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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In a relatively lengthy article discussing potential cuts to the military budget, the Post never once told readers what baseline projected spending is, nor what the cuts would be as a share of baseline spending. The Post told readers that the military had prepared for cuts of $400 billion over the next 12 years, but now it seems possible that the cuts could be as large as $800 billion.

Wow! Those are really big numbers. And no responsible newspaper would ever print them without giving its readers some context, since virtually none of them will have any ability to assign meaning to these numbers.

The baseline budget shows that the government will spend approximately $9.5 trillion on the military. (This does not count veterans benefits and some other costs associated with maintaining the Defense Department.) The $400 billion in cuts would imply a reduction in the budget of a bit more than 4 percent. If the cuts reach $800 billion then the cuts would be a bit over 8 percent of the budget.

By comparison, the Gang of Six have proposed a reduction in the cost of living adjustment for Social Security that will reduce average benefits by close to 6 percent. The largest cuts would hit the oldest beneficiaries with beneficiaries in their 90s seeing benefit reductions of close to 9.0 percent. 

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Of course they did not know that this was their warning. The NYT told readers that:

"Deterioration of investor confidence in the United States could also hurt the value of the dollar, according to William H. Gross, co-chief investment officer of Pimco, a bond fund based in California. Mr. Gross said he believed that the dollar would become weaker because of the country’s inability to deal with its rising deficit. Instead, he favors currencies in China, Canada, Brazil and Mexico."

While Mr. Gross, as a major actor in financial markets, may not want a lower dollar, the vast majority of people in the country should. A high dollar makes our exports more expensive to people in other countries, meaning that they will buy less of them. Raising the value of the dollar is like imposing a tariff on our exports.

A higher dollar also reduces the cost of imports relative to domestically produced goods. A higher dollar is comparable to subsidizing imports, leading consumers to buy imports instead of domestically produced goods.

This means that if Mr. Gross is correct, then most workers should be rooting for a continuation of the standoff on the debt ceiling. The drop in the value of the dollar would result in an increase in net exports, thereby providing a powerful boost to the economy and potentially creating millions of jobs.

While this is 100 percent standard economics that most students would be taught in an intro econ class, most economics reporting is so bad that very few people understand how much of a stake they have in a lower valued dollar. There are few policies that more directly transfer income from the middle and bottom of the income distribution to the top than an over-valued dollar, yet the implications of the value of the dollar is virtually never discussed in economics reporting.

This article also reports on the price of credit default swaps on U.S. Treasury bonds as a measure of the risk that investors assign to the risk that the U.S. government will default on its debt. This is not accurate. A credit default swap (CDS) effectively involves two bets. First the bet that the U.S. government will default on its debt. Second, it is also a bet that the financial institution issuing the CDS will survive after the U.S. government has defaulted on its debt.

Since the latter bet has a low probability, since U.S. debt is the basis for the world financial system, the price of CDS bears little relationship to the risk that investors assign to the U.S. actually defaulting. It is most likely a bet on the future direction of the price of CDS, sort of like the high price paid for a really awful painting by a great artist. No one really wants the painting, but it is still possible to make money off holding it, if one gets the timing right. 

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It is understandable that politicians would use euphemisms to conceal the true nature of their actions. But what serious newspaper would use the same euphemisms? Newspapers are not supposed to be assisting politicians in their deceptions, they are supposed to be informing readers.

Apparently this fact is not understood at the NYT. In an article on President Obama's redoubled effort to push the budget program of the gang of six, the NYT referred to "cost-saving changes to entitlement programs." How many of the NYT's readers would understand that this statement means CUTS TO SOCIAL SECURITY, MEDICARE AND MEDICAID?

Of course this is EXACTLY what this phrase means. The politicians who are pushing cuts to these programs know that such cuts are incredibly unpopular. This is why they try to use obscure and convoluted language to describe their plans. The job of a newspaper is get beyond these efforts and to clearly explain to readers what is at issue. 

The cut that Gang of Six proposed to Social Security would reduce benefits by roughly 6 percent to new retirees. They want further cuts to workers who retire in future years. The cuts to Medicare are likely to be even larger, although they have not been spelled out in any detail. The cuts in Medicaid could result in millions of people losing health care coverage.

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The NYT featured another Casey Mulligan episode of There Is No Unemployment this morning. Mulligan's argument is that if we look at employment rates for the older population we see that they have actually risen in the downturn even as employment for people ages 25-55 plummeted. Mulligan interprets this as evidence that highly motivated older workers are able to find jobs, and if younger workers were equally motivated they would find jobs too.

