year. The indirect effect of the loss of $6 trillion in housing bubble wealth was to reduce annual consumption by $600 billion a year.
With a total loss of $1.2 trillion in private sector demand, the choice for the government is either to boost the economy by running large deficits or allow the economy to contract further and let the unemployment rate rise even higher. If our deficit hawk commission members knew their economics, they would have been warning of the housing bubble in 2002-2006. Then, we could have avoided this economic collapse - and we would have had smaller deficits.
It is important to realize that the debt that we are incurring at present need pose zero burden on future generations. We are putting to use resources that would otherwise be idle, not pulling resources away from the private sector. While the deficit hawks eagerly threaten us with the prospect of our children paying interest on trillions of dollars of debt, the Federal Reserve Board could simply buy and hold this debt, leading to no net interest burden on future generations. (The Treasury pays interest on the debt to the Fed, which then refunds the interest payments to the Treasury at the end of the year, leaving no net interest burden.)
While the longer-term projections do show a serious deficit problem even after the economy has recovered, this is due to projections of exploding health care costs. Since more than half of our health care is paid by the public sector, if health costs really do grow out of control, then it will lead to very serious budget problems. Of course, if health care costs follow the projected path then they will also devastate the private sector.
The point is that we have a health care problem. If we don't fix our health care system, then our economy will be in serious trouble, with one problem being large budget deficits. If we do fix our health care system, then there is no long-term deficit problem.
The basic story is that, in the short term, there is no deficit problem; the problem is a plunge in private sector demand caused by the collapse of the housing bubble. In the longer term, the deficit problem is actually the problem of a broken health care system. The facts are as clear as can be.
So, why then do we have all these deficit commissions? It's simply modern Washington's way of digging holes and filling them up again. It gives these people something to do. Let's hope it ends up being harmless.

© 2010 FireDogLake.com

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. 

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Published on Tuesday, October 19, 2010 by The Guardian/UK

Timothy Geithner Forecloses on the Moratorium Debate

By refusing to halt foreclosures to sort out the mortgage mess, the treasury secretary again shows his favour to Wall Street

by Dean Baker

Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse.
This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks, congress could have given the money – but with the sort of conditions that would ensure the financial sector would never be the same. Alternatively, it could have allowed the collapse, and then rushed in with the liquidity to bring the financial system back to life.
But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible.
Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.
For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.
The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialise in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.
In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage – or who, in one case, did not even have a mortgage – have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases, foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.
A moratorium would give regulators the time needed to review servicers' processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic as the Obama administration used when it imposed a moratorium on deepsea drilling following the BP oil spill.
No one can seriously dispute that there is a real problem. Three of the largest servicers, Bank of America, JP Morgan and Ally Financial have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or "trust the banks".
If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner's disaster fairytale. If there were a moratorium in place for two to four months, then banks would stop adding to their inventory of foreclosed properties.
But most banks already have a huge inventory of unsold properties. Presumably, they would just sell homes out of this inventory. This "shadow inventory" of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.
Of course, it actually was Obama administration policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its Hamp programme, the idea being that this would give the housing market more time to settle down. Now, we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.
It doesn't make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner's positions throughout this crisis.
Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I'm just saying.

© Guardian News and Media Limited 2010

Dean Baker is co-director of the Center for Economic and Policy Research

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Net Neutrality Vital To Free Speech

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Published on Thursday, September 16, 2010 by TechZone 360.com

Net Neutrality Absolutely Vital to Assuring Progressive Free Speech

by Mark Weisbrot

The mass media remains one of the most powerful forces blocking social and economic progress in the 21st century.

It is because of the mass media that tens of millions of Americans are convinced that budget deficits are more important than the lives ruined by unemployment, or that Social Security won't be there for them when they retire. Or that their government's occupation of Afghanistan and its hundreds of military bases around the world, are protecting the "national security" of U.S. citizens.

All of these destructive myths -- and many more -- could be dispelled within a relatively short time if there were a free marketplace of ideas, instead of the "free press for those who own it" model currently in place.

