Notice: Trying to get property 'ID' of non-object in /code/wp-content/themes/thenation-2023/functions.php on line 3332 Billionaires Won’t Save Local News. Here’s What Will.https://www.thenation.com/article/society/billionaires-wont-save-local-news-heres-what-will/Dean BakerMar 4, 2024

Praying for beneficent tycoons is not the answer. We need the government to step up.

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Society / March 4, 2024

Billionaires Won’t Save Local News. Here’s What Will.

Praying for beneficent tycoons is not the answer. We need the government to step up.

Dean Baker
Jeff Bezos laughs as he speaks about his flight on Blue Origin’s New Shepard into space during a press conference on July 20, 2021 in Van Horn, Texas.

Washington Post owner Jeff Bezos laughs as he speaks about his flight into space on Blue Origin’s New Shepard, during a press conference on July 20, 2021, in Van Horn, Tex.

(Joe Raedle / Getty Images)

Local journalism is fading fast. According to Northwestern’s Journalism School’s annual report on the state of journalism, which came out last fall, the United States was losing an average of 2.5 newspapers per week in 2023. That was up from two per week in 2022. Since 2005, the country has lost nearly 2,900 newspapers and two-thirds of its newspaper journalists, or 43,000 people.

The bad news keeps coming. In late January, the widely respected Baltimore Sun was taken over by a billionaire executive from the right-wing Sinclair news network. He quickly told the staff that their job was to get clicks. That same week, the Los Angeles Times announced a new round of layoffs. 

This should be very troubling for people who care about democracy. The news media plays an enormously important role in informing the public and exposing corruption. The loss of local news outlets essentially gives free rein to corrupt local politicians and businesses.

The old business model that supported newspapers throughout the last century is no longer viable. Before the Internet age, newspapers relied primarily on advertising revenue to support their operations, with subscription revenue roughly covering the cost of printing and distributing the paper.

The Internet destroyed this model from both ends. First, the vast majority of readers want their news online rather than in print. This mattered because online advertising generally generates less revenue than print does. Department stores were more willing to pay to have people staring at their ads as they looked through different articles on a printed page than to have them quickly glancing at the ads as they clicked around a website.

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Cover of March 2024 Issue

On the other side, the Internet opened up a vast array of alternative advertising possibilities. That is true not just for major retailers but also for people who want to sell a car or a piece of furniture or advertise a job opening. Classified ads used to provide a healthy stream of revenue for newspapers, but they are now pretty much dead. It also doesn’t help that Google and Facebook manage to scoop up a disproportionate share of the relatively meager online ad revenue that is available.

With the old model no longer working, the newspaper industry is collapsing. This has provoked considerable hand-wringing, but not many proposed solutions. For the past decade or so, the go-to answer has appeared to be “find a beneficent billionaire.”

Beneficent billionaires are great (until they turn the money taps off, as has happened at the Los Angeles Times and Jeff Bezos’s Washington Post), but that is not a serious way to support an essential public service like local newspapers. We need a new model.

Fortunately, there is an alternative: investing public dollars into journalism. The idea of public subsidies for news outlets is hardly new.

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As Robert McChesney and The Nation’s John Nichols note in their “Local Journalism Initiative” proposal, the government used to heavily subsidize newspapers by requiring the postal service to distribute them at below cost. They calculate that this subsidy came to 0.21 percent of GDP, which would be almost $60 billion a year in today’s economy. Many public notices are also required to appear as paid ads in newspapers. And government-granted copyright monopolies are an explicit subsidy to newspapers, and creative work more generally, laid out directly in the Constitution.

The key issue is to have the subsidy distributed in a way that protects the content from government interference. This can be done through a system where the government gives people a coupon or tax credit so that they can support the news outlet of their choice.

The model for this sort of system is the charitable contribution tax deduction. The IRS grants organizations tax-exempt status based on what they do, not whether it likes what they do. This means that a church, a college, or a homeless shelter all qualify for tax-exempt status based on being a church, college, or homeless shelter.

The IRS does not try to determine whether the church, college, or shelter is “good”; that is for potential contributors to assess. To get tax-exempt status, the IRS just determines whether these organizations engage in the activity they claim.

There would be a similar determination in assessing eligibility for local journalism tax credits. A news outlet would merely have to show that it was engaged in the process of reporting local news. There would be no effort to determine whether it was doing a good job in reporting local news—that would be up to the individuals using their tax credits.

The news outlets getting the credit would also have to make their material freely available to the public outside of paywalls. This one is simple. Since the public is paying for the work, it gets to benefit from it.

The other big difference between the charitable deduction and this tax credit system is that beneficiaries of the tax deduction are almost exclusively high-income households. Almost 90 percent of the population takes the standard deduction, which means they are not eligible for the charitable contribution tax deduction.

The local journalism tax credit would be a fixed amount, say $100, for everyone. It is fully refundable, so everyone gets it. This sort of system could easily make up for the collapse of advertising revenue over the last three decades.

The death of journalism is a national problem. Ideally, we would have a tax credit available to everyone in the country. However, given the current state of Congress, expecting national legislation along these lines would be as unrealistic as relying on beneficent billionaires. But this sort of local journalism tax credit can be put in place at the state or even local level.

Currently, there are efforts in both Seattle and Washington, D.C., to establish a system of local news tax credits. There are many details to work out, and there will be serious political obstacles to overcome even in these relatively liberal cities.

However, the point is that we can devise mechanisms to support local journalism. We have long recognized the need to support this essential public service with subsidies, but these are no longer sufficient to keep the industry alive. We need a new mechanism—because praying for beneficent billionaires won’t do the trick.



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Why the Public Is Negative on the Economyhttps://www.thenation.com/article/economy/economy-biden-unemployment-wages/Dean Baker,Dean BakerFeb 21, 2024

The economic picture under Biden actually looks great—but he’s polling poorly anyway.

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February 21, 2024

Why the Public Is Negative on the Economy

The economic picture under Biden actually looks great—but he’s polling poorly anyway.

Dean Baker
President Joe Biden announces almost $5 billion for 37 transportation projects across the US.
President Joe Biden announces almost $5 billion for 37 transportation projects across the US. (Nicole Neri / Getty Images)

President Biden consistently polls horribly on the economy, giving Donald Trump an enormous edge on this key issue. More than half the public thinks unemployment is at a record high and the economy is in a recession.

These negative views are disturbing, since if people continue to believe that Trump is a better economic steward, it will be hard for Biden to win the election. But they’re extra alarming because they’re 180 degrees at odds with reality.

It’s worth highlighting some key facts about the economy under Biden. First, the unemployment rate is 3.7 percent. It has been under 4 percent for 24 consecutive months, a streak that has not been matched in more than half a century.

Unemployment is an issue not only for the roughly 6 million people who are currently unemployed, but also for the more than 5 million people who lose or leave their jobs every single month, with most subsequently joining the pool of people looking for new jobs. That means tens of millions of people (plus their immediate family members) have direct experience with the labor market over the course of the year—making those who care about the state of that market hardly a small minority.

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Cover of March 2024 Issue

Because of the strong labor market under Biden, tens of millions of workers have left bad jobs to take better ones. This is a great story: Workplace satisfaction hit a record high in the recovery.

The strong job market has also meant rising real wages. For all the complaints about high prices, wages have risen more rapidly and are now higher when adjusted for inflation than before the pandemic. Even better, the most rapid pay increases have been for those at the bottom end of the wage distribution spectrum. Much of the rise in inequality of the past four decades has been reversed in the past three years. And the Black/white wage differential has fallen to its lowest level on record.

Meanwhile, inflation is roughly back to its pre-pandemic rate. While most prices will not return to where they were before the pandemic, the prices of many items, like rents and used cars, are falling.

This is truly an incredible economic picture given that we faced the worst pandemic in more than a century. The United States has seen by far the best growth of any major economy during Biden’s term, and its inflation rate is among the lowest.

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This great economic picture was not an accident. Just after taking office, President Biden pushed through his ambitious pandemic recovery package without a single Republican vote in Congress. He faced opposition not only from Republicans but from prominent Democratic economists. Larry Summers, who held top positions in both the Clinton and Obama administrations, denounced it as the most reckless economic policy in 40 years.

But this robust stimulus quickly brought the country back to near full employment, recharging a recovery that was weakening when Biden took office. Biden also passed an infrastructure bill, the CHIPS and Science Act, to boost domestic semiconductor production, and the Inflation Reduction Act. These bills have sustained the recovery, even as they laid the groundwork for longer-term sustainable growth.

Given all this, we have to ask why the public is so negative on the economy. It’s true that tens of millions of people are still struggling to pay for their food, rent, and other necessities. For them, the economy is horrible. But this was also true in 2019, before the pandemic, when most people said the economy was good. So that can’t be the reason.

A better explanation is the media. This seems borne out by the fact that most people are reasonably upbeat about their own economic situation and the economy in their local community. It is the national economy that they think is terrible.

This point is simple but important. People have direct knowledge of their own situation and community. They don’t have direct knowledge of the national economy, so their assessment of it must come from what they hear others say.

Fox News trashing the Biden economy is a given. But mainstream news outlets like The New York Times, The Washington Post, and CNN have also chosen to misrepresent the data to highlight the negative. A recent analysis from Brookings showed that the media have been far more negative on the economy under Biden than the data warrant.

We have seen endless stories on how high prices for milk or gas or other items are devastating families. And major news stories don’t mention that for every family being hit hard by inflation, there is probably an autoworker or restaurant worker who has received a big raise.

In some cases, media outlets even seem to make things up. There have been numerous stories about how young people have given up on ever owning a home, even though homeownership rates are higher for young people now than before the pandemic.

A lot will happen between now and November. At the moment, almost all the economic signs are positive. The Democrats should tout that fact widely. Maybe even the media will notice.



