The Washington Post devoted an article to the plight of small businesses in the recovery. It claimed that the weakness of small business growth, which it attributes primarily to a lack of access to capital, is a major factor impeding the recovery.
The piece gave absolutely no evidence that small business has performed markedly worse in this recovery than larger businesses. Nor did it give any evidence, other than the complaints of a person who owns a small coffee roasting business, that access to credit is a big problem for small businesses.
In fact, it cited the survey done by the National Federation of Independent Businesses that showed credit is not much of a problem. This survey has consistently shown that lack of demand is the major problem as noted in the article.
If the Post did this piece based on evidence it would have highlighted the lack of demand that small businesses face. Lack of demand can of course best be addressed by additional spending, which would likely mean larger government deficits. That would directly contradict the Post's repeatedly expressed editorial position urging smaller deficits.Add a comment
Given the deficit obsession of the Washington media it is remarkable that none of the reporters covering Federal Reserve Board Chairman Ben Bernanke's press conference noted the fact that he offered little help on dealing with the budget deficit. There were two obvious steps that he could have taken.
First, the main reason that the deficit has soared in the last few years is that the economy collapsed following the bursting of the housing bubble, which Bernanke apparently failed to see. (We are a very forgiving lot in Washington.) If the unemployment rate was brought down quickly by more aggressive monetary policy, then the deficit could be reduced by an enormous amount.
In 1996, the Congressional Budget Office (CBO) projected a deficit of almost $250 billion (@ 2.6 percent of GDP) for the 2000 fiscal year. The country actually had a budget surplus of almost the same size in fiscal 2000, representing a shift from deficit to surplus in the year 2000 of more than 5 percentage points of GDP.
Congress did not approve any major tax increases in this 4-year period, nor were there any major unscheduled cuts to spending. Rather this shift from deficit to surplus of more than 5 percentage points of GDP ($750 billion in today's economy) was attributable almost entirely to better than expected economic performance.
In 1996 CBO projected that the unemployment rate would be 6.0 percent in 2000. Unemployment actually averaged just 4.0 percent. This was due to the fact that Alan Greenspan ignored the overwhelming consensus in the economics profession and allowed the unemployment rate to fall below the conventionally accepted levels of the NAIRU.
This decision, which was made over the objections of the Clinton appointees to the Fed, allowed millions of more people to get jobs than would have otherwise been the case. It also allowed strong wage growth for people at the middle and bottom of the wage distribution as their labor was then in demand. And it reduced the budget deficit. Because Bernanke offered little hope of more aggressive Fed actions to reduce unemployment, he is not offering any similar growth dividend on the budget deficit.
The other potential help that Bernanke is not offering is holding large amounts of government debt. The Fed now holds close to $3 trillion in government debt and other assets. If it continued to hold this debt throughout the decade, rather than selling it back to the private sector, it would reduce interest payments by close to $1.5 trillion over the course of the decade. It could deal with any inflationary pressures resulting from these holdings by simply raising reserve requirements. Bernanke is not offering this help either.
It would have been useful to readers to point out what the Fed is not doing to help address the deficit.Add a comment
Business reporters seem to have very bad memories. All of the media accounts of Federal Reserve Board Chairman's first press conference touted his commitment to Fed transparency.
These reporters are apparently too young to remember that the Fed strongly resisted giving out any information about the trillions of dollars of below market loans that it disbursed at the peak of the financial crisis. It only released this information when a coalition of conservative and progressive members of Congress, led by Ron Paul and Bernie Sanders, attached a provision requiring the release to the Dodd-Frank bill. Bernanke had claimed that releasing the information would jeopardize the stability of the financial system.
Bernanke also went to court to block the release of information about discount window borrowing from the Fed. He only gave up and released the requested data after all his legal options were exhausted. The description of Bernanke as unquestioned advocate of increased Fed transparency is wrong.Add a comment
It has become fashionable for billionaire types to offer big prizes for all sorts of things: new green technologies, teaching inner city kids, raising poor people in the developing world out of poverty. In this spirit, we really need some enterprising billionaire to offer a big prize for teaching basic national income accounting to the Post's editorial board.
The lead Post editorial expresses great concern that the world may lose confidence in the dollar, first and foremost because of the country's budget deficit and debt. If the Post's editors knew national income accounting then they would understand the contradiction in this position. The only sustainable way to get the budget deficit down is by lowering the value of the dollar. In other words, if it wants lower budget deficits, it should want the dollar to fall.
The logic is simple. The trade surplus is equal to net national savings. This is a definition, sort of like 2+3 being equal to 5. There is no way around it: 2+3 will always equal 5 and the trade surplus will always be equal to net national savings.