This is an interesting story. The rise employment rates of older workers is a striking story in this downturn and one that I and others have often noted. However, there are other possible interpretations. Older workers almost by definition will have more experience than their younger counterparts. Employers tend to fire less experienced workers with less job tenure first. (Just as they tend to fire less-educated workers first.) This could lead to the pattern of lower employment rates among younger workers that we are seeing without having any direct relationship to the commitment of workers to the labor force.

There is a simple way to try to test this story. We can look at patterns in wage growth since the downturn. If Mulligan's story is right then we might expect to see the wages of older workers rise less rapidly than for younger workers. (These are nominal wages.) The idea is that the desperate older workers are willing to take big pay cuts to keep or get a job, while the young whipersnappers would rather lounge around on the couch watching TV.

The chart below shows the change in median weekly earnings between 2007 and the average of last four quarters (2010:3-2011:2) for men and women between the ages of 25-54, 55-64, and over age 65.


(Click for Larger Image)
Source: Bureau of Labor Statistics.

As can be seen, median weekly earnings rose slightly more rapidly for both men and women in the 55-64 age cohort than in the 25-54 group. They rose much more rapidly for over the 65 age group. There is not much evidence here of older workers who are desperately looking for jobs and willing to make whatever sacrifice is necessary. In other words, this is consistent with the demand side story where employers dump their younger workers first while holding on to older workers, so there are no jobs for the under 55 set.

It is the same story as with more highly educated workers. College educated workers saw less of a fall in employment than less-educated workers. However, this does not mean that less-educated workers could find jobs if they really want them, nor that there are even jobs for every college-educated worker who wants them.

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As its drive to cut Social Security and Medicare builds steam, the Post is throwing reality to the wind. It again refers to the deficit commission report in its lead editorial. This should not be a tough one -- the report did not have the support of the necessary majority to be approved by the commission. It therefore should be referred to as the report of the co-chairs, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.

The editorial also praises the plan by the Senate's "gang of six" to change the annual cost of living adjustment for Social Security to the chained CPI. The Post calls this a more "accurate" measure of inflation. Actually, the Post does not know whether the chained CPI is a more accurate measure of the rate of inflation experienced by the elderly. An experimental elderly index constructed by the Bureau of Labor Statistics (BLS) shows a somewhat higher rate of inflation than the current measure.

If the Post is interested in accuracy, it can call for the BLS to construct a full elderly index. As it stands, we do know that the chained index will show a lower measured rate of inflation, leading to an average cut in Social Security benefits of close to 6 percent.

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Many deficit hawks are anxious to exploit nationalistic sentiments and even resort to crude xenophobia to push their agenda of cutting Social Security and Medicare. The starring role in this story goes to the foreign holdings (especially Chinese) of U.S. government debt. The Post did its part by having a chart showing the growth of foreign holdings of "our mountain of debt."

Those who are actually concerned about foreign holdings of U.S. government debt should know that it depends on the trade deficit, not the budget deficit. The trade deficit provides foreigners with the dollars that they use to buy U.S. assets, including government debt. If the United States had large budget deficits, but balanced trade, then foreigners would only be able to buy more government bonds if they sold other U.S. assets, such as the stock and bonds of private companies. Conversely, if the country had a large trade deficit, but a balanced budget, then foreigners would be able to increase their holdings of government bonds by using the dollars they acquired to buy bonds previously issued, or newly issued bonds that replace expiring issues.

This is all simple econ 101. It means that the jingoistic budget hawks are yapping about the wrong deficit. The recipe for correcting the trade deficit (more econ 101) is lowering the value of the dollar against other currencies. This makes our exports cheaper for people living in other countries, causing them to buy more. It makes imports more expensive for people living in the United States, leading them to buy less.

Of course a lower dollar also has important distributional implications. It will have the effect of increasing the relative wages of workers in industries that are subjected to international competition, most importantly manufacturing. It will reduce the relative wages who are largely protected from international competition like doctors, lawyers, and congressional staffers. These distributional implications might explain why the media rarely discusses the over-valued dollar and its impact on the trade deficit and the economy.

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This is what Thomas Friedman said in his column this morning, even if he didn't know it. Friedman told readers that:

"Germans are now telling Greeks: 'We’ll loan you more money, provided that you behave like Germans in how you save, how many hours a week you work, how long a vacation you take ...'"

