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).
This would have been an appropriate heading for this article on S&P's decision to downgrade U.S. government debt. S&P gave investment grade rating to hundreds of billions of dollars of mortgage backed securities. They received tens of millions of dollars from the investment banks for these ratings.
It would have also been worth asking what S&P thinks it means by this downgrade. U.S. government debt is payable in dollars. The U.S. government issues dollars. What does it mean that S&P thinks that at some point the government will not have the dollars needed to pay interest and principle and its outstanding debt. Does S&P think the U.S. government will forget how to print dollars?
If that is not what the downgrade means then it would be helpful to explain what it does mean. Readers of this article would likely be confused since there is no obvious meaning that could be attached to this downgrade.Add a comment
The NYT did a pseudo-retrospective on Jean-Claude Trichet as he approaches the end of his 8-year tenture as head of the European Central Bank. Remarkably, the piece never once mentions the fact that he allowed housing bubbles to grow unchecked in Spain, Ireland and elsewhere in the euro zone. These bubbles created huge imbalances that could not be easily corrected, as we are seeing now.
It was 100 percent predictable that these bubbles would burst and lead to a severe downturn. It is hard to imagine a more serious mistake by a central bank president. This is like a school bus driver coming to the job drunk, driving into oncoming traffic, and getting all the students killed.
It would have been worth mentioning a mistake of such magnitude in this article.Add a comment
Pearlstein says it's really too bad but there is just not much the government can do to get the economy back on track:
"we shouldn’t kid ourselves about how much government can do. Only markets can right-size companies and industries, find the market-clearing price for houses and shopping centers or bring wages in line with global competitive realities. Only markets can wring the speculative premium out of the price of stocks and commodities. And only markets can move workers from where they live to where they are needed, and create a match between the skills workers offer and the skills that companies require."
Of course Pearlstein provides zero evidence for any of these assertions, because Fox on 15th Street is not a newspaper that cares about evidence. For example, the wages in the U.S. that are most out of line with "global competitive realities" are the wages of people like Steve Pearlstein, professionals who get paid way more than their counterparts in other wealthy countries. These imbalances can persist because these professionals have the power to sustain barriers that largely protect them from international competition unlike people like steelworkers and auto workers who have been deliberately subjected to international competition.
If there was a serious problem of mismatch between skills and jobs, as Pearlstein asserts, then we should be able to identify sectors of the economy where there are large numbers of job openings, wages are rising rapidly, and average hours are increasing. No such sector exists. In other words, this skills mismatch exists only in Pearlstein's head and in the pages of the Washington Post.
If we needed any further proof about how unseriously Pearlstein and the Post take his column we have this comment:
"To spur private investment in equipment and research, the government could immediately allow companies of all sizes to deduct 100 percent of such expenses made in the next three years, rather than “depreciating” them over many years. That incentive to invest now will increase the deficit in the short run but have little or no impact on the long-term deficit."
President Obama and Congress agreed on a full expensing provision as part of last year's tax deal. In other words, we already did this. Oh well.
The reality is that there is much that we can do to get the unemployed back to work, but Pearlstein and the Post are willing to say things that are not true to dissaude others from acting.Add a comment
This one is almost too painful to write about. The Post tells us that:
"Even some of the recent bright spots in the global economy are starting to dull. German economic growth, for example, appears to be slowing. Germany exports heavily to the European nations that are experiencing a debt crisis."
Is there anything in the world that was more predictable? Why on earth didn't the people making policy at the ECB see this?Add a comment
David Wessel, the Wall Street Journal's economics editor, badly misled NPR listeners this morning when he told them that there is little that the Fed could do to boost the economy. This is not true.
The Fed could do another round of quantitative easing, although this is likely to have a limited impact. It could also target a long-term interest rate, for example putting a 1.0 percent interest rate target on 5-year Treasury bonds.
Alternatively, the Fed could pursue a path that Bernanke himself had advocated for Japan when he was still a Princeton professor. It could target a higher rate of inflation, for example 4 percent. This would have the effect of reducing real interest rates. It would also lower the debt burden of homeowners, which could allow them to spend more money.
This policy has also been advocated by Paul Krugman and Olivier Blanchard, the chief economist at the IMF. It would be amazing if Wessel was unaware of this policy proposal.Add a comment
Ezra Klein is one of the more knowledgeable columnists writing on economic policy today. He puts the rest of the Washington Post team to shame. But he gets it wrong in a really huge way in his front page column today.
