Dean Baker on the national disaster of long-term unemployment.

Paul Krugman talks about the human tragedy behind the economic policy failures of the Obama administration, which has prioritized deficit reduction over putting people back to work:

It goes without saying that the explosion of long-term unemployment is a tragedy for the unemployed themselves. But it may also be a broader economic disaster.

The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. This could happen because their work skills atrophy, but a more likely reason is that potential employers assume that something must be wrong with people who can’t find a job, even if the real reason is simply the terrible economy. And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak.

One piece of evidence comes from the relationship between job openings and unemployment. Normally these two numbers move inversely: the more job openings, the fewer Americans out of work. And this traditional relationship remains true if we look at short-term unemployment. But as William Dickens and Rand Ghayad of Northeastern University recently showed, the relationship has broken down for the long-term unemployed: a rising number of job openings doesn’t seem to do much to reduce their numbers. It’s as if employers don’t even bother looking at anyone who has been out of work for a long time.

To test this hypothesis, Mr. Ghayad then did an experiment, sending out résumés describing the qualifications and employment history of 4,800 fictitious workers. Who got called back? The answer was that workers who reported having been unemployed for six months or more got very few callbacks, even when all their other qualifications were better than those of workers who did attract employer interest.

So we are indeed creating a permanent class of jobless Americans.

And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”

--Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003.

Washington Post columnist Ruth Marcus is a dyed-in-the-wool Villager. (Her husband, Jon Leibowitz, is chairman of the Federal Trade Commission.) She's a kinda-sorta liberal, but liberal only in that DLC-Third Way way. Oh, and she thinks bloggers are icky! Now she's championing the chained CPI after being approached by the White House, and she's just tickled to help. She starts by clutching her pearls and claiming the current Consumer Price Index overstates inflation:

It fails to account for what economists call upper-level substitution bias, and what my mother would call plain common sense: If the price rises for a certain commodity in the basket of goods used to measure inflation, consumers will choose a cheaper alternative. In my house, when the price of beef soars, we substitute chicken.

The CPI doesn’t and, as a result, taxpayers are undercharged and beneficiaries are overpaid — a lot. The overestimate is small — less than 0.3 percentage points annually — but, much like compound interest, it adds up over time.

Changing the inflation measure to what is called chained CPI would save $225 billion over the next decade.

Of that, $95 billion would come from increased tax revenue, $80 billion from Social Security (assuming built-in protections for the very old and very poor, about which more later) and the rest from other programs. Because of the compounding effect, the savings in later years would be even larger.

If chained CPI is a more accurate inflation measure, benefit checks will be smaller than they otherwise would have been. But the purchasing power of those benefits will remain the same.

So, you might say, that’s a mighty big if. Indeed, the elderly may face higher costs, especially for health care, than other Americans, and health-care costs are growing more quickly than overall inflation. Some opponents of chained CPI argue instead for switching to what’s called CPI-E, a measure that gives more weight to health and housing costs.

The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs.

Yes, we're seeing a lot of "even the liberal Center on Budget and Policy Priorities" references these days. The Obama administration managed to convince ONE liberal economist that they would make sure the poor and elderly would be protected. (See "public option." "The White House wouldn't lie to ME, would they?")

And no, the E stands for elderly. But don't let facts stop you, Ruth. Sis! Boom! Bah!

There remain two reasons to worry about a switch to chained CPI — the old-old and the poor-poor.

For the very old, who are more likely to have exhausted other sources of income, the compounding effect of the switch will be significant.

For the very poor elderly and disabled who receive Supplemental Security Income (SSI), the impact could be doubly problematic because CPI is used to compute both initial benefits and cost-of-living increases.

As a result, every commission that has examined the issue and endorsed the change has coupled it with additional benefits for the poorest recipients.

Opponents of the switch — including AARP and, more convincingly, the National Women’s Law Center — insist these protections are inadequate. The administration assures me that, under its approach toward the oldest seniors, the poorest would be shielded and perhaps even better off.

What better status symbol for a Village insider? "The administration assures me." (See "public option.")

Such concerns are an important reason for care in crafting the details of any change. They are not a reason for refusing to fix an inaccurate inflation measure that overpays beneficiaries and undercharges taxpayers. That is a particularly clumsy, infuriatingly wasteful way of protecting the most vulnerable.

