Free Markets, Free People

Peter Orszag


The real unemployment rate

Ed Luce, writing in the Financial Times, discovers something our own Dale Franks has been saying for a couple of years.   The real unemployment rate is much higher than the published unemployment rate:

America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent. Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbers “actively seeking” work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs.

According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force.

Etc.  The fact is the government undercounts the unemployed because it bases its count on those drawing unemployment benefits.  However once those benefits end, those who are still unemployed but no longer eligible for benefits become invisible.  They’re no longer included in the count.  Thus you’ll see reports where the number of jobs created is far below even that necessary to maintain the unemployment rate and yet the rate goes down.

We don’t count the unemployment rate accurately at all, and politicians, as you might imagine, are fine with that.

As for the jobs that have been created:

According to a study this year by Michael Spence, a Nobel Prize-winning economist from Stanford University, and Sandile Hlatshwayo, all net job creation since 1990 has been in the “non-tradable sector”. Between 1990 and 2008, the US added 27.3m jobs, of which almost every one was in services. Almost half were in healthcare or the public sector – both areas in which productivity growth is virtually zero. Conversely, manufacturing’s impressive productivity growth has tracked its shrinking headcount.

Its not clear how one can blame this on the “1%” or the “rich” instead of the evolution of our economic state in a myriad of different areas (and for just as many different reasons).  Apparently politicians have to have someone to blame when the public tries to stick them with the responsibility for the downturn, but this is something that has been developing for decades and has gotten a pretty firm final push from the recession.  And politically here’s the ground truth:

“The truth is that we don’t know how to fix the US labour market – we are in uncharted territory,” says Peter Orszag, Mr Obama’s former budget director, now a vice-chairman of Citi. “It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these wouldn’t fundamentally transform the situation for the middle class … It is not yet clear what, if anything, could.”

Luce concentrates on fixing the education system which he calls “mediocre”.  And of course, it is a system that while widely panned, demands more and more investment for less and less return.  Naturally, in 1979 we were sold a bill of goods by our politicians that said government had to get much more deeply involved in education in order to save it from the mediocrity from which it obviously continues to suffer.  Thus the Department of Education was born.  The results have been very expensive and less than sterling.

Others will try to blame this all on globalization and the “outsourcing” of America’s manufacturing jobs.  But what they always fail to mention is America had priced itself out of the manufacturing business quite some time ago.  The fact that the jobs went elsewhere was a function of competition which has, in fact, benefited the American consumer.   You can’t have it both ways.  You can’t demand the lowest prices at Wal-Mart and then complain when a business does what it takes to meet that demand.

The bottom line here is we now face a new economic reality that says unless we make fundamental changes high chronic unemployment could become the norm.  Part of making those changes is to first recognize what shape we’re really in and why.  It isn’t because of the “rich” or the “1%”.  The problem is much broader and deeper than that.  Reporting incomplete statistics, such as the number used for unemployment, doesn’t help us understand or appreciate the shape we’re in or what we need to do to remedy that situation.  It simply continues to hide the reality of that situation in favor of making the number more palatable politically.

The number of unemployed is at 11% whether the politicians wish to admit it or not.  That’s a very high proportion of unemployed and as unemployment benefits continue to end for thousands of unemployed with meager job creation, it stands a chance of going higher.   That’s reality. That’s the number we should be dealing with.  Not this incomplete number that tells us a bad situation is better than it is.   That’s simply another means of self-delusion which has, unfortunately, become commonplace in the political world.  Harkening back to Peter Orszag’s words, just listen to the President’s new class warfare theme and you’ll understand that Orszag is exactly right. 

They haven’t a clue.

~McQ

Twitter: @McQandO


Orszag – keep Bush tax cuts for now

Obama’s former Budget Director has landed a job at the NY Times as a columnist, and for his first column, essentially says that plans to end the Bush era tax cuts at this time are, well, stupid.

Apparently, finally being able to breath the air outside the beltway has reinvigorated the “common sense” node in his brain

In the face of the dueling deficits [jobs and budget –ed.], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt.

Instead, what we got today from the administration was more of the same – a proposal for $50 billion in infrastructure spending over 6 years.  Not only that, dear friends, but within that proposal is one for a new government run “infrastructure bank”   After our glowing successes with Freddie and Fanny, this is the perfect answer.  And, if you’re as cynical as I am, you’ll probably assume the only jobs that will come out of this are those in the new “infrastructure bank” and those who will still be doing the environmental impact studies in 6 years time on the projects Obama wants to fund through the bank.