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Want to Reverse Inequality? Change Intellectual Property Rules.https://www.thenation.com/article/economy/inequality-patents-taxes-copyright/Dean Baker,Dean Baker,Dean BakerFeb 8, 2021

The explosion of inequality over the past four decades is appropriately a major focus of the political agenda for progressives. Unfortunately, policy prescriptions usually turn to various taxes directed at the wealthy and very wealthy. While making our tax structure more progressive is important, most of the increase in inequality comes from greater inequality in before-tax income, not from reductions in taxes paid by the rich. And, if we’re serious about reversing that trend, it is easier, as a practical matter, to keep people from getting ridiculously rich in the first place than to tax the money after they have it.

While the Reagan, George W. Bush, and Trump tax cuts all gave more money to the rich, policy changes in other areas, especially intellectual property have done far more to redistribute income upward. In the past four decades, a wide array of changes—under both Democratic and Republican presidents—made patent and copyright protection both longer and stronger.

In the case of patents, the TRIPS provisions of the World Trade Organization, which went into effect in January 1995, extended the length of patent monopolies from 17 years from the date of issuance to 20 years from the date of filing. The 1980 Bayh-Dole Act allowed for patents on government-financed research. In 1982, Congress established a special patent-friendly appellate court to hear cases on patent disputes. And court rulings extended patent coverage to include life forms, software, and business methods.

For copyrights, two revisions to the law, in 1976 and 1998, extended the maximum duration from 56 to 95 years. The Digital Millennial Copyright Act of 1998 imposed strong rules for copyright enforcement on the Internet. Washington has also sought to impose stronger intellectual property protections on our trading partners in every trade agreement that the United States has negotiated over the last three decades.

The effect of these changes was to transfer money from the bulk of the population to the relatively small group of people in a position to benefit from them, either because of their skills in software, biotechnology, and other areas, or because of their ownership of stock in companies that benefit from these rules.

The upward redistribution of wealth arising from intellectual property (IP) is typically disguised in public debates as being the result of “technology.” But blaming technology attributes it to an impersonal force. When we point out that it is due to intellectual property, we make it clear that inequality is a policy choice.

To take my favorite example, without Microsoft’s government-granted patent and copyright monopolies, Bill Gates would probably still be working for a living. Many other billionaires and millionaires would be far less wealthy if we had different rules for intellectual property.

By my calculations, the amount of money transferred from the rest of us to those in a position to benefit from IP comes to more than $1 trillion annually. This transfer comes in the form of higher prices for prescription drugs, medical equipment, software, and many other products. This amount is almost half the size of all before-tax corporate profits, and roughly one-third larger than the current military budget. In other words, it is real money.

Intellectual property does serve an important economic purpose in providing an incentive for innovation and creative work. But we can make patent and copyright monopolies shorter and weaker while still supporting innovation and creativity, instead of going the route of longer and stronger, as we have actually done over the past four decades.

We can also use alternative mechanisms to provide incentives. This is especially the case with prescription drugs, where we rely on direct public funding for a large portion of research costs. The federal government finances more than $40 billion in research annually through the National Institutes of Health, with several billion more funded through the Biomedical Advanced Research and Development Authority and other government agencies. This compares to $90 billion a year that the pharmaceutical industry spends itself and expects to finance through its patent monopolies.

Most of the public money goes to finance basic research, but sometimes the government supports the actual development process, as was the case with Moderna’s coronavirus vaccine. The government paid Moderna $483 million for its research and Phase 1 and 2 trials. It then coughed up another $472 million to cover the cost of Phase 3 trials. Incredibly, the Trump administration still allowed Moderna to have patent monopolies on its vaccine, even though the government had covered the development costs and taken the investment risk. If the vaccine had proven to be ineffective, the government would have borne the cost, while Moderna still would have been paid.

The contracting process for Moderna’s vaccine may have been chaotic and less transparent than desirable, since it was overseen by the Trump administration, operating in an emergency situation, but we did nonetheless manage to get a highly effective vaccine in record time. This is a clear case of direct government funding of research that proved to be effective.

We need to keep this example in mind as the Biden administration develops its foreign policy agenda, especially its relationship with China. Biden has already complained about China’s stealing “our” intellectual property. This sets the stage for potential conflicts that are not at all in the interest of the vast majority of the American people.

As a practical matter, very few of us receive any substantial income, either directly or indirectly, from intellectual property. That means that we don’t stand to lose anything if companies in China don’t honor Pfizer’s patents on a drug or Microsoft’s copyrights on software. In fact, if we are bothered by inequality, we really should not be upset that those at the top will have somewhat less income because China is not honoring their intellectual property claims.

While there may be cases where the failure to honor intellectual property can cost some middle-income jobs (for example, if China uses technology to which Boeing has patent rights), the impact is likely to be comparatively small. Arguing that we should protect Boeing’s IP on this basis would be like arguing that we should not tax Jeff Bezos because reducing his income could lead him to lay off some well-paid servants. The benefits that the relatively affluent and very wealthy get from IP protections are vastly greater than the higher wages that some workers may get as a result of working for Boeing or another company with large IP claims.

There’s another fundamental issue at stake here. Donald Trump openly sought to pursue a cold war with China. Unfortunately, many people around President Biden would like to continue this crusade. A cold war with China, like the historic Cold War with the Soviet Union, would be terrible for most people in the United States and the rest of world. It is also not one we are likely to win, since China’s economy is considerably larger than that of the United States.

Where there are legitimate areas of disagreement with China, Washington should push its concerns. They include China’s human rights record, most notably its brutal treatment of the Uighur population in Xinjiang. Beijing’s claims to islands in the South China Sea threaten long-established international boundaries. And we have economic differences as well, most notably the undervaluation of China’s currency, which is an important factor in our trade deficit.

But from the standpoint of the country as a whole, there is no reason Washington should push Pfizer and Microsoft’s IP claims. We should not ramp up hostility to China simply to give still more money to the ultra-wealthy. In fact, we should be going in the opposite direction. Rather than walling off knowledge with patent and copyright monopolies, we should be pooling our technology with cooperative, open-source research. This would be desirable in most areas, but especially in health and climate technologies.

We would be far better served if American researchers freely exchanged their ideas, allowing the technology to advance as quickly as possible. Think of how much better off the entire world would have been if all the research on coronavirus vaccines had been fully open, so that anyone with manufacturing capacity could have been producing the vaccines in large quantities as soon as they went into Phase 3 testing. That would have allowed the manufacture of large stockpiles as soon as the vaccines had been approved for use. It appears that the vaccines developed by Chinese companies are not as effective as the ones by Moderna and Pfizer—we certainly need more transparency from the Chinese on their trial results—but in the absence of sufficient supplies from Moderna and Pfizer, they are far better than nothing. We share a common, global goal in taming the pandemic as quickly as possible, so we should be using every tool available to accomplish it.

The same principle applies to technologies combating global warming. China is now the world leader in the deployment of wind and solar energy, as well as in sales of electric cars. We need to develop these technologies as quickly as possible. That is likely to occur if the United States and other countries pay for research and allow it to be freely shared, rather than allow private corporations to wall off their progress with patent monopolies.

The rules on intellectual property are a major part of the story of upward redistribution of the past four decades. Contrary to what is typically claimed, they have likely been a major obstacle to technological progress, especially in the areas of health and climate technologies. It would be tragic if the protection of IP was a major cause of a cold war with China. It would be even more tragic if progressives were leading the charge.



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Trump’s Reality-TV Trade Dealhttps://www.thenation.com/article/archive/trumps-reality-tv-trade-deal/Dean Baker,Dean Baker,Dean Baker,Dean BakerOct 3, 2018

Not surprisingly, Donald Trump is boasting loudly about his big new trade deal with Canada and Mexico. He touted the package, now called the United States, Mexico, and Canada Agreement, or USMCA, as “the biggest trade deal in the United States’ history” and promised that it would “transform North America back into a manufacturing powerhouse.”

In reality, there is not much in this package that was not also in the Trans-Pacific Partnership (TPP), from which Trump removed the United States shortly after taking office. And progressives should oppose Trump’s “historic” new trade deal for the same reasons they opposed the TPP.

Before getting into specifics, though, some basics on trade would be useful. Trump routinely refers to trade deals as pacts in which some countries are winners and others (the United States, in his story) are losers. The scorecard is the bilateral trade deficit. By this measure, Trump could denounce negotiators in the Obama, Clinton, and two Bush administrations as “stupid,” since the United States ended up with deals that left this country with enormous trade deficits. But this fundamentally misrepresents our trade negotiators’ agenda.

To take the case of NAFTA, US negotiators were quite explicitly negotiating a pact that would make it as easy as possible for US corporations to set up factories in Mexico in order to take advantage of its relatively low-cost labor. Much of the deal was about establishing rules on investment that ensured US corporations their factories could not be expropriated and that Mexico would not be able to prevent them from repatriating profits back to the United States. We even set up a special extra-judicial process, the Investor-State Dispute Settlement (ISDS) mechanism, which gave corporations an extra safeguard to protect their investments.

Since a major purpose of NAFTA was facilitating the outsourcing of factory jobs to Mexico, we should recognize that the US trade deficit with Mexico is evidence of the deal’s success, not its failure. The same applies to other pacts, most importantly the agreement that allowed China to enter the World Trade Organization.

While the millions of manufacturing workers who lost their jobs in places like Ohio, Pennsylvania, and Michigan were very big losers from China’s entry into the WTO, companies like GE and General Motors, which were doing the outsourcing, were very happy with the outcome. The same applies to retailers like Walmart, which used low-cost supply chains in China to undermine their domestic competitors.

With this background in mind, we can ask who will win and who will lose from USMCA. Here we can pretty much go back to the story with the TPP.

Like the TPP, the USMCA includes a variety of measures that strengthen and lengthen patent and copyright monopolies as well as related protections. This is good news for the industries that benefit from these protections, especially the prescription-drug industry, but it’s bad news for pretty much everyone else.