Of course, other falsehoods would persist for much longer; ideas, once widely accepted, can have great inertia. But during the last two decades the Internet has introduced a degree of competition in the world of mass communications, which although still quantitatively small, is nonetheless unprecedented.

An interactive process has been set in motion with the Internet and the blogosphere acting as a check on the mass media -- sometimes breaking important news that would otherwise go unnoticed or unreported in systems with direct censorship such as China and also in limited democracies like the United States; and sometimes influencing the journalists who produce the mass media.

This process has the potential for accelerating with the development and spread of Internet technology, for example to Internet television; and of course with advances in literacy and education.

This is rare in the history of technology, and especially in the technology of communications. Almost all prior innovations -- radio, television and motion pictures -- have mostly made it easier for the few to control the many -- like pilotless drone military planes.

This progressive contribution of the Internet is reliant on the principle of "net neutrality": that Internet service providers treat all packets of data the same. An individual blogger's challenge to The Washington Post can be downloaded by anyone at the same speed as the content of the multi-billion dollar corporate newspaper itself. Intelligent readers can decide for themselves who is correct.

The Federal Communications Commission has been considering what its role and rules should be for enforcing net neutrality, and in early August Google and Verizon put forth their own proposal on these issues.

These two big corporations, along with others, are likely to have a considerable influence on the FCC and Congress, and their proposal has elicited a torrent of criticism. It exempts wireless and other "online services" from net neutrality, and has other big loopholes.

There is now a clear and present danger that the road will be paved to a fragmented Internet where service providers can determine what people will see on the Web, and carve out a "non-neutral" sector. As Sen. Al Franken, D-Minn., has noted, defending net neutrality is "the First Amendment issue of our time." America's great concentrations of wealth -- more concentrated than at any time since the 1920s -- already dominate the Internet. But not nearly as much as they dominate the vast majority of information that Americans receive from more monopolized info-tainment news outlets such as TV, radio and what remains of the newspaper industry.

A coalition of organizations including MoveOn.org, Color of Change, Free Press and Credo Action is calling on Americans to lend a hand and preserve this one remaining mass medium of free speech and equal rights, before it is remade in accordance with corporate needs. We the people need the Internet as we know it is the essential tool in ongoing battle of ideas.

It is time to fight for it.

© 2010 Tribun Media Services

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, DC.

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The Party of No

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Published on Tuesday, July 6, 2010 by The Guardian/UK

