Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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That is quite literally what he told us in his column. His second paragraph tells readers:

"Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided."

See, we don't know what to do, so we just can't do anything. All those suckers who are unemployed or seeing stagnant wages, well we just don't know. And the fact that those on the top are getting rich with 60-year high shares of national income, well what can we do about that? It's just too confusing.

While Samuelson may be very confused by economics, those who understood their intro econ have little difficulty explaining the current situation. The housing bubble was driving the economy prior to its collapse. The collapse eliminated more than $600 billion in demand from residential construction and more than $500 billion in demand from consumption. There was also demand lost from a collapse of a smaller bubble in non-residential construction and from state and local government cutbacks forced by a loss of tax revenue. This is not complicated and it was predicted.

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In Carmen Reinhart and Ken Rogoff's (R&R) famous and now largely discredited "Growth in a Time of Debt," New Zealand's -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high debt) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt.

To make the story better, today I received a tweet that informed me that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months. Perhaps this dispute can be linked to New Zealand's high debt at the time, but the connection is far from obvious. This is the sort of problem you get when using very small samples. 

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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 they 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.

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The NYT has difficulty finding pundits who can write knowledgeably about economics. Thomas Friedman made this point in his Sunday column. At one point he quotes Gary Green, the president of Forsyth Technical Community College, in Winston-Salem, N.C.:

"'We have a labor surplus in this country and a labor shortage at the same time,' Green explained to me. Workers in North Carolina, particularly in textiles and furniture, who lost jobs either to outsourcing or the recession in 2008, often 'do not have the skills required to get a new job today' in the biotech, health care and manufacturing centers that are opening in the state.

"If before, he added, 'you just needed a high school shop class or a short postsecondary certificate to work in a factory, now you need an associate degree in machining,' a two-year program that requires higher math, I.T. and systems skills. In addition, some employers are now demanding that you not only have an associate degree but that nationally recognized skill certifications be incorporated into the curriculum to show that you have mastered the skills they want, like computer-integrated machining."

Actually there are simple ways to identify labor shortages. First and foremost we should be seeing rapidly rising wages. If employers cannot get the workers they need then they raise the wages they offer to pull workers away from other employers. This is how markets work. (We should also see longer workweeks and increased vacancies.)

In fact there is no major sector of the economy where wages are rising rapidly. This shows rather conclusively that workers do not have skill shortages although it may be the case that many managers are so ignorant of markets that they don't know that the way to attract better workers is to raise wages. Of course that would suggest the need to better train managers, not workers.

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The NYT had a useful piece on the increase in the number of people working at part-time jobs who would like full-time employment. This is an important measure of under-employment in the downturn that is missed when people just look at the unemployment rate. Since part-time workers often lack benefits like health care insurance, this can be an especially important issue.

However the piece concludes by equating part-time work with flexibility for employers. This is not true. There is no direct relationship between part-time work and flexible hours. A worker who has a regular shift from 1:00-5:00, Monday to Friday, provides no more flexibility to an employer than a worker who works from 9:00-5:00 the same days.

The flexibility comes from the fact that part-time workers are likely to have less bargaining power than full-time workers and therefore may have to accept changes in work hours on short notice. But this is a different issue than being employed part-time.

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There are some things that we can learn from economics, just as there are things we learn from astronomy. The vast majority of people in the United States believe that the earth goes around the sun because of what astronomers tell us. After all, we all see the opposite every day in the sky.

For this reason, when a major newspaper tells us that when it comes to economics it is all just so confusing (except for what they insist you believe), it is doing a serious disservice. While some aspects of economics are difficult, many of the fundamentals, such as why we have a prolonged economic slump and millions of people are unemployed, are not. (Lack of demand in the economy, if you have to ask.)

In this vein, the Post article, "It's an old numbers game. What if they're wrong?" seems almost like a deliberate effort to confuse readers into thinking there is nothing that can be done about the economy except to have the government reduce deficits.

The second paragraph tells people:

"How much debt can the nation manage? The United States was at about 102 percent in 2012, with the amount of debt held by the public closer to 75 percent. To some, that signals danger. Others say we could handle even more. In certain wonky circles, the debate over what ratio is sustainable is almost endless. And yet, serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come."

This is almost completely wrong. For example, many economists would not even look to the ratio of debt to GDP as being an important variable since debt can be quickly reduced by selling assets. If a high debt level is some horrible burden on the economy, then the United States could just sell several trillions of dollars of assets and immediately lower its burden. People who understand balance sheets know this.