Oh dear. Where to begin? I'll let Dean Baker sum things up:

The story here is pretty simple. If we want a more accurate index for adjusting Social Security benefits then we would have BLS construct a full elderly index. If the point is to cut benefits then we would do what Marcus advocates and switch to a chained CPI. That will teach those high living seniors.

The part that infuriates me is the argument that most of the elderly are healthy and energetic enough to hop around comparison shopping. Really? When was the last time any Villager was responsible for taking their 86-year-old parent shopping? I'm pretty sure they hire people for that.

And let's talk about class, too. The college-educated elderly do tend to be healthier and more active. But how many of that cohort depend on Social Security for 90 percent of their retirement income? Also: It doesn't hurt when your daughter went to Yale, and then to Harvard Law. After all, she can afford to help.

We won't even get into the fact that the chained CPI also means a significant tax hike for those earning under $40,000. (Hey, it doesn't affect anyone Ruth knows!)

I remember taking my mother shopping. Since she had vertebrae fractures, she was in constant pain and couldn't stand very long. Hell, she had trouble getting out of the car! Mom did try to pinch pennies by cutting coupons, but mostly it was all too much for her and she went for whatever was most convenient. You know how she made up for it? By refusing to turn the air conditioning on during record heat waves. (From what I hear from my friends, this is a common form of "thriftiness" among the elderly.) Yeah, having old people drop dead from the heat is a great solution.

And these are the people Stenographer Ruth Marcus wants to cut? What a dupe. But then, I shouldn't be surprised. The Post opinion pages are full of them.

[President Obama's at the debates: 'I want to fight for them']

When I was a young organizer for Iowa Citizen Action Network, we were doing a lot of work on utility rate hikes. I met an elderly woman, maybe late 70s, who was living on her Social Security check. As utility prices went through the roof, her cost of living increase in that check wasn't coming anywhere close to covering the costs she had.

She was extremely worried, because as frugal as she was she couldn't figure out how to keep her heat on, pay her rent, and buy a few meager groceries. She thought the utilities might end up shutting her heat off. I suggested a social services agency she could go to, and that she might check with neighborhood churches to see if they had funds that could help. And I promised that I would do everything I could to fight for her.

I pushed hard on the local utility companies to try and shame them away from turning the heat off the dead of an Iowa winter, which didn't work very well because the utility companies had no shame. And my organization pushed in the legislature to get a bill passed that would prohibit utility shutoffs in the wintertime, which didn't pass the first year but did the second year we worked on it.

But it didn't pass in time to save the woman I met. Reading the Cedar Rapids Gazette one day that winter, I saw that the woman I met had been found dead in her apartment of hypothermia after the utility company had turned off her heat.

When we got the bill passed in the next session, I thought of her. I was proud that no one would die in the coming years in Iowa because of having their heat turned off, but I was also mourning that we were too late to save her. And I vowed to keep my promise to her as long as I lived, that I would keep fighting for her and people like her.

It’s 30 years later, but I still have promises to keep, as do all Democrats who claim to be on the side of the middle class and poor. As Dean Baker makes clear, if the President’s apparent offer of changing the CPI formula is part of the budget deal, it will be a very hard blow for generations to come for seniors who will be unlikely to have decent pensions or much in the way of savings to cushion the blow of these cuts. And with prices for necessities (utility prices, gas, groceries, health care) tending to go up more than the inflation rate in general, this is the absolute worst kind of cut to be making.

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If they were really serious about saving money from Medicare, the Very Serious Schmucks could follow some of the suggestions in economist Dean Baker's book, "The End of Loser Liberalism". Sure, they'll tick off Big Pharma. But they can't be any less popular than the suggestion of raising the Medicare age, right?

For example, the nation will spend close to $300 billion in 2011 on prescription drugs. In the absence of government-enforced patent monopolies, the same drugs would cost around $30 billion, an amount that implies a transfer to the pharmaceutical industry of close to $270 billion a year, or about 1.8 percent of gross domestic product. It is close to 15 times current federal spending on the main government welfare program, Temporary Assistance for Needy Families (TANF), and it dwarfs the money at stake from a main goal of progressives: eliminating the Bush tax cuts for the wealthy.

Baker has lots of interesting ideas about how to cut Medicare costs. For one, he says we could simply give Medicare recipients vouchers to buy into the health insurance systems of other countries.

