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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Will the NYT ever include any economic analysis of the costs imposed on the economy by copyright enforcement? As a result of this form of protectionism, books, music, video material, computer software and other items that would otherwise be instantly available at zero cost, instead can cost consumers large amounts of money. This dwarfs the economics costs that result from most forms of trade protection, which rarely raises the price of items by more than 10-20 percent. 

This article on efforts by Internet providers to crack down on unauthorized duplication of copyrighted material would have benefited from some economic analysis.

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According to legend, the Great Chicago Fire of 1871 was started when Mrs. O'Leary's cow knocked over a latern in her barn setting it on fire. While Mrs. O'Leary certainly didn't set the fire on purpose, she is probably not the person we would consult on fire control. In the same vein, it is reasonable to ask why anyone would consult Bill Clinton about the country's current economic problems.

While the economy performed well during the second half of the Clinton administration, it was building up the imbalances that laid the basis for the current crisis. The late 90s growth was driven by a stock bubble which led a consumption boom. When the bubble burst, the economy went into a prolonged downturn. It did not create any jobs from March of 2001 to September of 2003. The jobs lost in the downturn were not gained back until the beginning of 2005, at the time the longest period without job growth since the Great Depression.

Furthermore, when the economy finally did begin creating jobs it was driven by the housing bubble. While the bubble itself cannot be blamed on the Clinton administration, it is responsible for the imbalances that laid its basis. Robert Rubin, Clinton's treasury secretary, consciously pursued a high dollar policy. He used the U.S. control over the IMF to bring it about.

A high dollar makes U.S. goods less competitive in world markets. If the dollar rises by 20 percent it has roughly the same impact as putting a 20 percent tariff on all our exports and giving a 20 percent subsidy on all our imports. This sort of increase in the value of the dollar has way more impact on trade flow than any trade agreement possibly could.

Rubin's high dollar policy meant that the U.S. would run a large trade deficit. If the country has a trade deficit, then it absolutely must have negative national savings. (This is an accounting identity, it has to be true.) Negative national savings means that we must have either large government budget deficits or very low private savings, as was the case at the peak of the housing bubble, when the savings rate hit zero.

It is likely that President Clinton does not understand this basic economics. He recently lectured the public on how to create manufacturing jobs through trade, apparently not realizing the country was losing manufacturing jobs due to the soaring trade deficit during the last three years of his administration. This means that he may not know that he is giving bad advice, but that still doesn't mean that there is any reason for the media to want to seek it out.

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The business-backed group Third Way has been making a big point of going after Social Security lately. Today it had a column telling us that Social Security is in crisis, even though the most recent projections from the Social Security trustees show that the program can pay full scheduled benefits with no changes whatsoever for a quarter century. Even after that point, the program would always be able to pay a higher benefit than what current retirees receive.

Third Way's crisis argument hinges on the fact that the program is paying out more in benefits than it collects in taxes. In other words, it is relying on interest from the $2.6 trillion trust fund that it has built up over the last quarter century. To term this a crisis would be like saying that Bill Gates had a crisis because he dipped into his $50 billion in assets to build some new play houses for his kids. The trust fund was built up for the explicit purpose of supporting the program. It makes no sense to say that using it is a crisis.

It is also worth noting that even if we waited until 2036 and the program actually faced a shortfall, the amount of additional revenue needed to sustain the program's full benefits past this shortfall would be trivial compared to costs like the increase in military spending associated with the wars in Afghanistan and Iraq. 

Third Way also is being somewhat deceptive in describing its proposed Social Security cuts as progressive. The cuts would hurt all beneficiaries, although the largest cuts would be for people like nurses and firefighters who might have averaged $60,000 to $70,000 in wages over their working lifetime.

While these cuts might technically be progressive for the program (they will reduce Bill Gates benefits by a larger proportion than the benefits of minimum wage worker), they will certainly have a larger impact on the living standards of low and middle income retirees than wealthy retirees. (They will reduce the retirement income of a low wage worker by a far larger proportion than the retirement income of Bill Gates.)

The focus of the cuts on middle income workers is progressive in the same way that a tax increase of 5 percentage points on workers earning less than $30,000 and 10 percent on income over $30,000 (and capped at $250,000) can be called progressive. On average, higher income workers would be seeing a bigger tax increase than lower income workers, but the people hit hardest do not fit anyone's definition of wealthy.

