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).
That's what millions of readers are asking after seeing a piece that asserted:
"The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region."
Actually, the industry has created relatively few jobs in Pennsylvania and many of the jobs that it has created have gone to out-of-staters, providing little benefit to the people in the regions where fracking is taking place. News stories should not include unsourced assertions like this one in the AP piece. The article should have sourced the claim and made an effort to evaluate its accuracy if it came from someone with ties to the industry.Add a comment
If someone has a gun and is shooting it repeatedly at another person, we might infer that the shooter wants to kill this person. In this vein, how could it never occur to analysts that the purpose of Chancellor Merkel and the ECB's policy of austerity across Europe is to permanently weaken the power of labor across the continent?
It is hardly a secret that workers can be forced to make concessions on wages and benefits in periods of high unemployment. The power of workers will be further undermined if government supports like pensions and employment protection legislation are also removed. All of this is well-known and widely understood.
Therefore it is remarkable that the class implications of the Merkel-ECB policies never get mentioned in a NYT piece examining the contrasting approaches of Merkel and President Obama to the euro zone crisis. In fact the piece explicitly sends readers in the opposite direction, saying it is "a battle of ideas" in a quote from Almut Möller, a European Union expert at the German Council on Foreign Relations.
In fact the most obvious basis for the difference in the views between President Obama and the Merkel-ECB view is standard Keynesian story that it is in the interest of any individual business owner to have other businesses pay their workers more money. This creates more demand for her products.
In this context, President Obama would be very happy to see a prosperous Europe which would provide a stronger market for U.S. exports right now. However, Chancellor Merkel and the ECB seem more focused on keeping down their own labor costs.Add a comment
The NYT continues its policy of affirmative action for people ignorant of the world by allowing Thomas Friedman to write two columns a week on whatever he chooses. Today he talks about the job crisis.
He does get some things right in pointing out that we have a huge shortage of jobs. He also notes the growing crisis posed by long-term unemployment in which millions of people are losing their connections to the labor market and risk being permanently unemployed.
However he strikes out in his dismissal of manufacturing as a source of jobs and calling for more high tech centers like Austin, Silicon Valley and Raleigh-Durham. When the dollar falls to a sustainable level it will have an enormous impact in improving the competitiveness of U.S. manufacturing. We stand to gain more than 4 million manufacturing jobs once we get the dollar down to a sustainable level.
To take this a step further, if we followed the German model (of which Friedman often speaks fondly) we would create another 3 million jobs in manufacturing by shortening the average length of the work year. The seven million new manufacturing jobs that would be added due to a more competitive dollar and shorter workyear is only a bit over 4 percent of the work force, but it is still a far larger number than those employed in Austin, Silicon Valley and Raleigh-Durham.
In addition, those seeing Austin, Silicon Valley and Raleigh-Durham as the future of the United States have not kept up with the present. Just as China and other low-wage countries can undercut the United States in manufacturing goods with their lower wages, so can developing undercut the United States in high tech production with their lower wages. India already has a large and growing trade surplus in software with the United States.
It is difficult to see how this trend will be reversed in the decades ahead, no matter how much we tax ordinary workers to subsidize the centers that Friedman advocates. The arithmetic is straightforward, high tech workers in the United States will not be able to compete with comparable skilled workers in the developing world making one-fifth as much. Furthermore, it is much cheaper to send software programs half way across the world than it is to send cars.Friedman also wants to cut Social Security and Medicare for retirees as advocated by the co-chairs of President Obama's deficit commission, former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. This policy will make Wall Street deficit hawks happy, but it is difficult to see how it will help the future strength of the economy. Add a comment
Fox on 15th yet again did some heavy editorializing in a front page story on the euro zone crisis. It referred to the plan to constrain debt as an effort to create an institutional structure that will "slap automatic penalties on governments that recklessly spend and borrow."
How did the word "recklessly" get into this article and why did it make it past the Post's editors? The point is that if the penalties are automatic, then they will not distinguish between countries that borrow "recklessly" and countries that might end up borrowing for reasons that are not reckless.
For example, a country like Ireland may end up borrowing because it had private banks that engaged in reckless lending and faced collapse. The country then had the choice of seeing its banking system go under or borrowing to rescue its banks. (It is possible that Ireland could have kept its banks operating at lower cost by giving creditors haircuts, but that is a debatable point.)
Alternatively, a country like Spain may end up borrowing because incompetent central bankers allow an enormous housing bubble to grow unchecked. When the bubble bursts it creates a severe recession leading to a huge loss of tax revenue and a massive increase in spending on unemployment benefits and other transfers.
