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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The folks at Morning Edition may not know that this is what they said, but in fact, this is exactly what a Planet Money segment on the dollar's status as a reserve currency implied. The segment told listeners that it was a good thing that foreigners demanded large amounts of dollars to use and hold as a reserve currency.

If foreigners increase their holdings of dollars then this means that the United States has a trade deficit. This is a logical implication of foreigners' efforts to acquire more dollars. In order to get more dollars, they have to sell more to the United States than they buy from the United States. There is no way around this.

If the United States has a trade deficit then it means that the country as a whole is a net borrower. That means that the combination of private and public savings must be negative. Again, this is an accounting identity, it must be true, just like 2+2 will always be equal to 4.

Generally private savings are roughly equal to private investment. The main exception is when asset bubbles like the stock market bubble or the housing bubble lead to a consumption boom and thereby depress private saving. (The housing bubble did also lead to a boom in construction, which as a component of investment allowed private investment to exceed savings, until the bubble burst.)

If the country has a trade deficit and private saving is equal to private investment, then the country must have a budget deficit. This means that in general circumstances, Morning Edition was telling us that budget deficits are good, since it told us that we should be happy that the dollar is the world's reserve currency.

There was another important aspect to this issue that the piece failed to mention. Even if the dollar is used as a reserve currency the amount that a country needs to support a given level of trade can vary enormously. The amount of reserves that developing countries hold soared in the wake of the East Asian financial crisis. This is usually attributed to the fact that the terms of the bailout imposed by the IMF on the countries of the region were viewed as being so harsh that developing countries wanted to make sure that they would never be put in the same situation. This meant accumulating massive amounts of reserves (i.e. U.S. dollars) as an insurance policy.

This was the origin of the massive trade deficits that the United States has been running in recent years. It would have been useful to make this point in this segment.

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The Post seems to think that this may be the case. In reference to a provision of the Dodd-Frank financial reform bill that requires companies to publish the ratio of top executive pay to the pay of an ordinary worker it reported that "businesses have argued that this proposal would be costly and impractical to implement."

This would only be true if businesses had no clue about either how much they pay their top executives or their ordinary workers. While it certainly seems to be the case that the top management of many corporations is not very competent, it is difficult that so many people earning 7 and 8 figure salaries could be that incompetent.

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In the list of people most responsible for the economy's wreckage, Robert Rubin is the only person who can rival Alan Greenspan for the top spot. As Treasury Secretary he pushed the over-valued dollar policy which led to the massive U.S. trade deficits.

These trade deficits are the fundamental imbalance in the U.S. and world economy. A trade deficit implies that either or both the government or private sector has negative savings. In other words, because we have a large trade deficit we must have a budget deficit or the sort of asset bubble-driven consumption boom that we had during the stock and housing bubbles.

Rubin also was a big proponent of removing government restrictions on the financial system. He helped to push through the repeal of Glass-Steagall. He also nixed Brooksley Born's efforts to regulate derivatives like credit default swaps.

After his years in the Clinton administration he took a top position at Citigroup where he earned over $100 million. When he left the bank in 2008 it was on government provided life support. It had been at the center of the subprime crisis, securitizing hundreds of billions of dollars of subprime mortgages.

Presenting Rubin as just a wise man who used to be Treasury Secretary, as this NYT article does, is like presenting the Unabomber as simply a man who lived in a small cabin in Montana.

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The NYT had a piece on the decision of four European countries to ban short selling. One of the rationales was that traders were spreading negative rumors about banks and profiting from them by shorting their stocks. Insofar as this is happening, this is a form of market manipulation which is a violation of security laws everywhere.

In principle, regulators should be able to track down and punish manipulators, however as a practical matter manipulation will often be difficult to detect. It is possible that outlawing short sales for a period of time can prevent manipulation, but the real issue is manipulation not short sales. Manipulation also takes place on the upside (e.g. rumors of exaggerated corporate profits) and is every bit as harmful to the proper working of the market and the economy.