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NPR decided to do a cutesy piece in which it implied that the debate over the debt ceiling amounted to the semantics of what constitutes a tax increase. It told listeners that there appears to be some movement by Republicans who are now willing to consider the elimination of some tax breaks, although these would have to be offset by reductions in tax rates. In other words, there would be no increase in revenue.

This is ZERO movement. Most Republicans have been on record as being willing to go along with the elimination of some tax breaks in exchange for a reduction in rates. In fact, this is the explicit goal of the Ryan plan which lowers tax rate but promises to offset with the elimination of trillions of dollars of unspecified tax breaks. This bill was approved by the Republicans in the House with just 4 Republicans voting no. It also garnered near unanimous support from Republicans in the Senate.

In short, the notion that there has been some change in the Republican position so that they are now willing to consider tax increases is a complete invention of NPR. It badly misled its listeners with this piece.

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This is the point that the Post should have been highlighting in an article about President Obama's comments on the housing market in his twitter townhall yesterday. Nationwide house prices had just tracked the overall rate of inflation from 1896 to 1996. In the decade from 1996 to 2006, house prices outpaced the overall rate of inflation by more than 70 percent.

At the point where President Obama took office, house prices had fallen by about 20 percent from their bubble peaks. Since there is no identifiable change in the fundamentals of the housing market, it is reasonable to expect prices to fall back to their trend levels. However, the article quoted Obama as saying:

“The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected.”

This statement reflects a frightening degree of ignorance about the housing market. It should have been the main focus of the article as the Post attempted to determine whether President Obama and his advisers could really not understand the housing bubble, the collapse of which has given the economy the worst downturn since the Great Depression.

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There are a large number of organizations that produce interesting research on the labor market on a regular basis (including CEPR). Today the Post ran a front page piece on a study from the Pew Research Center that told readers: "Men Getting Jobs Faster than Women."

Those who read the article would discover that neither men nor women are getting jobs at a very rapid pace. In fact, the employment to population ratio (the percent of people over age 20 who are employed) has fallen for both men and women since the recession ended in June of 2009. It has just fallen more rapidly for women than men, a 1.1 percentage-point decline for women compared to a 0.5 percentage-point decline for men.

Given the slow rate of job growth to date, it is not clear that the pattern of employment growth at present tells us much about what the mix of jobs will look like when (and if) employment grows fast enough to raise the employment rate. This was a peculiar piece of labor market research to highlight, since the Post so rarely discusses the labor market. More obvious research to highlight would include the large and growing research showing that structural unemployment explains at most a small share of the increase in unemployment since the beginning of the recession. This means that the vast majority of unemployment is due to bad economic policy, not a mismatch of workers' skills/location and available jobs.

It would also be interesting to see a discussion of racial patterns in employment. While the employment rate for white men and women have edged up over the last year, employment rates for black men and women are at recession lows.

The Post could also do a piece that covers research the OECD and elsewhere that discusses the effectiveness of work sharing programs in reducing unemployment. Post readers would probably be interested in knowing that Germany's unemployment rate has actually fallen by 0.5 percentage points since the beginning of the recession even though its economy has grown no more than the U.S. economy.

This is due to the fact that it has given firms incentive to reduce work hours rather than lay people off. This policy costs no more than paying unemployment benefits and keeps workers at their job.

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Morning Edition had another piece on the standoff over Minnesota's budget. Again it gave listeners no background that would allow them to determine the validity of Republican claims that state spending is soaring out of control. As noted before, the state is spending less relative to the size of the economy than it did in the early 90s. This means that the Republicans either are unfamiliar with the state budget or they are not being honest. Add a comment

That's the problem when you have young reporters. They can't remember back to the 1990s.

If NPR did have reporters who remembered back to the 1990s they would not be telling listeners that Ohio Governor John Kasich was "chairman of the House Budget Committee when he balanced the budget with President Clinton in the 1990s."

Actually, neither John Kasich nor President Clinton balanced the budget in the 1990s. The 1996 Congressional Budget Office (CBO) projections for the fiscal year 2000 budget showed a deficit in that year of $244 billion. Instead, the government ran a surplus of $232 billion. According to CBO the legislated changes put in place by Mr. Kasich and Mr. Clinton over this four year period added $10 billion to the deficit. 

This background information might have given listeners a somewhat different perspective on Mr. Kasich's quote:

"At the end of the day, you look yourself in the mirror, and you say to yourself, 'Did I do what was right for families and for children, and if I paid a political price, so what?"

CBO_projections_96-00_11873_image001
Source: Congressional Budget Office and author's calculations.