Republicans: A Party of Unemployment

by Dean Baker

From now until 2 November, the Republican party will be the party of unemployment. The logic is straightforward: the more people who are unemployed on election day, the better the prospects for Republicans in the fall election. They expect, with good cause, that voters will hold the Democrats responsible for the state of the economy. Therefore, anything that the Republicans can do to make the economy worse between now and then will help their election prospects.
While it may be bad taste to accuse a major national political party of deliberately wanting to throw people out of jobs, there is no other plausible explanation for the Republicans' behaviour. They have balked at supporting nearly every bill that had any serious hope of creating or keeping jobs, most recently filibustering on bills that provided aid to state and local governments and extending unemployment benefits. The result of the Republicans' actions, unless they are reversed quickly, is that hundreds of thousands more workers will be thrown out of work by the mid-terms.
The story is straightforward. Nearly every state and local government across the country is looking at large budget shortfalls for their 2011 fiscal years, most of which begin on 1 July 2010. Since they are generally required by state constitutions or local charters to balance their budgets, they will have no choice except to raise taxes and/or make large cutbacks and lay off workers to bring spending and revenue into line.
State and local governments have cut their workforce by an average of 65,000 a month over the last three months. Without substantial aid from the federal government, this pace is likely to accelerate. The Republican agenda in blocking aid to the states may add another 300,000 people to the unemployment rolls by early November.
The blocking of extended unemployment benefits promises similar dividends. As Paul Krugman rightly notes this week, unemployment benefits are not just about providing income support to those who are out of work, they also provide a boost to the economy. Since unemployed workers generally have little other than their benefits to support themselves, this is money that will almost immediately be spent. The benefits paid to workers are income to food stores and other retail outlets.
Unemployment insurance provides the sort of boost to demand that the economy desperately needs. That is why neutral parties such as the congressional budget office or economist Mark Zandi, a top adviser to John McCain's presidential bid, always list unemployment benefits as one of the best forms of stimulus.
Republicans give two reasons for opposing benefits. First, they claim that benefits discourage people from working. Second, they object that the Democrats' proposal will add to the national debt.
On the first point there is a considerable amount of economic research. Most indicates that in periods when the economy is operating near its capacity, more generous benefits may modestly increase the unemployment rate. However, they are less likely to have that effect now. The reason is simple: the economy does not have enough jobs. The latest data from the labour department shows that there are five unemployed workers for every job opening.
In this context, unemployment benefits may give some workers the option to remain unemployed longer to find a job that better fits their skills, but they are unlikely to affect the total number of unemployed. In other words, a $300 weekly unemployment cheque may allow an experienced teacher the luxury of looking for another teaching job, rather than being forced to grab a job at Wal-Mart.
However, if the teacher took the job at Wal-Mart, then this would simply displace a recent high-school graduate who has no other job opportunities. That might be a great turn of events in Republican-econ land, but it does not reduce the overall unemployment rate, nor does it benefit the overall economy in any obvious way.
The other argument the Republicans give is that these bills would add to the national debt. For example, the latest extension of unemployment benefits would have added $22bn to the debt by the end of 2011. This means that the debt would be $9,807,000,000 instead of $9,785,000,000 at the end of fiscal 2011, an increase of the debt-to-GDP ratio from 65.3% to 65.4%.
It is possible that Congressional Republicans, who were willing to vote for hundreds of billions of dollars of war expenditures without paying for them, or trillions of dollars of tax cuts without paying for them, are actually concerned about this sort of increase in the national debt. It is possible that this is true, but not very plausible.
The more likely explanation is that the Republicans want to block anything that can boost the economy and create jobs. Throwing people out of work may not be pretty, but politics was never pretty, and it is getting less so by the day.

© 2010 Guardian News and Media Limited

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. 

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Economists Are Economissed

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Published on Tuesday, June 15, 2010 by The Guardian/UK

Surprises in Store for Economists

Some analysts are shocked that US retail sales have declined. Have they lost their grasp of basic economic concepts?