Also, the price of debt fluctuates with interest rates. Debt issued at low interest rates can be repurchased at steep discounts when interest rates rise. This means that if debt-to-GDP ratios are what matters, we will have a great opportunity to quickly reduce this ratio when interest rates rise later in the decade as is widely predicted. This is a reason that serious people tend to focus on the interest burden, which is near a post-World War II low.

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The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.

Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed's low interest rate policy. According to Federal Reserve Board's latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.

Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama's proposal to change the base of the cost of living adjustment to the chained CPI.  


I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That's nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don't hold any stocks or bonds, but the Fed's data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don't have time to analyze the micro data just now.)

This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let's say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.

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The NYT had a piece on the precipitous fall in the price of Apple's stock since last September. It explained the decline in part by the fact that an unusually large portion of its stockholders are individual investors. These investors were overly enthusiastic about the stock last year and now, according to the piece, excessively pessimistic. It tells readers;

"At its current price, investors are betting that Apple will grow more slowly than the average American company. And they are ignoring the enormous pile of cash that Apple has built up, which it could hand out to shareholders tomorrow if it wanted."

These two sentences actually are in direct contradiction. Apple has accumulated an extraordinary amount of cash precisely because it does not see good investment opportunities. That is good reason to believe that its profits will grow less rapidly in the future than other companies. Rather than ignoring this cash, investors are likely focused very much on the fact that Apple does not seem able to find good places to use its money.

There is one other point that is worth making about the stock price. It is plausible to tell a story in which Apple's stock price would be driven to extraordinary levels by ill-informed individual investors. (Although large investors could counter this run-up by shorting Apple stock.) It is less plausible that the price would be driven to irrationally low levels.

Institutional investors do own large amounts of Apple stock and in fact they have considerably less money in Apple today than they did eight months ago. If they viewed Apple stock as being seriously under-valued at its current price then they would rush in to take advantage of a bargain. The fact that this does not appear to be happening suggests that it is not just individual investors who view Apple's stock price as being too high. The big institutional investors must share this view.

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Thomas Edsall relies on some research which unfortunately in many cases is a bit dated to discuss the idea that middle wage jobs in the United States are disappearing due to technology. While there was some evidence that middle wage occupations were dwindling in the 1990s, this was reversed in the last decade. In that decade there were declines in employment shares for all but the lowest paying occupations. Since we saw the same pattern of wage polarization, with more income going to the top, in the 2000s and 1990s, this would seem to indicate that the loss of middle wage jobs was not the story in the 1990s either.

In considering the recent pattern of job growth the proliferation of low-paying jobs is most obviously explained by the weak economy. The economy also generates lots of bad jobs, however in a healthy labor market most people don't take them. It is only when people have no other job options that take these low-paying jobs. Therefore the fact that a disproportionate share of the jobs created in the last 5 years are low-paying jobs is best explained by the fact that the economy is not creating very many jobs.

The piece also notes the shift of manufacturing jobs to China. This is not a result of inevitable globalization, but rather a policy decision to put manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that allow doctors, lawyers, and other highly paid professsionals from avoid similar competition. The United States has also further disadvantaged manufacturing workers by pursuing a high dollar policy that makes it more difficult for them to compete internationally.

There is little reason to believe that there is anything inevitable about the loss of wages by middle class workers. Rather this is primarily a policy driven outcome.

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Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT's Economix blog list of top blunderers in economics. Professor Feldstein's claim to fame in this category stems in large part  from a 1974 article which purports to show that Social Security led to a reduction in private savings.

This article received considerable attention and played an important role in advancing Feldstein's reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.

Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.

Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.



I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)

There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country's leading deficit scolds, was concerned that people were saving too much for retirement.

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Carmen Reinhart and Ken Rogoff (R&R) responded to the paper I noted earlier by Thomas Herndon, Michael Ash, and Robert Pollin (HAP), which showed that their famous result associating high debt levels with slow growth was driven by spreadsheet errors. The gist of the response is that HAP also find that high debt is associated with slower growth, and that other studies (including one of theirs) found the same result anyhow.

The first point is highly misleading. It is true that in most of their specifications HAP found growth was slower in periods with debt levels above 90 percent of GDP than below, but the gap was relatively small and nowhere close to statistically significant. Furthermore, they found a much bigger gap in growth rates around debt-to-GDP ratios of 30 percent. If we think that R&Rs methodology is telling us something important about the world then the take-away should be that we want to keep debt-to-GDP ratios below 30 percent.