During his campaign, Trump frequently denounced the outrageous prices the pharmaceutical companies charge for drugs. He has a strange way of clamping down on the industry, though; apparently, it’s to make people in Canada and other countries pay more for their drugs.

People who own stock in pharmaceutical companies should expect to see higher profits and therefore higher stock prices, but pretty much everyone else is harmed rather than helped in this deal. Locking in stronger protections (yes, this is protectionism, the opposite of free trade) makes it more difficult for people in the United States to seek out lower-cost drugs elsewhere.

Also, as a matter of basic economics, a larger US surplus on licensing fees for patents means a larger trade deficit in everything else, other things being equal. That’s because, contrary to what is often reported in the media, what is being protected is not “our” intellectual property; it is the intellectual property of a relatively small number of large corporations. The more money they get from our trading partners, the less money our trading partners have to spend on US manufactured goods and other items made here.

The USMCA also includes rules on the digital economy that are likely to benefit behemoths like Amazon, Google, and Facebook, to the detriment of other countries. One of the key issues in negotiations was whether such companies would be required to have a physical presence in countries where they do business. If they were, it would facilitate legal action against those that do things like assist in tax evasion or in manipulating elections. The final USMCA deal prohibits countries from requiring such a physical presence. This is a dangerous precedent, since the rules in the USMCA are likely to be carried over to other trade deals.

The final USMCA language also ended up retaining the ISDS, although it does limit the mechanism’s scope to a more narrow range of issues, such as when an industry dumps goods below cost. This is definitely a plus, since the ISDS had been used to challenge a wide range of laws and regulations affecting the environment, consumer safety, and workers’ rights.

There are also provisions on currency management. While neither Mexico nor Canada had deliberately reduced the value of their currencies against the dollar in order to make their goods more competitive, the section on currency values can be a useful precedent for future trade pacts.

Trump has talked a lot about bringing back manufacturing jobs. This trade pact, however, is unlikely to make that happen. While it does include some changes that may make a small difference at the margin, such as raising the North American content threshold that allows cars to qualify for tariff-free access (from 62.5 percent to 75 percent), it is likely to have only a minimal effect on trade patterns. Many cars already meet this threshold. In cases where they are far from the threshold, companies can still opt to import a car into the United States and pay a 2.5 percent tariff. That is a modest penalty that is dwarfed by the size of currency fluctuations.

Some people may wrongly take consolation in the USMCA requirement that 40–45 percent of the value added in vehicles must come from workers who make at least $16 an hour. This is essentially saying that this portion of the value-added must come from the United States or Canada, since $16 an hour is well above the pay of Mexican autoworkers.

If the purpose was to raise the pay of Mexican autoworkers, a target in the range of $10 to $12 an hour would have been much more realistic. As it is, the deal does include some stronger wording on labor rights, but the enforcement mechanism is nothing like the ISDS available to investors. The best hope for Mexican workers in this respect is their newly elected president, the left-populist Andrés Manuel López Obrador, not the USMCA.

It is important to recognize that the manufacturing jobs lost to imports over the past two decades are like toothpaste out of the tube; they are not coming back. While reducing the US trade deficit would increase the number of relatively high-paying manufacturing jobs available here to workers without college degrees, most of these jobs will not be in the Rust Belt states that were big job losers. And a much smaller percentage of the new jobs will be unionized.

OK, so the new NAFTA may not be a big boon to manufacturing, but at least we will sell more milk to Canada, right? Milk exports to our northern neighbor seem to loom large in Donald Trump’s head, but not in the real world. Canada’s market for dairy products is a bit more than $3 billion. We already have a surplus of $600 million in dairy trade with Canada. This means that if we captured half of the Canadian market—a huge achievement—we would increase our dairy sales to Canada by about $1.1 billion. This is equal to roughly 2.5 percent of our industry’s current production and 0.006 percent of US GDP.

In Trump’s reality-TV world, the USMCA may amount to a historic accomplishment. In the real world, it won’t change very much at all. Perhaps, if he keeps blustering about the Great Milk Conquest (GMC), it will help Trump carry Vermont in 2020.



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Elizabeth Warren Should Stay in the Senatehttps://www.thenation.com/article/archive/elizabeth-warren-should-stay-in-the-senate/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerJun 24, 2016

Speculation about whether Hillary Clinton will ask Elizabeth Warren to be the Democratic Party’s nominee for vice president reached a fever pitch over the past week. There are good arguments for and against the party’s presumptive presidential candidate’s making such a choice. Elevating one of the country’s leading progressives to such a prominent profile would be an impressive gesture by Clinton and could help to win over reluctant supporters of Bernie Sanders’s presidential campaign. But the more important question for Warren’s admirers on the left is whether she should accept an offer to become Clinton’s running mate.

I never expected to be arguing that Elizabeth Warren should stay in her place. But remaining in the Senate would provide the best platform for her to advance a progressive agenda during a Clinton administration. The inalterable reality is that her agenda is fundamentally different from the agenda Clinton will want to pursue, and no president is going to give their vice president a blank check to sabotage their agenda.

Warren’s main focus in the Senate and her prior work has been on reining in the financial sector. She recently laid out the major planks of her agenda, alongside unions and other allies, in the “Take On Wall Street Campaign.” This platform calls for breaking up the nation’s biggest banks and restoring Glass-Steagall–type separations between institutions that hold government-insured deposits and those that make risky market investments. It also calls for establishing a postal banking system as a low-cost competitor for the existing banking system.

Perhaps most importantly, the agenda calls for a financial-transaction tax (FTT). A robust financial-transaction tax, like the one put forward by Representative Keith Ellison or the one being developed by the European Union, would take more than $100 billion annually out of the pockets of Wall Street by reducing the volume of transactions. This is a great policy—it makes the financial sector more efficient—but is disastrous for Wall Street types who would see their millions and billions slipping away. These people would love to prevent a real FTT from being put into place. Without Warren in the Senate, that task would be made immeasurably easier.

Warren has also pushed for serious prosecutions of Wall Street criminals. We put kids in jail for passing bad checks or stealing an old car. How can it not be a comparable crime for bankers to steal hundreds of millions or even billions by defrauding the public?

Warren’s agenda is not Clinton’s agenda. Does anyone think that Hillary Clinton expects Wall Street to look fundamentally different at the end of a Clinton administration? Does she think that JPMorgan Chase should be downsized and broken up so that its current structure will not be recognizable in 2025? Does Clinton expect Wall Street to be doing half the trading volume in 2025 that it does today, so that the high-rollers will have to look to the productive economy to make big bucks? Does she think that some of her campaign’s biggest contributors will be in the jail cell next to Bernie Madoff?

That seems implausible. More likely, in Clinton’s vision Wall Street in 2025 looks pretty much the same as it does today. There may be better consumer and prudential regulation, but no one will have any problem finding JPMorgan.

In the Senate, Warren could force Clinton to alter her vision. Warren’s agenda has enormous power and popular appeal, as demonstrated by the success of the Sanders campaign and by Warren’s own success in pushing for the Consumer Financial Protection Bureau and other reforms. In fact, the popularity of a FTT even led Clinton to endorse a sham FTT that would apply only to high-frequency trading and would likely be avoided by almost everyone.

Senator Warren has done a huge amount to move the debate and advance policy on financial reform. Vice presidents attend state funerals. We need Elizabeth Warren’s voice in the Senate.



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Fix the Debt’s Fuzzy Mathhttps://www.thenation.com/article/archive/fix-debts-fuzzy-math/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerFeb 20, 2013Dire warnings about the deficit don’t add up mathematically. But then, Fix the Debt is not really about the economy, it’s about gutting Medicare, Social Security and other social programs.

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Trays of printed social security checks waiting to be mailed from the US Treasury. (AP Photo/Bradley C. Bower, File)


Believers in arithmetic are in full retreat in the national budget debate, thanks in large part to Pete Peterson’s Fix the Debt gang. The range of acceptable debate goes from yelling that the sky is falling because of the deficit to the more moderate perspective shown by President Obama and Democratic congressional leaders in favor of a gradual and balanced approach to deficit reduction. But stating the simple and obvious truth—that we have a large deficit because the economy collapsed—makes one an extremely nonserious person in Washington.

For all the debate, the facts on the deficit are not really debatable. We had a very modest deficit in 2007, before the collapse of the housing bubble sank the economy. The deficit that year was 1.2 percent of GDP, and it was projected to stay near 1.5 percent well into the current decade, even if the Bush tax cuts were not allowed to expire. The debt-to-GDP ratio was actually falling; we could run deficits of this size forever.

The deficit expanded enormously in 2008 and peaked in 2009 at 11.1 percent of GDP. But this wasn’t caused by some extravagant spending spree or an orgy of permanent tax cuts. It was caused by the fall in tax collections that occurs every time the economy goes into a downturn, coupled with the increase in spending for countercyclical programs like unemployment insurance and food stamps. There were additional spending and tax cuts associated with President Obama’s stimulus plan. But the overwhelming majority of them were explicitly temporary, and the impact on the deficit would be negligible by 2011.

The large deficits of recent years are not an accident caused by recklessness or irresponsibility; they’re a deliberate policy aimed at supporting the economy. We designed a tax code that collects less revenue when the economy shrinks. And we have programs like unemployment insurance that pay out more benefits when a shrinking economy causes people to lose their jobs. The resulting deficits are meant to fill the gap in demand created by the collapse of the housing bubble, which caused residential construction to fall by more than four percentage points of GDP. This is more than $600 billion a year in today’s economy.

Similarly, the $8 trillion in bubble-generated housing equity led to a consumption boom, with the savings rate pushed down to nearly zero. Now that this equity has disappeared, the savings rate has risen to a more normal level of close to 4 percent of disposable income. This higher level of saving has cost the economy more than $400 billion in annual consumption demand. In addition, the loss of tax revenue from the collapse of the housing bubble and resulting downturn has forced well over $100 billion in state and local government cutbacks. 

