Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR).

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For those young uns out there, was the poster child of the craziness of the 90s stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.

While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of "restoring home equity," which in turn it tells readers "is also crucial to getting consumers to spend again."

Umm, no it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.

In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.

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David Brooks told readers that the Occupy Wall Street movement it out of step with the country because it favors redistribution while most of the country opposes it. It is not clear what Brooks thinks he means by this.

The country has been seeing enormous redistribution over the last three decades, but it has all been in an upward direction. For example, the government gave trillions of dollars of below market interest rate loans to the largest banks to save them from collapse. The big banks continue to benefit from a too big to fail subsidy.

It has strengthened patent monopolies and sought to impose them on foreign countries through trade agreements. These monopolies provide the basis for huge drug companies like Pfizer and Merck.

The government has also pursued a policy of one-sided enforcement of labor law. The firing of union organizers and other law-breaking measures directed against workers are given a slap on the wrist, whereas unsanctioned strikes are confronted with the full power of the law, with unions seeing assets seized and officers put in jail.

It would not be surprising if most of the country is against this sort of redistribution since 99 percent (or thereabout) are losers from these government interventions. But this is consistent with a populist stance against the wealthy and their abuse of governmental powers to advance their interests.

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During the run-up of the housing bubble the Washington Post's main and often exclusive source in stories on the housing market was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 bestseller, Why The Real Estate Boom Will Not Bust and How You Can Profit From It. A front page article in today's newspaper indicates that its understanding of the housing market has not improved much.

Many of the basic facts in the article are wrong. For example, it tells readers that, "a quarter of all homeowners are 'underwater,'" owing more than their homes are worth. In fact, the correct statement is that a quarter (actually 22.5 percent in the Core Logic piece that is linked to in the piece) of mortgage holders are underwater. Since roughly one-third of all homes do not carry a mortgage, this translates into about 16 percent of all homeowners.

The piece also tells readers that:

"Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth."

Actually, rather than being near a crisis low, house prices can be better described as still being about 10 percent above their trend level. If the Post has some reason to believe that the fundamentals in the housing market justify this divergence from a 100-year long trend in nationwide house prices it should have discussed it in this article.

Also, consumption continues to be higher than normal relative to disposable income, not lower, as this quote asserts. The saving rate is currently hovering near 5 percent, compared to a post-war pre-bubble average of more than 8 percent. Consumption is down relative to its bubble peaks, but this is easily explained by the loss of close to $7 trillion in housing bubble wealth and $6 trillion in stock market wealth, not being too scared to spend.


Source: Bureau of Economic Analysis.

The article also includes the bizarre and unsourced assertion that:

"Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system."

It is certainly possible that Geithner claims that allowing bankruptcy judges to alter mortgages would reduce lending, but the Post has no way of knowing that he actually believed this. As a practical matter, it is difficult to see why it would have much impact on lending, although it would undoubtedly reduce bank profits.

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Workers work for pay. Most of the country understands this fact, but apparently the reporters and editors at National Public Radio do not. A Morning Edition segment [sorry, no link yet] on the impact that Alabama's crackdown on illegal immigrants is having on the ability of farms in the state to get workers never once mentioned the wages being offered for this work. 

The piece repeated complaints by farmers that they could not get citizens or green card holders to work in their fields because the work is too hard. The inability to get workers presumably reflects the pay being offered. For example, if the farmers were offering $40 an hour plus health care benefits, then they would likely be able to fund people willing to work in their fields.

Of course offering higher wages would make most of these farms unprofitable, but it is not true that people in the United States are literally unwilling to do farm work. The question is the wage at which they would be willing to work.

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That is sort of striking since its President Cristina Kirchner seems headed for re-election with a clear majority of the votes. Argentina has also enjoyed the strongest growth over the last decade of any country in Latin America. Nonetheless all 5 of the NYT's sources in an article discussing the election were critical of Kirchner.

This quote deserves special mention:

"'This election really seemed to defy the normal rules of politics,' said Michael Shifter, the president of the Inter-American Dialogue in Washington. 'But that is what happens when things are going well in the economy and there is a dearth of alternatives.'"

It really should not have been hard to find someone who has positive things to say about President Kirchner. It appears that the NYT is relying on a narrow range of sources who are more in tune with Argentina's creditors than the majority of the Argentine population.

The article at one point comments negatively about the state of Argentina's economy, noting that growth is expected to slow to 4.6 percent next year. This rate would still be almost a full percentage point faster than the average growth rate in Brazil over the last decade. Brazil is described as a positive contrast to Argentina in the article.

