Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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The NYT had an article on the response in the UK to warnings from Moody's that it may downgrade the country's debt because of the country's week economy. It is worth noting that it has been roughly 20 months since the Conservative-led UK government first began to implement its austerity program. President Obama saw a resounding electoral defeat in November of 2010, 20 months after Congress passed his stimulus program. Add a comment

ABC News took budget reporting to new levels of irresponsibility last night telling its viewers to think of the federal budget like the family budget by knocking off 8 zeros to make spending $38,000, instead of $3.8 trillion. While this approach could be useful to put some items in context (spending on TANF, the main welfare program, would be around $190; the $1 million Woodstock museum that served as a main prop for John McCain's presidential campaign would cost 1 cent), it is fundamentally misleading in explaining the significance of the deficit and debt.

Unlike ABC's family, the government is expecting to be around in perpetuity. This means that it never has to pay off its debt. At the least, it would be more appropriate to make a comparison to a corporation, which may forever add to its debt as it grows. No shareholder would complain if General Electric borrowed a huge amount of money to expand a profitable division. Government spending fosters growth by financing education, infrastructure and other public investments which will make the country richer in the future.

However, there are even more fundamental differences between the government and a family. The U.S. government's debt is in notes printed by the government. If ABC wants to make the family analogy, its family has an obligation to pay off the $9,000 it has borrowed in 9000 sheets of paper that say "I owe you $1, payable in notes that say 'I owe you a note saying that I owe you a note'."

Most families can't borrow on such terms, but the government can and does. If ABC can't explain this distinction in its 2 minute and 30 second news segment, then it should look for a different analogy.

Finally, the government has the responsibility to support the private economy. The collapse of the $8 trillion housing bubble (which ABC News neglected to tell its viewers about as it was growing) left a gap in annual demand of close to $1.4 trillion.

When the bubble burst annual spending on residential construction fell by close to $600. Consumption, which had been fueled by housing bubble generated equity, fell by close to $500 billion. The collapse of a bubble in non-residential real estate led to a fall off in this sector of close to $150 billion. And, cutbacks in state and local spending, forced by the decline in tax revenue, reduced annual demand by another $150 billion.

It would be wonderful if private sector demand would spring up and replace this lost demand, but the world doesn't work this way. If the government were to quickly cut back its deficit it would lead to lower output and higher unemployment.

To make the family analogy, suppose that the family's spending was responsible for keeping the local butcher, barber, and doctor in business. If the family decided to stop using its credit card, one or more of these businesses would go under.

If ABC wanted to do honest reporting on the budget, it would have crafted its family analogy along these lines.

One last point, ABC said that President Obama broke a promise by not cutting the deficit in half. It would have been useful to point out that the downturn was far more severe than President Obama, and most private economists, expected at the time he made this promise. This is the main reason that the deficits have not followed the course that expected.

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The folks at the Washington Post have worked themselves up into the usual tizzy over the fact that President Obama has not proposed large cuts to Medicare and Social Security in his 2013 budget. In keeping with this spirit over at Fox on 15th Street, Post columnist Dana Milbank thinks he has nailed President Obama on a big increase in his deficit projections since last fall.

Milbank tells readers:

"The Washington Post’s Lori Montgomery asked why the projected debt had swelled by $1 trillion since September. Zients spoke about 'differences in economic assumptions.'

But that didn’t hold up, because the Economist’s Greg Ip pointed out that the White House is using an optimistic 3 percent forecast for economic growth this year, higher than the Federal Reserve and private-sector forecasts."

You can hear the high fives and gotchas down at the Post even up here near the city's boundaries in 16th Street Heights. It turns out that the Post gang missed their mark, which they would know if anyone there ever did their homework.

Budget projections are made on economic assumptions; what matters is how the assumptions change, not what the economy is actually doing. While the assumptions should reflect the real world, it is only the assumptions that matter. If we look at the assumptions used last September we see that they are in fact quite a bit more optimistic than the assumptions being used in the 2013 budget. 

budget_projections_10120_image002

Source: Office of Management and Budget.

Last fall the administration was assuming that the economy would grow by 2.6 percent in 2011 and 3.3 percent in 2012, the current budget assumes 1.8 percent and 2.7 percent, respectively. Projected annual growth in the new projections doesn't exceed growth in the September projections until 2015. Clearly the slower growth assumptions would imply larger deficits. Whether this could explain the full $1 trillion change would require a more careful examination of all the assumptions used in the projections, but Milbank and the Post's gotcha doesn't hold water.