An automatic enforcement mechanism does not distinguish between this sort of borrowing and borrowing that is done for reasons that may be viewed as reckless. That is precisely the point with an automatic mechanism, it is automatic. The Washington Post should be able to hire people who understand this.Add a comment
If we see a car that runs into a brick wall at 80 miles an hour, we don't ask why its front end is messed up. In this same vein, why on earth would be looking for a reason for a lack of jobs in an economy that has a gap of close to $1 trillion a year in annual demand?
This is what Robert Atkinson does in a column in the Huffington Post. If we take him at face value, Atkinson is actually confused about the reason that the economy is lacking jobs. He must have missed the housing bubble and its collapse.
See, the housing bubble was directly creating hundreds of billions of dollars of annual demand by spurring record levels of construction. The housing bubble also generated close to $500 billion in annual consumption through the housing wealth effect. The bubble generated more than $8 trillion in additional equity, almost all of which has now disappeared.
After the bubble collapsed, housing fell from more than 6 percent of GDP to less than 2 percent of GDP, a loss in annual demand of more than $600 billion. The loss of housing wealth, coupled with the loss of close to $5 trillion in stock wealth, led to a falloff in annual consumption of close to $500 billion. Lost tax revenue also led to cutbacks in annual government spending at the state and local level of close to $100 billion.
In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.
The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets.
I suppose, in this weak economy, that it is good that people can get jobs looking for solutions to mysteries that do not exist. (Make work jobs can make sense if there is no productive employment available.) But there is no reason that the rest of us should be bothered by solutions for non-existent problems.
[Btw, the fact that the stimulus was too small is not 20/20 hindsight, it is what those of us who know economics said at the time.]Add a comment
Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF's role in the world economy. In an oped column he told readers that:
"From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations."
This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.
It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin's strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.
This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers' assertion that the IMF puts countries on a sustainable course.
In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post's opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers.Add a comment
The Republicans have substituted "job creator" for the word "rich" in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.
Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.
NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.Add a comment
Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)
The Washington Post decided to cover up the nature of the ECB's strategy when it told readers that:
"By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency."
The Post effectively defined the measures demanded by the ECB as being necessary to "stabilize the euro currency." That would perhaps be an appropriate stance for the ECB's public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.Add a comment
The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.
The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.
If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.Add a comment
Suppose you go out to sea in your beautiful new sailboat. (Don't worry folks, I don't have a boat and I don't think I even know anyone who has a boat.) A couple hundred miles offshore, your boat gets attacked by a gang of pirates. They tear up your sails, smash your engine, and run off with your lifeboat. When your body is found 2 weeks later, NPR surveys the damage and says "that's the power of the sea."
That was the tone of a Morning Edition story (sorry, no link yet) which discussed the new euro zone agreement and whether the markets would be satisfied. This is not a question of governments being forced by the market to make changes any more than the victim of the pirate attack can be said to have been killed by the sea.
The European Central Bank (ECB) created the conditions in which countries are facing bankruptcy, first by failing to notice the largest asset bubbles in the history of the world. Its inadequate response to the downturn and continued obsession with inflation has deepened the downturn. And, its repeated assertions that it will not act as a lender of last resort and stand behind euro zone sovereign debt, has ensured that member nations would be vulnerable to speculative attacks that could make otherwise solvent governments face bankruptcy.
It is wrong to confuse the deliberate policy of the ECB with random outcomes of the market. Reporters should be highlighting the distinction, not concealing it.Add a comment
If the Washington Post managed the development of computers the way it reported on the administration's efforts to promote green cars, I would be writing this piece on a typewriter. President Obama has been in office less than 3 years. It would be absolutely astounding if his administration's efforts to promote cleaner cars had already produced marketable results.
The effort to get affordable electric cars will inevitably be a long process involving many cost-saving and efficiency-enhancing innovations. People who know technology understand this fact. People who don't should not be writing on this issue for major news outlets.
It is also worth noting that in a period in which the economy has widespread unemployment, as is the case now, there is very little opportunity cost to this sort of spending. In other words, if the government did not spend this money we simply would have had more people unemployed. This may make deficit hawks happy, since it would mean a somewhat lower deficit/debt, but there is no obvious advantage to the country from this situation.Add a comment
In an article about the impact of the euro crisis on the U.S. economy the NYT told readers:
"the American economy has shown signs of life recently, with talk of a double-dipfading and job growth picking up."
People who were knowledgeable about the economy did not talk of a double-dip recession. There was a growth slowdown in the first half of the year due to one-time factors. This was the period in which most of the federal stimulus was withdrawn, imposing a substantial drag. There was a large rise in oil prices, which was partially reversed in the third quarter (although prices have risen part of the way back to their prior peaks in recent weeks). And, the Japanese earth quake and tsunami disrupted some supply chains, most notably in the auto industry.