When the United States has a large trade deficit, as it does today, then it means that net national savings are negative. This means that either private savings must be negative or public savings must be negative (i.e. we have big budget deficits) or some combination of the two.
In the last decade, we had very low private savings as the budget deficit shrank to just 1.0 percent of GDP. The low private savings were the result of the housing bubble. The bubble led to a huge amount of wasted construction (which counts as investment) and very low household savings as consumers spent based on bubble generated housing equity. While the Post may want a return to bubble driven growth, this is disastrous for the economy and it is certainly not sustainable.
In the absence of very low private sector saving, there is no alternative to having the government run large budget deficits to make the identity balance. (In principle, other investment could rise, but it is very difficult to find formulas to make that happen.) This means that the current trade deficit essentially requires a large budget deficit.
The way out of this story is for the dollar to fall. The Post and its deficit hawk buddies can jump up and down and call all sorts of people all sorts of names but the trade deficit is not going to fall by much unless the dollar falls. A lower valued dollar makes U.S. exports cheaper to foreigners, leading them to buy more of them. It makes imports more expensive for people in the United States, leading us to buy fewer imports.
For this reason, a lower valued dollar is an essential part of any sustainable recovery plan. If the Post's editors knew national income accounting they were be putting pressure on Bernanke and Geithner to reduce the value of the dollar, not pleading for pledges to a strong dollar.
Unfortunately, the Post's editors don't understand national income accounting so we get this confused editorial calling for lower budget deficits and a strong dollar. Isn't there some billionaire out there willing to put up the prize money so that these people can be taught? Please.Add a comment
It is striking to see the difference in the NYT and the WAPO in their discussion of the Fed's track record in the last two years. NYT columnist David Leonhardt raises the obvious point: the unemployment rate is far above anyone's estimate of full employment with no signs of core inflation in sight. The question is why doesn't the Fed do more to spur the economy?
By contrast the Post emphasizes the risk that Bernanke took with his quantitative easing policy. It told readers:
"But the central bank, with its decision last November, also put its reputation on the line, essentially shouldering responsibility for getting the economy on track. In that sense, the Fed now owns the crummy economy in the public mind to a degree that it wouldn’t have had Chairman Ben S. Bernanke and his colleagues followed a more cautious path in setting monetary policy."
Actually it is the Fed's mandate to maintain full employment, so Bernanke really does not have the option to decide to do nothing when the economy faces high unemployment due to a shortfall in demand. The only question is what is the most effective policy to raise demand. If he had opted to do nothing, then he should equally own the economy, assuming that the media reported the situation accurately.
The Post also wrongly asserts that Bernanke has set 2.0 percent as his inflation target. This is his target for the core inflation rate. This point is important because the overall inflation rate has been above 2 percent recently due to sharp increases in energy and food prices. However the core inflation has been just over 1.0 percent.Add a comment
In NYC there is an effort underway to fine people for buying unauthorized copies of designer products. This story mistakenly refers to these products as counterfeit. They are not counterfeit for the simple reason that there is no effort to pass them off as the real thing.
When someone hands you a counterfeit $20 bill, they do not want you know that it is not real. According to the article, the customers know full well that the designer items are not in fact the real thing but rather copies of the real thing.
This distinction is important because the customer is benefiting from this transaction. If the government prevents them from buying unauthorized copies then these customers will have to pay more to buy a similar item -- it is similar to imposing a tax. This price increase reduces customers' real wages and thereby gives them less incentive to work.
The fact that the customer is not deceived also means that they will not be an ally in cracking down on unauthorized copies. On the other hand, if they were actually being sold counterfeit items then presumably they would be willing to assist law enforcement in cracking down on the people who ripped them off. (Thanks to CTC for the tip.)Add a comment
An article that reported on Detroit's plans to cut wages and benefits for its employees told readers:
"meanwhile, entry-level office workers earn just $17,000 a year. Similar work paid $7,000 a year in 1970."
It would have been helpful to point out that prices have roughly quintupled in the last 40 years. This means that it would take a salary of $35,000 a year to be equivalent to the $7,000 a year that was reportedly paid in 1970. This means that the real wage for entry level positions has been more than cut in half even though productivity has more than doubled over this 40 year period.
It would also have been helpful to point out that many public sector employees are not covered by Social Security. This means that the 911 operator, whose $24,000 pension was highlighted in the article, may not have any other source of retirement income.Add a comment
David Brooks is worried because:
"Raising taxes on the rich is popular, but nearly every other measure that might be taken to address the fiscal crisis is deeply unpopular. Sixty-three percent of Americans oppose raising the debt ceiling; similar majorities oppose measures to make that sort of thing unnecessary."