by Dean Baker

The commerce department reported that retail sales in May were down by 1.2% from April. This surprised most economists who had expected a modest increase. The media were filled with accounts of economists trying to explain why consumers were still reluctant to open up their wallets and spend in a big way. It would have been much more interesting to hear accounts of why economists were surprised.There is always a large random element in month-to-month movements in retail sales or any other economic variable. Therefore no one is ever going to be able to explain these changes with any precision. (The data are also subject to large revisions, so it is entirely possible that revised data will look very different from the report released last week (pdf).)
Nonetheless, there is little basis for the surprise shown by so many economic analysts. With few exceptions these analysts failed to see the $8tn housing bubble, the collapse of which sank the economy. Remarkably, even now they apparently cannot understand its importance.
To put it as simply as possible (so even an economist can understand it), the housing bubble was driving the economy in the period prior to its collapse, beginning in 2007. It drove the economy in two ways. The run up in house prices led to a building boom. Residential construction, which is typically less than 4% of GDP, rose to more than 6%, creating more than $300bn in additional annual demand. A bubble in non-residential real estate added perhaps another $150bn to annual demand.
The bubble also drove the economy through the effect of housing wealth on consumption. Economists usually estimate that $1 of additional housing wealth increases annual consumption by between 5-7 cents. This implies that the $8tn of housing bubble wealth would lead increase consumption by $400bn to $560bn a year.
With most of the bubble wealth eliminated by the collapse of house prices over the last three years, we should expect a sharp drop in consumption. Furthermore, stock prices have lost a bit less than a third of their value (around $6tn), which we should expect to cause a further decline in consumption. With the stock wealth effect estimated at 3-4 cents on the dollar, the decline in stock prices should have reduced annual consumption by $180bn to $240bn. In total we should expect to see annual consumption have dropped by between $600bn and $900bn as a result of the loss of housing and stock wealth.
This is all very simple arithmetic and basic economics. Consumption had been driven by the housing bubble prior to the recession. Now that the bubble has collapsed and trillions of dollars of wealth has disappeared we should expect much lower levels of consumption. To flip this around, the savings rate, which had averaged more than 8% in the decades prior to the 90s, fell to near zero in the years leading up to the recession. Now that the bubble has collapsed, we should expect consumption to fall and saving to return back to its normal level. In fact, it might even go higher since the huge cohort of baby boomers is now mostly in their 50s and most have almost nothing saved for retirement. This might lead savings rates to go above their long-term average.
There seems very little room for argument in this story. The existence and housing and stock wealth effects are among the least questioned propositions in economics. Nor is there too much dispute about their size. How could any economist see the collapse of an $8tn housing bubble and the destruction of more than $6tn in stock wealth and not expect to see a substantial decline in consumption?
Yet, we have dozens of economists being cited in newspapers and broadcast news, all saying that they are surprised by weak consumption. If anything the surprise should be that consumption is still as strong as it is. The saving rate is still near 4%, far below its historic average. Why on earth would any economist expect it to go still lower?
The reason that consumers are not spending more money has nothing to do with attitudes. The reason that most consumers aren't spending is the same reason that homeless people don't spend much money: they don't have any.
Economists used to be able to understand basic economic concepts. Apparently, most have lost this ability. As a result we are likely to see many more surprised economists and much proposed in the way of very bad economic policy.

© Guardian News and Media Limited 2010

Dean Baker is co-director of the Center for Economic and Policy Research

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Why Should We Listen to Deficit Hawks?

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Published on Tuesday, June 1, 2010 by The Guardian/UK
Why Should We Listen to Deficit Hawks?
Calls to cut social security come from economists who want to line Wall Street pockets with money from ordinary workers

by Dean Baker
When politicians demand that the public do something because of the dictates of financial markets, it is best to hold on to your wallet. Back in September of 2008, both President Bush and the Democratic leadership in Congress insisted that if we did not immediately hand over $700bn to the banks, the whole financial system would grind to a halt.

The threat worked – the banks got their $700bn from Congress and much more from the Fed – with few questions asked. As a result, Goldman Sachs, Citigroup, and the rest are now as profitable as ever and once again paying out record bonuses to "top performers".

If the market had been allowed to run its course Goldman, Citigroup, Morgan Stanley, and many other major banks would have been bankrupt, leaving their shareholders and creditors out of luck and their top executives walking the unemployment lines. There are reasons that this outcome would have been undesirable for the economy as a whole, but there is a big difference between the Tarp blank check and doing nothing. If the politicians and their accomplices in the economics profession had not overwhelmed the public with fear, we could have ensured that the bankers suffered from the crisis that they had themselves created.

With the banks back on their feet, the Wall Street crew and their accomplices in the economics profession are again feeling their oats. They are insisting that we have to put our hopes for economic recovery on the back burner. Instead, we have to focus on deficit reduction. The reason is that we have to soothe financial markets.

The claim is that if we don't act aggressively now to reduce the budget deficit then the "bond vigilantes" will start a run on US debt just as they have recently done with Greece. This is supposed to make us so scared that we will accept large cuts in social security and in other important programmes.

There are three basic problems with this argument. First, why on earth should anyone trust what the bankers' economist accomplices are telling us? These people completely missed the $8tn housing bubble; is there any reason to believe that their insight into financial markets is better today than it was two years ago?

The second reason not to follow their advice is that the financial markets themselves don't necessarily reflect the underlying reality in the economy. Are we supposed to twist ourselves into knots over whatever is fashionable in financial markets this week? Suppose we structure our policies to make the markets happy this week and then next week the Wall Street diz brains decide that something else is now fashionable? This leaves us forever chasing Wall Street fashions. That is not a sound basis for economic policy.

