I have a policy of not discussing items that directly refer to me in this blog, but I will make an exception today because the issues raised by Robert Samuelson are important. In his column Samuelson makes two key arguments. First, that the Reinhart-Rogoff conclusions about high debt leading to slow growth still stand even after the errors in the original paper were corrected, and second, that this work was never really the basis for austerity anyhow.

Taking these in order, Samuelson constructs a chart showing the originally reported and corrected relationships between debt levels and GDP growth.

He then tells readers:

“After recalculating the Reinhart/Rogoff data, the UMass economists confirm that high debt implies lower economic growth.”

No, that is not right. The recalculated numbers show that high debt levels in the countries examined by Reinhart and Rogoff were associated with lower growth. However as the paper by Thomas Herndon, Michael Ash and Robert Pollin that exposed the error clearly explained, the growth falloff for countries with debt-to-GDP ratios above 90 percent was not statistically significant. In fact, they found a much stronger negative relationship between debt and GDP growth at very low ratios of debt-to-GDP. This means that if someone was basing policy on the corrected Reinhart-Rogoff numbers they would be arguing for debt-to-GDP levels in the range of 15-20 percent. That is not what Reinhart and Rogoff or anyone what else in this debate is saying.

More importantly, there was always the issue of causality, which is ignored by Samuelson. It is just as likely that weak growth leads to high debt as high debt leads to weak growth. If the former is true, getting upset about high debt levels would be like saying that hospitals cause people to be sick. UMass economist Arindrajit Dube did a nice test of causation and found the causality from growth to debt is very strong, while finding no real evidence of causation in the opposite direction.

This is hardly surprising. Debt is an arbitrary category. Countries also have assets (e.g. land, mineral rights, fishing rights, broadcast frequencies etc.). If the debt side of the balance sheet could lead to a sharp slowdown in growth, then they would be foolish not to sell off some of these assets. This would lower the debt-to-GDP ratio and produce a huge growth dividend, if anyone believed the Reinhart-Rogoff story.

Of course no one advocated selling off large amounts of assets, which brings us to Samuelson’s second point, that Reinhart-Rogoff paper was never really the basis for policy. His argument was that political figures wanted to pursue austerity anyhow and just grabbed Reinhart-Rogoff as a fig leaf.

Samuelson will get little argument from me on that point. Why would political leaders want to pursue austerity? Well, let’s look at the impact of the policy. High unemployment has weakened workers’ bargaining power, allowing employers to get the vast majority of the gains from productivity growth over the last 5 years. While the rise in profit shares may not always offset the loss in profits due to weaker growth, this is likely true today in many countries, including the United States.

From this vantage point, austerity is just great for those on top. The pressure for austerity also opens the door for lowering tax rates on the wealthy in the future, for example by cutting back programs like Medicare and Social Security in the United States, and their equivalents overseas. If these sorts of social commitments can be reduced, then the wealthy can look forward to being able to keep more of their income 10-20 years in the future. And if we think there is nothing that the government can do about unemployment because of the demands of the austerity gods, then we can blame workers’ problems on their lack of skills and inability to deal with the technological advances of a global economy.

In short, austerity serves some very useful purposes for the rich and powerful. It would hardly be surprising to me that the political figures they support are more likely pursuing austerity to please them than because of anything that Reinhart and Rogoff wrote. On the other hand, it is extremely useful to have ostensibly reputable studies like Reinhart and Rogoff that can be used to make the case that austerity serves the general good and not just the rich.

However corrupt politics in the United States might be, it just doesn’t look good for the President of the United States to go on national TV and say that, “I am cutting back spending on Social Security and other important programs to keep the unemployment rate high so that my rich campaign contributors will get even richer.” It is far more respectable if he can hold up a paper by two professors from Harvard and tell the American people that we have no choice but to cut back spending or the economy will go down the toilet.