It is this gap in demand of more than $1 trillion that we are trying to fill. We can love the private sector to death, but people will not consume more just because happy Republicans are smiling at them. Nor will firms invest more when they see no demand for their products. In fact, investment in equipment and software is almost back to its pre-recession share of GDP, which is impressive given the large amount of excess capacity in the economy. 

There is no plausible story whereby private demand would increase if the deficit were to shrink. Over a longer term, we can look to have net exports fill this hole in demand as the trade deficit moves closer to balance. But that will not happen tomorrow, and the process will not be hastened to any substantial degree by a lower budget deficit.

This means the people who want to reduce current deficits want slower growth and higher unemployment. They may not know it, but that is the implication of their position taken to its logical conclusion. This makes it indefensible; if someone spreads gasoline all over a barn and tosses a lit match on it without understanding the implications, it hardly affects the outcome.

There are more grounds for concern over projected budget deficits in the longer term, but these are the product of our broken healthcare system. We pay more than twice as much per person for healthcare as other wealthy countries, with little to show for it. If our healthcare costs were at all comparable, we would be looking at long-term projections of massive budget surpluses, not deficits. This is why truly serious people talk about fixing our healthcare system, not budget deficits and “entitlements.”

But the agenda of Fix the Debt is not really about the deficit and the economy. It’s about gutting Social Security, Medicare and other essential social programs. Pete Peterson and his fellow deficit hawks want to provoke irrational fears of large numbers. The good news is that the sky is not falling. The bad news is that, with the help of a massive PR budget and a compliant media, they could succeed in making people believe it is.

Also in This Forum

The Editors: “Inside the Phony, Fearmongering ‘Fix the Debt’ Campaign

John Nichols: “The Austerity Agenda: An Electoral Loser

Lisa Graves: “Pete Peterson’s Long History of Deficit Scaremongering

Mary Bottari: “Pete Peterson’s Puppet Populists



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Proposed Social Security Bargain Makes No Sense for the Elderlyhttps://www.thenation.com/article/archive/proposed-social-security-bargain-makes-no-sense-elderly/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerDec 18, 2012The median income of people over age 65 is less than $20,000. The solution is not to cut that further.

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Editor's Note: This piece is cross-posted from the Center for Economic and Policy Research Blog.

According to reliable sources, the Obama administration is seriously contemplating a deal under which the annual cost of living adjustment for Social Security benefits would be indexed to the chained consumer price index rather than the CPI for wage and clerical workers, CPI-W, to which it is now indexed. This will lead to a reduction in benefits of approximately 0.3 percentage points annually. This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent. If a typical senior collects benefits for twenty years, then the average reduction in benefits will be roughly 3 percent.  

There are a few quick points worth addressing:

1. The claim that the chained CPI provides a more accurate measure of the cost of living;
2. Whether Social Security benefits are now and will in the future be sufficient to allow for a decent standard of living for retirees; and
3. Whether this is a reasonable way to be dealing with concerns over the budget.

This are taken in turn below.

Is the Chained CPI More Accurate?

While many policy types and pundits have claimed that the chained CPI would provide a more accurate measure of the cost of living for seniors, they have no basis for this claim. The chained CPI is ostensibly more accurate for the population as whole because it picks up the effect of consumer substitution as people change from consuming goods that increase rapidly in price to goods with less rapid price increases.

While this is a reasonable way to construct a price index, it may not be reasonable to apply the consumption patterns and the substitution patterns among the population as a whole to the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W.

The main reason for the higher rate of inflation is that the elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. It is also likely that the elderly are less able to substitute between goods, both due to the nature of the items they consume and their limited mobility, so the substitutions assumed in the chained CPI might be especially inappropriate for the elderly population.

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade. It makes sense to try to get the indexation formula right.

Are Social Security Benefits Adequate?

While some people have tried to foster a myth of the elderly as a population living large, the facts don’t fit this story. The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year.

The reason that seniors are so dependent on Social Security is that the other pillars of the retirement stool, employer pensions and individual savings, have largely collapsed. Defined benefit pensions are rapidly disappearing. Defined contribution plans, like 401(k)s have also proved grossly inadequate. Only around half of the work force even has a defined contribution plan available to them at their workplace. In a period of stagnant wages and limited employer contributions, workers have generally been unable to accumulate much wealth in these plans. According to the Retirement Research Center at Boston College, the median value of 401(K) and other defined contribution plans for those near retirement who have a plan is $120,000, enough to get an annuity paying $575 per month.  

For most workers the vast majority of their wealth was in their homes. The collapse of the housing bubble destroyed much of this equity. Counting all forms of wealth, including equity in a home, the median household approaching retirement had just $170,000 in wealth in 2011.

The proposed cut in the annual cost of living adjustment will be a substantial hit to a population that for the most part is ill-prepared to see a cut in its income. The effect of this cut on the income of the typical beneficiary will be larger, measured as a share of income, than the return to Clinton era tax rates on the richest 2 percent will be to the people affected. It is also worth noting that this cut to benefits will affect current retirees, not just people who will be collecting benefits 10 or 15 years in the future, who might have some opportunity to adjust to a cut.

Is the Chained CPI a Reasonable Way to Deal with the Budget?

It is important to remember that under the law Social Security is supposed to be treated as a separate program that is financed by its own stream of designated revenue. This means that it cannot contribute to the budget deficit under the law, because it is only allowed to spend money from the Social Security trust fund.

This is not just a rhetorical point. There is no commitment to finance Social Security out of general revenue. The projections from the Social Security trustees show the program first facing a shortfall in 2033 after which point it will only be able to pay a bit more than 75 percent of scheduled benefits. While this date is still fairly far in the future, at some point it will likely be necessary to address a shortfall.

It is reasonable to expect that the changes needed to keep the program fully funded will involve some mix of revenue increases and benefit cuts. However if the chained CPI is adopted as part of a budget deal unconnected to any larger plan for Social Security then it effectively means that there will have been a substantial cut to Social Security benefits without any quid pro quo in terms of increased revenue. This hardly seems like a good negotiating move from the standpoint of those looking to preserve and strengthen the program.

There is also the question of whether the Social Security trustees will even “score” this cut accurately. In the 1990s there were changes to the CPI that had the effect of reducing the measured rate of inflation by at least 0.5 percentage points annually (Economic Report of the President 1998 Box 2-6). This would have implied a reduction in the annual cost of living adjustment by this amount and a corresponding improvement in the Social Security trust fund’s prospects. However, there is no evidence of this improvement in the program’s finances during this period. In fact the projected rate of real wage growth (the difference between the nominal rate of wage growth and the measured CPI) was 1.0 percent in 1995, before the changes to the CPI. The projected long-run rate of real wage growth had actually been lowered to 0.9 percent in the 1998 Trustees Report (Table II.D.1) which was issued after all the reductions in the CPI had been put in place.

It is important to remember that the trustees projections come from the trustees, not the professional staff of the Social Security Administration. Four of the six trustees are political appointees of the president. It is certainly possible that the cuts associated with the adoption of the CPI will not be factored into the trustees projections just as the even larger cuts associated with the changes in the CPI in the 1990s were not factored into the trustees projections.

Finally, it is worth commenting on the idea of tampering with statistical measures to achieve budgetary goals. The United States has been fortunate in having independent statistical agencies that have fiercely resisted efforts to manipulate data for political ends. In fact, in the 1990s there was considerable pressure placed on the Bureau of Labor Statistics to make adjustments to the CPI which would reduce Social Security and other indexed benefits. Katherine Abraham, the then head of the agency was steadfast in refusing to make any changes to the index that were not justified by BLS research.

The current effort has the spirit of using statistics for political ends, for example by refusing to have BLS produce a full elderly CPI so we would actually know the inflation rate experienced by the elderly. There also has been some discussion of leaving some programs, such as Supplemental Security Income, tied to the current CPI so as not to hurt a seriously disadvantaged population.

Congress can decide the benefit formula for these programs as it chooses. The honest way to cut benefits is for Congress to explicitly vote to cut benefits, not to try to hide a cut behind a statistical manipulation. This is the sort of behavior that encourages public contempt for politicians and the political process.  

For more in the impact of the chained CPI on elderly women, read Bryce Covert's latest.



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What Would Keynes Do? A Forum, Part 2https://www.thenation.com/article/archive/what-would-keynes-do-forum-part-2/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis UchitelleOct 6, 2011A second round of responses from economists and wonks to Thomas Geoghegan's Nation essay “What Would Keynes Do?”

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Herewith, the second installment in the forum in response to Thomas Geoghegan’s essay, “What Would Keynes Do?” Read yesterday’s installment here.

WWKD? Get the Dollar Down

Dean Baker

I am sympathetic to much of Tom Geoghegan’s piece. It is often said that there are two types of economists: those who believe in accounting identities and those who don’t; and unfortunately, those in policy positions fall primarily in the latter category.

Geoghegan is right to point out the inescapable logic of a large trade deficit. Either we must have a large budget deficit or we must have negative private savings, as we did when the stock bubble spurred a consumption boom in the late 1990s, or—worse—when the housing bubble drove an even bigger consumption boom in the last decade. Economists who are fine with large trade deficits want either large government deficits or negative private savings, or they don’t know what they are talking about.

I am also a big fan of a financial transactions tax to help rein in the bloat in the financial sector, as well as raise a ton of revenue for the government. And I would certainly not argue with Geoghegan about the merits of Medicare for all.

However, I would take issue with some other items in his analysis. First, there was absolutely zero surprise with the stimulus. The best analysis we have shows that it worked almost exactly as planned. Of course as planned, it was not nearly big enough. It was designed to create to 2-3 million jobs in a context where we needed 10-12 million jobs. There is no mystery that needs to be explained.