This big cost difference means that there are enormous potential savings from allowing Medicare beneficiaries to receive their care in Canada, Germany, or other wealthy countries rather than in the United States.

Figure 8-4 shows the potential benefit to Medicare beneficiaries, and dual beneficiaries of Medicare and Medicaid, if they got their care in Canada and split the savings with the government. The gains to beneficiaries would easily dwarf the average Social Security benefit in the decades ahead, according to the government‟s projections. Splitting the savings would both provide beneficiaries with a substantial boost to their retirement income and allow the government to address its deficit.

But I especially liked his plans for Big Pharma:

The importance of prescription drugs to our lives and health belies the fact that they are cheap. Few could not be profitably manufactured and distributed for less than $10 per prescription. The reason that we face moral dilemmas about paying $80,000 a year for a drug that may extend the life of an 80-year-old cancer patient by a few years is that we give drug companies patent monopolies that allow them to charge $80,000 a year. If the drugs were sold in a free market, we could avoid the dilemma and pay about $200 a year, making this a simple choice.

Of course, the research and testing necessary to bring a drug to market has enormous costs. But this expenditure has already been made when the drug comes on the market. The key goal of progressive policy should be to separate the payment for the research from the payment for the drug. If the payment for the research is made independent of the payment for the drug, then all drugs can be sold in a free market without patent monopolies, just as generic drugs are sold today.

The two main alternatives for financing research apart from the patent system are a prize system and direct public funding. Both would involve an expansion of public funding for biomedical research.102 Currently, the federal government spends $30 billion a year on biomedical research through the National Institutes of Health. For an additional $30 billion to $80 billion it could replace the research currently funded through the patent system. Even taking the higher figure, the government would soon recoup this cost through savings on drug expenses in Medicare, Medicaid, and other public health programs.

A prize system would effectively buy out patents from drug companies, with the price determined based on some measure of a new drug‟s effectiveness and importance. After buying the patent, the government would place it in the public domain, where any manufacturer could use it.

A system of direct public funding would pay for research in advance. Companies would contract with a government agency, for example, a much-expanded version of the National Institutes of Health. A limited number would receive large long-term contracts (e.g., lasting 10-12 years) to support research into specified areas. As the end of the contract period approached, companies could reapply for a contract based on their track record of achievement.

All the results, both preclinical and clinical, would be public, a transparency that should allow researchers to make informed assessments of the relative efficacy of different drugs and determine if some drugs are better for specific groups of individuals. The patents would be in the public domain, and so the drugs developed through this system would be sold at generic prices.

The signs are everywhere, and it won't really depend on which party wins, now that Nancy Pelosi's drinking the Catfood Commissioners' Kool-Aid: They're going after their Grand Bargain. They want to cut Social Security and Medicare in the lame duck session of Congress. They'll do it with what sounds like "reasonable" adjustments like chaining payments to the Consumer Price Index, claiming it more accurately reflects the cost of living. (It doesn't. For one thing, it doesn't include the cost of heat. Grandma ice pops!) Economist Dean Baker says of course it's not more accurate, and calls the proposed switch a very big deal:

First of all, when all the inside Washington types agree on something, it is a good idea to hang on to your pocket books. Remember, these are the folks who thought it was great that everyone was becoming a homeowner in the middle of a housing bubble and that Alan Greenspan was the greatest central banker of all-time. In other words, inside Washington types are a group of people that mindlessly repeat the conventional wisdom and are largely incapable of original thought.

At the most simple level, the switch to a chained CPI is a way to reduce the annual COLA in Social Security by roughly 0.3 percentage points. That may sound trivial, but it is important to remember that this sum adds up over time. After ten years, this lower annual cost-of-living adjustment would imply a reduction in benefits of roughly 3 percent, after 20 years the reduction would be 6 percent, and after 30 years close to 9 percent. So this is real money.

This plan to lower the COLA raises two obvious questions. First would the new measure actually be more accurate, and second is a cut in Social Security benefits good policy?

There are some complex philosophical issues raised by a cost-of-living index but at the most basic level, the question is to what extent Social Security beneficiaries substitute between items to offset price increases. The proponents of switching to a chained index for the COLA are arguing based on research that examines the consumption patterns of the population as a whole.