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The NYT discussed Defense Secretary Leon Panetta's responsibilities and told readers that one of the issues on the table is "the financial health of a debt-ridden country." It is not clear how the NYT made the determination that the United States is debt ridden. The financial markets seem to disagree with its assessment since they are willing to lend money to the United States at very low interest rates.

The more obvious economic problem is massive unemployment and the fact that the economy is operating far below its potential and is projected to continue to do so long into the future. If the NYT were listing the economic problems facing the country, unemployment might be the more obvious one to mention, but in any case, the sort of speculation that appears in this article is ordinarily left to opinion pages.

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Mankiw told readers that:

"to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare."

Actually, all we have to do is to fix our private health care system. If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.

Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.

This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.

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The New York Times used an article on Rhode Island's pension system to denounce "the nation’s profligate ways," which it warns will catch up with us. Newspapers are supposed to leave such editorializing to the opinion pages.

In fact there is good reason to believe that the nation's obsession with frugality is now catching up with us. The country lost close to $1.4 trillion in annual demand due to the collapse of the housing bubble. In the short term this can only be replaced by larger government deficits. However, because politicians in Washington do not want larger deficits, the economy is operating at close to 6 percent below its potential GDP and millions of workers are needlessly unemployed or underemployed. Since there is very limited support for the unemployed in the United States, this situation is a disaster for the millions of people facing it. 

The article also gets some of the facts on state and local pensions wrong. It tells readers:

"By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less."

Actually, the conventional measure to impute pension liabilities implies a shortfall of $1 trillion. Many economists are insisting in using a discount rate that implies the larger $3 trillion figure. If state and local governments actually adopted this discount rate and used it to guide policy, then it would mean large tax increases in the present, so that little or no money had to be contributed to pensions in the future. It is difficult to see how this would be good public policy.

The piece then complains that:

"But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent."

This statement is incredible because it is precisely because pensions had a low return in the last decade that it is reasonable to assume a higher return in the future. The big issue in pension accounting is stock returns. These will depend on the price to earnings ratio. At the start of the last decade the price to earnings ratio in the stock market was over 30. This implied that returns would be very low over any long period since stocks cannot possibly give their historic average 10 percent return (7 percent real), when the price to earnings ratio is already at such inflated levels. (This paper that I co-authored with Christian Weller provides a discussion of this issue.)

However, now that the market has fallen sharply relative to trend earnings, it is again plausible that stocks will provide 10 percent nominal returns in the decades ahead. In fact, it is almost impossible to describe a scenario in which the market provides a return that is substantially below this level.

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The Post's Outlook section featured a piece by Roberto Suro and Marcelo Suarez-Orozco, a public policy and anthropology professor, respectively that purports to examine a paradox on the public's view on immigration. The piece tells readers:

"But our public disagreements are matched by private conflicts. When it comes to immigration, we are not only a divided nation — we have a divided brain.

"The national ambivalence is evident. A Gallup survey this year found that a majority of Americans, 53 percent, said it was 'extremely important' for the government to halt the flow of illegal immigrants at the border. Yet an even larger majority, 64 percent, said that illegal immigrants already in the country should be allowed to remain and become U.S. citizens if they meet certain requirements."

If there is a conflict in these views it is difficult to see what it is. It is difficult to understand how someone could want to see the flow of illegal immigrants continue. The people coming over the border under current conditions risk death in the desert, as well as being robbed or even killed by the coyotes who bring them over. Once in the country they live in an underworld with limited access to health care and education for their children and facing a constant fear of deportation.

If there is a conflict between wanting to see this flow of illegal immigration replaced by a legalized flow, and wanting for the people who have already made lives for themselves in the U.S. to be offered a path to citizenship, it is difficult to see what it is. 

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One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed's manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed's coverage is a relatively narrow slice of the country (mostly eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere.

The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. It doesn't seem that this one received as much attention as the negative reading from last month. It would have been interesting to interview the double-dip forecasters to ask whether they had revised their assessment.

The other important data released yesterday was the weekly unemployment claims number, which again came in just over 400,000. This does not suggest strong growth, but it does suggest some amount of job creation, rather than the job loss we would see in a recession.

None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.

Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn't and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. And the media deserve much of the blame for being suckered.



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The NYT did some mind reading to better serve its readers telling us that businesses "consider" a law requiring a 3 percent withholding on federal contracts to ensure tax compliance to be "burdensome." The reason for this withholding is that many businesses cheat on their taxes. The government loses tens of billions of dollars a year to businesses who do not pay the income tax they owe.