The second place I would take issue is with the role of the value of the dollar. Geoghegan seems to think that devaluing the dollar will not lower the trade deficit. In fact, movements in the trade deficit follow the course of the dollar almost perfectly.

The deficit first grew large in the mid-eighties when Paul Volcker’s tight money policies sent the dollar through the roof. When the United States negotiated an orderly decline in the dollar later in the decade, the trade deficit stopped rising and rapidly shrank.

We had modest trade deficits through the mid-1990s until Robert Rubin took over and pushed the high dollar. He put muscle behind this policy with his engineering of the bailout from the East Asian financial crisis in 1997. From that point forward, the East Asian countries, along with much of the rest of the developing world, adopted a policy of propping up the dollar to increase their exports to the United States.

This is all 100 percent textbook. There are four obvious remedies. The first three are get the dollar down, get the dollar down and get the dollar down. Yes, we can do this.

The other solution is adopt trade policies that put our highly paid professionals in direct competition with their low-paid counterparts in the developing world. This means eliminating the barriers that keep millions of qualified Chinese, Indian and Mexican doctors, lawyers, architects and other professionals out of the United States. This would not only share the pain of international competition, it would lead to large savings in medical care and other services, which in turn would raise the real wages of tens of millions of middle-class workers.

Mainstream economics often has much more to offer than progressives give it credit for. The problem is that mainstream economists are just not very honest.

 

WWKD? Address the Maddening Mid-tech Deficit

Alice Amsden

Thomas Geoghegan doesn’t really explain why the United States has such a big trade deficit. It is surprising given that the United States is ahead of most countries in most industries technologically. Why isn’t everybody buying US high-tech goods? The answer lies in the nature of our trade deficit. The gap with the BRICs (Brazil, Russia, India and China) and other emerging economies is not in high-tech but rather in mid-tech—industries like steel, shipbuilding and semiconductors that are mature but whose demand is still growing and whose productivity is rising due to technological improvements in product design and process throughput. Our problem is, we’ve lost our mid-tech edge.

Source : BLS and BA

As you can see from the above table, manufacturing in the United States accounts for only 12 percent of GDP, which is far below the figure for Germany and Switzerland, who continue to export mid-tech products like precision machinery and chemicals. In 1989, MIT published a landmark study, “Made in America,” that set out a path to raise manufacturing’s share by relying on high-tech. But the share continued to decline after a brief period of stabilization. We’ve lost our competitive edge in heavy-duty manufacturing, and that is reflected in our huge trade deficit.

If the United States is serious about raising manufacturing employment and output, a prologue to balancing trade, it has to run on two tracks: one runs from our manufacturing problem to advanced technologies as solutions, and the other runs from our manufacturing problem to mid-tech industries, many of which are high-wage, large-scale employers. The United States has high-tech jewels, like Google and Amazon, but not first-class mid-tech firms with high employment and exports. Fortune’s 500 largest international firms (in terms of revenues) in 2008 ranked two Taiwanese electronics firms as 109th (Hon Hai) and 342nd (Quanta Computer) while Google ranked 423rd and Amazon ranked 485th. If the networks connected with these mid-tech firms were factored in, the size disparity might even be larger. This is where the jobs and exports are.

Besides running on the high-tech track, the United States must ensconce itself even deeper in the culture of mid-tech to get into the minds and motivations of the world’s leading manufacturers. Only then can it also anticipate revolutionary technologies that emerge from mid-tech sectors, such as high-speed rail, a fast-growth industry with dense linkages to other sectors that has left the United States, once the railroad king, woefully behind.

The shipbuilding industry is now sometimes classified as high-tech due to having achieved record rates of speed and safety in carrying hazardous cargoes. Korea is the world’s largest shipbuilder, employing upwards of 10,000 workers, having aced out Japan (but quivering at the rise of China). It began life in the 1960s, at the same time as the Brazilian shipbuilding industry, which failed. Now Brazil is trying to restart shipbuilding; Brasilia has ordered its state-owned oil company, Petrobras (ranked thirty-fourth on the Fortune 500) to source its oil tankers from local shipyards. Is it possible for the United States to start a shipbuilding industry of its own?

The answer depends on the distinction between “made by Americans” and “made in America”—by foreign-owned companies from the decolonized world. Emerging economies now account for one-quarter to one-third of total world outward foreign direct investment (FDI). India invests in China (China is India’s largest export market) and China allies with Korea to invest in Indonesia; Taiwan now invests more overseas than foreign firms invest in Taiwan. The United States must rejuvenate its manufacturing sector by attracting the world’s great manufacturers to invest in the US Developed countries account for 95 percent of total FDI in the United States, but the share of manufacturing in their investments is fast falling.

Keynes never wrote much about industrial policy, but it’s hard to believe he wouldn’t have heartily approved.

 

WWKD? Government Must Step In

Louis Uchitelle

The Keynesian emphasis on investment is particularly relevant in today’s nearly recessionary economy, and Thomas Geoghegan should be praised for bringing to our attention this important but overlooked aspect of Keynes’s thinking.

My concern is that even in good times—and these certainly aren’t good times—the private sector can’t muster enough investment to lift the economy to prosperity, or even meet all of its needs. Limiting interest rates through usury laws helps, of course, in channeling private capital into the production of goods and services and away from nonproductive financial markets. But the private sector can’t do the job alone. There will still be a shortfall, even if long-term investment were made to pay off and the rich were prodded, as Geoghegan says, into putting their investment money “into the kinds of things we can sell abroad.” That will certainly be a huge help, and I hope it happens, but even in the best of times and acting with the best intentions, the private sector is not capable of generating the investment this nation needs.

Government must step in with huge additional outlays. In sum, government must supplement the investment process, as it did so successfully in the 1950’s and 1960’s— and through much of our history. Notwithstanding the relentless proselytizing for markets that are free of government, the American economy was rarely capable of great success without significant public participation.



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Why We Aren’t Like Greecehttps://www.thenation.com/article/archive/why-we-arent-greece/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean BakerAug 10, 2011

“What’s the difference between the United States and Greece?” should be the setup line for a joke. Unfortunately, it’s a question that seems to be stumping many of the people involved in Washington policy debates. Now that Standard & Poor’s has downgraded the US government’s credit rating (along with that of government-controlled mortgage behemoths Fannie Mae and Freddie Mac, and other entities), the policy-wonk community is likely to find this question even trickier.

The problems faced by the Greek economy—and now, through contagion, perhaps the entire eurozone—are nothing like the problems facing the US economy. However, people with a clear political agenda are doing their best to confuse the public and claim that a crisis created by the collapse of the housing bubble is really a crisis of excessive government spending. Their goal is to gut Social Security, Medicare and Medicaid, and they are prepared to use their money and their influence over the media to achieve it.

The analogy to Greece is a farce from the word go. Greece had chronic deficits even in the good years. Its debt-to-GDP ratio was rising in the years before the crash, when its economy was experiencing strong growth. It now has a debt-to-GDP ratio approaching 150 percent. By contrast, in the United States, even with the Bush tax cuts, the wars in Iraq and Afghanistan, and the Medicare prescription drug benefit, the debt-to-GDP ratio was stable during the housing bubble years. It is now just above 60 percent.

The second key difference between Greece and the United States is that we borrow in our own currency. At the end of the day, if we cannot tax or borrow the money needed to pay our bills, we can print it. That may not be pretty (it could lead to inflation), but as long as our debt is denominated in dollars we will never have the IMF dictating terms to us.

However, the most important difference is that the United States is a huge, diversified economy. If we ever saw the flight from the dollar that the deficit hawks threaten, it would be terrifying—to our trading partners. Suppose the dollar fell so that there were $2 to a euro, or it took $1.50 to buy a Canadian dollar. The US market for imports of European and Canadian goods would collapse, and our exports (we still export more than $1 trillion a year) would be hyper-competitive in Europe and Canada, seizing large chunks of their domestic markets.

This would be an intolerable situation that Europe and Canada would not allow. They would have no choice but to support the dollar and prevent a collapse. What’s the comparable story with Greece—more people taking vacations in the Aegean islands? The people who use the Greek analogy—like former Comptroller General David Walker and former Senator Alan Simpson—deserve to have their arguments ridiculed, not treated as pearls of wisdom in serious debates.

The S&P downgrades, with perhaps similar downgrades to follow from Moody’s and Fitch, are similar in nature to the Greek joke. Remember, this is a credit rating agency that, like the other two, gave investment-grade ratings to hundreds of billions of dollars in subprime mortgage-backed securities. It also gave Lehman Brothers and AIG A-level ratings right up until their demise. Of course, S&P was paid millions for these ratings, leaving open the question of whether the problem is corruption or incompetence.

It is likely both. The Treasury Department officials working with S&P discovered a $2 trillion error in its calculations. Correcting this error meant that the deficit reduction package was actually larger than the $4 trillion figure (measured against the wrong baseline) that S&P had wanted. It didn’t matter; the agency downgraded the debt anyhow. Like the Iraq War, the downgrade decision was made independent of the evidence.

The deficit-hawk crew were crowing that the August 8 market panic vindicated their scare stories and S&P’s judgment. Wrong! The market’s response to S&P’s downgrade actually underscored the creditworthiness of US government bonds: their prices soared that day, as interest rates on US Treasuries fell to the lowest levels since the peak of the financial crisis.

The obvious explanation for both the rise in bond prices and the fall in the stock market is the fear of a euro meltdown. If the eurozone were to break up, it would lead to a world financial freeze-up that could be even worse than the post-Lehman panic. Desperate investors are fleeing to the safety of US Treasuries, a move that is 180 degrees at odds with the downgrade story.

