October 09, 2012

09 Octubre 2012

While we may not know whether David Brooks' try out as a Romney speechwriter was successful, he clearly is doing his best for the campaign. Today he pushes the idea that a voucher system is the only way to contain Medicare costs. This requires ignoring an awful lot of evidence, but that is an exercise at which David Brooks excels. To start, in dismissing the idea that governments can be successful in designing policies that contain costs, Brooks ignores all the evidence from every other wealthy country. All of them have much greater involvement of the government in their health care system (in some countries like the United Kingdom and Denmark they actually run the system) yet their average cost per person is less than half as much as in the United States. And they have comparable health care outcomes, with all enjoying longer life expectancies. If health care costs in the United States were comparable to those in any other wealthy country we would be looking at long-term budget surpluses, not deficits. (We could look to trade to reduce costs, but policy debates in the United States are dominated by ardent protectionists in the area of health care.) Of course relying on the private sector to contain costs in Medicare is not a new idea, contrary to what Brooks seems to believe. The Gingrich Congress' Medicare Plus Choice plan opened Medicare to private insurers as did President Bush's Medicare Advantage plan. Both raised costs. We also have the massive under 65 market which is overwhelmingly served by private insurers. Yet per person costs have consistently risen more rapidly for the non-Medicare population (Table 16) than for the Medicare population. This is in addition to the fact that the administrative costs as a share of expenses for Medicare are less than half of the costs for private insurers (this is even after adjusting for the higher denominator with the expenses of Medicare patients). Brooks seems to think it would be a great idea for providers to be paid by the patient rather than for the specific services provided. That may prove to be a very good idea and the Affordable Care Act actually puts in place a number of incentives to push providers into going this path. Most private insurers do not now follow this route in spite of Brooks' positive assessment of this approach. But Brooks still links this method of payment with private insurers. In effect Brooks is arguing that if pointy headed government bureaucrats in Washington force private insurers to change the way that they provide benefits, then it will lead to lower costs than if we just left the market to itself. Brooks faith in the effectiveness of government intervention is impressive. Interestingly, Brooks gives the voucher structure of the Medicare drug benefit credit for containing the costs of the program and holds it up as a model for Medicare more generally. In fact, the main reason that costs have been contained is that drug prices in general have risen much less rapidly than had been projected. In 2004, the Center for Medicare and Medicaid Services projected (Table 2) that we would be spending $440 billion in 2012 for prescription drugs. Instead we are now expected to spend $277.1 billion. The slower growth in costs was in turn attributable to a slower pace of innovation in the drug industry. The Food and Drug Administration data put the number of breakthrough drugs developed in recent years at less than half the late 90s rate.(A priority approval means that a drug is seen as presented a qualitative advancement over existing drugs.) Perhaps Brooks wants to attribute the slowdown in innovation to the voucher system in the Medicare drug benefit. Source: FDA and Knowledge Ecology International.

Very Good Account of Patent Abuse in High Tech

By Dean BakerDean Baker

October 08, 2012

08 Octubre 2012

The NYT has an excellent piece on how patents can obstruct innovation in high tech. The sector has wasted tens of billions of dollars in lawsuits in recent years and now takes out patents routinely as a legal weapon. The one major error is that the piece implies at one point that the story with prescription drugs is better, if anything it is almost certainly much worse. The enormous patent rents that drug companies are able to earn (drugs that can be profitably sold for $5 are instead sold for 100 or even 1000 times this much with patent protection) give them a huge incentive to misrepresent their effectiveness and safety and to market them for inappropriate uses. As the NYT has frequently documented in news stories, the drug companies respond to these incentives as economic theory predicts.

Robert Samuelson Celebrates Stagnation in Europe

By Dean BakerDean Baker

October 08, 2012

08 Octubre 2012

Robert Samuelson is excited by the fact that Europe’s economy faces stagnation. Unfortunately he gets almost everything in the piece wrong.

First, his central point, that the stagnation is due to overly generous welfare state, is 100 percent at odds with reality. The countries with the most generous welfare states are the Nordic countries and Germany, all of which are doing fine. The problem countries are Greece, Italy, Spain, and Ireland, all countries that rate near the bottom in the generosity of their welfare states.

The proximate cause of stagnation is quite evidently the decision by the European Central Bank to require austerity across the continent. In case anyone disputed this fact, the Conservative government in the U.K. agreed to prove the point by implementing an austerity plan in that country, which quickly threw it back into recession. In short, the immediate problem facing Europe is hardly overly generous welfare states; it is contractionary fiscal policies being pursued by European governments, in many cases against their will.

Other items that Samuelson gets wrong is his obsession with GDP growth. There is no obvious reason to be interested in growth per se, as opposed to per capita growth. China is not richer than Denmark even though its GDP is more than 80 times as high. The reason is that its population is more than 400 times as high. Economists focus on GDP per person, not absolute levels of GDP.

Furthermore, if GDP per capita grows less rapidly because people opt to take the benefits of productivity growth in leisure time or in quality of life improvements that may not be picked up in GDP (e.g. more park space), there is no economic basis for objecting to this decision. Samuelson is just expressing a personal preference for people working longer hours and getting rewarded with more consumption goods.

Samuelson urges the removal of constraints on growth. While this is a good idea, the top of the list would probably include things like patent protection for prescription drugs, which raises prices by around $270 billion a year and the removal of obstacles to trade in professional services. While Samuelson was no doubt thinking of cuts to Medicare and Social Security, my list would have a much more positive impact on growth.

Robert Samuelson is excited by the fact that Europe’s economy faces stagnation. Unfortunately he gets almost everything in the piece wrong.