The third reason not to take the deficit hawks argument seriously is simply that it is bad economics. The country needs deficit spending to sustain demand until private demand recovers from the collapse of the housing bubble. This is basic logic – and the prestigious positions of many of the deficit hawks will not allow them to repeal the rules of logic.

Furthermore, the United States is not Greece, as all serious people know. It has a huge economy that is still largely self-sufficient (imports are only 16% of GDP). The idea that the United States is about to experience a run on its debt is absurd on its face. The Fed can and should buy the debt, if necessary. Let's hear the deficit hawks say this will cause inflation. With very few exceptions, they won't dare make such an assertion because they know it is not true.

The deficit hawks are not concerned about national insolvency; they are not worried about soaring inflation; they are worried about how to take every last penny from ordinary workers and give it to the Wall Street crew. That is what the Tarp was about and this is what the latest crusade to reduce the deficit is all about. Now they want to go after workers' social security because, as Federal Reserve Board chairman Ben Bernanke said: "That is where the money is." The fact that workers have paid for these benefits doesn't matter at all to the Wall Street crew.

So, if you feel like giving all your money to the Wall Street gang, then you should take the deficit hawks seriously. But, if you think that people who are not Wall Street millionaires have rights too, then get out the pitchforks and send the deficit hawks and their economist accomplices running.
© Guardian News and Media Limited 2010

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. 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.

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Deficit Hawks Up To Old Tricks

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Published on Tuesday, April 27, 2010 by The Guardian/UK
Deficit Reduction: Argument by Authority

by Dean Baker
The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control.

What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.

Many public debates in the United States take this form. The issue is not what is said, but rather who says it. A few years ago all the authorities said that there was no housing bubble. The large body of evidence showing that house prices had hugely diverged from the fundamentals did not matter when the chairman of the Federal Reserve Board, the president's Council of Economic Advisers and other leading lights of the economic profession insisted that everything in the housing market was just fine.

Going further back to the mid-90s, many of this same group of deficit hawk luminaries tried to use argument by authority to cut social security. They came up with the story that the consumer price index (CPI) overstated the true rate of inflation. After workers retire, their social security benefits are indexed to the CPI. This crew (which included then Senator Alan Simpson, a co-chair of President Obama's commission, and Peter Peterson) argued that social security benefits should lag the CPI by one percentage point a year. In other words, if the CPI shows 3% inflation, then social security benefits will only rise by 2%.

That may seem a small cut, but it adds up over time. A worker retired for 10 years would have their benefits reduced by approximately 10%. A worker retired for 20 years would have their benefits cut by almost 20%.

To push this agenda, they put together a panel of the country's most prominent economists, all of whom blessed the claim that the CPI overstated the true rate of inflation by at least one percentage point. In addition to this panel, the social security cutters also pulled in other prominent economists, including Martin Feldstein, formerly President Reagan's top economist and the head of the National Bureau of Economic Research.

The social security cutters were so successful in rounding up the big names that virtually no economists were prepared to publicly stand up and question their claims about the CPI. They had near free rein, running around the country with the "all the experts agree" line.

As events unfolded they were not able to get their cut in social security benefits. (Ted Kennedy and Dick Gephardt deserve big credit on this.) But what is really interesting for the current debate is what happened to the experts' claim on the CPI. There were some changes made to the CPI, but in the view of the expert panel, the major causes of the biases in the CPI were not fixed. They concluded that even after the changes the CPI still overstated the true rate of inflation by 0.8 percentage points annually.

If this claim is really true then it has enormous ramifications for our assessment of the economy. It means, for example, that incomes and wages are rising far more rapidly than the official data show. It means that people in the recent past were far poorer than is indicated by official statistics. If the claim about the CPI being overstated is true, then we would have to re-examine a vast amount of economic research that starts from the premise that the CPI is an accurate measure of inflation.