The research from the UMass crew has taken away the fig leaf. The question is whether the austerity gang will be able to continue to press their case for upward redistribution even in the full light of day.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

The NYT appears to be following the pattern of journalism practiced by the Washington Post in openly editorializing in its news section. Today the news section features a diatribe against the Danish welfare state that is headlined, “Danes Rethink a Welfare State Ample to a Fault.” There’s not much ambiguity in that one. The piece then proceeds to present a state of statistics that are grossly misleading and excluding other data points that are highly relevant.

The first paragraphs describe the generosity of the welfare state then we get this ominous warning in the 5th paragraph:

“But Denmark’s long-term outlook is troubling. The population is aging, and in many regions of the country people without jobs now outnumber those with them.”

oooooh, scary! Yeah people are living longer in Denmark, that’s something that’s been happening for a couple of hundred years or so. Like every other wealthy country people live longer in Denmark than in the United States. While there are projected to continue to see gains in life expectancy and further aging of the population, the increase is actually going to much slower than in the United States.

From 2012 to 2025 the percentage of the Danish population over age 65 is projected to rise from 17.8% to 21.2%, an increase of 3.4 percentage points. By comparison, in the United States the share of the population over age 65 is projected to rise from 13.6% to 18.1%, an increase of 4.5 percentage points over the same period, from a considerably smaller base. The impact of aging on the economy and the government budget will clearly be much larger in the U.S. than Denmark, especially since the government first starts paying for health care for people after they turn age 65 in the United States. (Like every other wealthy country, Denmark has national health insurance.)

The concern that, “in many regions of the country people without jobs now outnumber those with them,” is especially touching. In the United States we have such a region, it’s called the “United States.” In March, 143.3 million people were employed out of a total population of 323,000,000 for a ratio of workers to population nationwide of roughly 44.4 percent. In many parts of the country it would be much lower.

The piece then goes on to describe the extent of the Danish welfare state with its 56 percent top marginal income tax rate, telling readers:

“But few experts here believe that Denmark can long afford the current perks. So Denmark is retooling itself, tinkering with corporate tax rates, considering new public sector investments and, for the long term, trying to wean more people — the young and the old — off government benefits.”

Hmmm, it would be interesting to know what data the experts are looking at. According to the IMF, Denmark had a ratio of net debt to GDP at the end of 2012 of 7.6 percent. This compared to 87.8 percent in the United States. Its deficit in 2012 was 4.3 percent of GDP, but almost all of this was do the downturn. The IMF estimated its structural deficit (the deficit the country would face if the economy was at full employment) at just 1.1 percent of GDP. Furthermore, the country had a huge current account surplus of 5.3 percent of GDP in 2012, more than $800 billion in the U.S. economy. This means that Denmark is buying up foreign assets at a rapid rate. By contrast, the United States has a large current account deficit.

If there is something unsustainable in this picture, it is not the sort of data that economists usually look at. Is marijuana legal in Denmark?

Then we find the real problem is that no one in Denmark is working:

“In 2012, a little over 2.6 million people between the ages of 15 and 64 were working in Denmark, 47 percent of the total population and 73 percent of the 15- to 64-year-olds.

“While only about 65 percent of working age adults are employed in the United States, comparisons are misleading, since many Danes work short hours and all enjoy perks like long vacations and lengthy paid maternity leaves, not to speak of a de facto minimum wage approaching $20 an hour. Danes would rank much lower in terms of hours worked per year.”

So in spite of the generous Danish welfare state a higher percentage of its working age population works than in the United States. (Actually Denmark ranks near the top of the world in employment to population ratios.) Yet, somehow this doesn’t really count because people in Denmark get vacations, work shorter hours, and have a higher effective minimum wage.

This ranks pretty high in the non sequitur category, apparently when you want to bash the welfare state, the rules of logic apparently do not apply. Danes, like most Europeans, have opted to take much of the gains in productivity growth over the last three decades in the form of shorter work years rather than higher income. (One interesting result of this practice is that we have some hope to save the planet from global warming — greenhouse gas emissions are highly correlated with income.) Of course Danes still work about 8 percent more hours on average than hard-working Germans, according to the OECD. If there is a problem in this picture, the NYT might want to devote a few paragraphs to telling readers what it is.