The Bureau of Labor Statistics (BLS) has done research indicating that the Social Security population has qualitatively different consumption patterns than the rest of the population. This research suggests that a consumer pirce index based on the consumption patterns of the elderly would show a higher rate of inflation.

The BLS research would imply that someone who is concerned about the accuracy of the Social Security COLA might want a higher annual cost-of-living adjustment, not a lower one. Of course the BLS research is not conclusive, since BLS did not directly monitor the actual purchasing patterns of the elderly, examining the specific items they buy and the outlets where they shop.

However, BLS could do this and construct a full elderly CPI. This would cost in the neighborhood of $10-20 million. While that may seem expensive, this index is being used to determine a COLA for $700 billion in annual spending. If the full elderly index turned out to show the same rate of inflation as the overall CPI, then there would be no need to continue to do it. However, if the rates differ, then we would continue to maintain the elderly CPI, if the interest is accuracy.

This is a simple way to distinguish between people who want an accurate COLA and people who just want to cut benefits. Those who want an accurate COLA advocate having BLS construct a full elderly CPI. People who just want to switch the indexation to a chained CPI simply want to cut benefits.

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The Washington Post is capable of some great investigative reporting, but for the most part, its editorial view reflects that of the Beltway media elites. You've seen their hunger to destroy the working class by the constant use of their pet phrase, "shared sacrifice,' and their love of economical austerity. You're not convinced? Their latest hit piece on Social Security calls it "cash negative". Not sure how that's possible with a $2.7 trillion in assets. Just read Dean Baker take these Villagers down.

Washington Post Discards All Journalistic Standards In Attack on Social Security.

News outlets generally like to claim a separation between their editorial pages and their news pages. The Washington Post has long ignored this distinction in pursuing its agenda for cutting Social Security, however it took a big step further in tearing this barrier in a business section story that would have been excluded from most opinion pages because of all the inaccuracies it contained...read on

And Duncan finds that they have an opening for a new ombudsman. Didn't one of their last executive editors declare that they needed to cover Glenn Beck and movement conservatives more closely because their reporting is so awesome? Yes, and he was backed up by an ombudsman too.

For a few weeks last fall, editors and ombudsmen at The Washington Post and New York Times seemed obsessed with the idea that they should be paying more attention to right-wing media and websites. In the wake of some wildly hyperbolic claims about ACORN, the nation's leading news outlets apologized for being too slow to run chasing after every "scandal" ginned up by Andrew Breitbart, Glenn Beck, and their ilk.

Washington Post executive editor Marcus Brauchli worried "that we are not well-enough informed about conservative issues. It's particularly a problem in a town so dominated by Democrats and the Democratic point of view" -- a concern echoed by his deputies and Post ombudsman Andrew Alexander.

Alexander gives us a detailed account as to why the WaPo is so slow to cover conservative conspiracies issues.
Still not swayed? Just take a look at the amount of MSM coverage was given to the bogus conservative lie about the $16 muffin.

Is he a liar? Is he just clueless? Or does he live in a parallel universe?

From Center for Economic Policy and Research:

"Greenspan also said he believes that the sharp rise in gold prices is due to market concerns about inflation taking off in the long run. He noted how there has never been such a major expansion of credit in U.S. economic history."

Let's look this one up. There is an organization called the "Federal Reserve Board" that puts out really good data on credit. If we look at its most recent Flow of Funds accounts, we see that credit for the economy as a whole expanded at a 3.0 percent annual rate in 2009, a 4.2 percent annual rate in 2010, and a 2.3 percent annual rate in the first quarter of 2011, the most recent quarter for which data is available.

Has there ever been "such a major expansion of credit in U.S. economic history?"

Well, actually credit expanded more rapidly than the 4.2 percent rate in 2010 in every single year that Greenspan chaired the Fed. In fact, it expanded more rapidly in every year in this series (going back to 1976) and probably every year since the Great Depression. In other words, for Alan Greenspan night is day, up is down, he is looking at an extraordinarily slow pace of credit expansion and telling reporters that is the fastest on record...read on

The media built him up for some reason. Maybe it was the glasses or his love of Ayn Rand, but usually they then tear you down after you get everything wrong. However, Alan escapes that path and still hangs around to sprout off nonsense that is usually listened to by the confidence fairies.