However, almost no economists have adjusted their research for a CPI's overstatement of inflation. In fact, even the members of the expert panel don't generally use a measure of inflation that adjusts for the alleged bias in the CPI. In other words, when they are not pushing cuts to social security, these economists act as though the CPI is an accurate measure of the rate of inflation. This could lead one to question these experts' integrity.

This history should give the public serious grounds for being suspicious about the latest efforts to cut social security and Medicare. A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion with their argument by authority.
© Guardian News and Media Limited 2010

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. 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.

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Health Care Costs Should Be Priority

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Published on Tuesday, April 13, 2010 by The Guardian/UK
Attack Wall Street, Not Social Security

by Dean Baker

Suppose our top generals described the growing threat from a hostile Middle East power. The country has tens of billions of oil dollars, a growing army, chemical and biological weapons, and is in the process of developing nuclear weapons. After carefully describing the risks posed by this country, our generals suggested an immediate attack on Canada. They explain that combating this Middle East country would be difficult, but defeating Canada is easy.

This is essentially the story of the latest attack on social security. Everyone who looks at the projections agrees; the scary budget stories being hyped in the media and by the Wall Street crew are driven almost entirely by projections of exploding healthcare costs. But instead of proposing ways to fix the healthcare system, these deficit hawks want to attack social security. They tell us that fixing healthcare is hard. By contrast they think that cutting money from social security will be relatively easy.

The facts on this are straightforward and known by everyone involved in the budget debate. The US healthcare system is broken. We pay more than twice as much per person as the average for other wealthy countries.

And it is projected to get worse. In three or four decades we are projected to pay three or four times as much per person for healthcare as people in countries like Germany and Canada. Since more than half of our healthcare is paid through public sector programmes like Medicare and Medicaid, this explosion in healthcare costs will bankrupt the government if it actually occurs. Of course it will also devastate the private sector.

On the other hand, it is easy to show that if we contain healthcare costs then our budget problems are relatively minor. In fact, the current projections of enormous budget deficits two or three decades out would flip over to projections of enormous budget surpluses if our healthcare costs were comparable to those of any other wealthy country.

Logic would dictate that our top priority should be getting our healthcare costs under control. But fixing healthcare is difficult because, as we saw in the healthcare debate, this means confronting the health insurance industry, the pharmaceutical industry, the medical supply industry, highly paid medical specialists and other powerful lobbies.

The deficit hawks don't want to fight this fight. Defeating these powerful interest groups would be a hard fight. And for the deficit hawks it would likely be an especially painful fight since these are their friends.

By contrast, the Wall Street deficit hawks don't have friends who depend on social security for their income. Wall Street investment bankers like Peter Peterson and Robert Rubin are unlikely to associate with such people. This is why they see attacking social security as easy.

Of course attacking social security makes as much sense as our generals' plan to attack Canada. The Congressional Budget Office's projections show that the programme can pay full benefits until the year 2044 with no changes whatsoever. Even after that date the programme would always pay a higher benefit than what current retirees receive, even though somewhat less than the full scheduled benefits.

The long-term problem is not that anything improper has been done with the programme; the reason that social security is projected to eventually face a shortfall is that future generations are projected to live longer than we do. This raises costs since our children and grandchildren are projected to enjoy longer retirements than we do. In short, there is no story of generational inequity here, contrary to what the Wall Street deficit hawks say.

If our deficit hawk generals are too scared to take on the healthcare industry then we also have to also make them too scared to take on social security. If we need to reduce the deficit the best place to start is a financial speculation tax. A modest set of financial transactions taxes, like the 0.5% tax on stock trades in the United Kingdom, can easily raise $150bn a year. This would go a long way toward addressing future budget shortfalls and it would raise money from people who can afford it: the Wall Street crew whose financial shenanigans led to the meltdown.

Federal Reserve board chairman Ben Bernanke recently suggested cutting social security because: "that's where the money is". That's not true, the real money is on Wall Street. Let's go get it.
© 2010 Guardian News and Media Limited

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. 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.

