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If Bernanke Did Not Know the Fed’s Mission, Would That Be News?

Dean Baker asks a central question:

If Bernanke Did Not Know the Fed’s Mission, Would That Be News?

Not at the WSJ, nor it seems anywhere else. Yesterday, Federal Reserve Board Chairman Ben Bernanke referred to the “our dual mandate, which is growth and inflation.” In fact, the dual mandate is full employment (defined as 4.0 percent unemployment) and price stability. Presumably Bernanke had unemployment in mind when he said “growth,” but it is striking that he would not use the right term. The two of course are not synonymous.

Thanks to Nicole Woo.

–Dean Baker

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Entirely forseeable costs and how to pay is the real debate…not the rhetoric

by coberly

Robert Samuelson has written an article so nasty and dishonest that decent people might wish to avert their eyes. But the 288 comments on his website suggest that enough people believe him that it’s worth trying to explain what’s wrong with his thinking.

Here is an example of it: ” One of our long-running political stories is the economic assault on the young by the old. We have become a society that invests in its past and disfavors the future. This makes no sense for the nation, but as politics, it makes complete sense. The elderly and near elderly are better organized, focus obsessively on their government benefits, and seem deserving. Grandmas and Grandpas command sympathy.

“Everyone knows that the resulting “entitlements” dominate government spending and squeeze education, research, defense and almost everything else. In fiscal 2008 — the last “normal” year before the economic crisis — Social Security, Medicare and Medicaid (programs wholly or primarily dedicated to the elderly) totaled $1.3 trillion, 43 percent of federal spending and more than twice military spending. Because workers, not retirees, are the primary taxpayers, this spending involves huge transfers to the old.”

“Everyone knows.” You see, the fact that “the elderly” paid their payroll tax (when they were “the young”) imposes no obligation on “us” to see that they get what they paid for.

But the fundamental fallacy here is that apparently none of “the young” will ever become “the old.” So instead of thinking of Social Security and Medicare as money they pay in advance, while they have it, for services they will need in the future, when they won’t, it is politically important to get them to think of it as “the economic assault on the young by the old.”

In order to do this Samuelson has to represent “entitlements” as “43 percent of federal spending.” This is not true. Social Security and Medicare have their own funding, and have nothing to do with “federal spending”. They are just the people paying for their own needs using the government to handle the details. This is no more “government spending” than it is “bank spending” when the bank takes in your deposit and later gives it back to you. Most people would be glad to learn that they will pay more for rent and groceries and health care when they get old than they pay for their share of “defense.” But Samuelson’s friends don’t like that. Where’s the profit in keeping old people alive? With their own money.

Even in the private insurance market, Samuelson entirely fails to understand this basic idea. We buy insurance, paying for it today, so that if some expense arises at a future time, there will be money to pay for it. But in Samuelson’s world, that transaction can only be understood on a month to month basis:

Samuelson says, “All insurance aims to protect against risk — but within groups facing similar risks. Put differently, most insurance is risk-adjusted. Auto insurance premiums vary by age; younger drivers pay higher rates because they have more accidents. Homeowners’ policies for similar houses cost more in high-crime areas. This is not “discrimination”; it’s a reflection of risk and cost differences. Insurers that ignored these differences would soon vanish, because they’d suffer heavy losses and lose customers.”

What Samuelson, and his admirers, cannot understand, is that if you “expect” heavy expenses in the future, it makes no sense to wait until that future to start paying a premium appropriate to the risk of that month. You simply can’t afford it. It makes more sense to prorate the expected expenses of a lifetime over an entire working lifetime. Your “expected costs” when you are young might be less than 20 dollars a month, while your expected costs when you are old might be 1000 dollars a month.

Only to someone with the brain of a Samuelson would it make sense to pay 20 a month when you are young and working, and pay 1000 a month when you are old and not working. Since the young person knows he will get old, and will have much higher “expected” costs, he can prepay those expected costs at an affordable 200 dollars a month. This way that 200 a month adds up over 40 years to about a hundred thousand dollars, enough to pay your expected costs when you are old and out of work, without having to find a 1000 dollars every month.

Of course it is difficult for a private insurance company to run this way. Even the government has to understand what it is doing as “pay as you go,” in which the premiums collected today (from the young) go to pay today’s medical bills (mostly of the old). As long as this pay as you go is understood and continues from generation to generation, the problem of paying for the higher expected costs in old age, coupled with lower expected earning, is solved.

But Samuelson and his ilk don’t want you to understand this..

Worse, it sometimes seems that the non partisan experts advising the President and the Congress don’t understand it. Even the “good guys” always frame the debate in terms of “fairness” to old people, whatever that means. The proper debate is “how do we most rationally pay for the entirely foreseeable high costs of our own medical care when we get old.”
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by coberly

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Access vs Cost Controls in Health Care Reform

by Bruce Webb

There has been some discussion here and there about whether the HCR bills in place do enough for cost control. I think that this is the wrong question at the wrong time and points out a bigger issue in progressivism, that is what exactly is our project? Comment by me to this post by Ezra Siding with Cost Control under the fold.

This is not a cost control bill and should never have been allowed to become one. This bill is by name and intent a bill focused on access and affordability which go hand in hand. The demand that the bill even be budget neutral was bad enough that it also had to hit selected and arbitrary spending targets was from a progressive perspective a regrettable compromise.

You have 50 million people with only limited access to what is by all measures an expensive service. You decide that almost everyone should have equal access to that service. But decide that on net it can’t actually cost any more than before, that all moneys need to come from within societal medical spending. Thank God we didn’t take that approach when it came time to establishing public education and libraries, when Massachusetts introduced public higher education did they insist on a surtax on Harvard tuition to pay for it?