He says that China's desire to slow its economy means that there will be no engine for economic growth in the world. This is 180 degrees wrong. If China wants to slow its economy because it is worried about inflation, then the simple textbook method would be to raise the value of its currency against the dollar.
This has two effects. First, it makes imported goods cheaper for people living in China. That will slow inflation. Second, a higher valued yuan will lead China to import more from countries like the United States and to export less. This will reduce demand in its economy and slow growth.
And the flip side of this story is -- that's right, the U.S. exports more to China and reduces its imports, leading to an improvement in our trade balance and a boost to growth. In other words, the fact China wants to slow growth means that they should be very happy to increase imports from the United States. We should be worried if the opposite were true; if China, like the U.S., Japan, and Europe desperately needed to increase demand, then we would face more of a problem.
(I am going to ignore the fact that Ezra called me "no one.")Add a comment
Morning Edition had a segment on the current turmoil in financial markets in which it asserted that the United States still has not recovered from the effects of the financial crisis. This is not true.
The economy is not in any obvious way suffering from the effects of the financial crisis. Potential homebuyers have little difficulty getting mortgages. We know this because the Mortgage Banker Association's mortgage application index has not been rising. This index measures applications, not mortgages. If otherwise qualified buyers were being turned down by banks, they would have to put in multiple applications to get a single mortgage. This is not happening.
The real and nominal interest rates on corporate bonds are at extraordinarily low levels indicating that larger firms have no difficulty getting capital. The National Association of Independent Businesses, which consists of smaller businesses, has fielding a monthly survey for more than a quarter century that asks its members what are its biggest problems. Very few cite the availability or cost of finance, indicating that small business does not finance as a problem either.
The economy's weakness is easily explained by the collapse of the housing bubble. The overbuilding of the bubble years led to enormous oversupply of housing and most type of non-residential structures. Therefore construction is hugely depressed. Similarly, the loss of close to $8 trillion in housing wealth is leading to predictable drop in consumption. The bubble wealth pushed the saving rate close to zero. It is now rising back to its normal level of close to 8 percent.
In short, the fallout from the collapse of the bubble easily explains the economy's weakness. It is not clear why NPR is telling its listeners that the problem is the financial crisis.Add a comment
National Public Radio showed either its ignorance of the policy community in Washington or its bias in supporting Peter Peterson's efforts to cut Social Security and Medicare in a news story on the deficit and taxes. It described Maya MacGuineas, the head of the Committee for a Responsible Federal Budget, as:
"about as close to an independent voice on tax policy as you'll find in the nation's capital."
While Ms. MacGuineas has been critical of both political parties, this is true of many of the people working on budget policy in Washington. It is remarkable if NPR is somehow unaware of this fact.
Ms. MacGuineas has consistently taken positions that are consistent with those supported by Peter Peterson (whose foundation supports her work). Her organization has not shown in interest in proposals that focus on reducing the deficit by taxes on Wall Street speculation or reforming the U.S. health care system, the primary driver of the long-term deficit.
NPR's comment is inaccurate and misleading to listeners, as well as insult to dozens of people doing policy work on budget issues in Washington.Add a comment
The Washington Post is trying to win yet another Pulitzer for bad reporting. Today's entry is a page 4 story discussing the impact of potential cuts to the military budget. The Post told readers that the Pentagon could face $600 billion in cuts over the next decade.
That is supposed to sound really really big. But is it? It would have been helpful if the Post had bothered to tell readers the baseline level of spending. The Congressional Budget Office baseline is $7.8 trillion over the decade, putting the proposed cuts at a bit under 8 percent of projected spending.
Another useful benchmark is the pre-2001 level of spending. If spending were the same as a share of GDP as the pre 9-11 level, we would spend approximately $5.4 trillion on the military over the next decade.Add a comment
The Post forgot to mention the role of the European Central Bank (ECB) in worsening the European debt crisis. The original crisis stemmed from the failure of the ECB to notice and respond to the huge housing bubbles that were driving the economies of countries like Spain and Ireland.Instead, it allowed these bubbles to grow to sizes where their collapse would inevitably sink the economy.
However, the ECB has compounded this damage by its limited response the downturn. It never pushed its overnight money rate below 1.0 percent, in contrast to the zero rate at the Fed. It also was more cautious in it quantitative easing policy and now is actually raising rates, ostensibly because it fears inflation.
Higher interest rates will worsen the debt situation for two reasons. First, it will tend to put upward pressure on the interest rates that countries must pay on their debt. Second, it will slow growth. Slower growth will mean reduced tax revenues for debt burdened countries and higher payments for unemployment insurance and other benefits.