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An article on the congressional debate over a new transportation bill began:

“The next flash point in the debate over the nation’s will to live within its means may emerge this week as House Republicans present a long-term transportation bill expected to cut funding for highways and mass transit by almost one third.”

Characterizing the battle over the transportation bill as a “flash point in the debate over the nation’s will to live within its means” is crude editorializing that would not appear in a news section of a serious newspaper. It’s because of articles like this that the Post is known as “Fox on 15th Street.”

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The Post reported on President Obama’s assertion that it is necessary to make large cuts in projected deficits, telling readers:

“Obama weighed in Tuesday, noting that a remarkable bipartisan consensus has emerged about the scope and severity of the nation’s debt problem. ‘Most of us already agree that to truly solve our deficit problem, we need to find trillions in savings over the next decade, and significantly more in the decades that follow,’”

It would have been more appropriate to use the term “asserting” rather than “noting.”

Noting implies that the claim that President Obama is making about a consensus is true. It is not.

People familiar with economics know that the main reason that the country is facing large budget deficits is because of the economic crisis created by the collapse of the housing bubble. Contrary to President Obama’s assertion, the main way to solve the deficit problem is to get the economy back to full employment.

This is yet another case where the Post has ignored journalistic standards in a front page story to foist its editorial position on readers.

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In an article on the decline in illegal immigration from Mexico, the NYT cited a “prominent economist” as saying that Mexico’s per capita GDP had increased by more than 45 percent since 2000. This view of Mexico experiencing an economic boom is radically at odds with the official data. The IMF data show that Mexico’s per capita GDP has increased by just 10 percent since 2000, including a 4 percent increase projected for 2011. This is considerable less than per capital GDP growth in the U.S. over this period.

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NYT readers must have been stunned to see the second paragraph of an article on the prospects for shale oil in Argentina refer to "the country’s long-stagnant economy."

According to data from the IMF, Argentina's economy grew at almost an 8 percent annual rate from 2003 to 2008, following a severe recession in 1998-2002. The world economic crisis brought its economy to a standstill in 2009, but it grew by 9.2 percent last year and is projected to grow 6.0 percent this year. This is stagnant?

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It is not balanced reporting to present a Republican legislator from Minnesota talking about spiraling state spending and then present someone else talking about state services. Most NPR listeners will not have the time to look up the data on state spending in Minnesota. NPR's reporter should.

If NPR had done its job, it would have pointed out that there has been no upward trend in state spending. Therefore when the Republicans complain about out of control or spiraling spending, they are not being honest.

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One of the great skits from the days of Monty Python's Flying Circus was the "Stake Your Claim Game Show." The first contestant on this show is introduced as claiming that he wrote the complete works of Shakespeare.

By asking the contestant's age, the host is able to quickly determine that works of Shakespeare were known for several hundred years before he was born. At that point the contestant acknowledges that this is where his claim breaks down and concedes that the host is more than the match for him.

I felt sort of like this contestant when I saw that Greg Mankiw had discovered that Ron Paul's plan to destroy the $1.6 trillion in government bonds held by the Fed (which I endorsed) to get around the debt ceiling was "just an accounting gimmick." Clearly Mr. Mankiw is more than the match for me.

Of course it is an accounting gimmick. We have an accounting problem (the debt ceiling). It cries out for an accounting solution.

However, there is a more serious issue in the second part of the story. If the Fed destroyed the bonds, rather than selling them back to the public as currently planned, it can save the government close to half a trillion in interest payments over the next decade. That sounds like a good deal to me, especially in a context where people are talking about cutting Social Security and Medicare as a way to reduce deficits.

Destroying the bonds would create some problems. The reason that the Fed plans to sell the bonds is to pull reserves out of the system thereby preventing inflation at a point where the economy has recovered. The alternative that I suggest is that the Fed could simply raise reserve requirements to accomplish the same goal. 

Mankiw points out that:

"assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing."

This is true. Higher reserve requirements will increase the gap between the interest rate that banks charge on loans and the interest rate they pay on deposits. However, this may be seen as a relatively harmless tax. After all, what's the consequence of people getting 20 basis points (0.2 percentage points) less on average on their bank deposits or paying 20 basis points more for loans?

In any case, this implicit tax seems like the sort of proposal that should be in the policy mix right now. After all, I suspect that most people would consider it preferable to the bi-partisan plans to reduce Social Security payments 3 percent by changing the cost of living adjustment formula.