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A Huffington Post piece hugely overstated the size of the stock wealth effect. It told readers that:

"According to a research note from J.P. Morgan Chase earlier this year, every 100-point drop in the S&P 500 index translated to a $1 trillion loss in household wealth, and a 1.5 percent drop in consumption."

While this may accurately represent the research note (no link is provided), this is far out of line with the findings of a large literature on the stock wealth effect. With total consumption at more than $10 trillion, a 1.5 percent decline implies a drop of $150 billion. This would imply a stock wealth effect of 15 percent. Most of the literature has found a stock wealth effect in the range of 3-4 percent, usually with considerable lags.

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The Washington Post had a front page column that waxed philosophically on the meaning of the debt downgrade by S&P. It concluded by telling readers:

"The U.S. economy is still nearly three times the size of China’s."

According to the IMF's projections, the United States economy is currently less than 40 percent larger than China's on a purchasing power parity basis. The IMF projects that China will surpass the United States as the world's largest economy by the end of the term of the president elected next year.

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Time to beat up on really really bad news reporting. The stock market doesn't tell people why it does what it does. We have commentators who bloviate on what they think caused the market to rise or fall, but they don't really know and they could be completely wrong.

That is why it was incredibly irresponsible for NPR to tell listeners in its top of the hour news segment that the market plunged because Standard and Poor's downgrade of U.S. debt. NPR does not know this to be true and it certainly is not obviously the case.

The market that should have been most immediately affected by the S&P downgrade was the U.S. bond market. However bond prices soared in the trading immediately following the downgrade and continued to rise through Wednesday. If there was greater fear that the U.S. would default because of the downgrade, then bond prices should have plunged as investors demanded a higher risk premium. This did not happen.

The most obvious alternative explanation for the plunge in the market is the risk that the euro could break up as the debt crisis spread from relatively small countries like Greece and Ireland, to the euro zone giants, Spain and Italy. The prospect of a euro zone break-up raises a real risk of a Lehman-type freeze up of the world financial system. It is far more plausible that this prospect led to the plunge in the stock market than the downgrade by one of three major credit rating agencies.

This point is important because many political actors, including National Public Radio, are trying to use the debt downgrade as an argument for cutting Social Security and Medicare. Their argument will be furthered if they can claim that the downgrade had enormous consequences for the stock market, since so many people involved in political debates (i.e. columnists, policy wonks, reporters, congressional staffers) have substantial amounts of money invested in the stock market.

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The NYT has a good editorial outlining the weak U.S. growth prospects, although the double-dip discussion is silly – we're looking at too slow growth, not a double-dip. The piece makes another serious error at the end when it argues that Germany, like China, should reduce its trade surplus.

China and Germany are in fundamentally different positions in the world economy. China is an extremely fast growing developing country. It would be expected that China would have a large trade deficit. By contrast, Germany is a very slow growing wealth country with a stagnant or declining labor force. It should be expected that Germany would have a large trade surplus as it sends capital to countries where it can be better used.

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A front page piece in the NYT compared the current turmoil in financial markets with the situation in the fall of 2008. It referred to the 2008 crisis as being a subprime crisis. While subprime mortgages took the biggest hit, prime mortgages also defaulted at rates that were many times higher than expected.

The piece also said that the Federal Reserve Board is largely out of ammunition in terms of its ability to counter a crisis. This is not true. The Fed could take far more aggressive measures to counter the downturn. For example, it could target a longer-term interest, committing itself to keep the 5-year Treasury bond rate to 1.0 percent for the next year.

Also, it could target a higher rate of inflation (3-4 percent), a policy that Bernanke himself had advocated for Japan when he was still a professor at Princeton. This would reduce the real interest rate, giving firms more incentive to borrow and also reduce the indebtedness of homeowners as house prices would presumably rise in step with inflation.

It is irresponsible for the NYT to make unsupported assertions about the lack of Fed power. The Fed is one of the main tools for affecting the economy and it is wrong to tell readers that it cannot do anything.

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In the spirit of Thomas Friedman's column today, we should not have confidence in the quality of the news and opinion writing we see in the NYT until we see the following press release from the New York Times.