Some people may be familiar with the requirement for withholding taxes, since they work for a living and employers are obligated under the law to have withholding. This requirement for government contractors is similar, except that it is almost certain to be lower than their actual tax liability.

However, the NYT told readers that businesses consider it burdensome to have to actually pay their taxes. It did not bother to tell readers why this withholding was there in the first place. In fact, the repeal of this provision can be viewed as a shameless pander to small businesses by politicians seeking their support in the next election.

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The Washington Post has to find economics reporters and/or editors who know some economics. Then it would not print without comment a statement like:

"'The problem for the U.S. is they owe China so much debt,' he [Shi Yinhong, director of the Center on American Studies at Beijing’s Renmin University] said, referring to the Chinese government’s vast holdings of U.S. Treasury bonds, estimated at about $1.5 trillion."

This statement appears in the context of a discussion of whether the dollar is over-valued against the Chinese yuan. The way that China keeps up the value of the dollar is by buying up U.S. debt. The United States government would owe China exactly zero, if the Chinese government did not decide to buy up U.S. government debt with its dollar earnings instead of just selling them in international currency markets.

This is exactly what advocates of a lower dollar are complaining about. It is absurd for someone to say that the problem is not an over-valued dollar, but rather U.S. debt to China. These are the same problem -- and reporters and editors at major newspapers should know this.

The article also wrongly tells readers:

"China is well known as the home of counterfeit products — from imitation iPads and iPhones to fake software to pirated CDs and DVDs."

Actually, the vast majority of these products are not counterfeits, consumers know that they are not getting the brand name product. The products are unauthorized copies of brand products.

This is an important distinction. Consumers benefit from buying unauthorized copies at lower prices than the brand versions. Consumers are defrauded by counterfeit products. Consumers will assist law enforcement officials in exposing counterfeit operations, they will not help in shutting down sellers of unauthorized products.

If U.S. corporations succeed in excluding the sale of unauthorized copies in China's markets then it will lead to higher prices for Chinese consumers. This will reduce real wages and incomes and slow growth. The Post should have interviewed an economist who could have explained this to readers.

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The Post wrongly implied that the problem of a large national debt has been longstanding. It told readers that the Congressional supercommittee is trying to "break the impasse over taxes that has long blocked aggressive action to tame the national debt."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

The NYT made the same mistake earlier in the week. The budget reporters and editors at these paper should familiarize themselves with the official deficit projections so they do not continue to make this mistake.

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The NYT left this important fact out of a discussion of the state of the debt crisis in Europe. It noted that lower than projected growth is likely to cause Spain to miss its deficit target. The predicted result of cuts in government spending and increases in taxes in the middle of a severe downturn is lower growth. (GDP is equal to consumption, investment, government spending, and net exports. If government spending falls in the middle of a severe downturn, there is no obvious mechanism through which one of the other components would grow to fill the gap.)  Add a comment
CNNMoney wrongly told readers that the rise in prices that provided the basis for the 3.6 percent cost of living adjustment for Social Security beneficiaries will also cause 10 million workers to pay more in Social Security taxes. The reason it gave was that this rise in prices would increase the cap on wage income subject to the tax (currently $106,800). Actually, the cap on wage income subject to the tax is determined by the increase in average wages, not the increase in prices. Add a comment

An NYT news story told readers that it doesn't like Europe. That is the only thing that readers can conclude from an article that said Europe is "in economic and demographic decline."

While the collapse of the housing bubbles in Europe have impaired growth, just as they have in the United States, and the drive to austerity has further slowed growth, there is no reason to believe that Europe's economy will be condemned to permanent stagnation if it gets competent people at the European Central Bank and other policy positions.

Prior to the downturn, productivity growth in Europe had been little different than in the United States. If Europe can ever get competent economic managers, there is no reason to believe that its growth would not return to this path. Lower population growth (or decline) will actually help Europe since it will increase the ratio of capital to labor and reduce the stress on Europe's infrastructure and natural resources. In other words, the story here is really a failure of the people designing economic policy for Europe, not a failure of Europe.

This fact is reversed in an article that seems to be trying to tell readers that Europe is fundamentally broken. To make this point, it includes the bizarre assertion that:

"Technologically, it is behind the United States, but its pay scales are too high to be an easily competitive exporter."

The United States is running an annual trade deficit of roughly $600 billion, or 4 percent of GDP. By contrast, the European Union's trade is roughly in balance. It is not clear how the NYT has determined that Europe is having trouble competing, but it clearly is not using a market measure.