As far as the $20 an hour effective minimum wage, isn’t the problem of a high minimum wage supposed to be that it creates unemployment. But the NYT just told us that Denmark has higher employment rates than the United States. (My brain hurts.)

Okay, we get it. The NYT doesn’t like Denmark’s welfare state. It doesn’t really have any data to make the case that Denmark’s welfare state is falling apart and leading to all sorts of bad outcomes, but they can wave their arms really fast and hey, they are the New York Times.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

The New York Times ran a front page piece warning readers that the cost of treating dementia are “soaring.” The piece tells readers of the findings of a new study by the Rand Corporation that shows the cost of dementia doubling by 2040 from its 2010 level.

Are you scared? Are you shaking in your boots? Thinking about pulling the plug on these costly old-timers?

Well our friend, Mr. Arithmetic, reminds us that the Congressional Budget Office projects that the size of the economy is projected to roughly double over this period. This means that the Rand study’s finding implies that dementia will impose pretty much the same burden on the economy in 2040 as it does today.

This story follows a common practice among the Washington elite. They continually highlight and exaggerate costs associated with an aging population. Of course as a practical matter there is little that we can do about these costs, although we can redistribute the burden. The implicit and explicit intent behind much of this discussion is that the elderly and their children should bear more of these costs, as opposed to the government.

Keeping the costs of an aging population front and center in public debate obstructs discussion of the massive upward redistribution of income over the last three decades. This upward redistribution has shifted roughly ten percentage points of GDP ($1.6 trillion annually) to the richest one percent of the population at the expense of the rest of the population. The impact of this upward redistribution on the living standards of the bulk of the population dwarfs the impact of any taxes that might be associated with caring for an aging population through Social Security, Medicare, and other government programs.

If issues were treated in proportion to their importance to the public we would be seeing daily pieces on proposals for breaking up the big banks, taxing financial speculation, ending patent monopolies for prescription drugs, free trade in health care services and other measures that would reverse the upward redistribution of income over the last three decades. However, importance to the public is apparently not a major criterion for determining news coverage. Hence we get misleading front page pieces in the NYT on the cost of dementia.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

When it comes to high medicare costs, the blame lies with our unreasonably expensive healthcare system.

The New York Times ran a piece with a headline complaining “public misconception of government benefits makes trimming them harder.” The piece goes on to explain that the cost of the Medicare benefits received by a typical beneficiary vastly exceeds the taxes they will have paid into the system using standard discount rates. The piece tells readers that most readers do not recognize this fact, so they get upset at the idea of cutting benefits.

The desire expressed in the piece to cut Medicare benefits indicates a misconception by the NYT and the experts cited on the nature of Medicare costs. The United States pays more than twice as much per person for its health care as the average for other wealthy countries. If it paid the same amount as Germany, Canada, or any other wealthy country with comparable health care outcomes, most or all of the gap between taxes and benefits would disappear.

This enormous gap in expenditures is not associated with better care, it is the result of the fact that doctors, hospitals, medical equipment suppliers and other providers get paid far more in the United States than in other countries. In effect, the NYT and the experts cited in the piece want to see Medicare beneficiaries accept lower quality care because we pay too much to doctors and other providers.

It is likely that most people would find their policy prescription somewhat perverse. It is hard to see why Medicare beneficiaries should feel guilty because the specialists who treat them can make $500,000-$600,000 a year. The more obvious response would be to force doctors and other providers to accept compensation that is more in line with world standards. (We could also give beneficiaries the option to buy into lower cost systems in other countries and split the savings.)