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The headline of the NYT story told readers:

"2 Republicans Open Door to Increases in Revenue." 

However, the second paragraph of the article said:

"One of the senators, John Cornyn of Texas, said he would consider eliminating some tax breaks and corporate subsidies in the context of changes in the tax code, provided there was not an overall increase in taxes."

Okay folks, "not an overall increase in revenue" directly contradicts "increases in revenue."

What the hell is so hard to understand about this? Cornyn said that he would be willing to redistribute the tax burden, he explicitly said that he is not open to increasing revenue. How can the NYT headline say something 180 degrees at odds with reality?

In fairness to the headline writer, the first sentence of the article commits the same error by telling readers:

"Two senior Republicans said Sunday that they might be open to raising new government revenue as part of a deal to resolve the dispute over the federal debt ceiling."

It is not clear who deserves the blame here, but this NYT article managed to turn reality on its head.

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The lead editorial in the Post tells us that they are very upset that Congress has not approved the trade deals negotiated with South Korea, Colombia, and Panama. The Post of course wrongly refers to them as "free-trade" deals. This is inaccurate since they do little or nothing to reduce the trade barriers that protect highly educated professionals (e.g. doctors and lawyers) and actually increase protection in many areas (e.g. patents and copyrights).

The Post also is more than a little off-base in telling readers that:

"Basically, each party is playing some last-minute hardball on behalf of its respective ideological bases. On the Democratic side, labor unions have been unable to prevent Mr. Obama’s belated conversion to the cause of the free-trade agreements. Trade adjustment assistance (TAA) money is the consolation prize labor demands — and the White House is determined to let the unions have it. On the Republican side, the anti-spending Club for Growth and affiliated back-benchers in Congress see TAA as yet another failed, expensive bureaucracy and want to kill it. GOP leaders on the Hill are committed to giving them at least a chance to vote 'no' on TAA."

Let's try an alternative explanation. This trade pact will mean lots of money to the companies most directly affected. These companies will be likely to reward the party with campaign contributions that is perceived as delivering for them. Companies seeking trade pacts elsewhere will also be impressed with this party's ability to deliver. This means that President Obama wants to get the pacts through to get more money for his re-election campaign, whereas the Republicans are trying to block him because they don't want him to get more money for his re-election campaign.

That's my theory: no ideology just money. Of course, I live in Washington.

Now for the Post's lesson on trade theory. The Post tells us:

"Both sides need to focus less on pleasing their bases and more on figuring out a politically realistic plan for passing both the free-trade agreements and trade adjustment assistance — ASAP. On Friday, as Washington dithered, a free-trade agreement between the European Union and South Korea took effect. In other words, German, French and Italian workers got a head start in the race for those jobs you’ve been hearing so much about."

Okay, in the world of trade theory that the Post is presumably relying upon for the basis of its editorials, more free trade is generally better than less free trade. However, they get it 180 degrees wrong with the European Union story. In trade theory, the deal with European Union and South Korea makes the U.S. better off, not worse off. We are better off when our trading partners get richer.

Maybe we can start a collection to get the Post's editorial writers an intro trade textbook. It might be good if they read one before lecturing the rest of us on the topic.

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It really is incredible to see such a concerted effort to rewrite history in front of our faces. There is not much ambiguity in the story of the housing bubble. The private financial sector went nuts. They made a fortune issuing bad and often fraudulent loans which they could quickly resell in the secondary market. The big actors in the junk market were the private issuers like Goldman Sachs, Citigroup, and Lehman Brothers. However, George Will and Co. are determined to blame this disaster on government "compassion" for low-income families.

The facts that Will musters to make this case are so obviously off-base that this sort of column would not appear in a serious newspaper. But, Will writes for the Washington Post.

The first culprit is the Community Re-investment Act (CRA). Supposedly the government forced banks to make loans against their will to low-income families who did not qualify for their mortgages. This one is wrong at every step. First, the biggest actors in the subprime market were mortgage banks like Ameriquest and Countrywide. For the most part these companies raised their money on Wall Street, they did not take checking and savings deposits. This means that they were not covered by the CRA.

Let's try that again so that even George Will might understand it. Most of the worst actors in the subprime market were not covered by the CRA. The CRA had as much to do with them as it does with Google or Boeing.

The second CRA problem is many of the worst loans would not have been covered even if the institution was. Many of the worst loans were made to finance homes purchased in newly created exurbs. The CRA is about having banks make loans in inner city areas where they take deposits. So we have the wrong location and wrong institutions for the George Will story.