The real problem in the US economy is a lack of demand resulting from the fact that 28 million people are unemployed, underemployed or out of the workforce. Policy debates should be focused on getting these people back to work. Unfortunately, the people who control the national agenda care little about the devastation they have wreaked with their greed and incompetence. Their philosophy of government is that a dollar that goes to the middle class and the poor is a dollar that should be going to the wealthy. This means that as long as Social Security, Medicare and Medicaid are still providing income and security to ordinary Americans, they will be pushing to pare these entitlements back. And they are prepared to use everything in their power to accomplish their goals.



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Going Down With the Dowhttps://www.thenation.com/article/archive/going-down-dow/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean BakerAug 5, 2011The market’s worst drop in two years may not signal a double-dip recession. But it certainly underscores the stupidity of Washington’s deficit/debt mania.

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It’s panic time on Wall Street, with the S&P dropping 4 percent on Thursday and more than 11 percent over the past two weeks. Apparently traders were not too impressed by the deal between the White House and Congress on raising the debt ceiling.

Of course, the most obvious explanation for the plunge is the prospect of a collapse of the euro. The debt problems hitting Ireland and Greece have spread to two of the four eurozone giants, Italy and Spain. The prudes at the European Central Bank are going to have to relearn economics very quickly—their cult of 2 percent inflation is bringing down the house. They have come to the point where they have to choose between abandoning the cult or ending the euro. Naturally the prospect of the dissolution of one of the world’s two main currencies is going to unnerve the markets.

The other big factor depressing stock markets is a set of weak economic reports that indicate the US economy is barely growing. The most important of these reports was the second-quarter GDP numbers, which showed the economy growing at just a 1.3 percent rate. This was coupled with a sharp revision to first-quarter data that showed growth of just 0.3 percent. This growth is far too slow to keep pace with the growth of the labor force.

While the July jobs report showed a small uptick in employment, growth over the past three months has averaged just 72,000. This is 20,000 less than what is needed just to keep pace with the growth of the labor force. At this pace, we will never make up the 8 million jobs lost in the recession.

The big debt-ceiling agreement promises to depress this growth even further. The proposed cuts to government spending effectively amounts to taking away water in the middle of a jobs drought. Good job, Washington!

Those still believing in the virtues of government austerity also got a big kick in the face last week. Britain had its third consecutive quarter of near zero growth—the apparent fruits of the austerity path put in place by the Conservative/Liberal Democrat coalition government.

It’s worth putting in a couple of calming notes. First, the stock market is not the economy. As Paul Samuelson famously quipped, the market has predicted nine of the last five recessions. The people who invest in the market are the same geniuses who thought Countrywide and Pets.com had great business models. There is no reason to think the markets are any wiser today than they were when they thought everything was just great in 2007.

Second, the folks warning about a double-dip recession seem to have forgotten how we usually get recessions. The standard recession is associated with a collapse in house and car sales. The good news is that both sectors are still so badly depressed that there’s not much further down they can go. In other words, it is unlikely we will see the negative growth associated with a recession.

On the other hand, many quarters of very slow positive growth is really no better. This is most likely what the economy faces, barring some serious change in policy in Washington. So the double-dippers might be too pessimistic, but not by much. 



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No Free Ride for Financehttps://www.thenation.com/article/archive/no-free-ride-finance/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean BakerMay 11, 2011A financial activities tax (FAT) would encourage long-term investing and help plug budget deficits. Can states rally to pass them?

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There is growing momentum in the United States and Europe for increasing taxation on the financial industry. On April 13, the Congressional Progressive Caucus put out a People’s Budget that explicitly called for taxing trades of derivatives and foreign exchange transactions. In March the European Parliament voted in support of a financial transaction tax by a margin of more than 4 to 1. Even though the financial industry is too powerful to allow any new taxation at the national level in the United States, there is a real possibility of new taxes on the sector at the state level.

The best way to tax the financial sector would be through a financial transaction or financial speculation tax (FST). Such a tax (e.g., 0.25 percent on each side of a stock trade) would impose a modest cost on normal financial dealings. In most cases, it would just raise the cost of a trade back to where it was twenty or twenty-five years ago, when the United States already had a deep and well-developed capital market. For those engaged in rapid trading, however, a financial transaction tax would impose a heavy cost. This would discourage many types of short-term trading strategies, leading investors to focus more on longer-term trades—which, in turn, could help reorient the focus of the financial sector to its economic purpose.

While the financial industry has the political clout to prevent a serious tax from being imposed at the national level, that doesn’t necessarily mean that it can escape better taxation. A financial transaction tax would be difficult to impose at the state level, but last year the International Monetary Fund suggested a viable alternative: a financial activities tax (FAT).

A FAT is essentially a value-added tax that would be applied to wages and profits in the financial sector. Countries around the world have extensive experience with value-added taxes. In Europe, they rival income taxes as the primary source of revenue for national governments. So the concept of the FAT is nothing new, even though this sort of value-added tax has not previously been applied to the financial industry.

The IMF argued for the merits of the FAT for the same reasons that many progressives support financial transaction taxes. It views the financial sector as being bloated with rent-seeking behavior that offers no benefit to the productive economy. A FAT would help to shrink the financial sector down to size while pulling away some of the industry’s vast profits.

Although a FAT would not directly target speculative trading the way a transaction tax would, it would likely be easier to enforce, and in the United States it could be imposed at the state level. All but the smallest FST would send the bulk of trading into neighboring states. With current technology, even Wall Street would lose much of its business to trading platforms in New Jersey if it faced anything beyond a very minimal tax.

However, banks, brokerage houses and insurers will not abandon their business in a state simply because of a modest tax. Much of this activity is location-specific. Financial firms will want to keep their markets even if the profits are somewhat smaller following the imposition of a tax.

And a FAT can raise a substantial amount of money. If a 5 percent FAT had been imposed on the entire financial industry in 2010—the IMF used that rate in a recent report to the G-20—it would have raised more than $115 billion nationwide, an amount that would have covered almost two-thirds of the states’ budget shortfalls.

If FATs become widely instituted across states, they will help reduce the profits and weaken the power of the financial industry. This will also show that the industry is a potential source of considerable tax revenue, a fact that has somehow been absent in the budget discussions in Washington.

For these reasons, the industry can be counted on to do everything in its power to oppose state-level FATs. But if one state can go first and show the substantial revenue dividend that such a tax can yield, other states will likely follow.

Willie Sutton was right when he said that banks are where the money is. That’s because they have taken it from us. Progressives must find ways to give the money back to people.



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https://www.thenation.com/article/archive/no-free-ride-finance/
The Right Prescription for an Ailing Economyhttps://www.thenation.com/article/archive/right-prescription-ailing-economy/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean Baker,Dean BakerJun 30, 2010Developing policy solutions to reduce inequality is not difficult. Mustering political will to enact them is.

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The roots of this economic crisis are very much centered in the growth in inequality over the past three decades. This becomes clear once we recognize that the financial turmoil is a minor aspect of the overall crisis, and that its primary cause is the economic imbalances created by the housing bubble.

The financial crisis produced great drama and headlines, as we got to watch the treasury secretary, the Federal Reserve Board chair and the CEOs of collapsing banks stay up late on weekend nights patching together bailout packages. However, this show was just a sidebar to those of us who don’t work for these banks or own large amounts of their stock. While the Fed and Treasury bailouts were sold as necessary to save the economy, they were mostly necessary to rescue Goldman Sachs, Citigroup and the other big financial institutions.

In the worst-case scenario, the major banks would have been taken over by the Fed and FDIC, leading to more uncertainty in financial markets and a tidal wave of lawsuits. This would likely have resulted in a sharper initial falloff than what we experienced, but certainly not the second Great Depression that the politicians threatened if we didn’t cough up the money to save the banks.

The first Great Depression was not just the result of mistaken policy during the initial banking crisis; it was caused by ten years of inadequate policy response. If the government had pursued sufficiently aggressive stimulus at any point in the 1930s, it could have restored the economy to full employment long before World War II forced such stimulus on the country. By the same token, failure to rescue the banks in the fall of 2008 would not have necessitated ten years of stupid policy; a second Great Depression was never in the cards.

It is also important to dismiss the claim that the downturn is being perpetuated by the unwillingness of banks to lend because of their weak capital positions. This story doesn’t fit the facts. The capital position of many cautious banks is just fine, yet they are not rushing to make loans and steal market share from wounded competitors. Similarly, large firms have no problem raising capital at very low cost right now. Yet Wal-Mart and Starbucks are not rushing to gain at the expense of the smaller businesses that can’t borrow from banks. The problem is simply that consumers are tapped out: healthy banks are not lending, and cash-rich companies are not expanding, because weak demand makes any investment very risky.

In short, the story of economic weakness being the result of a broken banking system is a complete fabrication. This is a good story if your intention is to get more money to the banks. It is not a good story if your goal is getting the economy back to full employment.

The real story is a very simple one of a burst housing bubble. At its peak in 2006, the wealth created by that bubble and the smaller bubble in nonresidential real estate was generating more than $1 trillion in annual demand. This took the form of more than $500 billion in excess construction demand, as builders rushed to complete projects that commanded bubble-inflated prices. It also led to more than $500 billion in additional consumption, as people spent based on $8 trillion worth of bubble-generated home equity.

As much as economists like to pretend to be sorcerers, they have no easy way to replace $1 trillion in annual demand. The Obama administration’s 2009 stimulus package went perhaps one-third of the way, but it was nowhere near large enough.

This brings us to the question of why we got the housing bubble in the first place, which goes directly to the issue of inequality. In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.

This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.

If the institutional changes of the Reagan era had not weakened workers’ bargaining power, these bubbles would not have been possible. Demand would have kept pace with output capacity. The Fed would not have felt the need to lower interest rates to sustain demand. Furthermore, if the Fed had any concerns about inflation, which in that environment would have been driven by wage growth, it would never have lowered interest rates, as it did in the 1990s and even more in the past decade. Low interest rates alone cannot be blamed for the stock and housing bubbles, but it is safe to say that these bubbles could not have arisen in a high-interest-rate environment.