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Yes, that was back in 2001 when Greenspan was arguing for the virtues of President Bush's tax cuts. That concern turned out to be somewhat misplaced. However the inaccuracy of the projections being used at the time, which did show the country paying off its debt inside of a decade, should provide some caution in assessing long-range projections.

The inaccuracy of these projections might cause some to question the wisdom of the Washington Post's decision to headline a piece on President Obama's budget:

"Obama budget: National debt will be $1 trillion higher in a decade than forecast."

An assertion like this implies a level of accuracy in these long-range projections that is not at all justified by their track record. It also would have been helpful to point out that $1 trillion is a bit more than 4.0 percent of projected GDP for 2022.

While this article includes the criticisms of people who feel that President Obama did not go far enough in reducing the deficit in this budget, a balanced piece would have included the comments of some of the many economists who criticize the administration for failing to have sufficient stimulus to bring down the unemployment rate more quickly.

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Those familiar with economics know that government deficits can help sustain demand in a downturn, keeping GDP from falling and unemployment from rising as much as would otherwise be the case. This could mean that it would be desirable to have large deficits in response to a steep downturn like the one we have seen following the collapse of the housing bubble.

But the NYT doesn't buy it. A news story on President Obama's 2013 budget told readers:

"The one charge the White House has no defense against is that with the new budget, Mr. Obama has broken his 2009 promise to cut the deficit in half in his first term. The deficit that year was a record $1.4 trillion. The deficit in fiscal 2012 will total $1.3 trillion."

The economic downturn was far more severe than what President Obama's advisers (like most economists) assumed when he made this promise. President Obama and his advisers certainly can be blamed for failing to recognize the severity of the damage that would be caused by the collapse of the housing bubble, even as late as 2009, however most people might consider the worse than expected downturn, kind of a like or a war or enormous natural disaster, to be a pretty good defense here.

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Andrew Ross Sorkin has a lengthy discussion of the complexities of the Volcker rule, which bans proprietary trading by banks that hold government guaranteed deposits. The point of the rule is that banks should not be taking risks with taxpayers' money.

While Sorkin ultimately comes down in favor of the rule, he neglects to point out that until 1999 there was a much stricter rule in the form of the Glass Steagall separation between commercial and investment banking. Up to that point, investment banks like Goldman Sachs and Merill Lynch could do whatever trading they wanted. In principle they were not putting government money at risk, since they did not enjoy protection from the Fed and the FDIC. These banks also made large profits.

If banks now find the Volcker rule to be too onerous, as they claim, then there is no obvious reason they could not just separate their investment banking and commerical banking divisions so that they are again independent companies. It is certainly understandable that the banks would prefer to be able to gamble with taxpayers money (who wouldn't?), but they really don't have much of a case.

btw, Sorkin begins his piece with a paean to Volcker:

"It is hard to disagree with Paul A Volcker.

"But I will.

"On Monday, Mr. Volcker, the former Federal Reserve chairman who almost single-handedly rescued the United States from the stagflation crisis of the late 1970s."

Whether or not one agrees with the interest rate policies that Volcker used to slow inflation, which gave us double digit unemployment, it is a bit hard to describe Volcker as uniquely talented. All wealthy countries saw a sharp decline in their inflation rates at the beginning of the 80s. This suggests that Mr. Volcker's skills were not needed to bring inflation down.

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David Brooks is upset that liberal economists keep harping on the loss of middle class jobs as the main factor behind the disruption of working class families and communities. In expressing his anger he creates a caricature, since there probably is no economist who would claim that the problems of working class people are exclusively their poor employment prospects.

Bad economic prospects lead to a variety of ills that cannot be simply reversed when the economy turns around. This is why many of us left-wing economic types are angry with the Brooks types who think it is just fine if we wait until 2020 to get back to normal levels of employment. 

Brooks also has an interesting theory on the loss of skills. He tells readers:

"The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them."

Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column.

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Robert Samuelson is unhappy that so many people without jobs are getting Social Security disability benefits. He notes the sharp rise in the number of beneficiaries over the last two decades. 

He misses one reason that the number of beneficiaries could be rising. Many companies have striven to downsize to save money and increase their productivity. This downsizing effort is often touted as one of the factors behind the uptick in productivity growth in 1995.