Anyone reporting on the course of the debt crisis of the Euro zone countries has to give the ECB a starring role.Add a comment
For some reason the media never find room to mention the fact that Erskine Bowles is a director of Wall Street investment bank Morgan Stanley (an otherwise bankrupt beneficiary of the bailout). Bowles was a co-chair of President Obama's deficit commission and is now apparently one of the people whose name is being mentioned as a possible successor to Timothy Geithner if he were to resign as Treasury Secretary.
If Bowles was getting $350,000 a year from the United Auto Workers it seems likely that it would be mentioned in news reports. It's not clear why the media do not think his ties to a major Wall Street bank are relevant.Add a comment
Casey Mulligan seems to believe that because some groups (i.e. older workers) can increase their employment in a downturn, that the problem is one of supply and not demand. As I noted in my past exchange, a recession does not mean that some demographic groups will not be preferred to others. In the downturn there has been an increase in employment for college grads also.
There is nothing inconsistent with the idea that demand is a constraint on employment yet some individuals may be able to beat out others for the jobs that are available, either because they have more experience in the case of older workers or they have better skills in the case of college educated workers. This is very different from saying that if only all our workers had these advantages (being more experienced or college educated) that we would not have a problem of unemployment.
In fact, even among these groups unemployment has risen substantially in the downturn. If we snapped our fingers and suddenly our whole workforce had the experience of the over 55 population or the skills of a college graduate then we would see many more experienced and college educated workers unemployed. I don't see anything in Mulligan's story suggesting otherwise.
(As another example, Mulligan shows us that employment has increased in Texas. Is this a surprise? There has been a huge increase in oil and gas prices that has both increased demand in these industries and led to a substantial increase in the money flowing into the state for royalties. Also, Texas did not have as large a housing bubble as states like Nevada and California. Therefore, it suffered much less damage when the bubble burst.)
Finally, Mulligan insists that us Keynesian types have no evidence that lack of demand explains the downturn. Actually, there are a number of macroeconomic models that have been built up over the years based on evidence of firm and individual behavior. These do support the view that the downturn is attributable to a lack of demand. Also, there was a study (Feyrer and Sacerdote, 2011 and my comment) of the state by state effects of the stimulus that found multipliers that were very much consistent with the ones predicted by these macroeconomic models. So, we have the standard Keynesian theory, which is largely embedded in macroeconomic models based on years of data collection, that is now supported by a careful analysis of the impact of the stimulus.
That seems pretty good in the evidence department, what does Professor Mulligan have?
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Politicians don't always tell the truth. Most school kids know this, but apparently the NYT believes otherwise. That explains why it tells us that:
"the reason that many conservative Republicans refused to vote for the [debt] agreement" was that the debt to GDP ratio would still rise even with the proposed cuts. Actually, this is what many conservative Republicans said. That is how it should be reported, as in "many conservative Republicans said ......"
The NYT also said that this is the reason the bond rating agencies are considering a downgrade of U.S. debt. Again, a newspaper reports this as "this is the reason that the bond rating agencies have given ..."
The bond rating agencies do not have a great deal of credibility at the moment, having rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade, and getting paid tens of millions of dollars in the process. No one can accept their claims at face value, especially since it is not even clear how they think the U.S. could ever default on its debt. (The debt is owed in dollars. The U.S. prints dollars. How could we be unable to pay our debt, apart from deliberate non-payment through failing to raise the debt ceiling?)
The piece also wrongly asserts that Social Security contributes to the debt. This is not true. Under the law, Social Security can only spend the money in its trust fund and not a penny more. If it runs short of money then payments would not be made. This is a very serious error that the NYT should not make. (It is clear that the article is referring to the on-budget budget, since it reports that CBO projects that the debt to GDP ratio will exceed 100 percent of GDP in 2021. This is only true if we look at the on-budget budget and add in the debt held by the Social Security trust fund.)
It would also have been useful if the article found at least one source who was not a deficit hawk. There are no shortages of economists, policy analysts and elected officials who fall into this category.
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No one expects sophisticated economic thinking from the Washington Post (a.k.a. Fox on 15th Street), but they really surprised readers with an article on the debt ceiling where they took the fall in the stock market as evidence that investors did not have confidence in the debt deal. After making assertions that investors believe the deal did not go far enough in cutting the deficit, the Post told readers:
"The lack of enthusiasm among investors for the deal was reflected in the U.S. markets. Stocks on Tuesday had their worst day in nearly a year, wiping out the gains made so far in 2011."