If we look to the OECD data, we see that the average number of hours in a work year for Germans in 2008 (the most recent data available) was 1430. This compares to 2120 hours a year for the average Greek worker. This means that if Germans want the Greeks to be more like Germans in the number of hours a week they work and the length of their vacations, then they want the Greeks to work less, not more.

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The prospect of cutting Social Security benefits for seniors and giving more money to the very wealthy seems to have excited reporters so much that they just can't get anything straight. The NYT again told readers that President Obama's fiscal commission produced a deficit reduction plan. This is not true. The deficit commission did not have the votes necessary to produce a plan. The plan referred to in this article was the plan of the co-directors, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.

The article also assists President Obama in misrepresenting public opinion about the cuts proposed by the Senate Gang of Six plan. It comments:

"Seeking to sum up the current state of affairs, Mr. Obama said, 'We have a Democratic president and administration that is prepared to sign a tough package that includes both spending cuts and modifications to Social Security, Medicaid and Medicare that would strengthen those systems' and provide for new tax revenues. And, he added, 'we now have a bipartisan group of senators' and a majority of the American people who agree."

President Obama was not in any obvious way "seeking to sum up the current state of affairs." He was misrepresenting the state of affairs, presumably to advance his agenda. There are no public opinion polls that show the majority of the American people support the cuts to Social Security and Medicare in the Gang of Six plan. In fact, there are no polls that show even a majority of Republicans support such cuts. Presumably President Obama is aware of polling data on these issues. 

It also would have been helpful to remind readers that President Obama means "cuts" when he refers to "modifications" to Social Security. Some readers may not have read the Gang of Six plan closely enough to realize that it proposes to cut Social Security benefits by an average of close to 6 percent.

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Ezra Klein recounted the record of President Obama's stimulus with the help of two of his top economic advisers at the time, Larry Summers and Christine Romer. Romer commented that she failed to recognize that they would only have one shot at stimulus, therefore they had to get as much as possible in their first package.

While this turned out to be true, a main reason was the way the Obama administration sold the stimulus. They used a set of economic projections that were hugely overly-optimistic. Their baseline had the unemployment rate just reaching 9.0 percent in the absence of stimulus.

The fact that the projections were overly optimistic was already quite evident at the point the stimulus was signed in late February. In addition, both Romer and Summers knew that the package they got was grossly inadequate even for the economic path they had projected.

However rather than trying to lay out a path in which more stimulus was possible, President Obama began touting the "green shoots of recovery" and talking about the need to deal with the deficit. It was President Obama's course, presumably carried through on the advice of his Keynesian advisers, that made any further stimulus impossible.

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The Post obviously finds it hard to get good help. That must be why it had to use a column by a person, Norman Ornstein, who didn't know that the Simpson-Bowles commission never issued a report. Ornstein is referring to the report of the co-chairs, Bowles and Simpson. This report never got the support from the necessary majority of the commission. This is an example of the sort of skills mis-match that economists refer to as "structural unemployment," where workers do not have the skills necessary for the jobs that are available.
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This is really getting painful. The NYT has an article reporting that many Chinese consumers were outraged when they discovered that the expensive DaVinci furniture they had purchased was actually produced at "a ramshackle factory in southern China."

It then tells readers:

"Maybe more significant, the scandal indicates that even in China — where consumers have long been willing to turn a blind eye to pirated DVDs and Gucci knockoffs — there are boundaries that no counterfeiter should breach. Not if the fakes are priced as high as the real thing."

There is a very simple point here that the paper is missing. When people buy unauthorized copies that sell for a fraction of the brand version, they know that they are not getting the brand version. The deal if beneficial to both the seller and the buyer. This is why it is very difficult for the government to crack down on sales of unauthorized copies of merchandise. Both parties to the deal are happy with it.

On the other hand, a counterfeit involves deceiving the buyer, as seems to be the case with the sale of DaVinci furniture. People thought that they were getting something that they did not in fact get. In this case, the consumer is an ally, since the consumer has been ripped by the counterfeiter.

The distinction between sales of unauthorized copies and counterfeiting is very clear and very fundamental. The NYT should be able to get it right.

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That's what the NYT tells us. It has a piece this morning on the union representing the workers at Greece's public electric utility. At one point it reports that:

"an increasing number of Greeks regard the power company workers in particular as an overpaid, overprotected caste. According to Mr. Fotopoulos, Genop’s 21,000 members are paid an average net salary of $1,980 a month and its 35,000 retirees an average net pension of $2,122 a month — much higher than the Greek average."