However an implication of this downsizing is that less productive workers will lose their job. A worker who is downsized out of a job at age 50, who may actually have serious mental and/or physical problems that limit their ability to work, will have a very difficult time finding a new job. Such a person may well end up getting disability whereas in prior times a company may have been willing to keep them on the payroll until retirement.

Insofar as this is the case, the rise in disability recipients may be a direct outgrowth of faster productivity growth. The alternatives would be slower productivity growth (leaving these people on company payrolls) or letting them slip into abject poverty. 

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It's always good to get a silly caricature to begin the week and Fred Hiatt at the Washington Post is happy to supply one. He presents us with the divide between "nostalgia liberals" and "accountability liberals."

The story is that nostalgia liberals are opposed to means-testing Social Security while accountability liberals say "the only way to protect benefits for the poor is to scale back expected benefits for the wealthy." Nostalgia liberals support traditional public schools, while accountability liberals support charter schools and testing. More generally, "accountability liberals put more stock in market forces and individual empowerment." Of course the picture of "nostalgia liberals" is a ridiculous caricature by someone who is a charter member of the "accountability liberals" masquerading as a neutral voice.

Starting with Social Security, those familiar with arithmetic know that almost no money can be saved by cutting benefits for the wealthy. The only way to save substantial money is by extending a means test down to people earning $30,000 a year, which does not ordinarily pass for wealthy.

Also, contrary to what Hiatt claims, Social Security is not a subsidy to middle class and wealthy people, it is a government-run insurance system. The middle class and wealthy pay for their benefits.

Hiatt also seems to think that an aging population is a new story. It isn't. Fifty years ago there were five workers per retiree, today there are three. In spite of the declining ratio of workers to retiree, we still enjoy higher living standards today than we did 50 years because of productivity growth. Productivity growth is of course continuing which is why we will have no difficulty supporting a larger population of retirees and still have rising living standards, assuming that the gains from productivity growth are shared widely.

The real problem is of course our broken health care system, as every analyst knows. If the United States paid the same amount for its health care as any other wealthy country, then we would have budget surpluses in the long-term, not deficits.

The point about schools also misrepresents reality. The accountability liberals have been calling the shots in school policy for two decades and have little to show for it. It is hard to see this drive as anything more than a glorified effort to bash teachers' unions, which is the one area where it clearly has been successful.

Contrary to Hiatt's caricature, there are plenty of ways in which some who he dubs "nostalgia liberals" would be happy to embrace market forces, such as ending too-big-to-fail banks that enjoy implicit government protection, less stringent patent protection for prescription drugs, and more open trade for highly paid professionals like doctors and lawyers. But acknowledging this fact would undermine the caricature, so Hiatt would not venture into this territory.

 

 

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The NYT had an article reporting on the rebuilding following last year's earthquake and tsunami in Japan. The article is devoted to what it describes as a generational conflict where older residents wanted even the smallest villages rebuilt whereas many younger residents preferred to save money by consolidating some of the smaller villages into large ones.

At one point the piece describes the rebuilding as a boon to "politically connected" construction companies. It would have been helpful to include more discussion of the impact of these construction companies on the rebuilding process. The more money is spent, the more they would stand to profit. For this reason, it seems likely that they would be opposed to plans to save money by consolidating villages. It would be interesting to know the extent to which they played a role -- as oppose to older citizens -- in pushing the decision to rebuild all the villages.

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Thomas Friedman gives the Republicans some well-deserved bashing in his column today, but he also unthinkingly repeats his standard lines:

"The second of our great long-term challenges are our huge debt and entitlement obligations."

Of course our debt has expanded substantially due to the economic devastation caused by the collapse of the housing bubble. It is not at a level that poses any great harm to the country as witnessed both by the fact that financial markets are willing to lend the United States money at very low interest rates and also that the United States and other countries have been able to sustain much larger debt burdens for long periods of time.

The part about entitlement obligations is misleading since the real problem is the broken U.S. health care system. We pay more than twice as much per person for our health care as people in other wealthy countries. This gap is projected to rise rapidly in the decades ahead. If we paid a comparable amount for our health care we would be looking at long-term budget surpluses, not deficits.

It is ironic that Friedman unthinkingly repeats cliches about entitlements when the point of the article is adopting policies to ensure that the United States is among the HIEs (high-imagination-enabling country) rather the LIEs (low-imagination-enabling countries).