Actually this is not true. Insofar as it is necessary to deal with long-term budget issues there is is widespread support for most of the measures that would be required. Polls consistently show majority support for a quick end to the wars in both Iraq and Afghanistan, as well as sharp cuts in the military budget. Polls also show support for negotiating Medicare drug prices with the prescription drug industry, as well as opening up the Medicare program for anyone who chose to buy into it.
These measures and the others put forward in the Progressive Caucus budget last week would be sufficient to reach a balanced budget in a decade. Brooks apparently does not approve of the items in the Progressive Caucus budget, but that is not the case of the public at large.
This budget does not even include other items that would produce large budget savings that would almost certainly produce no negative public reaction. For example, Congress could require the Fed to buy and hold substantial amounts of government debt. If the Fed held $3 trillion in debt (a bit more than its current holdings) throughout the decade, it would save close to $1.5 trillion in interest. (The Fed refunds the interest on the debt it holds to the Treasury.) It can offset the potential inflationary impact of increasing reserves by raising reserve requirements.
There are also huge potential long-term savings from allowing Medicare beneficiaries to buy into the health care systems of countries that provide care more efficiently (i.e. everyone). The savings could be split between the government and the beneficiary. This would hand beneficiaries tens or even hundreds of thousands of dollars over their retirement while saving taxpayers an equal amount. It is difficult to see why there would be opposition from the general public to giving beneficiaries this choice.
In short, people who are familiar with the numbers know that the middle class can easily live with the changes that might be needed to address long-term budget problems. The wealthy and powerful interest groups, like the insurance and pharmaceutical industries, are the more obvious problem.
Brooks also gets some basic facts wrong. The stagnation of middle class incomes is not new. It dates from mid-70s. Furthermore, the middle class has not consumed lavishly, as he claims. They don't have the money to spend lavishly. It has been the wealthy, who have benefited from a huge upward redistribution of income over the last three decades, who have been spending lavishly.
It is also worth noting that Brooks is warning of a potential calamity if the deficit is not addressed. He apparently is not aware of the collapse of the housing bubble which has cost tens of millions of workers their jobs and wiped out much of the savings of tens of middle class families. If he were, he would know that the crisis is here now.Add a comment
The Washington Post has frequently editorialized against welfare state measures in both Europe and the United States. It does not hesitate to use its news section to advance its editorial position. It did so today with a front page article stating that the welfare state benefits that Europeans have come to expect:
"increasingly appear to be luxuries the continent can no longer afford."
The article includes a large number of inaccurate assertions to try to make this case. First, it is important to note that Europe is getting richer, not poorer. Every year the productivity of its workforce increases by approximately 1.5 percent. This means that each worker is producing 1.5 percent more for each hour of work. With productivity growing through time it is difficult to see why Europe would be less able to afford a welfare state in the future than it is today.
The article also cites globalization as a reason that Europe will be unable to afford a welfare state. Again, globalization is supposed to make countries richer, not poorer, so it is difficult to see why increased opportunities from trade should make a welfare state less affordable.
The article also points to the economic crisis as a reason that countries can no longer afford the welfare state. This is very confused thinking. The economic crisis stems from inadequate demand. The demand that was being driven by the housing bubbles in the United States and Europe disappeared with the collapse of these bubbles.
The current problem facing the United States and Europe is too little demand, not too much. Welfare state supports help to increase demand and generate more employment and output. The Post would have a better argument if Europe faced too much demand generating shortages and inflation -- the opposite of the situation it faces today.
The article makes fundamental mistakes in logic elsewhere as well. It tells readers that:
"an hour of work costs $43 on average in France, compared with $36 in neighboring countries that also use the European currency, the euro, giving those other countries, particularly Germany, the edge in globalized competition."
Actually, whether or not France can support paying its factory workers an average of $43 in compensation depends on their relative productivity. There are many workers who get much higher pay. For example, many Wall Street executives get compensated at the rate of more than $1000 an hour. However, in the current system, their employers can apparently make a profit paying these wages. Since France maintains near balanced trade (unlike the U.S., which has a large deficit), it seems that its wages are competitive.
The article also attributes an obviously untrue assertion to an economist featured in the piece:
"As a result, he [French economist Michel Godet] said, French workers on average show up at the office or factory 620 hours a year, compared with about 700 in Germany and 870 in the United States." These numbers would be approximately accurate if 1000 was added to each one.Add a comment
Robert Samuelson decided to lecture President Obama on being an adult today. He wants President Obama to take big steps to reduce the budget deficit. Interestingly, all of the ways that Samuelson suggests for reducing the budget deficit, such as cutting Social Security and Medicare benefits or raising gas taxes, hurt middle income people. Apparently, this is Samuelson's view of what adults do.