With these factors having passed, it was predictable that the economy would again grow at near its trend rate of 2.5 percent. This growth rate will do nothing to reduce the huge gap between the economy's potential output and its actual output, leaving tens of millions of people unemployed or under-employed. Unfortunately, because baseless comments about a double-dip recession were given such prominence in the media, this sort of growth is viewed as being acceptable.Add a comment
Harold Meyerson confuses them today in an otherwise useful column on how democratic governments are being forced aside due to economic pressures. He approvingly quotes Wall Street investment banker Roger Altman:
"financial markets have become 'a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes. . . . [L]eaving aside unusable nuclear weapons, they have become the most powerful force on earth.'"
This is not quite right. The circumstances under which the financial markets brought about a run first on the debt of Greece, Ireland and Portugal, and more recently on the debt of Italy and Spain were created by the policies pursued by the European Central Bank (ECB) and Mario Draghi and his predecessor Jean Claude Trichet.
The ECB has run a policy that is focused on containing inflation and forcing governments to reduce their deficits. It could have instead run a policy that placed its primary emphasis on promoting growth. It also could have played the role of lender of last resort. It was a quite deliberate policy decision by the ECB to impose a fiscal straightjacket on the heavily indebted countries of Europe. (Its policies have made this debt burden much worse.)
It is understandable that Draghi and the ECB would like to pretend that the problems facing Greece, Italy and other countries in the euro zone are simply the result of the market imposing its discipline. However, this is not true. They are responsible for the difficulties facing these countries.Add a comment
Bloomberg has done some outstanding reporting over the last few years on the Federal Reserve Board's bailout of the financial sector. Much more money went through the Fed's special lending facilities than went through the TARP program that was approved by Congress.
Bloomberg's reporters have taken the lead both in pressing the Fed to release data on its bailout programs and also in publicizing the numbers when they were released. They even sued the Fed (successfully) to force it to release data on the beneficiaries of lending through the discount window. The Fed has resisted the release of information about its programs, claiming that it would make it more difficult for it carry through bailout programs and monetary policy.
Yesterday Fed chairman Ben Bernanke attacked Bloomberg claiming that its reporting was misleading. It looks like the Fed missed the mark on just about every issue.
Perhaps the most important issue is the Fed's claim that it did not lend at a below-market rate to banks, thereby effectively giving them a subsidy. In fact, it is almost definitional that the rate did provide a subsidy.
No one forced the banks to borrow from the Fed. If they had better options, they would have borrowed elsewhere. Instead the Fed made large amounts of money available to banks at a time when liquidity carried an enormous premium. This meant that the banks could relend the government's money to others and earn a substantial profit.
This lending may have been justified to stem the financial crisis, but in principle the government could have imposed conditions (e.g. real caps on executive pay, downsizing the too-big-to-fail banks, modifying mortgages) on the banks as the price of getting access to credit at below-market rates. Bernanke and Congress did not seek to impose such conditions.
Given Bernanke's strenuous opposition to the release of data on the bailout programs it would be interesting to know if he now feels that it is more difficult for the Fed to conduct monetary policy.Add a comment
The media regularly gives us stories about the impending demographic disaster in Japan because of its low birth rate and declining population. Today, in the context of an article about the clean-up from the accidents at its nuclear reactors last spring, the NYT told us Japan's problems are even worse than we thought:
"The Soviet Union did not attempt such a cleanup after the Chernobyl accident of 1986, the only nuclear disaster larger than that at Fukushima Daiichi. The government instead relocated about 300,000 people, abandoning vast tracts of farmland.
Many Japanese officials believe that they do not have that luxury; the evacuation zone covers more than 3 percent of the landmass of this densely populated nation."
So we now learn that Japan is not only suffering because it has a declining population, but also because it is a densely populated country. Can things get much worse?
In reality, the demographic story is silly. The alleged problem is a decline in the ratio of workers to retirees. (The correct measure is the ratio of workers to non-workers, the latter would include children.) In a healthy economy, the rise in productivity growth swamps the impact of even very negative demographic trends.
For example, going from 3 workers to retiree to 2 workers per retiree over a 20 year period (an extremely fast rate of decline) would imply that the share of workers' wages going to support retirees would have to increase by 0.6 percentage points annually, assuming a 70 percent replacement rate for retirees. This is 40 percent of the 1.5 percent annual productivity growth in the years of the productivity slowdown (1973-1995) and 24 percent of the 2.5 percent annual productivity growth in the years since 1995.
This means that in a healthy economy workers can continue to enjoy substantial increases in living standards even during years in which the demographic trend leads to a sharp increase in dependency ratios. Insofar as this is associated with a declining population, there are many gains associated with less crowding and less pollution that will not show up in GDP statistics.Add a comment
The boys and girls at Fox on 15th Street are really getting excited over their hopes that the European welfare state might be dismantled. The third paragraph of the lead front page article told readers:
"If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world."