Of course cost control is important and in the medium term absolutely vital, but particularly the Senate has been a little too eager to trade away access and affordability to achieve short term cost savings apparently indifferent to the fact that every additional percentage of the non-elderly population NOT covered is another 2 million people or so priced out of insurance.

I start from the position of Social Democratic Utilitarianism, decide where social and economic justice lies and then strive for the greatest good for greatest number solution that you can achieve through democratic means. But at least start from the goal and concede only what you have to. I mean who exactly signed us up for the Pretty Darned Good Society? Or the Near the Frontier? or the Modified Deal?

We have a 2074 page bill that does lots of stuff including some measures that I think will produce more cost control than people think. But somebody needs to keep an eye on the prize which is to deliver what other developed countries treat as a right, that is universal health care. If that ticks up the percentage of GDP spent on health care we can start working on cost from the other side of the equation, after we get the access issue settled.

Of course it is both impossible and undesireable to simply divorce ends and means, there are a lot of things we would like to buy that simply are not affordable. For example I want an end to world hunger tomorrow, and I am sure there are little girls in public housing that desperately want a pony. Odds are neither of us are going to get our wish fulfilled immediately, or maybe ever. But that does not mean you don’t start from a goal.

And the opposition does this all the time. The modern Republican Party defines National Security as an absolute and is currently blasting any questioning of the cost of any particular component and still less any proposals that require that it be paid for to be nearly treasonous, even as they dismiss universal health coverage as some utopian dream never to be achieved. Yet when you put those two goals side by side universal health coverage is achievable in ways that universal national security is not and the stakes in terms of lives are much higher in the former case than the latter. Of course we want to prevent another 9/11, on the other hand in the eight years since about 15 people are reported to have died from lack of health insurance than died in that one-off event. EVERY YEAR. No we don’t have dramatic video footage of firemen rushing into or people jumping off burning buildings but those people are just as dead.

The Republican Party has performed a neat trick, one that Neo-Liberals and ‘Realists’ have fallen for completely. Divide spending into two categories: Spending we CAN’T afford. vs Spending we can’t NOT afford. And then stick all Great Society and New Deal programs in the first category, while placing all MIC (Military Industrial Complex) programs in the second. And then layer the first with ‘fiscal responsibility’ and ‘intergenerational equity’ and the latter with ‘patriotism’ and ‘keeping our grandchildren safe’ as if that kid was more exposed to a potential terrorist attack than illness and disease. I AM thinking of the children when I say they should have health care coverage and a quality education, yet those goals somehow get tossed on some utopian scrapheap.

The New Frontier and the Great Society were bold affirmations that we could do better, that we could reach for the Moon AND feed the children, yet somewhere along the way we fell hostage to the advice “Wouldn’t be prudent”. Well the hell with that.

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Employment Report

By Spencer

The BLS just wished the Obama administration a very merry Christmas with a very encouraging employment report. It was still a report that things are worsening at a lesser rate as far as employment was concerned, but other employment reports were positive. The unemployment rate fell to 10.0% as payroll employment was essentially unchanged at -11,000 and household employment rose 227,000. This data is consistent with initial unemployment claims falling below the 500,000 level as it has over the past few weeks.

Hours worked rose 0.6% from 98.5 to 99.1. This means that the fourth quarter will be starting with hours worked above the prior quarters level for the first time since 2007. Roughly, productivity growth plus hours worked is equal to private sector real GDP growth.Average hourly earnings only rose 0.1 so wage growth remains very weak– implying that unit labor cost are not creating inflationary pressures.


But the combination of weak average hourly earnings and a big jump in hours worked generated a 0.7% — about 8% on an annualized basis — increase in average weekly earnings. This should generate a very large jump in real weekly earnings going into the important Christmas shopping season.

Just on a technical note, both the payroll and manufacturing diffusion indices are moving up nicely, confirming the other signs of a bottom.

Interestingly, the payroll employment indicator appears to be turning ahead of the household survey data. Normally at bottoms the household survey leads. This unusual development probably reflects the difficulty small firms are experiencing obtaining bank loans.

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I Tend to Describe this as "Unwarranted Optimism"

The Shrill One (tm – Brad DeLong) as Optimist:

The result, then, will be high unemployment leading into the 2010 elections, and corresponding Democratic losses. These losses will be worse because Obama, by pursuing a uniformly pro-banker policy without even a gesture to popular anger over the bailouts, has ceded populist energy to the right and demoralized the movement that brought him to power.

Despite all this, the midterms probably won’t give Republicans the majority in the House. But the losses will be big enough to deny Obama a working majority for any major initiatives in the rest of his first term. (My guess is that he’ll be reelected thanks to the true awfulness of the Republican nominee). Since Republicans are dead set against any of the things I think could help pull the economy out of its rut, this means more economic stagnation.

Can anyone point to any evidence of either of the bolded statements being likely to be true? (I’ll pre-emptively conceed that the Republican nominee may well be awful—probably a 75% probability, since the current Best Case Scenario is Mittens. But adjust you expectations by what you would have expected the Democratic Party nominee to be in late 2005.

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Simple Answers to Simple Questions, Floyd Norris/GS Edition

Floyd Norris is Shocked! Shocked! to Find Goldman Sachs controls Congress as well as the Treasury. Where has he been for the past three years?

Imagine the reaction if, perhaps during the 1998 Asian financial crisis, a group of Republican legislators had threatened to block legislation unless a contributor to their campaigns received special treatment. Then imagine what would have happened if a powerful House committee chairman had called companies with a direct interest in legislation pending in his committee and asked them to help out that contributor.

Why is this any different?

It isn’t. But why is this any different that the pandering to Goldman that you have been applauding for the entire Paulson/Geithner/Summers maiming of Main Street?

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