Back to Orszag though.  While he is right about the tax cuts, he then says this:

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Anyone – what hasn’t been calculated in all of this?   That’s right, cut spending by that amount over the next decade.  That’s 300 billion a year. 

And, note carefully what Orszag is saying here.  He’s talking about ending all the Bush era tax cuts, not just those for the “rich”..  Per the CBO, leaving those cuts for the very highest earners in place will only cost $700 billion over 10 years. The $3 trillion number includes the middle class.

Orszag, as expected of a former budget director, goes on to analyze the future budgets.  He notes that by 2015 – a mere 5 years from now – the deficit will comprise 4 to 5 percent of the GDP.  His analysis is below:

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

Summary – cut defense spending … a lot.  Not going to happen with Republicans poised to sweep into the House and possibly take it over.   Cut non-defense discretionary spending – most likely not going to happen regardless of who is in control of the government or the legislature … at least not the the level Orszag thinks is necessary.  “Additional revenue”, a code phrase for “raise taxes”.

Don’t believe me?  The first thing out of his pen after his analysis is this:

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.

But the desire sure is.  And, like health care, this is going to be on the left’s agenda from now on.  Orszag just throws it out there as the panacea for capturing the revenue necessary to help “pay down” the deficit.  They may have spent all the money, but it is up to you to pay it back. 

Orszag finishes it up with this:

Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

In fact, if I’m not mistaken, what Greenspan and Feldstein have said is the tax cuts can’t continue forever without commensurate spending cuts.  That’s a much different point than the one Orszag is making.  Frankly, most Americans, at least right now, want to see those spending cuts before they see any additional taxes.  And they’re going to remain angry and uncooperative (or as the Dems like to say, ‘ungovernable’) until they actually see government serious about addressing the deficit with spending cuts.

Got that, Mr. Orszag – spending cuts are the key to deficit reduction, not new taxes.  Put that in your economic model and crank out a new plan, will ya?

~McQ


Orszag Called Newly Adjusted White House Budget “Unsustainable” In March

Back in March of this year, when both the White House and the CBO put out their budget deficit numbers, we were told that the CBO simply had it wrong and were much too pessimistic about the 10 year budget that the Obama administration was touting.

The head of the White House’s Office of Management and Budget, Peter Orszag, had this to say at the time:

White House budget chief Peter Orszag said that CBO’s long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained.

“Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.

Deficits so big put upward pressure on interest rates as the government offers more attractive interest rates to attract borrowers.

“I think deficits of 5 percent (of GDP) are unsupportable,” said economist Mark Zandi, chief economist at Moody’s Economy.com. “It will lead to higher interest rates to the point where it will force policymakers to make changes.”

Of course, today the White House’s OMB acknowledged that, in fact, the CBO’s estimates in March were indeed correct. OMB has adjusted its deficit estimate up 2 trillion dollars to over 9 trillion. That means that in 2019, the deficit will be 6% of GDP – or to quote Peter Orszag, “unsustainable“.

What does “unsustainable” mean to you, and how does one address such a problem?

Well, it certainly isn’t addressed with increased spending, new entitlements and more debt, is it?

Is there any wonder a sizable majority thinks the country is still on the wrong track despite a change of administrations?

In case the politicians still don’t get it (and after this morning’s awesomely dumb move by Republicans, they need to be reminded as well) — It’s the spending, stupid!

~McQ


Health Care Reform – Peeling The Onion

There are a number of things going on in the health care reform debate that are the reason Democrats are at odds with each other. One, obviously is cost. What should be apparent, even to rocket scientists like Nancy Pelosi, is that the American people are not buying into the premise that “government can expand coverage, improve care and do it for less”. It’s not happening.

And, of course, those on the blue side that are leading the “no way, no how” charge are the so called Blue Dogs. Bolstering the Blue Dog position is the CBO, or Congressional Budget Office – a non-partisan organization which “scores” proposed bills for cost and savings. In the last few weeks it has consistently found Democratic Congressional legislative proposals wanting – pointing out none delivered the promised savings over the long haul.

Predictably, the CBO has come under fire from the left, and yesterday the White House joined the fray. Peter Orszag, the White House budget director, Peter Orszag said – carefully – that the CBO’s recent analysis might be feeding a perception that its tendency is toward “exaggerating costs and underestimating savings.”

Given how the costs of most government programs skyrocket after implementation, I’m having difficulty buying into this supposed perception. And it may say more about Orszag, former CBO director, than it does about the CBO now.

However, what Orszag is talking about specifically is a proposal that is another part of the infighting going on among Democrats.

