Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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

Washington Post reporter Jay Mathews had a column on former DC school chancellor Michelle Rhee's initial response to a USA Today article that finds evidence of widespread cheating on the exam scores reported by one of the District's star schools. Ms. Rhee denounced the article and described the reporters who researched it as flat earthers who opposed school reform.

The next day Rhee apologized for her previous comments and acknowledged that there were important questions about the integrity of the test scores that need to be examined. Mathews praised Rhee's reversal and commented that:

"I sensed from my talk with Rhee that one reason she misspoke on Monday was that she had not had time to read either the USA Today story or the investigators’ reports, or to probe the weaknesses of test security protocols in Washington and other districts."

If true, this would be astounding. There have been major testing scandals in many cities around the country dating back to the mid-90s. In the wake of these scandals it is difficult to believe that a school administrator who substantially increased the importance of standardized tests in the assessment of teachers and schools had not given careful consideration to test security protocols.

Add a comment

USA Today had a piece that reported that distressed house sales are likely to depress house prices for years to come. The piece never refers to the housing bubble. This is remarkable since it is impossible to understand the housing market without reference to the bubble.

At its peak, the bubble pushed house prices more than 70 percent above their long-term trend values. The fall in prices to date has brought prices closer to their long-term trend, but the market still has to fall another 15-20 percent to return to its trend level. Distress sales are part of this process, but the main point is that house prices are still well above the level that would be supported by the fundamentals of the market in large parts of the country.

Add a comment
David Leonhardt has a nice column making the point that the Fed faces a lot of pressure to keep inflation under control, but it does not have the same lobby pushing it on unemployment. Add a comment
The Financial Times featured a column from former Federal Reserve Board Chairman Alan Greenspan arguing that the reforms in the Dodd-Frank bill will make financial markets less stable. Just in case you have forgotten, we have 25 million people who are unemployed, under-employed or have given up looking for work altogether because Alan Greenspan did not understand financial markets and the economy. Perhaps the FT will have a column offering advice on disaster management from Michael Brown. Add a comment
We have almost 25 million people unemployed, under-employed or who have given up looking for work altogether and he is worried about the "$14 trillion debt crisis." Yeah, this is the crisis that has pushed the interest rate on 10-year Treasury bonds all the way up to 3.4 percent. Pretty scary.
Add a comment

Ezra Klein responded to criticisms raised by myself and others of his piece urging liberals to support Social Security reform. Ezra suggests that we over-rate the importance of editorials in shaping public debate.

For myself, I never meant to suggest that the main problem was the anti-Social Security diatribes that are regularly featured in the Washington Post and elsewhere. The problem is that the major news outlets (e.g. the Washington Post, National Public Radio, the Wall Street Journal) allow their editorial position to thoroughly permeate their reporting.

Their news sections are full of pieces that highlight the Social Security crisis and routinely feature prominent people saying the equivalent of "the earth is flat," without the reporter calling readers' attention to the vast body of evidence showing that the earth is not flat. At best, readers are allowed to hear the perspective of an expert saying that the Social Security is not in crisis, but even in this sort of he said/she said story, the flat-earthers typically out-number the reality based commentators.

Add a comment

The hottest sport these days in Washington is seeing how many incorrect or misleading statements about Social Security you can get in one column. All the major media outlets are fully on board, anxious to convey any misinformation that reflects badly on the program. And there are plenty of deep-pocketed funders like Wall Street investment banker Peter Peterson who are happy to finance the effort. Hence we are seeing a plethora of pieces decrying the high-living seniors who are getting fat on their Social Security checks.

The latest contestent to enter the fray is Republican political strategist Mark McKinnon with a column in the Daily Beast. Let's play along.

Mckinnon starts by warning that the United States could end up like Greece or Portugal, abandoned by the credit markets and forced to beg international organizations to buy our debt. Very nice -- this one always gets lot of points with political pundits. Of course it is not true. The United States has its own currency, that means it can never be like Greece or Portugal.

Add a comment

Ezra Klein criticizes Social Security supporters for being reluctant to have Social Security reform taken up by Congress at the moment. He argues that Social Security and the retirement system more generally could be restructured to better serve the bulk of the country's workers. Klein notes the fears of Social Security supporters that this could open the door to serious cuts and then responds to these fears, "this country is better than that."

Of course that is true, but also irrelevant. Social Security enjoys overwhelming support from the public. Polls repeatedly show that people across the political spectrum strongly support the program and would even be willing to pay higher taxes to protect the program, but the public as a whole will not directly decide the program's fate.

Congress and the president will decide the future of the program. These politicians live in a world where a willingness to cut Social Security is routinely referred to as a sign of seriousness. Those who do not support cuts are taunted as being unrealistic and weak. Politicians who want to protect the program can expect much less campaign funding from business groups and ridicule from the media.