If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.

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That's the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting. 

But HAP tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.

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It would have been helpful to note this fact in an article discussing the Obama administration's proposal to cut Social Security benefits by adopting a chained consumer price index as the basis for Social Security cost of living adjustments (COLA). The piece notes claims that the chained CPI provides a more accurate measure of the rate of inflation, then tells readers:

"Some argue that the chained CPI would cheat seniors by understating inflation for the elderly, who spend more on health care. The nonpartisan Congressional Budget Office (CBO) has found conflicting evidence on that point."

Actually the Congressional Budget Office did not find conflicting evidence on this point, it just noted that the evidence is not conclusive. If the White House was interested in an accurate measure of the rate of inflation seen by seniors then it could instruct the Bureau of Labor Statistics to construct a full elderly CPI that would track the actual consumption patterns of the elderly. It has steadfastly refused to consider this proposal, which could lead to a higher annual COLA.

The Post should have made this point so that readers would recognize that the goal of the Obama administration is to cut Social Security, not make the COLA more accurate. Some people may be confused on this point.

The article also misled readers when it asserted:

"Medicare, Medicaid and Social Security account for nearly 40 percent of federal spending and are growing rapidly, as they must provide benefits to all who qualify, regardless of cost."

Actually the cost of Social Security is growing relatively slowly, having risen by roughly 1.0 percentage point of GDP over the last two decades. It is projected to rise another 1.0 percentage point over the next two decades, then stay roughly constant as a share of GDP over the rest of the century.

Medicare costs have been projected to rise more rapidly because of rapidly growing private sector health care costs. In fact, Medicare costs have risen quite slowly over the last 5 years, although CBO does not project this slower rate of growth to persist.

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Nelson Schwartz struggled to make sense of the economy in a NYT column today. After all, we see signs of economic weakness everywhere, yet the stock market is soaring. (This may be less of a mystery to folks who know that stock prices are ostensibly a measure of corporate profits, not the health of the economy.) 

After going through the bad news, Schwartz gives us the case for optimism about the economy:

"'The current slowdown will be the last for a while,' said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. He estimates that after growing by annual rates of only 1.3 percent in the second quarter and 1.5 percent in the third quarter, the economy will expand by 2.5 percent in the final months of the year and maintain that pace in 2014.

'We’re getting closer to the end of chronically disappointing growth,' Mr. Harris added. 'It’s not like we’re going to have a huge boom but something that feels sustainable.'"

The economy has a trend growth rate of between 2.2 percent and 2.4 percent. If we sustain a 2.5 percent growth rate then we will be exceeding the trend growth rate by between 0.1-0.3 percentage points. According to the Congressional Budget Office the economy is still 6.0 percentage points below its potential level of output. This means that in the optimistic scenario described here we will return to potential GDP in somewhere between 20 and 60 years.

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The Washington think tank Third Way has managed to make a lot of news lately by misrepresenting its research. It put out a paper by David Autor and Melanie Wasserman with some tentative results concerning the impact on children of growing up without a father present in the household. The paper found weak evidence that boys were less likely to graduate college under such circumstances, while girls were less affected. While the piece itself notes the tentative nature of this finding (the impact of growing up in a rural household on college graduation rates was equally strong), Third Way touted this "startling discovery." (Fans of this finding are no doubt troubled by same sex marriage, since it implies that boys raised by lesbian couples will be less likely to graduate college.)

Anyhow, Robert Samuelson naturally picks up on this finding to warn us about our future in a piece titled "family meltdown." Complaining about single parent families is old news, as is the growth of single parent families. (The increase in single parent households was largely a story of the 60s and the 70s. The percentage of children being raised in a household with just one parent has been relatively stable over the last quarter century.) What is new is that this complaint is coming from "a liberal think tank" rather than conservatives like Charles Murray.

It is not clear what makes Third Way liberal. It has called for cutting Social Security, focusing on deficit reduction at the expense of economic growth, and taken a variety of other positions that are not ordinarily associated with being liberal. There is nothing wrong with an organization adopting eclectic positions on issues, but it is certainly misleading for it then to be described as "liberal." Samuelson's description of Third Way may lead readers to believe that there is a consensus on the societal risks posed by his family meltdowns which is not at all true.

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It is understandable that politicians would use euphemisms when they talk about cutting Social Security. After all, it is an incredibly popular program among all demographic groups and across the political spectrum. Therefore it is not surprising they would refer to "changes" to Social Security when they mean cuts to Social Security. But what is the Post's excuse?