Step 3, the big subprime issuers (Ameriquest, Countrywide, New Century, IndyMac) were making money hand over fist on their subprime mortgages. Their profits and stock prices soared in the peak years of the housing bubble. Does George Will think that bankers need government bureaucrats to tell them to make money? What sort of free market believer is he?

Finally, the CRA has no enforcement power. In the worst case the government tells you that you have been a bad boy. If a bank wants to merge, they may be forced to pledge to do better in the merged company. (With the pledge generally being unenforceable.)

So we have banks that are not covered by the CRA, being forced to make loans that are not covered by the CRA, which were hugely profitable, by a rule that had no enforcement mechanism. Welcome to the world of George Will logic.

The beating up on Fannie Mae as the main cuplrit in this story is similarly short on logic. Fannie Mae and Freddiie Mac lost market share at an incredibly rapid pace in the peak bubble years precisely because they were not buying the worst of the junk. That was going to the private investment banks.

This is not a secret. They did start to get into the junk market late in the game in 2006, precisely because they were losing market share.

Here's what Moody's had to say about Freddie Mac in their December 2006 assessment:

 Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective." (p. 6)

This puts things about as clearly as they possibly could be. Moody's was concerned that Freddie (the same applied to Fannie) was losing market share to the private issuers because they were not big actors in "adjustable-rate loans and other hybrid products [i.e. junk]." However, they were cheered by the fact that Freddie was moving in this direction. In other words, the private issuers were very clearly the big actors and Fannie and Freddie were jumping in as a business decision to preserve market share. In other words, it was profit, not government compassion that drove this bubble.

Just to be clear, Fannie and Freddie were horrible actors in this story. I criticized them throughout this period and raised the possibility of these two mortgage giants being sunk by the bubble as early as 2002. Housing is all they do, how could they have totally missed the largest housing bubble in the history of the world?

There were also numerous cases of some really seriously misguided "compassion." There were many community groups and foundations touting the rise in homeownership even when it should have been apparent that this increase was being driven by people were using junk mortgages to buy homes at bubble-inflated prices. If there was truth in labeling, the "asset building" programs pushed by many of these outfits would be called "asset shrinking."

But it is a tremendous re-write of history to blame misguided do-gooders for the core problem. Good old-fashioned capitalists were making money hand over fist and they were doing it largely without government support, except for the implicit too-big-too fail (TBTF) guarantees that ensured that outfits like Citigroup and Bank of America would survive no matter how reckless they had been. If Will wants to blame the government because of the implicit subsidy of TBTF then he has somewhat of a case. But the argument in this article belongs in the fiction section.

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The Washington Post once again shows why it is known as "Fox on 15th Street." It begins an article on the government shutdown in Minnesota:

"There is a giant gap between what many of the world’s governments have promised and what they can afford. Now, the headlines from the across the United States and overseas show what happens when the clunky machinery of democracy goes about trying to close that gap.

"The latest: The Minnesota government shut down Friday, locking families out of state parks on a normally busy holiday weekend after the Democratic governor and Republican-controlled legislature failed to reach agreement on whether to close a projected $5 billion budget deficit in part with tax increases."

As folks who looked at the graph in the last piece know, this bit of editorializing has nothing to do with the Minnesota budget crisis. It is just one more instance where the Post shoved its editorial position about budget problems right into the middle of a news story.

On the larger point about "many of the world's governments" the Post is also misleading. A main source of the budget problems facing governments at all levels is the economic collapse caused by the bursting of housing bubbles in the U.S., Ireland, Spain and elsewhere. (The folks at Fox on 15th have not been told yet about the housing bubble. They still rely on the chief economist at the National Association of Realtors as their main expert on the housing market.) 

If the world economy was operating at normal levels of output, most countries would have manageable budget deficits. In the case of the United States, the long-term budget deficit is the result of its broken health care system. If we paid the same amount per person for our health care as other wealthy countries, the long-term budget projections would show a surplus, not a deficit.

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It is irresponsible to run a story with a statement from one politician saying it is sunny and warm in Alaska and another saying that actually the temperature is below zero and it's snowing. There are real conditions in Alaska that the reporter should know and be able to tell readers. This information will let readers know that one politician is being largely truthful, while one is not. Reporters who have a job reporting the news have the time to find out about the actual weather conditions in Alaska. Readers generally do not.