"As of this date we have notified Thomas Friedman that the New York Times no longer has a place for his column. While we recognize that Mr. Friedman had a substantial following, his column had simply become too much of an embarrassment for the newspaper and its staff. Column after column would make broad assertions that were almost completely impervious to the facts.

"For example, he recently wrote a piece telling readers that everyone will have to join together to help solve the country's economic and fiscal problems. This piece completely ignored the massive redistribution from wages to profits over the last three decades and from low wage workers to high workers. This call for togetherness must have been deeply offensive to the hundreds of millions who are suffering because of this upward redistribution of income.

"The prior week he told readers that Social Security, Medicare, and Medicaid were unaffordable 'entitlements' ignoring the fact that Social Security is actually fully funded for the next quarter century and according to the Congressional Budget Office, more than 80 percent funded for the rest of the century. The projections that show Medicare and Medicaid becoming unaffordable are based on projections of exploding private sector health care costs. A competent columnist would have focused on the need for fixing the U.S. health care system.

"In another column he explained that the Germans were going to bail out the Greeks, but that they would insist that the Greeks work German hours and take German vacations. Apparently Mr. Friedman did not realize that German workers on average work fewer hours than Greek workers and get longer vacations.

"The NYT is a great newspaper. It should not be associated with this sort of sloppiness week after week. For this reason we will be looking for a new columnist to replace Mr. Friedman. In the mean time we will run Tom Toles cartoons in his space."

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The Washington Post told readers that Senator John Kerry's appointment to the Supercommittee that is supposed to come up with $2.5 trillion in deficit reduction "could help appease liberals." Senator Kerry has repeatedly expressed his willingness to cut Social Security and Medicare, despite the fact that retirees and near-retirees saw much of their wealth destroyed with the collapse of the housing bubble.

It is difficult to see why liberals would be appeased this selection, especially since the Republicans selected are likely to be adamantly opposed to any tax increases.

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The NYT ran a piece that told readers that it was necessary for President Obama to cut Social Security and Medicare for the good of the economy. This is not obviously true. There is no shortage of economists who would say that the economy's main problem is a lack of demand. This can be met by more stimulus, more aggressive action from the Fed, or a decline in the value of the dollar.

Remarkably, the NYT did not include the views of any economist who made these points. The only views presented in these articles were of those who wanted to cut Social Security and Medicare. The former is especially peculiar since the latest projections from the Congressional Budget Office projects that the program will be fully solvent until 2038 even with no changes and it could always pay more than 80 percent of scheduled benefits. Also, under the law the program cannot contribute to the deficit since it can only spend money raised through its designated tax.

One of the two experts cited in the piece suggested the need to means-test Social Security. Analysts familiar with the program generally do not support means-testing since it is likely to raise little money unless it is applied to people with very modest incomes.

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Wall Street investment banker Peter Peterson has pledged $1 billion to the effort to cut Social Security, Medicare, and Medicaid. Other Wall Street types are doing their part, as is National Public Radio.

They are doing a full court press now -- things are really terrible, if you don't give up your Social Security and Medicare, then the economy might collapse. (Oh yeah, the economy already did collapse because none of these people were troubled by the $8 trillion housing bubble, but don't think about that.) Standard and Poor's might have to downgrade the U.S. again, even if they can't get their arithmetic straight. (Math is hard.)

NPR did its part yesterday with a piece that told us that the debt is not just that scary $14 trillion number that we all hear, it's actually -- stand back boys and girls -- $211 trillion!!!!!!

Are you impressed? You should be. This is an extraordinary example of cesspool journalism that would even embarrass Fox News.

The piece gets from the debt number normally reported to $211 trillion by doing some unusual accounting (following a methodology developed by Boston University economist Lawrence Kotlikoff) and also hiding assumptions about exploding private sector health care costs. First, the calculation adds up all the Social Security and Medicare benefits that current workers are projected to receive and then assumes that no new workers pay taxes into the system.