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In a column discussing Charles Murray's new book, Coming Apart, Ross Douthat decries the fact the choices posed are between Murray's do-nothing libertarianism and the "liberal view" that:

"there’s nothing wrong with America’s working class that can’t be solved by taxing the wealthy and using the revenue to weave a stronger safety net."

Of course there is a more obvious progressive response that involves reversing the policies that have led to the massive upward redistribution of income over the last three decades. This would include opening up highly paid professions (e.g. doctors, lawyers, economists) to trade in the same way that we have opened up manufacturing to trade. This would put downward pressure on the wages of these professionals. That in turn would lower the cost of health care and the other services they provide, thereby raising the wages of ordinary workers.

We could also look to alternatives to patent protection to supporting research in prescription drugs. We pay close to $300 billion a year (2.0 percent of GDP) for drugs that would cost $30 billion in a free market. The difference of $270 billion a year is roughly five times as large as what is at stake with extending the Bush tax cuts to the wealthy.

The country could change rules on corporate governance so that CEOs don't get to effectively write themselves huge paychecks at the expense of other corporate stakeholders. If executives in the United States were paid in line with executives in other wealthy countries it would free up tens of billions of dollars for increased investment and higher pay for ordinary workers.

And, the government could end various forms of public subsidies for Wall Street banks, such as too-big-to-fail insurance. This would also save tens of billions of dollars a year.

There are many things that could be done to improve the situation of the white (and African American and Hispanic) working class that have nothing to do with tax and transfer policy. However, folks like Douthat want to restrict progressives to a loser liberalism agenda which he quite correctly points out is not very attractive.

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The Washington Post is widely known as a hotbed of Neanderthal protectionism, strongly supporting measures that shield highly educated professionals from international competition. This has the effect of redistributing income from autoworkers, textile workers and other people who have been subjected to international competition by deliberate policy to the highly educated workers who enjoy protection.

It carried its protectionist agenda a step further in a lengthy front page business section piece that told readers that:

"It is no exaggeration to say that the success of the health-care law rests on young doctors choosing to do something that is not in their economic self-interest."

This view is also pounded home in the headline to the print version of the article:

"The health-care overhaul depends on primary-care doctors. They work more and earn less. Who'd sign up for that?"

Remarkably the piece never once mentions the possibility of filling any potential shortage of primary care physicians with an increased number of foreign doctors. The article reports that the median compensation for primary care physicians is $208,700 a year.

There is no shortage of smart people in countries like China, India, Mexico and elsewhere who would be happy to train to U.S. standards, become completely fluent in English and work for half of this wage. The gap in wages between the United States and these countries is so large that doctors from these countries would be far ahead of what they could earn in their home countries even if they only made $100,000 a year.

It is also simple to design systems that would repatriate a portion of the earnings of immigrant doctors to their home countries so that they can train 2-3 doctors for each one that came to the United States. This could ensure that the countries sending doctors to the United States also saw improvements to their health care systems.

Unfortunately the Washington Post, like most of the political elite, is so committed to its protectionist agenda that it does not want such possibilities to even be discussed. 

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The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn are the main factor behind the current deficit:

"Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt."

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a sudden urge on the part of politicians to increase the generosity and scope of these programs.

A second point that deserved more emphasis is the extent to which the projected budget problems in future years are the result of a broken health care system. The United States already spends more than twice as much per person for its health care as do people in other wealthy countries with little obvious benefit in outcomes. This gap is projected to grow rapidly in the decades ahead. If U.S. health care costs were in line with costs in other countries then the country would be looking at long-term surpluses, not deficits.

A third factor that provides an important backdrop to this discussion is the path of wage growth. The people interviewed for this piece expressed concern for their children and grandchildren's living standards based on the possibility that they would face higher taxes. However, the extent to which taxes impose a burden depends hugely on workers' before-tax income.

If workers get their share of projected productivity growth, then real wages will rise by roughly 1.3 percent a year, even assuming a higher portion of compensation going to pay health care benefits. This growth rate implies that wages will be nearly 40 percent higher after 25 years, roughly a generation. This would mean that if most workers got their share of productivity gains, then after-tax wages would be far higher for the next generation than for current workers even if the tax rate they paid increased substantially. 

This brings home the point that the real problem faced by the people interviewed for this piece and elsewhere in the country is that they have not been sharing in the gains of economic growth. If the current policies that enforce this pattern of income distribution persist, then workers in the future will find their taxes to be a serious burden, however the core problem is the set of polices (e.g. trade, Fed policy, patent policy etc.) that lead to an upward redistribution of income, not taxes.