By this same standard, the NYT printed a horribly irresponsible piece on the shutdown of Minnesota's government. This article included a quote from the Republican House Speaker, Kurt Zellers:

“We’re talking about runaway spending that we can’t afford,... And we will not saddle our children and grandchildren with mounds of debts with promises for funding levels that will not be there in the future.”

While the article also includes a quote from the Democratic governor, it provides no information that would allow readers to assess the truth of the claim that spending is out of control. In fact, state and local government spending in Minnesota has not been rising relative to its GDP over the last decade. (Sorry, I couldn't quickly find state spending broken out separately.)

MN_Spend.php

Source: USgovernmentspending.com.

As the chart clearly shows, there is no upward trend in spending relative to state GDP since the early 90s and in fact current spending levels are somewhat lower than two decades ago. This means that Mr. Zellers was not being truthful. A good news story would have conveyed this information to readers.

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It's always fun to read the Post's editorials on economic issues, since you never know what you might find. For example, it recently told readers that reducing the annual cost of living adjustment for Social Security beneficiaries by 0.3 percentage points annually (i.e. 3 percent after 10 years, 6 percent after 20 years, and 9 percent after 30 years) "won't hurt."

Today we get the Post's assessment of the Fed's QE2 policy. It praises the policy for preventing deflation, which it says was a risk at the time the Fed started the program. Actually, it is hard to see how deflation was a serious risk in the fall of 2010 or much impact of QE2. The core inflation rate has been pretty constant over this period, running in the range of 1.0 to 1.5 percent, with nominal wage growth running close to 1.6 percent.

The Post also makes a common mistake in viewing deflation as some sort of grave economic threat. There are good reasons for wanting a higher inflation rate (e.g. 3-4 percent) as economists across the political spectrum have argued. Most importantly it would reduce the real interest rate at a point where the nominal interest is already stuck at its zero lower bound.

In this context, a lower inflation rate is worse than a higher one, but crossing zero holds no special magic. In other words, it is bad news if the rate of inflation falls from 0.5 percent to -0.5 percent, but there is no reason to believe that this decline in the inflation rate is any worse than the drop from 1.5 percent to 0.5 percent.

The Post may be thinking about the sort of rapid deflation that was seen at the start of the Great Depression, when prices were dropping at near double-digit rates. That kind of deflation makes any sort of economic planning almost impossible, but there was little risk that economy would see rates of deflation go that high.

The other oddity in the Post's piece is that it blames QE2 for the run-up in commodity prices:

"But the negative consequences of QE2 — all of them also foreseeable — have canceled out some of the positives. Perhaps the most important of these was a commodity price boom, caused by the fact that many investors used the Fed’s freshly printed money to speculate on grain or oil. The winnings accrued to a wealthy few, while the U.S. middle class coped with higher prices for groceries and gasoline."

There are two big problems with this story. First, much of the recent run-up in commodity prices is likely to be enduring, driven by rapid growth in China and elsewhere in the developing world. I don't know anyone betting on a return to $40 a barrel of oil.

However the other part is even more bizarre. Speculators did not need QE2 to speculate. The Post's editorial writers are probably too young to remember, but back in 2008, before the collapse of Lehman, most commodity prices were even higher than their recent peaks. The Fed was in a tightening phase at that point. Given that we saw a much larger speculative bubble just three years ago, when the Fed still had relatively tight monetary policy, why would anyone think that the current bubble was primarily due to the Fed's actions?

Oh well, that's why it is always fun to read the Post's editorials on economic issues. 

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Marketplace radio had an interview with Larry Summers, formerly the head of President Obama's National Economic Council. At one point the interviewer questioned Summers about whether he viewed the size of the stimulus as too small. Summers responded that while he felt the economy needed a bigger stimulus, he thought the stimulus was the biggest package that it was possible to get through Congress at the time.

It would have been appropriate to ask, if Summers held this view, why neither he nor President Obama made such a statement after the stimulus passed. If they knew that the stimulus was too small then it meant that the recovery would be weak and that unemployment would remain higher than necessary.

In such circumstances, it would have been reasonable for President Obama to take credit for passing a big stimulus, which was an important step for getting the economy back on track, but that it would likely be necessary for further measures.

Instead, President Obama quickly began touting the "green shoots of recovery" and focused on reducing the deficit. This has created a political environment in which further discussion of stimulus has become almost impossible politically.

This pattern of behavior is completely inconsistent with what Summers claims was his view of the state of the economy at the time. This would indicate that either President Obama ignored the head of his National Economic Council or that Summers is not accurately describing the advice he gave to Obama at the time.

 

 

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