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Wage Suppresion Key to Greenspan World View

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Published on Thursday, March 11, 2010 by The Guardian/UK
Inside Alan Greenspan's Nightmare
News that wages are rising in China is greeted with dread by those who share Greenspan's unwarranted fear of rising inflation

by Mark Weisbrot

Alan Greenspan had a dream, or rather a nightmare. Greenspan seems to have woken up in a cold sweat one morning in fear that the period of "disinflationary pressures" that had kept inflation low since the 1990s was about to end. This was 2007, when he published his autobiographical economic treatise, The Age of Turbulence. Despite his well-known love for economic data, and poring over the latest reports from every statistical agency, he did not realise that he was sitting on a housing bubble of epic proportions. Not seeing the bubble (he also missed the prior stock market bubble that accumulated and burst on his watch, causing the 2001 downturn), he could not know that it would soon collapse and cause a very ugly recession, in which inflation would be irrelevant.

This by itself should be enough to question the wisdom of central bankers, since the evidence for both of these world-historic asset bubbles was blindingly obvious once they had reached a certain size. But Greenspan's nightmare is scary for other reasons, some of which will become increasingly relevant as the world economy recovers.

As Greenspan details in his book, the reason for his nightmare is that the world was depleting its stock of hundreds of millions of unemployed people, including those of the former Soviet Union and also in rural China. In other words, "too many" of them had become employed, and this was allowing for wages of factory workers in China to rise. So long as China had a huge mass of unemployed, wages were held in check, and - according to Greenspan - competition from low-wage production there held down wages in the rest of the world, including even rich countries like the United States. All good! Until the nightmare started.

Is there something wrong with this picture, that one of the world's most powerful economic decision makers (at the time), dreads the decline of mass unemployment and rising wages among people making 80 cents an hour? What, then, is the purpose of economic development, if not to raise living standards for poor people? Some may dismiss Greenspan's values as unrepresentative - he was, after all, a devotee of the extreme libertarian writer Ayn Rand. And his autobiographical narrative is rather unusual: although we learn about his love of baseball, music (he attended the Julliard School), and how he became interested in economics, there is something missing. Most public figures of his stature, and even most economists, would have offered at least a perfunctory paragraph about how his economic thinking was aimed at helping those at the bottom of the social ladder - whether true or not. Greenspan didn't bother.

But unfortunately Greenspan is not an outlier but a moderate among central bankers. What is worse, their perverse world view has a hugely disproportionate influence on reporting and discussion of economic issues. As the press has recently reported, wages in China are again rising, due to the additive effect of the global economic recovery and the world's most effective economic stimulus programme, which enabled China to plough right through the world recession with 8.7% growth in 2009. The reports are somewhat less negative than they were a few years ago, but Greenspan's nightmare is everywhere: a dreaded "labour shortage" is forcing Chinese wages up and this will add to inflation. It is not clear what is wrong with a "labour shortage" being resolved in the way that markets resolve other shortages: ie the price of labour goes up until quantity supplied matches quantity demanded.

"China has drained its once vast reserves of unemployed workers in rural areas and is running out of fresh labourers for its factories," reports the New York Times. "Personnel managers here say they are also abandoning the informal tradition of not hiring anyone over 35 - they say they are now hiring workers up to 40 years old, and sometimes older, despite concerns about whether they can keep up week after week with the rapid pace of Chinese assembly lines."

"Managers can no longer simply provide eight-to-a-room dorms and expect labourers to toil 12 hours a day, seven days a week," says Business Week.

There is more, but we wouldn't want to give Alan Greenspan a heart attack.

To its credit, the Times recognises the positive aspect of rising wages for Chinese workers and also notes that the Obama administration, which has complained about the Chinese yuan being undervalued, should welcome this development. An increase in Chinese wages, to the extent that it raises the price of the country's exports, has the same impact as an appreciation of the yuan.