Increased taxes on the rich are not on his list nor are taxes on financial speculation. These might seem obvious ways to reduce the deficit since the share of the wealthy in national income has increased by so much in the last decade as has the financial sector's share of total output. But Samuelson apparently does not believe that adults tax rich people or the financial industry. It also doesn't seem as though adults talk about cutting the military budget, since this doesn't come up in Samuelson's article either. Nor does constraining health care costs, which is by far the most important contributor to the country's projected long-term deficit problem.
In criticizing President Obama for not doing anything about the deficit Samuelson apparently has not noticed that if President Obama's health care reform is left in place it is projected to do a great deal to reduce future deficits. CBO's extended baseline shows spending, measured as a share of GDP, increasing by roughly 15 percent over the next 25 years, not the one-third claimed by Samuelson. This extended baseline assumes that the law is followed.
If they had, they would have mentioned it in the context of Indiana Governor Mitch Daniels' comparison of the Bush era deficits to the current deficit. Daniels, who was director of the Office of Management and Budget under President Bush, made the comparison in saying that the deficits that he presided over in this position were small compared to current deficit.
This is true, but the reason is that the recession created by the collapse of the housing bubble was much deeper than the recession created by the collapse of the stock market bubble that President Bush faced when he took office. Not mentioning this fact is like blaming a city for its excessive use of water, without mentioning that it was combating a major forest fire. This is an important piece of information that should have been given to readers.Add a comment
Steven Pearlstein did his part for the Wall Street crusade to get people to surrender their Social Security and Medicare. He warned readers that if we don't follow the Wall Street deficit reduction agenda, the dollar could enter a free fall. I would say that this is one of the silliest things the paper has ever published, but this is the Washington Post that we are talking about.
Anyhow, let's put on our thinking caps and try to envision what Pearlstein's scare story would look like. Currently, the euro is equal to around 1.45 dollars, there are approximately 6.5 yuan to a dollar and around 80 yen. Suppose we don't follow the Wall Streeters' wishes. Will the dollar fall to 3 to a euro, will it only be worth 3.5 yuan and 40 yen?
Does anyone think this story is plausible? We supposedly have been begging China to raise the value of its currency by 20 percent. Is China's leadership suddenly going to sit back and let the yuan rise by 100 percent? What happens to China's export market in this story? The same is the case for our other trading partners. Europe will lose its export market in the U.S. and suddenly U.S. made goods would be hyper-competitive in Europe's domestic market. Japan, Canada and everyone else would face the same situation.
These countries will not allow their economies to be destroyed by the loss of the U.S. export market and a surge of imports from the United States. They will undoubtedly take steps to stop and reverse any free fall of the dollar, if we did begin to see one.
In other words Pearlstein and the others are peddling total nonsense when they try to push this scare story. The bottom line is that they want to cut benefits to the middle class. They don't have a good story to sell a policy that will be harmful to large segments of the population, especially when the Peter Petersons of the world are making out like bandits. So they make stuff up.
As every economist knows the story of our deficit in the short-term is the downturn created by the collapse of the housing bubble. The deficit is propping up the economy following the loss of $1.2 trillion in annual demand from private sector.
The deficit story in the long-term is health care. Our health care system is out of control. Fixing health care would end the deficit problem, but this would reduce the income of the insurance industry, the pharmaceutical industry and other powerful interest groups. So, the Washington Post would rather just see people go with out health care. Hey, someone's got to pay.Add a comment
This is one of the things that readers of an article discussing the impact of the Fed's quantitative easing policy might conclude. The article indicates that the second round of quantitative easing (QE2) has had little effect in boosting economic growth.
While this is likely true -- it had a limited effect in keeping interest rates at already low levels -- the policy of quantitative easing has had a substantial impact on the deficit. As a result of the fact that the Fed holds a large amount of assets, interest that otherwise would have been paid out to the general public is instead paid to the Fed. This money is then refunded to the Treasury.
Last year the Treasury refunded almost $80 billion to the Treasury, an amount that is approximately twice the size of the deficit reduction in the agreement reached earlier this month between President Obama and Congress on a continuing resolution. If the Fed were to continue to hold around $3 trillion in assets it would reduce the deficit by close to $1.5 trillion over the course of the next decade. (It can offset the inflationary impact of the increased reserves in the financial system by raising reserve requirements.) Given the obsession of the media with the budget deficit, it is remarkable that the NYT did not mention this implication of quantitative easing.