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The Washington Post has an interesting piece about opposition to a trade pact between the European Union and India which could limit the ability of India to supply generic medicines for treating AIDS and other diseases. The article repeatedly refers to the agreement as a "free-trade" pact.

This is 180 degrees wrong. Patent protection is the opposite of free trade. It is a government-granted monopoly. Patent protection is a government policy for supporting innovation. Just as trade protection in other areas is a form of industrial policy.

Patent protection leads to the same sort of distortions as economists criticize from other types of protection except the magnitudes are much larger with patent protection. In the case of prescription drugs, it often raises prices by many thousand percent above the free market price. Most tariffs only raise the price of products by 20-30 percent. There are arguably more efficient mechanisms for supporting research on prescription drugs.

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The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.

It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:

                               X-M = (S-I)+ (T-G)

This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.

That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.

That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villain the story.)

But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.

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BusinessWeek decided to take a shot at Paul Krugman. Okay Krugman, like everyone else in public debate, is fair game. But if they can find a reporter who knows a little economics they might better serve their readers by constructing a little scorecard.

Krugman (along with a few other Keynesian types out here) has staked out very clear positions on a number of key economic issues such as the size of the stimulus, the impact of deficits on interest rates, and the impact of quantitative easing on inflation. Maybe Businessweek can tell its readers whether the Keynesians have been right or whether the fresh water types carried the day.

Then, if they really want to be cruel, they can ask who warned about the housing bubble before it actually sank the economy.

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Short-term measures of real family income are driven primarily by sampling error and erratic movements in the consumer price index. The latter is mostly due to fluctuations in energy prices.

This is the reason that most economists, unlike USA Today, would not take seriously a report showing a large gain in median family income in the last four months of 2011. The main reason for the sharp rise in income shown in this report is likely the sharp drop in the consumer price index over this period.

It is more useful to report these data over longer periods of time so that random fluctuations play less of a role. Given the vast amount of material that is available for free on the web, it is especially difficult to understand why USA Today would place so much emphasis on a newly produced report that is being sold for $20 each.

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The NYT had an interesting article reporting on new research showing a sharply growing gap in educational outcomes based on the income of children's parents. While the racial gap has fallen sharply, this income gap has exploded.

The discussion of this research was quite valuable, however the second part of the article was devoted to telling readers that nothing can be done. For example, article concluded by presenting the views of Douglas Besharov, a fellow at the Atlantic Council who was formerly at the American Enterprise Institute:

"The problem is a puzzle, he said. 'No one has the slightest idea what will work. The cupboard is bare.'"

Of course there are all sorts of ideas on measures that would reduce income inequality, which would presumably also reduce the large gap in educational outcomes. For example, if doctors and lawyers were not largely protected from international competition they would no longer have the sort of incomes that would allow them to hire tutors and give other advantages to their children compared with the children of ordinary workers.

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The Washington Post still seems to not have seen the housing bubble. A front page article refers to a housing "slump" and discusses the possibility that the states' settlement on foreclosure practices will heal the housing market.

These sorts of comments imply that it is plausible that the housing market will somehow bounce back to its bubble levels of prices and construction. It isn't.

The bubble led to house prices in many parts of the country that were completely out of line with the fundamentals of the housing market, just as was the case with stock prices at the peak of the stock bubble in 2000. It also led to enormous overbuilding of housing.

There is no reason to expect house prices to bounce back at all, as house prices nationwide are just now returning to trend levels. Housing construction will pick up gradually as the oversupply from the bubble era is gradually reduced through population growth, but there is no plausible story where we will see some sort of boom in housing construction at a time when vacancy rates remain near record highs.

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A NYT Economix blognote told readers that confidence about the economy is up and that this should be reinforcing leading to a stronger economy, as firms invest more and consumers spend more. The chart accompanying the note shows the opposite.

The recent levels of the Gallup Economic Confidence Index are getting back or slightly exceeding the peaks hit at the end of 2010, just before the economy nearly ground to a halt, growing just 0.3 percent in the first quarter of 2011. After 6 months of very slow growth, the confidence measure cratered. It has been rising again following the stronger growth of the last two quarters.

In short, this confidence measure looks like a very good lagging indicator, one that tells us where the economy was.

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