“The point of the proposal … was never to generate savings over the next decade,” Orszag said in a letter posted on Saturday.

“Instead the goal is to provide a mechanism for improving quality of care for beneficiaries and reducing costs over the long term.”

In fact, the proposal is about shifting power from Congress to the Executive Branch:

The new council, if approved, would replace the current Medicare Payment Advisory Commission, which is made up of doctors and health care experts. Once a year, it gives recommendations about coverage and reimbursement rates for Medicare but has no authority to enforce its ideas. Its report in March recommended that payments for primary care physicians be increased and home health services rates be decreased.

The proposed council would be comprised of doctors and health care experts making their recommendations based on extensive data and analysis of best health care practices, according to administration officials.

It would be an independent executive branch agency — which would give its recommendations more weight. The president would have to approve or disapprove the its recommendations as a package. If it is approved, the package would be enacted if Congress did not vote against it within 30 days.

This isn’t necessarily about “best health care practices” – this is about centralizing the decision making and making it harder and harder for Congress as a whole and individual Congressmen specifically, from excepting their district or certain constituent health care providers from some of the provisions. The White House wants to take that little perk away from them. And that’s another one of many stuggles going on within this fight to pass something.

A Democratic president trying to take power away from a Democratic congress is probably not the best way to try to pass something that the President can call “health care reform”. That’s not to say I support this council in either form – its more to point out how clumsily this administration is proceeding in all of this. If you want legislation passed so your signature issue doesn’t fail, it may be best not to try to take power away from a friendly Congress and take it yourself. Executive power grabs don’t just happen in the national security area as the Democrats constantly criticized Bush for attempting. They can occur in many other areas. We’ll see if the Dems will be as critical of this power grab as they were of the ones alleged of the previous administration.

~McQ


Orszag: Advocates Of Delay Just Trying To Kill Health Care Reform

We now have the White House Budget Director weighing in on health care reform legislation:

ORSZAG: We have to remember: there are some who are advocating delay simply because they don’t have anything to put on the table. The typical Washington bureaucratic game of — ‘if you don’t have a better alternative, just delay in the hope that that kills something’ is partly what’s playing out here.

Of course what Peter Orszag seems not to understand is that most of those trying to delay (and eventually kill) the legislative monstrosity called “health care reform” are quite happy with putting nothing on the table as they don’t buy into the manufactured crisis being whipped up by the administration.

Nothing of earth shaking consequence is going to happen in the health care world if this bill isn’t passed before August.  In fact, most likely that statement is true of next August and the following one as well.

What you really hear Orszag subtly acknowledging is the longer this goes on, the more people are going to become aware of what is in the bill and object to the cost and intrusion. This isn’t about “better alternatives” or their lack thereof. This is about the administration’s fear that delay means defeat because of what’s in the bill. Hence the attempt to rush something through before it can be read and understood and certainly before members of Congress have to go home and face their angry and concerned constituents.

~McQ


Medicare Rationing – The Shape Of Health Care To Come

I love the way the Wall Street Journal starts this editorial about health care reform and rationing. It is something I’ve been wondering for some time here at QandO:

Try to follow this logic: Last week the Medicare trustees reported that the program has an “unfunded liability” of nearly $38 trillion — which is the amount of benefits promised but not covered by taxes over the next 75 years. So Democrats have decided that the way to close this gap is to create a new “universal” health insurance entitlement for the middle class.

In fact what they’re proposing defies logic. It is counter-intuitive (some wag said that “counter-intuitive” is the new “stupid”). I mean think about it – they’re essentially saying “we’ve run the 46% of the health care segment we have into $38 trillion of unfunded debt. The way to fix that is to give us the rest”.

But the bulk of the editorial is about who, under this new grand scheme the Democrats are proposing, will be making decision about how to treat you. And in this case one example serves to make the point:

At issue are “virtual colonoscopies,” or CT scans of the abdomen. Colon cancer is the second leading cause of U.S. cancer death but one of the most preventable. Found early, the cure rate is 93%, but only 8% at later stages. Virtual colonoscopies are likely to boost screenings because they are quicker, more comfortable and significantly cheaper than the standard “optical” procedure, which involves anesthesia and threading an endoscope through the lower intestine.

Virtual colonoscopies are endorsed by the American Cancer Society and covered by a growing number of private insurers including Cigna and UnitedHealthcare. The problem for Medicare is that if cancerous lesions are found using a scan, then patients must follow up with a traditional colonoscopy anyway. Costs would be lower if everyone simply took the invasive route, where doctors can remove polyps on the spot. As Medicare noted in its ruling, “If there is a relatively high referral rate [for traditional colonoscopy], the utility of an intermediate test such as CT colonography is limited.” In other words, duplication would be too pricey.