Of course the route of cutting payment to providers would mean confronting powerful interest groups. Many policy experts are reluctant to pursue this path.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Nope, I’m not kidding. In his column today, Hiatt complained that no one seems to be moving forward on his deficit reduction agenda. He then told readers:

“What could shake them out of their own devices? One possibility, a fiscal hawk in the Obama administration told me almost wistfully, would be a ‘minor market event.’ A stock market plunge, an interest rate spike, a race to the exits by America’s foreign lenders — just enough to spook Congress.

But as long as the Federal Reserve is gobbling up U.S. debt to keep interest rates low, such a mishap seems unlikely.”

Yes, it must be awful when you have a view of the economy that the economy refuses to corroborate. (In fairness, Hiatt, does add that such a market event could spin out of control, so “it is not really to be wished for.” )

As usual, Hiatt is upset that President Obama is not pushing hard enough for cuts to Social Security and Medicare. While he does give Obama credit for proposing some cuts to Medicare (what happened to the chained CPI?), what really has him upset is that President Obama doesn’t talk about inflicting pain:

“On the White House Web site, you can see his $400 billion in health-spending cuts, including a few tens of billions in short-term Medicare reform — paltry, but more than the Republicans, with all their supposed courage on entitlements, have proposed for the near term. ….

“But Obama promised better. Over and over, he vowed to face up to the “hard choices,” including regarding “our entitlement obligations.”

“Now he reassures Americans that the nation’s fiscal problems can be solved with no pain. Middle-class taxes will never rise. A carbon tax is not to be mentioned. Pre-kindergarten education can be provided to all without increasing the deficit ‘by a single dime.’ The only tax loopholes that need closing are distortions “that nobody really defends on their own,” as he told ABC’s George Stephanopoulos. Entitlement reform can be modest.”

Of course if Hiatt had access to economic data he would know that President Obama’s policies are already causing the middle class to feel plenty of pain. The economy is still down almost 9 million jobs from its trend growth path. Workers have received none of the gains from economic growth over the last decade. Barring a major change in economic policy, this situation will not improve much over the rest of the decade.

Of course the needed change in policy is the opposite of what Hiatt is pushing. We need larger deficits to generate the demand needed to boost the economy. That is because the private sector doesn’t generate demand just because we want it to. There is no source of private sector demand to replace the $1 trillion in annual construction and consumption demand that we lost when the $8 trillion housing bubble collapsed.

As we teach students in intro economics, GDP = consumption + investment + government spending + net exports. There is not a plausible story where consumption will increase much beyond its already high share of disposable income. Investment is near its historic average as a share of GDP, despite large amounts of excess capacity. Net exports will not increase until the dollar falls substantially and/or our trading partners experience much more rapid growth. That leaves the government — even if you don’t like it.

This collapse in private sector demand is the reason we have large deficits. The deficits were small going into the downtown. The rise in deficits was a direct result of reduced tax collections and countercyclical spending.

Hiatt would know this if he had access to budget documents, but it is hard to get information on the budget in the nation’s capitol.

Social Security

Okay, that’s not exactly what Robert Samuelson said, but pretty close. He actually told readers:

What frustrates constructive debate is muddled public opinion.

I just thought I would make a small change in the interest of accuracy.

Samuelson is very upset because almost no one, Democrat, Republican, or independent wants to go along with his crusade to cut Social Security and Medicare. He tells readers with disgust:

In a Pew poll, 87 percent of respondents favored present or greater Social Security spending; only 10 percent backed cuts.

He then demands that President Obama rise to the occasion and insist that people accept lower benefits.

President Obama’s time can probably be more productively spent teaching economics and arithmetic to people who write on budget issues in major news outlets. Most of the main assertions in Samuelson’s piece are misleading or just flat out wrong.

First, the budget is only constrained at the moment by superstition. There is no obstacle to the government borrowing more money to meet needs and put people back to work. We are not spending more money because we have superstitious people with large amounts of power who are making claims about the dangers of deficits that they cannot support with evidence. Rather than lecturing seniors, who have a median income of $20,000, on the need for lower Social Security and Medicare benefits, Obama could try to confront the people spreading superstitions about deficits.