The most obvious explanation for the fall in the stock market would be a series of weak economic reports. If the issue is confidence in the ability of the U.S. government to pay its debt than the relevant market would be the bond market. Interest rates on U.S. debt fell on Tuesday hitting extraordinarily low levels, suggesting that investors have no concern whatsoever about the ability of the U.S. government to repay its debt.
The article also includes a very confused discussion about the status of the dollar as the world's reserve currency. It gets most of the basic wrong.
First it implies that it would be a bad thing for the United States if the dollar stopped being the world's leading reserve currency. It is difficult to see why this would be the case. The demand for dollars by foreign central banks pushes up the value of the dollar thereby making U.S. goods less competitive in world markets. The high dollar is the cause of the U.S. trade deficit.
A trade deficit also logically implies negative national saving. If we have a trade deficit of 5 percent of GDP (as we did before the collapse in 2008), then we must have negative net national savings. This logically implies (i.e. there is no damn way around it) that we will either have negative public savings (big budget deficits) or negative private savings (households spend their entire income).
For this reason, it is not clear why we would want foreign central banks to buy and hold large amounts of dollars. In fact, a newspaper like the Post, which has been crusading for deficit reduction forever, should be especially anxious to see foreign central banks reduce their holdings of dollars. (This is all the standard economics that business reporters should have learned in their intro econ classes.)
The article also implies that central banks have to hold dollars as reserves because there is no good alternative currency. Actually, the amount that central banks hold in reserves is not a fixed amount. The amount of money that central banks held as reserves soared in the years following the East Asian financial crisis in 1997.
The IMF treatment of the crisis countries was deemed so harsh by the countries in the region and elsewhere in the developing world that they began to accumulate massive amounts of reserves in order to avoid ever having to be in the same situation. Central banks don't need to find an alternative currency to park their reserves. They can just decide that they no longer need to hold so much money as reserves. If this happened, they could unload dollars. This would allow the dollar to fall and bring the trade deficit closer to balance.
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Fox on 15th Street had another front page editorial calling for cuts in Social Security, Medicare, and Medicaid. It told readers:
"Foreign investors and economic analysts see further action as crucial to restoring the United States’ financial reputation."
Without actually citing any investors or analysts it then added:
"On Tuesday, critics in China and elsewhere warned that the initial debt-reduction package, which would cut about $1 trillion from agency budgets over the next decade, is too modest. And they complained that the last-minute agreement will not tackle the dangers that national health and retirement programs pose to the government’s long-term fiscal health."
It would have been interesting to know who these critics were. The reaction of actual investors in the market was the opposite. Interest rates on U.S. Treasury bonds have been falling for most of the last month and fell again yesterday. The investors who are putting trillions of dollars oon the line apparently have a different assessment of the country's financial situation than the Washington Post.Add a comment
The NYT had a great opportunity to raise this question, but for some reason chose not to. A lengthy piece discussing the possibility and implications of a downgrade never asked the fundamental question, how could the United States ever be unable to pay off its debt?
This a simple but important point. The debt is issued in dollars. That means that the U.S. government is committed to paying it off in dollars. The U.S. government also prints dollars. So does a downgrade mean that Moody's thinks that it is possible that at some point we will forget how to print dollars?
The NYT should have asked this question in the article. We should ask why they didn't.Add a comment
The sky is up, grass is green, and Clinton got budget surpluses because the economy grew much more rapidly than expected. We know this because the Congressional Budget Office (which passes for God in Washington budget debates) told us in 1996 that the deficit in the year 2000 would be $244 billion or 2.7 percent of GDP ($405 billion in 2011). CBO calculated that the net impact of legislated changes between 1996 and 2000 was to raise the 2000 deficit by $10 billion.
Therefore when Bloomberg tells us that the economy grew at a 4 percent annual rate from 1994 to 2000 as the federal government's budget moved from deficit to surplus, this is like telling us that the sun rose as the rooster crowed. Yes, the sun did indeed rise, but the rooster's crowing had nothing to do with it.Add a comment
Dana Milbank, a Washington Post columnist who doubles as a fashion critic, devoted today's column to ridiculing progressive members of Congress who complained about the deal on the debt ceiling. He presents a number of quotes from progressive members of Congress who complained about cuts that may mean that people cannot afford housing, heat, food or medical care.