Add a comment

The NYT had an interesting article on the downsizing of food products by manufacturers in order to conceal price increases. It is worth noting that these price increases would be picked up by the Bureau of Labor Statistics (BLS) in constructing the consumer price index (CPI). The BLS price checkers carefully assess the quantities in products and if these change, they adjust the price charged accordingly. Add a comment
USA Today ran a carefully researched article that strongly suggests that much of the rise in school test scores under school chancellor Michelle Rhee was due to teachers' cheating. Teachers had a substantial incentive to cheat since they would get an $8,000 bonus if their students improved beyond set levels. This is the sort of serious investigative journalism that is rarely seen anymore. Add a comment

We know that arithmetic is not the strong suit of the Washington Post and Robert Samuelson drives this point home again today with his discussion of the TARP. Samuelson tells us that TARP is now projected to cost just $19 billion and that the final cost may actually be lower. He also tells us that the alternative to TARP, bank nationalization would have been far more costly. And, he said that without TARP the unemployment rate "would be 11 percent or 14 percent; it certainly wouldn’t be 8.9 percent."

Okay, let's take these in turn. First, the idea that the TARP cost almost nothing is based on some very shoddy accounting. Samuelson apparently does not understand the idea of money carrying an opportunity cost.

Suppose the government lent me $1 trillion for 10 years at 1 percent annual interest. In the Robert Samuelson world, the government is earning a $100 billion profit on this investment ($10 billion a year for 10 years). Economists familiar with opportunity costs would instead see this as a huge loss to the government, since it is giving me an enormous loan at an interest rate that is several percentage points below the market rate.

We saw how this worked with the TARP when Warren Buffett reported earning twice the money on his investment in Goldman Sachs which was half of the size of the investment from Treasury. Buffett got the market rate of return on his investment, the difference was a subsidy from taxpayers to the shareholders and executives of Goldman. The same story was true with the other TARP loans, as well as the even larger amount of money lent through the Fed as well as the guarantees provided by the FDIC.

Add a comment

Paul Krugman added another post on the potential impact of large deficits on the U.S. economy in which he argues that it doesn't matter that the U.S. can print its own currency; it still faces the same constraints from financial markets. I would argue that it matters a great deal for two reasons that I laid out in my previous post.

The first reason is that at any point in time the Fed would have the option to intervene in bond markets and buy up debt, if private investors were demanding very high interest rates. This is important because the decision by the Fed to not buy debt would always be a policy choice, not an economic fact.

There is a popular mythology in economic policy circles that in 1979 there was no alternative to putting Paul Volcker in as chair of the Federal Reserve Board to really tighten the screws and get inflation under control. At the time inflation was rising and the dollar was falling. Volcker sent rates through the roof, giving us the recessions of 1980 (destroying Carter's re-election chances) and then 1981-82. The latter recession was at the time the worst of the post-war era.

Volcker is widely touted for making the tough call to throw millions of people out of work. (Somehow rich and powerful people are always credited with being "tough" when they inflict pain on ordinary workers and the poor. It seems that if they were really tough they would be inflicting pain on the rich.) Arguably Volcker made the right call even though it did impose enormous costs on the country.

Add a comment

This is what readers of his column presenting a hypothetical presidential address to the country in 2026 must be wondering. In this speech, Mr. Mankiw's president explains to the country how the rising cost of Social Security, Medicare and Medicaid let to unsustainable deficits. Of course Mr. Mankiw's president knows that the real story is the explosive growth of the costs of Medicare and Medicaid. These were in turn driven by the soaring cost of private sector health care. If per person costs in the United States were the same as in other wealthy countries then the United States would be looking at a budget surplus, not a deficit.

Given the basic facts, it is hard to understand why Mankiw's president did not propose a system that allowed the United States to take advantage of trade in medical services by letting Medicare beneficiaries buy into the more efficient health care systems in other countries. The tens of thousands of dollars in annual saving could be split between the beneficiaries, the host government and the U.S. government. The total savings to the U.S. government would reach hundreds of billions of dollars each year.

If Mankiw's president were not such a protectionist then surely she would have pushed for such a policy long before this speech. Opening to trade certainly seems preferable to cutting off health insurance to middle income beneficiaries, as Mankiw's president proposed.

Add a comment

The Post made yet another effort to attack public sector employees today in an editorial (this one is on its editorial page) that criticized the rate of return assumptions used by public pension plans. It tells readers that:

"Eighty-eight of the 126 largest public pension plans assume a rate of return exceeding 8 percent a year, according to the Wall Street Journal. By way of comparison, the S&P 500 achieved a compound average annual growth rate of 5.69 percent over the past 20 years."