This methodology would imply enormous deficits in these programs even if they were projected to be fully solvent forever, in the sense that current tax payments would always pay current benefits. The reason is that today's workers will provide a smaller share of the tax revenue as more of them retire. It is unlikely that any of NPR's listeners would be very scared if it told listeners that Social Security and Medicare would be fully solvent indefinitely, but applying the methodology from this segment it could tell listeners about tens of trillions of dollars in uncounted debt.

The other part of the story is that much of this $211 debt figure is driven by projections of exploding private sector health care costs. Per person Medicare costs are projected to rise far more rapidly than the rate of economic growth in the projections used in this segment (albeit not in the Congressional Budget Office's baseline or the Medicare Trustees projections) because private sector health care costs are projected to rise far more rapidly than the rate of economic growth. The projections in this segment imply that the cost of providing a Medicare equivalent policy for an 85-year old in 2030 will be $40,000 a year (in 2011 dollars) in 2030. The cost would exceed $100,000 a year (also in 2011 dollars) by 2080.

If private sector health care costs actually follow the path assumed in this segment's debt calculations it would devastate the economy even if we eliminated public sector health care programs like Medicare and Medicaid. On the other hand, if U.S. health care costs were contained, like those in every other wealthy country, then there would be no long-term deficit problem.

An honest news report would have discussed the projections of explosive private sector health care costs and what they mean for the economy if they prove true. It would not hide these projections in a huge debt figure and tell its listeners that the debt is much bigger than they realize.

The only possible point of a piece like this is to scare people. It provided no information whatsoever about the country's fiscal situation to NPR's listeners.

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That must have been what the editors at Reuters asked their reporter in Chile. How else could one explain the quote from the head of research at a Santiago brokerage house at the end of a short story on student protests. I guess no story is complete without presenting the view of the financial sector on the topic. Add a comment

An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.

Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can't get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.

Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.

It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.

It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.


Productivity Growth, 1995-2011


Source: Bureau of Labor Statistics.

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In an article on the value of the dollar the Washington Post noted that a high dollar makes U.S. goods less competitive in international markets. While this is an improvement over pieces that warn the dollar could plummet if the U.S. doesn't get its budget deficit down, the article still remains confused on the issue. It later told readers:

"For the better part of the past decade, the dollar has steadily lost value against other international currencies, reflecting both the rapid economic growth of many developing countries and a persistent U.S. pattern of spending more than it takes in."

Of course the U.S. pattern of spending more than it takes in is due to the fact that the dollar is too high. In a system of floating exchange rates, like the one we have, the price of currencies is supposed to fluctuate to bring trade into balance. This means that the trade deficit is caused by the over-valued dollar and a decline in the dollar is the predictable result.

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Steve Inskeep allowed former Wyoming Senator Alan Simpson (who is also the son of a Wyoming senator) to misrepresent the deficit reduction plan that he co-authored with Morgan Stanley director Erskine Bowles. Simpson complained that most of the criticism he got came from people in their 70s, which he said was foolish because his plan would not even hurt people in their 70s.

This is not true. Senator Simpson's plan calls for changing the indexation formula for Social Security. Under Simpson's plan benefits would fall by roughly 0.3 percentage points annually compared with the current benefit schedule. After 10 years this would imply a benefit cut of 3 percent, after 20 years the cut would be 6 percent, and after 30 years it would be almost 9 percent. (Simpson's plan does provide a 5 percent boost to benefits after 20 years of retirement.)

Senator Simpson's plan would be a much larger hit to the income of seniors than most of the tax increases that were discussed in the debt ceiling debate. He should not have been allowed to so grossly misrepresent his plan to listeners.

Senator Simpson also was allowed to imply that President Obama's health care plan would be hugely costly, telling listeners that we could not afford it. The Congressional Budget Office's projections show that the plan would actually reduce the deficit while extending coverage.

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The NYT got a bit overenthusiastic about the prospects for a double-dip recession. It told readers:

"the most recent government reports of consumer spending and factory orders show that both have been falling."

This is not quite right. The most recent data on consumer spending showed that it was flat in June. The key category in factory orders is orders for capital goods. This represents investment demand, which reflects firms' confidence about future business prospects. Excluding aircraft (which are highly volatile) new orders for capital goods rose 1.1 percent in June after rising 1.7 percent in May. (The numbers would be roughly the same if aircraft are included.)