While these were all very funny, it would be much easier to find ridiculous comments from deficit hawks. For example, Mr. Milbank could fill endless columns with lines from former Senator Alan Simpson, the co-chair of President Obama's deficit commission. Mr. Simpson apparently thinks that we have just discovered the existence of the baby boom cohort as they are on the edge of retirement.
He also could have included comments from David Walker, the former comptroller general at the Government Accountability Office and also former head of Peter Peterson's Foundation. Mr. Walker has repeatedly warned that if we don't get the deficit down, then the dollar could fall against other currencies. This one is really hilarious, because a decline in the dollar against other currencies is actually supposed to be one of the main benefits of lower deficits.
In standard economics the argument is that deficit reduction will reduce the trade deficit by lowering U.S. interest rates, which will make dollar assets less attractive to foreign investors. If they buy fewer dollar assets, then the dollar will fall, improving our trade deficit. Now how funny is that? Our former comptroller general doesn't even know which way is up when it comes to the deficit, his life's obsession.
Milbank also could have made fun of the bond rating agencies threatening to downgrade U.S. government debt. What does this mean? U.S. government debt is denominated in dollars. The U.S. government issues dollars. Do Moody's and Standard and Poors think that the government will lose the ability to issue dollars? In other words, what could they mean with this threat to downgrade U.S. debt?
The credit rating agencies are making a nonsense threat. Now that is really funny.
Milbank could fill many columns making fun of the deficit hawks who are trying to whip up hysteria with nonsense stories about the budget and the economy. Of course the Post, his employer, is at the forefront of this effort. So, Mr. Milbank sticks to making fun of politicians who profess concern for the poor and middle class, and to fashion criticism.Add a comment
In a front page news article the Post told readers that the debt ceiling battle was really a battle over "the size and role of government." Is this something their mother told them?
I didn't see anyone in this debate arguing for "big government." If there is anyone in the country who supports big government as a matter of principle, they have a seriously losing electoral position.
In the real world the battle is over specific programs. And, apart from the military, there is overwhelming support for most of what the government spends money on -- Social Security, Medicare, Medicaid, and unemployment benefits -- across the political spectrum. Everyone from liberal Democrats to Tea Party Republicans strongly supports these programs.
In fact, there is only a small minority that really wants to see these programs cut back in a major way. Of course this minority is extremely powerful since it includes much of Wall Street and major news outlets, like the Washington Post.
It helps to advance the agenda of those who want to cut the major social programs to mischaracterize the issue as a debate over the size and role of government. This can create serious divisions among the programs' supporters. However, if the debate is more accurately described as one between people who support social programs and those who oppose them, then the Washington Post's position has much less chance of succeeding.Add a comment
Yes, it was just a throw away line. But serious newspapers do not say in front page story that:
"Over the long term, the deal could help free the nation from what is fast becoming a crushing debt."
Lines about a "crushing debt" should appear in quotations or left to the opinion pages. They should not be assertions of fact to readers.Add a comment
Okay boys and girls, this stuff about a credit downgrade has gone far enough. We know that all the important people in Washington and on Wall Street are warning us about the possibility that the credit rating agencies will downgrade the U.S. government if we don't reduce the debt to their standards. But what could this possibly mean?
The U.S. debt is denominated in dollars. The government issues dollars. Do Moody's and Standard and Poor's think that there will be some point in the future where the government will not be able to issue dollars?
Let's say this so that even a reporter with an elite news outlet can understand it. Suppose I issue IOUs that are payable in Dean Baker IOUs. What is the likelihood that I will ever default on my IOUs?
That's right, unless I lose the ability to write, the probability is zero. There is a possibility that at some point that Dean Baker IOUs will lose some of their value (i.e. inflation) because I have issued so many of them. However the credit rating agencies are not in the business of making inflation predictions. They certainly don't have any obvious expertise in this area.
Furthermore, if a debt downgrade for the U.S. is simply a forecast for higher inflation, then the debt downgrade must apply to every debt issue denominated in dollars. In other words, if U.S. debt loses 30 percent of its value because of higher than expected inflation, then so will dollar denominated debt issued by General Electric, AT&T, or the government of Israel.
In other words, if the concern really is higher inflation, then the credit rating agencies must be considering downgrading all debt denominated in dollars. But, they have not threatened every issuer of dollar denominated debt with a credit downgrade, so this must not be what they mean.
So, what does the threat of a credit downgrade mean? The reporters should be asking this question and giving us the answer. This is their job.Add a comment