This article also wrongly referred to the downturn as a financial crisis. The main reason why the economy is suffering from high unemployment and weak growth is the collapse of the housing bubble. Large firms can now borrow money in financial markets at historically low real interest rates. Few small firms cite credit availability as a major problem in their business. It is difficult to see how the economy would be any different right now if the financial crisis had not occurred.Add a comment
The LA Times told readers that:
"Congress is on its first recess since Republican leaders unveiled a plan to end the federal deficit by dramatically changing Medicare, cutting other government programs and reducing taxes."
Actually the Republicans never produced a plan to "end the federal deficit."
They produced a plan that promised large tax cuts but did not identify any of the taxes that would have to be raised to offset the lost revenue. This is like saying they had a plan to fly to moon because they said they would build a rocket. The whole point is the specifics. How would they build a rocket? How would they raise taxes to meet their revenue targets?
It would have also been worth mentioning that the Congressional Budget Office projections for the Ryan plan imply that it would increase the cost of buying Medicare equivalent insurance policies by $30 trillion over the program's 75-year planning period. This is approximately 6 times the size of the projected Social Security shortfall and comes to almost $100,000 in additional costs for every man, woman, and child in the country. This money would be a transfer from retirees to the insurance and health care industries under the Ryan plan.Add a comment
The Washington Post printed an oped column from Alaska Senator Lisa Murkowski arguing for increased domestic oil production. The column directly confuses short-term economic weakness with the impact of long-term oil prices.
It cites Harvard professor and former AIG director Martin Feldstein as supporting the claim that "that if prices remain high, economic growth will languish." In fact, the quote from Feldstein explicitly refers to economic growth this year. There is nothing that the government can do that will in any significant way affect the amount of oil that the U.S. produces this year. Therefore, Feldstein's statement is irrelevant to the issue at hand.
As far as the longer term question, higher oil prices would have a modest impact in slowing growth in most economic forecasting models. However even large increases in domestic production would have little impact on world oil prices (the relevant variable) and therefore have little effect on economic growth. A serious newspaper would not have allowed a columnist to make such misleading assertions.Add a comment
The NYT wrongly told readers that a bill approved by the New Hampshire legislature would, "disallow collective bargaining agreements that require employees to join a labor union." It is already the case that collective bargaining agreements cannot require employees to join a labor union.
Under current New Hampshire law, collective bargaining agreements can require workers to pay representation fees to a union. National labor law requires that a union represent all workers who are in a bargaining unit regardless of whether or not they opt to join the union.
This means that non-members not only get the same wages and benefits as union members, but the union is also required to represent non-members in any conflict with the employer covered by the contract. For example, if a non-member is faced with an improper dismissal the union is obligated to provide them with the same representation as a union member.
The new bill passed by the New Hampshire legislature effectively guarantees non-union members the right to get union representation without paying for it (representation without taxation). It denies workers the freedom of contract that they currently enjoy, which would allow them to require that everyone who benefits from union representation has to share in the cost of union representation.Add a comment
Readers of the front page Washington Post article headlined, "the dollar, no longer almighty," no doubt walked away very confused. The article never distinguishes between the government deficit/debt and the trade deficit/foreign debt.
The dollar will likely fall because of the ongoing trade deficit. This is the adjustment mechanism for a trade deficit in the system of floating exchange rates like the one we have in the United States. This has no direct relationship to the budget deficit. If the United States were running its current deficit of around $600 billion a year (@ 4 percent of GDP), it would be expected that the dollar would fall regardless of whether or not the country is running a budget deficit.
The decline in the dollar will benefit workers who are subjected to international competition, most importantly manufacturing workers. The decline in the dollar will reduce U.S. imports by making them more expensive and increase exports by making them cheaper to foreigners. This will increase the demand for manufacturing workers, driving up their wages.
By contrast, workers who are largely protected by regulations against foreign competition, like doctors, lawyers, and other highly educated professionals, will likely lose when the dollar falls. They will have to pay more for manufactured goods and will probably not be able to raise their fees proportionately.
It would have also been useful to remind readers of the basic accounting identity that net foreign borrowing is equal to net national investment. An identity is something that is true by definition -- there is no possible way around it.
This identity means that if the United States has a large trade deficit, as it does now, then it must have either a large budget deficit or very low private savings, or some combination. (In principle, investment can rise, but as practical matter it is very hard to make non-residential investment rise by much as a share of GDP. Residential investment did rise substantially during the housing bubble, but it would be difficult to view this experience as health.)
This identity means that anyone who wants the budget deficit to fall without wanting the dollar to fall, want to see very low private sector savings. This would be a very perverse goal, although many policymakers seem to advocate this position without realizing it.Add a comment