The monthly pay for caste members would be less than an hour's pay for high earners in the financial sector. It would be quite interesting if Greek politics had gotten to the point where most people had more resentment toward workers earning $1,980 in a month than the people who earn this amount in an hour.

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The NYT seriously misrepresented public attitudes toward Social Security and Medicare. It referred to Social Security and Medicare as:

"entitlement programs that represent core values to many liberal voters."

Actually polls routinely show that overwhelming majorities of voters across the political spectrum support Social Security and Medicare. It is not just liberals who care about this program. This is why politicians who want to cut these programs need cover from their political opponents. If they just said they wanted to cut Social Security and Medicare, they would quickly be voted out of office.

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Surely it was an oversight. In his column today, David Brooks lists all the various groups on the Republican side who made it difficult, if not impossible, to work out a deal with President Obama for large cuts to Social Security, Medicare, and other government programs. For some reason he forgot to include people like himself, ostensible moderates who routinely mislead the public about the budget.

As every budget expert knows, the large budget deficits we currently face are not the result of out of control spending, but rather the downturn caused by the collapse of the housing bubble. If the deficit were smaller right now, we would be seeing lower output and higher unemployment. Nonetheless, Brooks has been happy to contribute to the notion that spending and deficits are out of control.

Every budget expert also knows that the long-term story of exploding deficits is first and foremost a story of runaway private sector health care costs. The problem is not "entitlements." If we paid the same amount per person for our health care as people in other wealthy countries then we would be looking at budget surpluses in the long-term, not deficits. However, Brooks would rather blame entitlements in his columns, helping to convince readers that the problem is demographics.

Brooks also fundamentally misrepresents public sentiment. In today's column he tells readers:

"Opinion polls showed that voters are eager to reduce the federal debt, and they want to do it mostly but not entirely through spending cuts."

This is not really true. Opinion polls show that most voters, including most Republicans, do not want to see Social Security and Medicare cut. They also do not want to see many other large areas of spending, like unemployment insurance, or infrastructure spending, cut.

The public has been convinced by people like David Brooks that there are vast amounts of government money being spent on things like John McCain's Woodstock Museum. The polls indicate that they would like to see these items cut. However, all the arguably wasteful spending items in this category only amount to a small fraction of the budget. Eliminating them will not have a notable impact on the deficit.

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The NYT decided that it did not like the efforts of the government to sustain demand and used a news story to describe this policy as "America’s own fiscally dubious habits." While one can argue with the NYT's view that it would be better for the United States to have slower growth and higher unemployment than run a deficit, the more fundamental issue is that such comments are usually reserved for editorial pages.

This is not the only peculiar item in this piece. The article tells readers that China is concerned about losing money on its dollar holdings. This is difficult to believe since it is almost inconceivable that China's government did not expect to lose money on these holdings. There are no other buyers who will be willing to hold dollars at the price that China paid and in fact the dollar already has declined substantially since its peak at the start of the last decade.

Presumably China's government did not mind losing money on its dollar holdings, seeing this loss as the necessary price of maintaining its export market in the United States. In effect, China's government was paying people in the United States to buy its stuff.

The article also includes this bizarre paragraph:

"Most of those reserves are held in dollars, and recycled back to the United States through investments in Treasury bonds and other dollar-denominated securities — even stocks. And while some of China’s foreign exchange reserves are plowed into European and Japanese debt, those bond markets are not big or liquid enough to absorb the bulk of China’s ever-larger foreign holdings."

China is under no obligation to accumulate foreign exchange holdings. It can allow Chinese corporations and citizens to simply sell their foreign exchange holdings on international currency markets. China has accumulated foreign exchange holdings only because it made a conscious decision to accumulate these holdings. This is part of its effort to keep down the value of its currency to sustain its exports. 

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Yes, I am serious. In his column today Samuelson holds up Latvia as the model for the United States to follow. The unemployment rate in Latvia is currently close to 20 percent. According to the latest projections from the IMF, it is still projected to be double-digits by 2016, the end of its projection period. Its 2016 GDP is projected to be 1.5 percent below its 2007 level. If this is a model for success, it's interesting to think of what Samuelson would view as a failure.
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Larry Summers wants Post readers to believe that the policy choices are either letting banks fail like Lehman, and setting off a financial earthquake, or keeping them alive through government bailouts. Actually, there is a third option. Governments can keep the banks alive but tell them that their world will end.

