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).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

Morning Edition touted the qualifications of Leon Panetta, President Obama's pick to be Secretary of Defense, as budget cutter, noting that he will be asked to trim $400 billion from the Defense Department budget over the next decade. It would have been worth pointing out that is just over 5 percent of the almost $8 trillion that the department is projected to spend over the decade. 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
This point should have been raised in an NYT article that discussed efforts by state and local governments to reduce their pension obligations. At present, state and local employees get somewhat lower compensation (including pension and health care benefits) than workers in the private sector with comparable education and experience. If pensions are cut back then the penalty for public sector workers will get larger. In the short-run most public employees will probably remain at their jobs even with pay cuts, however in the longer term economic theory predicts that governments that pay below market rates will have difficulty getting and keeping good workers. 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.


Add a comment

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
The NYT reports on how drug companies are getting access to databases that allow them to track individual doctors' prescribing practices. This information can be helpful in better pitching their drugs to doctors. This is yet another abuse of the sort that economists predict happens when the government imposes monopolies (i.e. patents) that raise prices far above marginal cost. If economists paid attention to the $300 billion industry, they would be looking for more efficient mechanisms for financing prescription drug research. 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
That is the implication of an NYT article on the decline in the number of physicians in independent family practices. The article argues that long hours and uncertain pay make it unattractive for physicians in the United States. This may be true given the extent to which the doctors' lobbies have been able to limit the number of people licensed to practice medicine in the United States. However, there is a huge supply of people in the developing world who would be willing and able to train to U.S. standards and work under the conditions described in the article. If the Obama administration and Congress were not so completely dominated by protectionists, they would be working to eliminate the barriers that are making it more expensive for people in the United States to get health care. 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

The headline of the WSJ article on weekly unemployment insurance filings told readers, "jobs data signal progress." The article then went on to tell readers that:

"Initial jobless claims decreased by 13,000 to a seasonally adjusted 403,000 in the week ended April 16."

It's always good to hear that unemployment claims are down from the prior week, except the prior week's number was a jump of 31,000 from the level reported two weeks earlier. This means that the number reported for last week was still 18,000 higher than the the number of claims reported two weeks earlier. In fact, this is the first time that we have seen two consecutive weeks in which claims have exceeded 400,000 since January.

We always need the caveat that weekly jobless claim numbers are erratic, and two weeks does not establish much of a pattern. But it is clear that the news in this report suggests that the economy is going in the wrong direction, except to the WSJ.

Add a comment

House prices have been declining at the rate of 1 percent a month for the last four months. This is why it was somewhat surprising to see Paul Dales, a senior economist at Capital Economics, quoted in the Post as saying that house prices would decline by about 5 percent this year. That would imply a sharp slowing in the rate of price decline in the months ahead.

The Post gained notoriety during the run-up of the housing bubble for relying on David Lereah, the chief economist for the National Association of Realtors, as its main and often exclusive source on the housing market. Mr. Lereah was also the author of the book, Why the Real Estate Boom Will Not Bust and How You Can Profit from It.

Add a comment

The NYT somehow thinks that it's good journalism not to point out that people who say that the earth is flat are wrong. How else can one explain the fact that it reports on Representative Paul Ryan's presidential ambitions (or lack thereof) and notes in passing that he has different views on how to constrain health care costs and promote growth than President Obama.

Representative Ryan's views on both topics have been tested and shown to be wrong. The government run Medicare program is far more effective in constraining costs than the private sector. This is why the Congressional Budget Office (CBO) projects that adopting Representative Ryan's plan would add $30 trillion to the cost of buying Medicare equivalent plans over Medicare's 75-year planning horizon.

This is not the sum transferred from the government to beneficiaries. It is the increase in total costs -- waste to the government, income to insurers and health care providers. This $30 trillion figure is approximately 6 times the size of the projected Social Security shortfall. It comes to almost $100,000 for every man, woman, and child in the country.

We also have had ample opportunity to test Representative Ryan's other main theme, that lower taxes are necessary to boost growth. President Reagan had large tax cuts in the 80s. This was the worst decade for growth in the post-war period until the last decade when President Bush had another big round of tax cuts. This is why CBO projects that tax cuts do not pay for themselves and will lead to deficits that will be a drag on growth.

Given the overwhelming weight of the evidence, the NYT is misleading readers when it reports that:

"And Mr. Ryan is making a counter case — tax cuts are needed to stir economic growth, and Medicare is on an unsustainable path — as he travels through towns like North Prairie, Delavan and Clinton, population 2,162."

The reporter should know that Mr. Ryan's case does not make sense and should not imply to readers that it does.

 

Add a comment