Of course the most generous welfare states who have the most "cozy" social protection systems are not facing fiscal crises. These are countries like Sweden and Denmark and even Germany, all of whom have relatively solid finances. Paul Krugman put up a nice graph on his blog yesterday showing the non-relationship between the share of government spending in GDP and the current interest rates paid by government.
Also, as people familiar with current events know, this crisis did not stem from "three decades of overspending," it came about because of a collapse of housing bubbles in the United States and across Europe. This is the opposite of a problem of an excessive welfare state. It was a problem of a private financial sector gone wild making the reckless loans that fueled the bubble. Apparently the Post has not heard about this.Add a comment
The NYT had a good piece on Ireland's effort to get back on a solid growth path. At one point it refers to a 5.4 percent rise in exports as an encouraging sign:
"driven by gains from Pfizer, Intel, SAP and other multinational companies that were drawn to Ireland in the 1990s and 2000s by its low taxes, well-educated English-speaking work force and access to the European market."
Actually, this picture is less clear. Many of the exports associated with these companies are likely to be associated with increased imports as well. For example, if Intel is exporting more microprocessors assembled in Ireland it is also importing more components. The net gain to Ireland's economy might be very small since most of the value added may take place elsewhere.Add a comment
Some people try to teach by providing step by step instructions. This can be very tedious. David Brooks instead teaches by example. In his column today, David Brooks commits two of the great sins that would not appear in any serious discussion of regulation.
First he discusses the cost of the regulations put in place by different presidents:
"George W. Bush issued regulations over eight years that cost about $60 billion. During its first two years, the Obama regulations cost between $8 billion and $16.5 billion, according to estimates by the administration itself, and $40 billion, according to data collected, more broadly, by the Heritage Foundation."
So regulation under the last president Bush cost $60 billion. Is this $60 billion a year (@0.4 percent of GDP)? Is it the accumulated cost over ten years (@0.04 percent of GDP)? Or, is it over a one-time cost of $60 billion? David Brooks doesn't tell us. The differences are of course enormous, but we have not a clue based on the information given in the article.
The second major sin is that we have no idea how Brooks is measuring costs. Suppose that my neighbor has the disturbing habit of dumping his sewage on my lawn. If this is a common problem, then I and others similarly afflicted may unite to put a socialist in the White House who will prohibit people from dumping sewage on their neighbors' lawn.
Most regulation does in fact have this character. It prohibits businesses from doing harm to the life and property of others. The question is, does Brooks' measure of the cost of regulation simply count the cost to my neighbor of dealing with his own sewage, or is it supposed to be some net measure that subtracts the savings that accrue to me and other current recipients of our neighbors' sewage?
Brooks doesn't tell us, but since analyses of most regulations show the benefits far exceed the cost (in the case of the Clean Air Act, the net benefits were estimated as $2 trillion over the next few decades), it is likely that Brooks is simply counting the cost to my neighbor of cleaning up his own sewage. It's not clear what this tells us exactly about the burden of regulation, but hey, this is David Brooks, what did you expect?Add a comment
A newspaper that doesn't fact check its news articles can hardly be expected to fact check its opinion pieces. This mean that Robert Samuelson can get away with just about anything he wants in his column.
Today it is a diatribe against the welfare state. He tells readers that the euro crisis is the grand reckoning of the welfare state. Now that the euro zone economies are growing slowly and have aging population, the welfare state is no longer sustainable.
If the Post had fact checkers, they would ask Samuelson why, if the problem is an excessive welfare state, the countries with the most generous welfare states appear to be doing just fine. If we just take the measure of spending relative to GDP, the leaders would be countries like Sweden, France and Denmark, all of which are surviving the crisis reasonably well. None of the crisis countries rate near the top of the list and Spain is an outlier in Europe for having a much lower than average share of government spending in GDP.
A fact checker would have reminded Samuelson that the crisis came about because out of control lending by bankers who somehow could not recognize the huge housing bubbles in the United States and much of Europe that created the largest asset bubble in the history of the world. This is a story of a broken private sector and/or too little government regulation.
The immediate problem facing the euro zone countries is too little demand, the exact opposite of the problem that Samuelson is blaming, which is too much demand and too few resources. (Lesson for reporters: the bloated welfare state story is too much demand chasing too few resources. The problem today is too little demand chasing too many resources, hence the mass unemployment. Remember this one and you are head of 99 percent of your peers.)
Add a comment
NYT columnist Roger Cohen told readers that ideas like a:
"tax on global financial transactions, have been around for years but they’re almost impossible to apply."
He wouldn't say this if he was familiar with the United Kingdom. The United Kingdom has been taxing trades of stock for centuries. It raises between 0.2-0.3 percent annually ($30-$40 billion in the United States). There are many other financial transactions taxes in place in other financial markets.
It is not clear what makes Mr. Cohen think that a tax that raises tens of billions of dollars each year is "almost impossible to apply."Add a comment