In short, rising inequality is at the center of the current economic crisis. And since that increase in inequality was not a natural process but the result of conscious policy, it can be reversed. Some of the remedies are well-known. Restoring some discipline to CEO pay would be a great first step. One way would be to change the rules on corporate governance and require that compensation packages be approved by stockholders, where only directly cast votes count.

A small tax on financial speculation would go a long way toward moderating the multimillion-dollar salaries on Wall Street. The tax rates being discussed in Congress would raise trading costs only back to the level of the late 1980s or early ’90s, but they would take a huge bite out of profits from the short-term trading at which the Wall Street crew excels.

Trade and immigration policy have been structured to put non-college-educated workers in direct competition with low-paid workers in the developing world, thereby putting downward pressure on their wages. We can instead restructure trade and immigration policy so as to subject highly paid professionals (doctors, lawyers, dentists, etc.) to the full force of international competition. This will help to bring down the pay of those in the top 2 to 3 percent of wage distribution. It will also raise real wages for the rest of the workforce by lowering the price of the goods and services produced by these professionals.

Finally, unions have long been a major force in reducing inequality. Whatever can be done to protect the right to organize and allow workers the option of joining unions will help to reduce inequality.

It is not difficult to develop policies to reduce the inequality that has given us a crisis-prone economy. The problem is getting the political will.
 

Also in This Forum

Robert Reich, "Unjust Spoils"

Katherine Newman and David Pedulla, "An Unequal-Opportunity Recession"

Orlando Patterson, "For African-Americans, A Virtual Depression—Why?"

Jeff Madrick, "American Incomes: Soaring or Static"

Matt Yglesias, "A Great Time to Be Alive?"



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https://www.thenation.com/article/archive/right-prescription-ailing-economy/
Solution to Unemployment: Pay People to Work Shorter Hourshttps://www.thenation.com/article/archive/solution-unemployment-pay-people-work-shorter-hours/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerNov 17, 2009

In the wake of the highest unemployment rate in twenty-five years, the Roosevelt Institute asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. The Nation is running selections from the Roosevelt Institute’s series on the New Deal 2.0 blog. Below, Dean Baker argues for a work-share program that would save 5 million jobs.

The unemployment rate is 10.2 percent and virtually certain to rise even higher in the months ahead. Even with the prospect of extended benefits, unemployment is still a crisis for the families affected, as they struggle to pay their mortgage or rent and cover other essential expenses. Millions will end up falling behind, losing their home–in some cases leading to homelessness and/or family break-ups.

Fortunately, there is an easy and quick way to begin to get these unemployed workers back to work. It involves paying workers to work shorter hours. The mechanism can take the form of a tax credit to employers. The government can give them a tax credit of up to $3,000 to shorten their workers’ hours while leaving their pay unchanged. The reduction in hours can take the form of paid sick days, paid family leave, shorter workweeks or longer vacations. The employer can choose the method that is best for her workers and the workplace.

If take-home pay is left unchanged as a result of the credit, then demand should be left unchanged. If workers are putting in fewer hours and demand is unchanged, then employers will need to hire more workers.

This logic is as simple as it gets. The process is also quick and cheap. In principle, the government can go this route to save jobs at a cost of a bit more than $20,000 per job–far less than the cost per job saved through the stimulus package.

Germany has used this policy to keep its unemployment rate at 7.6 percent, about the same as it was before the recession. Imagine if workers in the United States, like workers in Germany, were dealing with the recession by putting in four-day weeks (while getting paid for five) or getting an extra two weeks of paid vacation. This sure beats being unemployed.

Seventeen states already have a “work-share” program in place that allows employers to use unemployment insurance money to cover a reduction in work hours, without a corresponding reduction in pay. More than 100,000 layoffs have been prevented as result of this program.

Senator Jack Reed, a Democrat from Rhode Island, has a bill that would increase funding for work-share programs and remove some of the bureaucracy. The bill also provides start-up money for the states that don’t have programs.

The Reed bill would be a big step towards following the Germany model, taking advantage of a program that is already in place. It could quickly make a big dent in the unemployment rate, by preserving many of the jobs that are now being lost.

In this respect, it is important to clear up a common confusion about the economy. The monthly job growth number is a net figure. Approximately 4 million people leave their jobs every month, half involuntarily. We have job growth if we either create more than 4 million jobs or reduce the number of jobs lost below 4 million.

If a work share program reduced involuntary job loss by 20 percent, or 400,000 per month, it would have the same effect as adding 400,000 new jobs. Over a full year, this would generate nearly 5 million new jobs. This would be a quick and effective way to reduce unemployment.



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https://www.thenation.com/article/archive/solution-unemployment-pay-people-work-shorter-hours/
The Housing Bubble Popshttps://www.thenation.com/article/archive/housing-bubble-pops/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerSep 13, 2007

The housing market is in its worst downturn since the Great Depression–and it’s taking the rest of the economy down with it. Most forecasters insist there won’t be a recession, although the August job losses forced even optimists to acknowledge that the meltdown is causing serious economic problems. (When it comes to recessions, the professionals seem to be the last to find out: On the eve of the last downturn, in the fall of 2000, all the Blue Chip 50 forecasters predicted solid growth for the following year.)

The downturn should not have been a surprise. House prices rose at an unprecedented rate over the past dozen years. For a hundred years, from 1895 to 1995, house prices nationwide increased at the same pace as the overall inflation rate. Since 1995 inflation-adjusted house prices have risen by more than 70 percent. It should have been clear to economists that this run-up was being driven by a speculative bubble. There was no change in the fundamentals of supply or demand that could have explained the rise.

Like Japan’s in the 1980s, the US housing bubble coincided with its stock bubble. While the two bubbles burst simultaneously in Japan, in the United States the stock collapse actually fueled the growth of the housing bubble. Investors, after losing much of their wealth in the stock crash, viewed housing as safe. The housing bubble in turn fueled the recovery of the US economy from the stock crash recession of 2001.

Soaring home prices pushed construction and home sales to record levels. Even more important, the run-up in home prices created more than $8 trillion in housing bubble wealth. This wealth fueled a consumption boom, as homeowners withdrew equity from their homes almost as it was created. The savings rate plummeted to near zero in 2005 and ’06. People used their homes as ATMs, borrowing to take trips, buy cars or just to meet expenses.

This pattern of growth could not be sustained. Record house prices were supported by a tidal wave of speculation, as millions of people suddenly became interested in investment properties. As prices soared, financing arrangements became ever more questionable. Down payments went out of style. Adjustable-rate mortgages and interest-only loans, even negative amortization loans (in which mortgage debt grows month by month), became common.

The worst of the speculative financing was in the subprime market, where moderate-income home buyers were persuaded to take out adjustable-rate mortgages, which generally feature very low “teaser rates,” typically reset after three years, often to levels that are five or six percentage points higher. Millions of families who could afford the teaser rates cannot possibly afford the higher rates. This is leading to a huge wave of defaults and foreclosures–which is just beginning, as homeowners who took out mortgages in 2004 are now hitting their three-year mark.

The subprime scandal would not have happened if the mortgage market had not been transformed over the past quarter-century. Banks used to hold the mortgages they issued, which gave them a strong incentive to be careful (often too careful) not to issue a mortgage the borrower could not pay. In the current market, the mortgage issuer typically sells it off in the secondary market, where it becomes the basis for mortgage-backed securities that are then sold throughout the world. This is why the subprime crisis is leading to failures of banks and funds in France, Germany, Australia and elsewhere.

Mortgage credit has frozen up for all but the safest loans. This showed up starkly in a 12.2 percent drop in the July pending sales index, which measures the number of sales contracts signed each month. While this is an extraordinary decline, the reality is almost certainly much worse than the data show, since many of these contracts will fall through because buyers can’t get mortgages.

The price data also scream trouble. Formerly supercharged markets like Las Vegas, Miami and San Diego are experiencing double-digit price declines, while the slightly less bubbly markets of New York, Boston and Washington are seeing declines in the single digits. With record numbers of unsold and vacant homes, it is difficult to see how prices will stop falling anytime soon.

The basic story is a downward spiral as the housing sector interacts with the rest of the economy: lower house prices, more foreclosures, fewer jobs in housing and less consumption, a weaker economy and less demand for housing. Throw into the mix declining state and local tax revenues due to the loss of construction fees and property taxes, and you have a further source of bad economic news.

There will be no quick fixes. As former Federal Reserve chairman Alan Greenspan discovered in 2002, it is not easy to boost the economy out of a recession caused by a burst financial bubble. Since housing wealth is far more evenly distributed among households than stock, it will be even harder to recover from the housing crash than the stock crash. But we can implement policies to get the economy on the right track.

First, it is important to protect the subprime home buyers who were tricked into taking out mortgages they could not afford. President Bush has proposed measures that would encourage lenders to renegotiate mortgage terms to allow people to stay in their homes and would provide additional support from the Federal Housing Authority. These are steps in the right direction, but they will not help the vast majority of the subprime homeowners at risk of losing their homes. The simplest and quickest way to help them is to adopt the “own to rent” policy, by which subprime homeowners facing foreclosure are allowed to remain in their homes indefinitely as renters paying the fair market rent. This assures them a roof over their head, with no new bureaucracy and no tax dollars (for more information see cepr.net).

Tax cuts directed at low- and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as rebuilding New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on US exports. A lower dollar will make US manufactured goods far more competitive in the world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in US financial assets that have gone bad.

Finally, we must get people on the Federal Reserve Board who take financial bubbles seriously. Greenspan recently asserted that “the human race has never found a way to confront bubbles.” But it is possible for the Fed to do so, most obviously by repeatedly and publicly warning against stock, housing or other market bubbles as they arise. This would educate even the stupidest hedge fund managers, or at the very least make them fear personal liability for mismanaging billions of dollars. Clearly, Greenspan was not up to the job. We will need more qualified people running the Fed in the future.