Okay, get your calculators out boys and girls. If I look up the value of the S&P 500 for March 1991 I get 375.22. The S&P closed yesterday at 1313.8. This gives a compounded annual rate of return of 6.46 percent. 

But wait, we have to share a little secret with the folks who write editorials for the Washington Post: stocks pay dividends. Dividends are typically paid out quarterly and usually average 3-4 percent of the stock price. If we add in dividend yields, then we would get an average return over the last 20 years in the 9-10 percent range that is assumed by pension funds in their analysis. 

Of course returns going forward will depend on the current ratio of stock prices to corporate earnings. This is around 15 today (measured against trend earnings) compared to about 20 in 1991, suggesting that the prospects going forward over the next 20 years are likely better than they were back in 1991.

It is especially ironic to see these misplaced warnings about excessive stock return assumptions in the Washington Post. This is a paper that for years featured the columns of James K. Glassman, the co-author of Dow 36,000. At the time, it had no room in the paper for those of us who tried to warn of the risks of the stock bubble.

Add a comment

It does not happen often, but it does happen; I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments:

"But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt."

Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece.

Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. Unless Greece leaves the euro (an option that it probably should be considering, at least to improve its bargaining position), it must pay the rate of interest demanded by private investors or meet the conditions imposed by the European Union/IMF as part of a bailout.

However, because the United States has its own currency it would always have the option to buy its own debt. The Federal Reserve Board could in principle buy an unlimited amount of debt simply by printing more money. This could lead to a serious problem with inflation, but it would not put us in the Greek situation of having to go hat in hand before the bond vigilantes.

Add a comment

This appears to be the case, since the Post featured an article, arguing that Social Security benefits should be cut, that made no reference to the the trust fund. The article tells readers:

"Social Security is the single largest federal program, dispensing about $700 billion last year to nearly 60 million people, the vast majority of them retirees. Since the program’s creation in 1935, the cost of Social Security benefits has been entirely covered by payroll taxes paid by current workers. This year, however, payroll tax revenues are projected to fall $45 billion short of covering benefits, and the problem is projected to grow as the number of retirees balloons compared with the number of working adults."

Actually, there have been prior years when current taxes did not cover benefits, but more importantly the program quite deliberately built up a surplus of more than $2.6 trillion, which is held in U.S. government bonds. It is drawing on the interest from these bonds in 2011. It will eventually rely on the principle on these bonds, which will be sufficient, together with current taxes, to cover all benefits through the year 2037.

Add a comment

In his blog today, Floyd Norris notes an unprecedented divergence between the trends in existing home sales and new home sales. He points out that existing home sales have held up reasonably well, while new home sales are down by more than 75 percent from their bubble peak.

While this is largely true (Core Logic and real estate analyst Keith Jurow have noted an upward bias in the realtors' data on existing home sales) this gap is also entirely predictable given the rise and fall of the housing bubble. New homes are the mechanism that adjusts supply and demand. When prices went through the roof during the run-up of the bubble, builders rushed to build new homes so that they could profit from the extraordinarily high prices. As a result, we had near record rates of new construction from 2002-2006.

However, once the bubble burst and prices began to tumble, there was little reason to build new homes. A large supply of homes for sale and falling prices makes building new homes an unprofitable venture. The price that builders can expect to receive is on average more than 30 percent less than it was at the peak of the bubble and they are likely to have to wait a long period of time before they can even make a sale.

For this reason, it should not be surprising that new home sales have fallen by much more than existing home sales following the collapse of the bubble. They will presumably rise back to a more normal level in the next two or three years, which is likely to mean at least a 100 percent increase from the February level. At that point, we will again be building homes fast enough to replace worn out structures and to meet the needs of a growing population.

Add a comment

Back in the old days news outlets used to try to have people associated with a political position represent that position. In other words, they used to have conservatives represent conservative positions, liberals represent liberal positions, etc. It just seemed reasonable to have the people who actually held a particular political standpoint present that standpoint to the public.

But, that was then. Now, with the ascendancy of the right over national politics, there is no reason to waste valuable space in major media outlets allowing those who are left of center to express their views. There are plenty of conservatives who regularly express their views in the opinion and news sections. Why not let some of them also express the views of those who are left of center as well?

This obviously was the position taken by the Washington Post when it decided to have Robert Pozen, a finance industry executive and advocate of Social Security privatization, tell liberals what their position should be on Social Security. David Leonhardt highlighted Pozen's "liberal plan" in his NYT blogpost today.