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Economist Dean Baker really lets John Kerry, Patty Murray and Max Baucus have it for the column that appeared in the Wall St. Journal this week -- but he's especially savage with Kerry:

Senator John Kerry, along with the two other Democratic senators appointed to the "Super Committee", had a column in the Wall Street Journal yesterday on their approach to the committee's work. This piece is infuriating for its empty platitudes and the refusal to acknowledge economic reality. In just 700 words the piece promulgated 3 major economic myths while ignoring the fundamental truths about the economy and the budget.

[...] The reason that we actually had a $240 billion surplus (2.4 percent of GDP) in 2000 was that the United States had a stock bubble propelled boom at the end of the decade. This caused the economy to grow much more rapidly than CBO expected with the unemployment rate falling to 4.0 percent in 2000, rather than the 6.0 percent predicted by CBO. Do the senators not remember the stock bubble?

In addition to promoting these false stories about the economy and the budget, the senators fail to tell the true story. The large deficits the country currently faces are not the result of an ongoing pattern of excessive profligacy. They are the result of the economy's plunge following the collapse of the housing bubble. Even with the cost of the wars, the Medicare drug benefit and the Bush tax cuts, the projected deficits were relatively modest prior to the collapse of the housing bubble.

The true story is that our deficit problem is really an economic problem - we let a huge housing bubble grow, which would inevitably collapse and sink the economy. The deficit is needed now to make up for the $1.2 trillion loss in annual demand from the private sector, which had been generated by the housing bubble. The bubble had led to booms to both construction and consumption that have gone bust now that house prices have crashed.

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Economist Dean Bellows on the logic of the debt ceiling increase and possible default.

Dean Bellows argues that the downgrade of the United States' credit rating did not cause the recent losses on Wall Street:

Time to beat up on really really bad news reporting. The stock market doesn't tell people why it does what it does. We have commentators who bloviate on what they think caused the market to rise or fall, but they don't really know and they could be completely wrong.

That is why it was incredibly irresponsible for NPR to tell listeners in its top of the hour news segment that the market plunged because Standard and Poor's downgrade of U.S. debt. NPR does not know this to be true and it certainly is not obviously the case.

The market that should have been most immediately affected by the S&P downgrade was the U.S. bond market. However bond prices soared in the trading immediately following the downgrade and continued to rise through Wednesday. If there was greater fear that the U.S. would default because of the downgrade, then bond prices should have plunged as investors demanded a higher risk premium. This did not happen.

The most obvious alternative explanation for the plunge in the market is the risk that the euro could break up as the debt crisis spread from relatively countries like Greece and Ireland, to the euro zone giants, Spain and Italy. The prospect of a euro zone break-up raises a real risk of a Lehman-type freeze up of the world financial system. It is far more plausible that this prospect led to the plunge in the stock market than the downgrade by one of three major credit rating agencies.

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Dean Baker schools Steve Forbes and Larry Kudlow on what another Tax Repatriation holiday would mean for our struggling economy. Kudlow usually just screams that tax breaks are the true job creators in the world, but with a seasoned pro like Baker on the set, he could only muster up a wimpy I've got no crystal ball defense. He's for Tax Repatriation to be made permanent of course, but not because it creates jobs or helps the economy. Kudlow just goes cuckoo for corporate cash.

Kudlow: I can't predict investment and job creation, but....

Larry says this quite a lot to Dean. His only defense for this scam is that it puts more money in the pockets of those nice and quite generous investors who aren't sitting on the sidelines even now. See?

Baker: The question is what's the best way to spend money and that's probably not a good way to do it. if we want to stimulate the economy there's lots of other things we can do and that's not a very good way and what that's going to mean is we'll have larger deficits in the future because everyone is going to park their money overseas with the expectation that there's going to be another tax holiday come 2016 or whatever it might be. So this is going to be costing us a lot of money in the long term with very little impact in the way of boosting growth or investment.
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We need to stimulate the economy and this is a bad, bad way to stimulate the economy. It'll give almost no boost and I probably couldn't think of a worst way in fact

Steve Forbes finally chimes in and says we have the highest tax rates in the entire developed world dammit and everyone is growing faster than us and pulling away and we need to get the investors animal spirits back up. Baker brings up the '90s that had higher tax rates and higher economic growth. Steve Forbes comes back on and in a fit of desperation practically pleads with Baker: can't we be more like China? Dean starts laughing at him at this point. I did too.

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