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Corporate governance structures in the United States make the old Soviet Union look like a model of democracy. As it is, the voting structure is so rigged to favor insiders that it is almost impossible for shareholders to remove even the most incompetent directors and install better management.

This is mostly done through the structure of elections to give incumbents an almost unbeatable advantage. However the NYT tells us that even in the rare cases where the incumbents are voted out they don't always leave. Columnist James Stewart identified 41 cases where directors lost elections but still continued to hold their seats on the board. 

This is why we need Director Watch (TM). The basic story in corporate America is that the CEO and other top management pay off the directors to look the other way as they pilfer the company at the shareholders' expense. And then the CEOs run around claiming that they earned their big paychecks. Leonid Brezhnev would have been jealous.

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Charles Krauthammer is not impressed with President Obama's proposal to cut the cost of living adjustment for Social Security. He complains:

"First, the proposal — “chained CPI,” a change in the way inflation is measured — is very small. It reduces Social Security by a quarter of a penny on the dollar — a $2,000 check reduced by a five-dollar bill."

This is a correct statement (or almost correct statement, the Social Security Administration estimates the impact 0.3 percent annually) on the first year impact of the cut. However the impact accumulates over time. After ten years it would be between 2.5-3.0 cents on a dollar or $50-$60 on a $2,000 check. This is a considerably larger hit to the typical beneficiary than the typical high income taxpayer would see as a result of the increase in tax rates last year.

It is also worth noting that a $2,000 monthly check would put this person near the top of the distribution of beneficiaries. The average check is a bit over $1,200.

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The NYT had a major article on the budget today which told readers:

"While many economists say the new formula is more accurate, opponents say it does not adequately reflect the out-of-pocket health care expenses that burden older Americans."

This comment is misleading since the issue with Social Security benefits is whether the chained CPI better reflects the cost of living of the population drawing Social Security checks. That is actually distinct from the rate of growth of out of pocket health care expenses, which would show that the cost of living for seniors as they age rises much more rapidly than the CPI.

There is good reason to believe that it does not. The Bureau of Labor Statistics (BLS) has an experimental elderly index that has consistently shown that the elderly experience a rate of inflation that is somewhat higher than the CPI that currently provides the basis for the annual cost of living adjustment. The main reason is that seniors spend a larger share of their income on health care and housing than the population as whole. Since these items tend to rise more rapidly in price, their cost of living rises somewhat more rapidly than what is shown by the current CPI.

It is also not clear that seniors substitute to the same extent as is assumed by the chained CPI. This would mean that a switch to a chained CPI would overstate the extent to which seniors benefit by substituting to goods that are rising less rapidly in price.

For this reason, many economists have advocated having the BLS construct a full elderly index which would track the rate of inflation in the specific items purchased by seniors at the stores at which they shop. This would provide a more accurate measure of the rate inflation seen by seniors.

It would have been useful if the NYT had made this point in its budget article. The comment about the views of economists on the accuracy of the chained CPI for the general population is at best misleading. It is not an issue that is relevant for the current debate.  


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The Washington Post showed yet again why it is known as "Fox on 15th Street," running a lead front page story headlined, "Obama eyes end to debt deadlock." (The on-line version is slightly different.) The piece begins by telling readers in the first sentence:

"In the first budget of his second term, President Obama set aside the grand ambitions that marked his early days in office and sent Congress a blueprint aimed at achieving a simple goal: ending the long partisan standoff over the national debt."

The "long partisan standoff over the national debt" is of course the Post's invention. There are major debates over budget issues, with Republicans demanding cuts in many programs that Democrats support. (Interestingly, Social Security and Medicare are not on that list except in Washington. Both programs enjoy overwhelming support across the political spectrum elsewhere in the country.) There are also major issues on economic policy, with Democrats generally more willing to use stimulus to try to support the economy and get out of the downturn more quickly.

However there is no long partisan standoff on the national debt. Most people have little comprehension of the debt and do not view it as a major concern. Neither do financial markets, which is why the interest on 10-year Treasury bonds remains near a 60 year low. The interest burden the government faces is also near a post-World War II low. (It is at a post World-War II low if we subtract off the interest payments from the Fed to the Treasury.)

In short, the Post's headline and the structure of the article should be understood as part of its effort to hype the debt as the country's major problem. It is in fact not recognized as such by people across the country, nor is there any evidence suggested that it should be.

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