The gist of Mr. Pozen's proposal is to leave benefits mostly unchanged for the lowest wage earners while reducing benefits and raising the retirement age for middle income workers like school teachers, construction workers and fire fighters. By reducing the benefits for those in the middle, Mr. Pozen wants to make Social Security more "progressive." Naturally liberals who were troubled by high-living nurses and plumbers will rally behind this bold effort at redistributing income.

In keeping with this spirit, suppose that we had a media that tilted as much to the left as the current outlets tilt to the right. Obviously, people like me would have the opportunity to lay out what the conservative position should be on reforming the income tax code.

So, here's the outline of my proposal which the Post will be running next week. It will leave income taxes largely unchanged on the bottom 98 percent of taxpayers. We will raise the marginal tax rate to 50 percent on incomes between $250,000 and $10,000,000. Then we would have a zero tax bracket for income over $10,000,000. This means that the richest of the rich will pay considerably less under the Baker plan than under the current tax code. This should accomplish the upward redistribution that is central to the right's political agenda. 

I can't wait to see my column in the Post and highlighted as a conservative plan for tax reform in Leonhardt's blog.

Add a comment

Showing the sort of balanced journalism that we have come to expect from the Washington Post, its oped page featured a column by Robert Pozen, a financial industry executive and proponent of Social Security privatization, telling liberals why they should support cuts to Social Security. The gist of Mr. Pozen's argument is that Social Security is becoming less progressive over time because the gap in life expectancies between higher paid workers and lower paid workers is growing.

Furthermore, because of growing wage inequality, a larger share of wage income is escaping the Social Security tax. In addition, Pozen tells us that the structure of retirement income subsidies is highly regressive since the bulk of the tax benefits go to high income earners.

So, how do we fix the situation? Maybe improve health care for the bottom half of wage earners (other countries don't have the same gap as the United States)? Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should try to restructure the economy to reverse the policies that have led to the upward redistribution of wage income over the last three decades. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

Maybe we should reverse the structure of retirement saving subsidies so that this is more progressive. Nope, Mr. Pozen doesn't want that to be on the agenda of liberals.

How about raising the cap for the wages subject to the Social Security tax. No, Mr. Pozen tells us that Congress won't do that.

No, the best way that Mr. Pozen can think of for making Social Security more progressive is by cutting benefits for people earning $40,000 a year and higher. Yes, this has been the big problem the country is facing. School teachers, construction workers, and office clerks are getting too much money. We better take away their Social Security benefits so we can make this a fairer society. All good liberals would agree with that.

Remember you can read this only in the Washington Post.


Add a comment

The NYT reported on the Federal Reserve Board's payment of $82 billion to the Treasury last year, more than 2.3 percent of the total budget. This is striking because this figure vastly exceeds most of the budget items that have dominated the attention of Congress and the media.

In principle, the Fed can offset much of the burden of the debt run up to boost the economy during the downturn by simply buying and holding it. In that case, the interest would be paid to the Fed and then refunded to the Treasury, leaving no net burden for taxpayers. The Fed could prevent this from leading to inflation when the economy recovers by raising reserve requirements. Of course most economists agree that a somewhat higher inflation rate would be desirable at the moment since it would alleviate the debt burden of consumers.

It is remarkable that this path towards dealing with the deficit has garnered so little attention. This could perhaps be explained by the fact that the Wall Street actors who are the main financiers of the anti-deficit crusade are not interested in a deficit reduction path that does not cut social spending and risks somewhat higher inflation. Higher inflation is generally anathema to the financial industry, since it devalues the debt it owns.

It is also worth noting that most people involved in the debate on economic and budget policy are not very astute observers of the economy. They were unable to see the $8 trillion housing bubble that both gave us the current downturn and the large deficits that have fixated Washington.

Add a comment

Some folks might have heard of it. We had an $8 trillion bubble in this market in the last decade. It led to a huge construction boom. The wealth created by the temporary run-up in house prices also led to a consumption boom. When the bubble collapsed, construction plummeted and consumption fell back to more normal levels. The collapse of this bubble has given us the worse downturn since the Great Depression.

Given the importance of the housing market for the economy it might be reasonable for the media to pay some attention to important economic releases. However, news outlets don't seem to share that perspective. 

The news of a 9.6 percent drop in home sales in February seems to have escaped the notice of the New York Times and the Washington Post. The Wall Street Journal noticed the decline but raised the unlikely possibility that bad weather was a major factor explaining the falloff in sales.

This is unlikely since the data reports the number of sales that were closed in February. Since it typically takes 6-8 weeks between a contract's signing and the closing, most of the contracts for homes sold in February would have been signed in December and January. Weather would have only been a factor if bad weather at the end of the month had prevented people from coming in for a closing during February. 

It is also worth noting that both the median and average house price fell sharply in the month. The median house price is now 5.2 percent below its year ago level.

Add a comment