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https://www.thenation.com/article/archive/housing-bubble-pops/
Anti-Social Securityhttps://www.thenation.com/article/archive/anti-social-security/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerDec 9, 2004here for info on how to help save social security and click here to send a letter to your elected reps asking them to resist Bush's plans for social secuirty privatization.]]>

The battle for Social Security’s survival is under way. In a key maneuver recently, N. Gregory Mankiw, George W. Bush’s chief economic adviser, explicitly floated the idea of cutting benefits, a necessary but unmentioned part of the White House’s privatization plan. More details will be presented to the public in the weeks ahead, but the outlines of the Bush plan are already clear, having been laid out by his 2001 Social Security Commission. As Mankiw suggested, the Bush plan would require a large reduction in the benefits provided by the existing system. A worker who is 20 today would see a cut of approximately one-third in his or her retirement benefit, although workers would theoretically more than recoup this loss by investing a portion of their Social Security taxes in a private account.

The President’s main pitch is that these accounts will yield higher returns than Social Security does. The pitch also includes rhetoric about the accounts being “your money,” and giving every worker a stake in the “ownership society.” These claims are mostly bad math, faulty logic and deception. Advocates of private accounts assume that the stock market will give the same returns in the future as it has in the past, even though price-to-earnings ratios in the stock market are far higher now than in the past, and the Social Security trustees project that profits will grow at about half the rate they did in the past. None of the proponents of privatization have yet passed the “no economist left behind test,” which asks them to show the set of dividend yields and stock price increases that add up to the stock returns they assume in their analysis.

Private accounts also have high administrative costs. According to Bush’s Social Security Commission, their private accounts will cost about ten times as much to administer as in the current system if they’re handled through a single government-managed system. If Wall Street gets its hands on this money, with everyone going to his or her local bank or brokerage house–as is the case with the privatized systems in England and Chile–the costs could be thirty times as high as the cost of our Social Security system. When the administrative costs are combined with real numbers on stock returns, the individual accounts will provide no better returns on average than the government bonds currently held by the Social Security trust fund. The accounts just add risk–individuals may invest poorly or retire during a market downturn, leaving them with much less money than they’d have under the current system.

The faulty logic is telling workers that the dollars in their accounts are “your money.” When money is genuinely “your money,” you do what you want with it. This is a real problem–restrictions on existing private retirement accounts have consistently been relaxed to allow withdrawals for education, starting a business or other purposes. These are legitimate uses of workers’ money, but not the way to secure money for retirement. The only way to preserve money for retirement is if the government requires that it stay in the account–but then it is not really “your money.”

Under Bush’s plan, workers will even be able to pass their private accounts on to their children, which raises the same problem. If the account will be there to support a worker’s retirement, then the money can’t also be passed down to children. While a small number of wealthy people may be in a position of not needing their accounts, creating this opt-out option will add further to the administrative costs for everyone–reducing benefits by another 5 to 10 percent, according to an extensive body of research.

Of course, the only reason anyone is even talking about cutting benefits and privatizing the program is that the right has managed to convince the public that Social Security is on its last legs. For more than two decades they have spread stories about the baby boomers bankrupting the system and multitrillion-dollar debts left to our children and grandchildren. In reality the program can pay all scheduled benefits long past the boomers’ retirement. According to the Social Security trustees report, it can pay full benefits through the year 2042 with no changes whatsoever. The nonpartisan Congressional Budget Office puts the date at 2052. And even after those dates, Social Security will always be able to pay a higher benefit (adjusted for inflation) than what retirees receive today. Those scary multitrillion-dollar debts translate into a deficit equal to 0.7 percent of future income–presented in very precise form in the Social Security trustees report for those who care to look.

Social Security is the country’s most important and successful social program. It provides a large measure of economic security to the whole country, uniting the interests of the poor and the middle class. The program not only keeps tens of millions of retirees out of poverty, it also provides disability and survivors insurance to almost the entire working population. More children receive benefits from Social Security than from the Temporary Assistance to Needy Families program (the revamped welfare program). Social Security is also extremely efficient and has a minimal amount of fraud and abuse.

It’s a hugely popular program. Close to 90 percent of the public regularly affirms that we spend either too little or the right amount on Social Security. While polls also show majority support for private accounts, that’s only when the question is asked, Would you like a private account? When the real-world question, Would you like a private account if it means a cut in your Social Security benefits? is asked, substantial majorities say no. Bush’s Social Security plans are grounds for a decisive battle early in the Administration’s second term. The public is overwhelmingly on our side; they just need to know the truth.



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https://www.thenation.com/article/archive/anti-social-security/
Bush’s House of Cardshttps://www.thenation.com/article/archive/bushs-house-cards/Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Alice Amsden,Louis Uchitelle,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean Baker,Dean BakerAug 9, 2004

The latest data on growth suggest that the economy may again be faltering, just when President Bush desperately needs good numbers to make the case for his re-election. As bad as the Bush economic record is, it would be far worse if not for the growth of an unsustainable housing bubble through the three and a half years of the Bush Administration.

The housing market has supported the economy both directly–through construction of new homes and purchases of existing homes–and indirectly, by allowing families to borrow against the increased value of their homes. Housing construction is up more than 17 percent from its level at the end of the recession. Purchases of existing homes hit a record of 6.1 million in 2003, more than 500,000 above the previous record set in 2002. Each home purchase is accompanied by thousands of dollars of closing costs, plus thousands more spent on furniture and remodeling.

The indirect impact of the housing bubble is at least as important. Mortgage debt rose by an incredible $2.3 trillion between 2000 and 2003. This borrowing has sustained consumption growth in an environment in which firms have been shedding jobs and cutting back hours, and real wage growth has fallen to zero, although the gains from this elixir are starting to fade with a recent rise in mortgage rates and many families are running out of equity to tap.

The red-hot housing market has forced up home prices nationwide by 35 percent after adjusting for inflation. There is no precedent for this sort of increase in home prices. Historically, home prices have moved at roughly the same pace as the overall rate of inflation. While the bubble has not affected every housing market–in large parts of the country home prices have remained pretty much even with inflation–in the bubble areas, primarily on the two coasts, home prices have exceeded the overall rate of inflation by 60 percentage points or more.

The housing enthusiasts, led by Alan Greenspan, insist that the run-up is not a bubble, but rather reflects fundamental factors in the demand for housing. They cite several factors that could explain the price surge: a limited supply of urban land, immigration increasing the demand for housing, environmental restrictions on building, and rising family income leading to increased demand for housing.

A quick examination shows that none of these explanations holds water. Land is always in limited supply; that fact never led to such a widespread run-up in home prices in the past. Immigration didn’t just begin in the late nineties. Also, most recent immigrants are low-wage workers. They are not in the market for the $500,000 homes that middle-class families now occupy in bubble-inflated markets. Furthermore, the demographic impact of recent immigration rates pales compared to the impact of baby boomers first forming their first households in the late seventies and eighties. And that did not lead to a comparable boom in home prices.

Environmental restrictions on building, moreover, didn’t begin in the late nineties. In fact, in light of the election of the Gingrich Congress in 1994 and subsequent Republican dominance of many state houses, it’s unlikely that these restrictions suddenly became more severe at the end of the decade. And the income growth at the end of the nineties, while healthy, was only mediocre compared to the growth seen over the period from 1951 to 1973. In any event, this income growth has petered out in the last two years.

The final blow to the argument of the housing enthusiasts is the recent trend in rents. Rental prices did originally follow sale prices upward, although not nearly as fast. However, in the last two years, the pace of rental price increases has slowed under the pressure of record high vacancy rates. In some bubble areas, like Seattle and San Francisco, rents are actually falling. No one can produce an explanation as to how fundamental factors can lead to a run-up in home sale prices, but not rents.

At the end of the day, housing can be viewed like Internet stocks on the NASDAQ. A run-up in prices eventually attracts more supply. This takes the form of IPOs on the NASDAQ, and new homes in the housing market. Eventually, there are not enough people to sustain demand, and prices plunge.

The crash of the housing market will not be pretty. It is virtually certain to lead to a second dip to the recession. Even worse, millions of families will see the bulk of their savings disappear as homes in some of the bubble areas lose 30 percent, or more, of their value. Foreclosures, which are already at near record highs, will almost certainly soar to new peaks. This has happened before in regional markets that had severe housing bubbles, most notably in Colorado and Texas after the collapse of oil prices in the early eighties. However, this time the bubble markets are more the rule than the exception, infecting most of real estate markets on both coasts, as well as many local markets in the center of the country.

In this context, it’s especially disturbing that the Bush administration has announced that it is cutting back Section 8 housing vouchers, which provide rental assistance to low income families, while easing restrictions on mortgage loans. Low-income families will now be able to get subsidized mortgage loans through the Federal Housing Administration that are equal to 103 percent of the purchase price of a home. Home ownership can sometimes be a ticket to the middle class, but buying homes at bubble-inflated prices may saddle hundreds of thousands of poor families with an unmanageable debt burden.

As with the stock bubble, the big question in the housing bubble is when it will burst. No one can give a definitive answer to that one, but Alan Greenspan seems determined to ensure that it will be after November. Instead of warning prospective homebuyers of the risk of buying housing in a bubble-inflated market, Greenspan gave Congressional testimony in the summer of 2002 arguing that there is no such bubble. This is comparable to his issuing a “buy” recommendation for the NASDAQ at the beginning of 1999. More recently, Greenspan has done everything in his power to keep mortgage rates as low as possible, at one point even offering markets the hope that the Fed would take the extraordinary measure of directly buying long-term Treasury bonds. The man who testified that the Bush tax cuts were a good idea apparently has one last job to perform for the President.



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