Consequently, because there might be a percentage of referrals (that Medicare assumes might be “relatively high”) which then require a traditional colonoscopy, no Medicare patients may have the virtual colonscopies even if they are quicker, more comfortable and, as with any invasive procedure, less dangerous.

Now I assume I don’t have to lay out all the implications of this to readers here – this is prefect example of precisely what opponents of government health care have been saying for years. And it certainly gives lie to the claims by some that all government wants to do is offer “insurance”.

Led by budget chief Peter Orszag, the White House believes that comparative effectiveness research, which examines clinical evidence to determine what “works best,” will let them cut wasteful or ineffective treatments and thus contain health spending.

The problem is that what “works best” isn’t the same for everyone. While not painless or risk free, virtual colonoscopy might be better for some patients — especially among seniors who are infirm or because the presence of other diseases puts them at risk for complications. Ideally doctors would decide with their patients. But Medicare instead made the hard-and-fast choice that it was cheaper to cut it off for all beneficiaries. If some patients are worse off, well, too bad.

One of the complaints about private health insurers is that patients resent someone group on high deciding what is best for them. That should be their doctor’s decision. Yet here is that complaint being sanctioned for the largest purchaser of health care in America – Medicare. And, as the WSJ points out, since private carriers usually adopt Medicare rates and policies, the virtual colonoscopy could be a technology which is “run out of the market place”.

Mr. Orszag says that a federal health board will make these Solomonic decisions, which is only true until the lobbies get to Congress and the White House. With virtual colonoscopy, radiologists and gastroenterologists are feuding over which group should get paid for colon cancer screening. Companies like General Electric and Seimens that make CT technology are pressuring Medicare administrators too. More than 50 Congressmen are demanding that the decision be overturned.

All this is merely a preview of the life-and-death decisions that will be determined by politics once government finances substantially more health care than the 46% it already does. Anyone who buys Democratic claims about “choice” and “affordability” will be in for a very rude awakening.

Is this how you want health care decisions affecting your life to be made? Political fights in Congress? Look at the financial health of the US government right now and consider the huge unfunded liabilities in front of it. What side do you really think such decisions will come down on – yours or the least costly alternative regardless of your individual need?

~McQ

[HT: Anna B]


Former CBO Director Now Finds CBO Numbers Not So Good

This parallel world that exists only within the DC beltway and where the laws of economics don’t apply has got to be merged again with the real world we all live in as soon as possible:

Despite new estimates that say President Barack Obama’s budget would generate unsustainable large deficits averaging almost $1 trillion a year, the White House insisted Friday that the flood of red ink won’t swamp its costly agenda.

The Congressional Budget Office figures released Friday predict Obama’s budget will produce $9.3 trillion worth of red ink over 2010-2019. That’s $2.3 trillion worse than the administration predicted in its budget just last month.

Worst of all, CBO says the deficit under Obama’s policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

Just feast your eyes on those statements. First – 10 years of trillion dollar deficits “won’t swamp” the “costly agenda” of the Obama administration? Really? Or is it just that the administration refuses to acknowledge the reality of the coming deficits and intends to imperil the economy to push its social agenda forward? Which is more likely true?

And how does the administration address the CBO projections?

White House budget chief Peter Orszag said that CBO’s economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.

About those deficits?

About those deficits?

Orszag, the former director of the CBO, now finds the CBO just isn’t an entity in which we should put much stock when it comes to budget analysis – especially when it finds such budget numbers “unsustainable”. Nope. Instead we should heed the Fed – which has proven to be such an economic font of solutions in this current crisis – and unnamed “private economists” whose only claim to fame is they agree with the administration’s projections. The organization Orszag previously led suddenly has a credibility problem.

However Orszag did have to admit that if the CBO is right, well, that’s a horse of a different color:

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained. “Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.

Of course there have been many economic analysts prior to the CBO projections who have found the administration’s projections to be very optimistic in outlying years, in fact the term “rose colored glasses” seems most apropos.

So which makes more sense to you in this particular time of financial crisis- listen to those who say your projections are too rosy and trim them back (and the deficits they produce) to ensure that should it happen as the more pessimistic projections hold, you don’t chance pushing the nation into a period of unsustainable debt, or waive them off and take the chance that you’re right and they’re not?

“Caution” seems like a very important watch-word at this point, or it should be.

Instead we’re seeing a “damn the icebergs, full speed ahead” attitude from the crew of the economic Titanic.

~McQ

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