Samuelson’s complaint about the size of spending on the elderly is also highly misleading. He complains:

In fiscal 2012, Social Security, Medicare, Medicaid and civil service and military retirement cost $1.7 trillion, about half the budget.

That sounds really outrageous — those damn old people. Samuelson case is considerably weakened by the fact that the vast majority of this money was paid into these programs through designated taxes. He might think it’s fine to tax people for Social Security and Medicare and use the money for the military or to pay interest on Peter Peterson’s government bonds, but the less educated public might not share this view.

In fact, according to the Social Security Trustees projections, Social Security is completely funded by its designated tax through 2034 with no changes whatsoever. While Medicare is projected to face a shortfall after 2024, the size of this projected shortfall has fallen sharply in recent years. If the path of slower health care cost growth over the last five years continues, then Medicare will be largely funded throughout its 75-year projection period with few changes.

Insofar as Medicare and Medicaid do pose cost problems the issue is that we pay too much money to doctors, drug companies and other providers, not that seniors are getting too much health care. If we paid the same amount per person for health care as people in other wealthy countries we would be looking at long term budget surpluses, not deficits. But Samuelson and his friends would much rather beat up on old people than on rich doctors and powerful drug companies.

One final point on which Samuelson is apparently confused is that the public does understand that there may be a need for money to pay for these programs and in fact is prepared to pay more for them, according to a recent poll conducted by the National Academy for Social Insurance.

Hey, but what can you do? We have a punditry that just won’t accept reality and prefers to beat up on old people. If only President Obama could show some leadership and try to educate people like Robert Samuelson.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Steve Rattner wants someone to stop stealing from our kids according to the headline of his blogpost in the NYT. The finger should be pointed backwards in Rattner’s case because if anyone is going to jeopardize the living standards of our kids it is wealthy people like Mr. Rattner.

We have seen an enormous upward redistribution of income over the last three decades. As a result most workers have seen little of the benefits of economic growth. If this upward redistribution continues, then our children are unlikely to see much of the gains of growth in the future.

Rather than have people focus on the policies that have led to this upward redistribution (trade policy, too big to fail banks, patent policy etc.), wealthy people like Rattner use their money and power to try to divert attention to the cost of Social Security and Medicare. They have thrown enormous resources into trying to scare people with the prospective burdens posed by these programs. For example, Rattner today tells us that with Social Security:

The present value of the unfunded liability is ‘only’ $9 trillion.

Are you scared yet? After all, it’s “only” $9 trillion. Didn’t you love that sarcasm? Yes, $9 trillion is a lot of money, none of us will ever see that much money, even Bill Gates or Warren Buffet. But if we are having a serious discussion, we would talk about this as a share of future income. It’s about 0.7 percent of future GDP. Does that scare you?

That’s a bit less than half of the cost of the wars in Afghanistan and Iraq over the last decade, that’s hardly trivial, but that expense would not impoverish our kids. Medicare and Medicaid are projected to cost more but that has nothing to do with the old stealing from the young, their higher costs are the result of doctors, drug companies, medical supply companies and other providers in the industry charging us two to three times as much as their counterparts in other wealthy countries. If we paid the same amount per person for our health care as people in other wealthy countries then we would be looking at long-term budget surpluses rather than deficits.

The reality is that the hit to future living standards from demographics is relatively modest. It is easily dwarfed by the gains from projected productivity growth even under very pessimistic assumptions. Even if productivity just grows at the same rate as it did in the slowdown era from 1973-1995 the gains from productivity growth through 2035 would be more than three times the potential hit that our children would face from supporting a larger population of retirees. And after 2035 productivity continues to grow, even as the demographics barely change.

Source: Author’s calculations.

But this story depends on our children being able to capture the gains of productivity growth rather than seeing them all go to the top. That requires a reversal of the policies of the last three decades. But rather than having people talk about the policies that are causing this massive upward redistribution, Rattner is trying to set children against their parents and grandparents. And the NYT is apparently happy to give him the space to do so.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.