But the reality is that the Obama administration, as well as Congressional leaders, are not really serious about a more competitive dollar. If they were, they could push down the value of the dollar worldwide, rather than trying to blame the Chinese for our overvalued currency. But they don't do that because the Greenspan/Wall Street view prevails: anything that lowers inflation is good, whether it's an overvalued dollar, cheap imports from repressed overseas labour, or US workers' wages stagnating, as they have, for decades.

All this despite the fact that the non-partisan Congressional Budget Office projects inflation over the next 10 years averaging less than 1.7% annually - lower than any decade for more than half a century. Imaginary threats of inflation could turn out to be one of the more real threats to the United States' economic recovery.
© 2010 Guardian News and Media Limited

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, DC.

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Dean Baker Suggests Solution to Unemployment Crisis

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Published on Tuesday, March 2, 2010 by The Guardian/UK
Nice Work If You Can Share It
If Congress is serious about addressing unemployment, it will act on bills that aim to strengthen work-sharing programmes

by Dean Baker

The housing bubble and subsequent crash were the result of extreme incompetence on the part of the country's top economic policymakers. Somehow these people could not see, or did not care about, the dangers of an $8tn housing bubble.

Unfortunately, economic policymaking is not like most jobs where workers get fired when they make serious mistakes. In economics, they just keep getting promoted. Therefore, the people who sank the economy are for the most part the same group of people still designing policy today. Now this group of incompetent economists is telling the rest of us that we are going to have to endure five more years of high unemployment.

However, the rest of the country should not be forced to suffer even more just because those determining economic policy cannot do their jobs. We know how to get the unemployment rate down. Keynes taught us more than 70 years ago that we just have to spend money to eliminate mass unemployment. People work for money, if the government spends, people will work. It's pretty straightforward.

But, the deficit hawks seems to have largely closed this route. Members of Congress somehow think that they are helping our children by putting their parents out of work.

Fortunately, we can even find a way to create jobs that can keep the deficit hawks happy. It's called "work-sharing". The basic point is so simple that even an economist can understand it.

Instead of paying workers to be unemployed - in the form of unemployment benefits - we pay workers to stay employed, but work fewer hours. In effect, to avoid one worker from being laid off, several workers put in somewhat less time on the job and take a small cut in pay. Germany and the Netherlands have used this path to keep their unemployment rates from rising even though they have experienced steeper downturns than the US.

The way the system works in Germany, a firm will cut back the hours of its workers by 20%. The government then replaces 60% of the lost pay (12% of total pay). The firm is expected to kick in 20% of the lost pay (4% of total pay) and the worker ends up taking home 4% less pay.

In this scenario the worker ends up working 20% fewer hours for 4% less pay. This can mean, for example, that the worker ends up working a four-day week instead of a five-day week. Given the savings on work-related expenses, like transportation and childcare, most workers would almost certainly end up better off under a work-sharing arrangement than they are now.

While the economy is past its period of rapid job loss, a huge number of workers still lose their jobs each month through the economy's normal job churning. Each month, companies lay off or fire close to 2 million workers. These job losses are largely offset by hiring by other firms, so that the net change in jobs has been a small negative in recent months. However, if we could just reduce the rate of job loss by 10%, then it would be equivalent to creating an additional 200,000 jobs a month or 2.4 million jobs a year. This would get us back to full employment in two years, rather than five or six, as is currently projected.

There are other potential benefits from work sharing. The reduction in work time could give companies an opportunity to adopt more family friendly work practices. For example, they could adopt a policy of paid family leave or paid sick days on a trial basis during the downturn.

There would also be environmental benefits to reducing work hours. Suppose everyone worked a four-day week so that we reduced the number of commutes by 20%. This would substantially reduce the amount of greenhouse gas emissions associated with getting to and from work. The fact that Europeans tend to work far fewer hours than we do is undoubtedly one of the main reasons that their per person carbon emissions are about half of the US level.

There are already 17 states that have work-sharing programmes in place. There are bills in both the House and Senate that would strengthen these programmes and give support to other states to set up their own programmes. If Congress is serious about addressing unemployment, it will act on these bills.
© 2010 Guardian News and Media Limited

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) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. 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.

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