The principle here is so simple that even one of the world's top economists should be able to understand it. Insolvent banks are kept alive by government welfare. Just as the government sets all sorts of conditions for getting monthly welfare checks (which average around $500), it can impose conditions on the banks that are on life support. This can mean giving large capital stakes to the government, voluntary haircuts for creditors (voluntary in the sense that they will get next to nothing if it goes bankrupt), and really really big paycuts for bank executives. This means no more multi-million dollar paychecks.

Congress pretended to impose some of these restrictions with the TARP, but everyone except Washington Post reporters knew at the time that the restrictions were a joke. The story as Summers and the Wall Street boys tell it is that we have no choice but to give the financial industry all of our money. This is not true.

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Pointless death is always tragic. The Post's budget reporting is a great tragedy for trees everywhere. Today it tells readers about plans to consider a balanced budget amendment to the constitution in Congress. It would have been useful to tell readers something about this amendment, which does not just require a balanced budget. It also restricts spending to 18 percent of GDP, requiring a super-majority of both houses of Congress to exceed this level of spending. This implies a reduction in spending of more than 10 percent going forward (compared with its average over the last decade), even as health care costs and the aging of the population are pushing up spending on programs like Medicare, Medicaid, and Social Security. It would have been useful if the Post had pointed this fact out to readers.

Later the article refers to a proposal by Oklahoma Senator Tom Coburn to cut $9 trillion from the deficit over the next decade. It would have been useful to tell readers that this is approximately equal to 20 percent of projected spending or 4.4 percent of projected GDP over the decade. Few readers are able to assess the meaning of $9 trillion over a decade without some context.

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That was the NYT's line in a piece on how best to deal with the deficit. While the piece briefly refers to some of the key research papers on the issue, it would have been worth noting that the U.S. already ranks at the bottom among wealthy countries in the tax share of GDP. Since other countries do manage to sustain healthy economies, with several enjoying comparable or better levels of productivity, it might suggest that raising taxes would not derail the U.S. economy. This fact would have been a useful point to include in this "it's so complicated" piece. Add a comment

I was glad to see Paul Krugman's piece this morning in which he reminded readers of the basics of supply and demand. If we slow the foreclosure process, we reduce the supply of housing, thereby raising the price of housing. This is important because there are a lot of people running around this town, with pretensions of being serious, who have been saying that slowing the foreclosure process would lower house prices and hurt the market. 

Maybe I'm idealizing the past, but I would like to think that in the old days, not knowing the basics of supply and demand would have been a fatal blow to a business reporter or a Treasury Secretary. These days, ignorance on this level seems to be a job requirement.

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That's what the Washington Post told readers today in a front page article. It quotes Senator Conrad as saying:

“We cannot as a country fail to deal with the debt threat. .... Every serious economic analysis tells us we’ve reached the danger zone. And just kicking the can down the road? That can’t be. We’re better than that. We’ve got to be better than that.”

This is not true. Many economists, for example Nobel Laureate Paul Krugman, have argued that the country is nowhere near its debt limit. They point to the fact that both the United States and other countries have sustained much higher rates of debt to GDP than the United States does now or is projected to in the near future. For much of the 19th century the UK had a debt to GDP ratio of more than 100 percent. Japan currently has a debt to GDP ratio of more than 200 percent yet can still borrow long-term in financial markets at interest rates of less than 1.5 percent.

They also point to the fact that the markets do not seem concerned about the debt situation of the United States. If the financial markets were concerned about the ability of the U.S. government to pay off its debt then they would not be lending the country money for ten years at interest rates close to 3.0 percent. 

It seems that Mr. Conrad relies exclusively on economists who could not see the $8 trillion housing bubble, the collapse of which devastated the economy. This was obviously true before the collapse of the bubble. The fact that it is still true even after the collapse of the bubble should have been highlighted by the Post. This demonstrates a serious failure of judgment by a person in an important position of power.

It is also worth noting that the Post article bizarrely confuses financial markets with credit rating agencies, telling readers that

"the markets are demanding it [large-scale debt reduction]. The credit rating agency Standard & Poor’s says Washington must agree to reduce the debt by $4 trillion over 10 years to avert a downgrade."

Of course the credit rating agencies often have little to do with the market. They rated hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. The value of these bonds subsequently collapsed, leading to the financial collapse in the fall of 2008. They were paid tens of millions of dollars for these investment-grade ratings. Financial markets have also often ignored the credit rating agencies. For example, Japan can still borrow at extremely low interest rates despite the fact that both Standard and Poor and Moody's downgraded its debt.

The Post should know the difference between the judgment of financial markets and credit rating agencies.

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