First, his central point, that the stagnation is due to overly generous welfare state, is 100 percent at odds with reality. The countries with the most generous welfare states are the Nordic countries and Germany, all of which are doing fine. The problem countries are Greece, Italy, Spain, and Ireland, all countries that rate near the bottom in the generosity of their welfare states.

The proximate cause of stagnation is quite evidently the decision by the European Central Bank to require austerity across the continent. In case anyone disputed this fact, the Conservative government in the U.K. agreed to prove the point by implementing an austerity plan in that country, which quickly threw it back into recession. In short, the immediate problem facing Europe is hardly overly generous welfare states; it is contractionary fiscal policies being pursued by European governments, in many cases against their will.

Other items that Samuelson gets wrong is his obsession with GDP growth. There is no obvious reason to be interested in growth per se, as opposed to per capita growth. China is not richer than Denmark even though its GDP is more than 80 times as high. The reason is that its population is more than 400 times as high. Economists focus on GDP per person, not absolute levels of GDP.

Furthermore, if GDP per capita grows less rapidly because people opt to take the benefits of productivity growth in leisure time or in quality of life improvements that may not be picked up in GDP (e.g. more park space), there is no economic basis for objecting to this decision. Samuelson is just expressing a personal preference for people working longer hours and getting rewarded with more consumption goods.

Samuelson urges the removal of constraints on growth. While this is a good idea, the top of the list would probably include things like patent protection for prescription drugs, which raises prices by around $270 billion a year and the removal of obstacles to trade in professional services. While Samuelson was no doubt thinking of cuts to Medicare and Social Security, my list would have a much more positive impact on growth.

Greg Ip Gets the Basics Wrong in Analysis of Downturn (with response)

By Dean BakerDean Baker

October 07, 2012

07 Octubre 2012

Greg Ip is usually a solid analyst of economic trends. However he apparently agreed to adopt house standards in his column for the Washington Post that told readers that "Obama is saving the economy, but maybe not in time to save the economy." The main assertions in the piece are just flat out wrong. For example, the column tells readers: "Paradoxically, the same forces that made for such a weak recovery during Obama’s first term suggest that the next four years will be better, regardless of who holds the White House. Right now, businesses, households and governments are all trying to wrestle down their debts. That “deleveraging” saps spending and blunts the power of low interest rates." This statement would lead readers to believe that the problem is low consumer spending and low business investment because of high debt burdens. However the Commerce Department's data strongly disagrees with this assessment. Here is the ratio of consumption to disposable income over the last four decades. (Adjusted disposable income has to do with the statistical discrepancy in GDP accounts.) Source: Bureau of Economic Analysis. The Commerce Department strongly disagrees with Ip, telling us that consumption remains far above its long-term share of disposable income even if it is somewhat below the peaks driven by the wealth from the stock and housing bubbles. It also disputes the business side of Ip's argument. In the second quarter of 2012 (the most recent quarter for which data are available), businesses spent an amount equal to 7.4 percent of GDP on equipment and software investment. In 2007, the last pre-recession year they spent 7.9 percent. See the collapse? In fact, given the large amounts of excess capacity in major sectors of the economy, business investment is surprisingly high. The real story of the current shortfall in demand is very simple. The wealth generated by the housing bubble led to unusually high consumption. It also led to a building boom in both residential and non-residential construction. Consumption fell back to more normal levels after the wealth that was driving it disappeared. Construction went from boom to bust, as we had enormous overbuilding of both homes and most types of non-residential structures.

The Washington Post Gets It Wrong on the Economy, Again

By Dean BakerDean Baker

October 06, 2012

06 Octubre 2012

The Washington Post once again reminded readers why so many people are praying for the day that the paper shuts its door. Its lead editorial touted the September jobs report as though this was great cause for celebration. The piece begins by saying that President Obama asked to be evaluated based on the economy's performance, it then tells us: "Friday’s employment report gave Mr. Obama a reason to crow. Having hit a high of 10 percent in October 2009, the jobless rate fell in September to 7.8 percent, the level it was when Mr. Obama took office amid a historic wave of job losses. More important, it fell even as the labor force grew; previous rate declines partly reflected worker discouragement. The percentage of adults with a job rose from 58.3 percent to 58.7 percent, wages by 0.3 percent." Huh? It took us almost 4 years to get to an unemployment rate that is still higher than at any point in the last recession and equal to the peak in the 1990-91 recession and the Post thinks that President Obama has reason to crow? In fact, most of the improvement has been due to people dropping out of the labor force. Even with the jump in September, at 58.7 percent the employment to population ratio stands much closer to its low of 58.2 percent reached last summer than the pre-recession peak of 63.3 percent. (The picture is slightly better using an age-adjusted EPOP, as Paul Krugman constructed, but the story is very much the same.) No one expects an economy to remain permanently depressed. The fact that we are still seeing unemployment rates and other measures of labor market weakness that are consistent with a severe recession almost 5 years after the recession began is really really bad news. If the Post applied the same performance standards to teachers as it does to our economic policy makers, no teacher in the country ever would have been fired for not being competent. Much else in this column is annoyingly wrong. For example, the piece tells us that wages rose 0.3 percent in September. Yes, this was after two months of essentially zero growth. The monthly data are extremely erratic. (Doesn't anyone there know this?) Over the last year the average hourly wage has increased by 1.8 percent, roughly enough to keep pace with inflation, meaning that workers are getting none of the benefits of the economy's productivity growth. It then does another pitch for supporting the bailout of its rich Wall Street friends:

The NYT's Romance of Start-up Businesses

By Dean BakerDean Baker

October 05, 2012

05 Octubre 2012

Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:

“But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs.”

Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.

The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:

“For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977.”

This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.

The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.

While it’s great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.