The article also includes a peculiar discussion of the housing market and its impact on the economy. It told readers:

"Some housing experts warn that further declines in home prices could help set off another recession. 'The wait-and-see attitude begets more bad economic data, and it can become a self-fulfilling prophecy,' said Andrew D. Goldberg, market strategist for J.P. Morgan Funds, an asset manager.

"The downward cycle that could be at play is known by some economists as a 'feedback loop' — when one piece of bad economic data has a way of making everything else worse."

Actually, we should fully expect a further decline in house prices since house prices are still about 10 percent above their long-term trend level. This decline in house prices will likely be associated with a further rise in the savings rate from its current 5 percent level, back to its pre-bubble post-war average of 8 percent.

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A front page NYT article on the impact of the S&P downgrade included several assertions that were not supported by evidence. For example, the article told readers in the second paragraph:

"Even before the panel [the congressional commission established in the debt agreement] is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury."

This assertion is not sourced to anyone. Also, in the wake of the downgrade, interest rates on Treasury bonds have fallen, not risen. While this is likely the result of concerns over the survival of the euro, it indicates that financial markets are not especially concerned over S&P's downgrade.

The article also asserted that members of the congressional panel will have to "mute ideological disagreements." It is not clear that members of Congress have ideological disagreements. Members of Congress get elected because of their ability to appeal to powerful interest groups. The differences around proposals to cut programs like Social Security and Medicare or to raise taxes on the wealthy most obviously stem from the different interest groups being represented. It is not obvious that the ideology of individual members of Congress matters, since their ability to keep their jobs will depend on the extent to which members of Congress can keep their backers satisfied.

It also would have been useful to include the views of members of Congress who ridiculed the downgrade, pointing out that S&P had rated hundreds of billions of subprime mortgage backed securities as investment grade. It also had given top investment grade ratings to both Lehman and AIG until the day they collapsed. It also was off by $2 trillion in its calculations of U.S. indebtedness. In other words, there are very good reasons not to take S&P's ratings seriously and there certainly many people who do not, including it seems investors in financial markets.

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Washington Post columnist Robert Samuelson came up with a new metric for measuring the size of the military budget. He told readers that under last week's debt deal:

"defense spending would shrink to 15 percent of the budget by 2016. This would be the lowest share since before World War II."

Wow, military spending measured as a share of the budget, what a great concept! The Samuelson measure means that we should be spending more money on the military if we were to have a national health insurance program run through the government, like Medicare. It also implies that if we privatize Medicare and Social Security, then we should cut back the military to keep its share of the budget in its normal historical range.

And remember, you can only find this in the Washington Post.

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It's apparently hard to get economic news at the Washington Post. How else can one explain the fact that it explains the movement of markets over the weekend only in reference to S&P's downgrade of U.S. debt and completely ignores the debt crisis in Europe that could lead to the collapse of the euro. The latter threatens the same sort of freeze up of the financial system that we saw in the wake of the Lehman bankruptcy. It is likely that markets were more concerned about this prospect than the downgrade by one of the three major credit rating agencies.

The article also includes a bizarre quote from Kazahiro Takahashi, general manager of investment research with Daiwa Securities:

"But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.

'The same kind of problem should be expected for the U.S. economy, too, ... Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.'"

It is unlikely that the Post could find many other analysts who believe that the United States is about to experience deflation and even fewer who believe that the downgrade makes deflation more likely. If the U.S. was actually having difficulty taxing and borrowing to meet its debt payments, then it would most likely print more money to pay its debt. This would tend to increase inflationary pressure, not deflationary pressure.

It also would have been worth noting that S&P's downgrade of Japan's debt in 2002 had no noticeable impact on Japanese interest rates. The government can still borrow long-term at interest rates just over 1.0 percent. Furthermore, this was a clear example where Moody's was completely wrong. It is now 13 years after the downgrade, no one believes that Japan is anywhere close to defaulting on its debt. And, because of the deflation over this period, bondholders are getting repaid in yen that are worth more than the yen they lent.

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