The article also misleads readers on the importance of China, saying that the EUs GDP is three times the size of China's. In fact, on a purchasing power parity basis, China's GDP is $11.3 trillion, roughly two-third's the size of Europe's.

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Good article in the NYT. It discusses the fact that most mortgages may prohibit property owners from signing drilling leases with gas companies without prior approval. The point is that the mortgage holder must be concerned about preserving the value of the property and drilling could reduce it. This could be a case of banks doing what they are supposed to do. Add a comment

I see that my earlier blogpost on Planet Money's podcast on Argentina has prompted a defense from both Planet Money and Megan McArdle. Both seem to feel that the piece on Argentina was quite balanced and indicated that there were many positive aspects to Argentina's decision to default.

That was not the story that I heard. The piece I heard began by mentioning Greece's debt crisis and then said (slight paraphrase):

"There is a worst case scenario and that scenario has a name: Argentina."

My guess is that if we can promise the Greek people a policy path that will give them 3 months of sharp downturn, followed by 3 months of stagnation and then 9 and half years in which its economy will grow at an average annual rate of close to 7 percent, they would jump for joy. No one has a path for Greece that looks even half as promising as the route that Argentina has actually followed. So the question is how can Planet Money accurately describe this as a "worst case scenario?"

In fact, even Planet Money's defense of its piece begins by citing this line from the story:

"It has been a tough decade for Argentina."

Of course the data show that it has not been a tough decade for Argentina. It had recovered the ground lost to the recession by 2004. Argentina's economy then enjoyed 4 more years of exceptional growth before the world economic crisis temporarily derailed it in 2009, but it then saw strong growth resume again last year.

There certainly were problems from the default. As McArdle points out, some of Argentina's creditors are still pursuing their claims in various jurisdictions, including the United States. (The creditors' representative here, Robert Shapiro, was featured prominently in the podcast.) This makes it difficult for Argentina to borrow in international capital markets.

The IMF did everything in its power to try to sink the country's economy, including making bogus growth projections. In the three years prior to the default every single IMF growth projection proved overly optimistic. In the three years following default every single IMF growth projection proved overly pessimistic. The probability of this happening by random chance is non-existent.

(Btw, McArdle asked why I began my chart in 1998. The answer was to show the full extent of the downturn preceding the default. Economists usually believe that it is easier to recover from a cyclical downturn than to increase growth from a trend path, so I was trying to show the extent to which the post-default growth was just the recovering from the downturn.)  

But the question is not whether the default caused problems, the question is whether anyone on Planet Earth can describe Argentina as presenting a worst case scenario for Greece as Planet Money clearly did.

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The NYT implied that large budget deficits have been a longstanding problem in an article discussing the progress of the supercommittee working on a deficit plan. It told readers that the committee is trying to find solutions:

"in a matter of weeks, to find fiscal answers that have eluded Congress and the White House for years."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

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The Washington Post told readers that Federal Reserve Board Chairman Ben Bernanke now says that it is appropriate for the Fed to target bubbles like the stock market bubble in the 90s or the housing bubble in the last decade which "were in hindsight dangerous bubbles."

Actually, it was easy to see in real time that these were dangerous bubbles. Greenspan, Bernanke and other people in policy making positions simply chose to ignore the evidence. Since the Washington Post and other news outlets are covering up this failure, rather than holding these people responsible for the incredibly economic disaster that resulting from their mismanagement, we can anticipate more such failures in the future.

Economic theory predicts that people respond to incentives. There is clearly no incentive to challenge the conventional wisdom in the economics profession even when it is as wrong as it can possibly be.

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In a bizarre article, the NYT told readers that, "economists have only recently devoted serious study to how a decline in housing prices affects consumer spending." Actually economists have studied the effect of house prices on consumption for close to a century.

The housing wealth effect is a well-known concept in economics, not something that economists have just stumbled upon. It is usually estimated as being between 5-7 cents on the dollar. This implies the loss of roughly $7 trillion in housing wealth would lead to a drop in annual consumption of between $350-$490 billion, more than twice as large as the number cited in this article.

In fact, rather than being depressed consumption is still somewhat higher relative to income that was normally the case through the post-war period. Prior to the run-up of the stock bubble in the 90s, saving averaged more than 8 percent of disposable income. At 5 percent, the saving rate is still well below this level, meaning that consumption is high, not low. The NYT should have been able to find an economist who could have explained these facts.


              Source: Bureau of Economic Analysis.


[Thanks Jay R. for the correction. I understand there is some dispute as to whether the housing wealth effect has long been known, as I claim. I encourage readers to go Google Scholar and see for yourself.]

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