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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The WSJ had a piece on the European Central Bank's (ECB) decision to buy a small amount of government bonds. It raises the question of whether this could jeopardize the ECB's credibility as an inflation fighter.

This is an interesting question. According to central bank folklore, credibility as an inflation fighter comes from being willing to impose a severe recession to squeeze inflation out of the system. Paul Volcker sits at the top in the Central Banker's Hall of Fame for his willingness to keep interest rates high through 1981-82 recession. The folklore tells us that we don't  want to lose this hard-earned credibility by allowing inflation to rise now.

It is worth noting that in its length and depth, the 1981-82 recession is being dwarfed by the current downturn. In other words, even if aggressive monetary expansion did lead to inflation that central banks subsequently felt necessary to rein in, the cost in terms of unemployment and lost output is likely to be less than we are now experiencing.

This should make more expansionary policy at present a no-brainer, but we have to remember, our central banks are run by people who could not see an $8 trillion housing bubble.

 

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For those wondering what those Wall Street boys do to earn tens of millions a year in salary and bonuses, the NYT has part of the answer. The Wall Street boys rip off school districts and other governmental units who pay them high fees for creating complex financial instruments that they don't understand. Add a comment

This exciting tidbit was conveyed in the lead-in to a story on the failure of the Obama administration's mortgage modification program (HAMP). That is a surprising assessment given the fact that purchase mortgage applications have dropped by more than 30 percent from year ago levels since the end of the homebuyer's tax credit on April 30th. Unless 30 percent fewer people feel like selling their homes in 2010 than 2009 (a relatively weak period for house sales), then house prices will be headed sharply lower. (This is based on a complex technical process known as "supply and demand.")

The issue of the direction of house prices is actually very relevant to the topic. The housing bubble has not fully deflated in many areas of the country. This means that government efforts to keep people in their homes are likely to still leave many people underwater. In other words, by design, the Obama program will be paying servicers and investors money for mortgage modifications that still leave homeowners with no equity in their homes. This makes HAMP a good mechanism for getting money to banks, but a very way to help homeowners.

It is not possible to assess the merits of this sort of mortgage modification program without a serious assessment of the future course of house prices. NPR excluded such a discussion with the unsupported assertion in its lead-in.

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It's super silly season in Washington. The powers that be have decided that Social Security should be cut, so now anyone can say anything they want against the program, even if it is directly contradicted by the evidence.

In this spirit the WSJ told readers: "In 2010, Social Security expenditures will exceed receipts for the first time since 1983, the last time Congress enacted major changes to the program." This is not true. As trustees report clearly shows, the program is projected to have a surplus of almost $80 billion in 2010. It is true that tax receipts will be less than projected benefits, but that is not a relevant figure for the program since it also collects interest on the bonds held by the trust fund.

 

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The Post should have reminded readers of this fact when reporting that: "Republican leaders criticized the package as a giveaway to labor and an undeserved bailout for profligate state governments." The package in question was a bill to provide additional funding for education and health care to states.
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The NYT discussed the Obama administration's plans to extend President Bush's tax cuts only for households earning less than $250,000 a year. The article also reported on Republican claims that not extending the tax breaks for the wealthy would hurt the economy. It concluded by telling readers that:

"he [Treasury Secretary Timothy Geithner] dismissed as “myths” Republican arguments that tax cuts pay for themselves, by bringing in new revenues from economic growth."

It would have been helpful to note that this is not just Secretary Geithner or the Democrat's view. It is the near unanimous view of every economist who has examined the issue, including Republican economists. For example, Douglas Holtz-Eakin, a prominent Republican economist who was the chief economic advisor to John McCain in his presidential campaign, examined this issue when he headed the Congressional Budget Office. He used a wide variety of models and found that in the most optimistic scenario additional growth could temporarily replace 30 percent of the lost revenue. (Even this increase would largely disappear in the long run.)

The treatment of the issue in the article may lead readers to believe that the question of whether tax cuts pay for themselves is one that is actively debated by economists. In fact, it has long been settled even if some Republican politicians choose to ignore the evidence.

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In a discussion of the impact of the BP oil spill, the NYT qualified the estimates of the size of the spill from the National Ocean and Atmospheric Administration (NOAA) by telling readers that: "NOAA is the same agency that devised the early, now-discredited estimate that the well was leaking only 5,000 barrels a day, one reason some people distrust the new report."

This is useful information for readers, since the fact that the agency had previously been off by a factor of ten in its earlier estimate of the size of the spill might suggest something about its competence and/or its integrity. This is relevant to the credibility that should be assigned to new estimates from the agency.

In the same vein, it would be appropriate to report on the failure of individual economists or organizations, like Harvard's Joint Center on Housing, to notice the $8 trillion housing bubble, when discussing the current views on the housing market and the economy.

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USA Today has a nice piece showing stimulus spending by state. It shows that there is no link between spending and unemployment, in large part because much of the funding goes through preset formulas that do not respond to current unemployment rates. Add a comment

The NYT had an article about Germany's relatively healthy economy, which is now growing at a healthy pace largely as the result of a surge of exports. The article also notes the effectiveness of Germany's work sharing policy which provides tax credits to companies for shortening hours rather than laying off workers. This policy has been even more effective than the article implies.

While the article tells readers that Germany's unemployment rate is 7.6 percent, this is the German government measure. This measure counts people who want full-time work but only have part-time jobs as being unemployed. By contrast, the OECD's methodology, which is similar to the one used by the United States, shows a German unemployment rate of 7.0 percent, roughly the same as before the downturn.

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In an article reporting on a study that concluded that the health care reform bill will lead to substantial savings for Medicare, the Washington Post told readers:

"critics say trust fund solvency will only improve on paper, since actual savings from the Medicare cuts would have been spent to provide coverage for more than 30 million uninsured Americans."

This is a real trip to bizzaro world. The Medicare trust fund is an accounting entity. Improvements can by definition only occur on paper, or more accurately in computer entries. It is not clear what the Post thinks it means with this statement. 

 

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The NYT headline told readers that, "Bernanke Says Rising Wages Will Lift Spending." Real wages have been virtually unchanged over the last year. Let's hope that the NYT got the story wrong and that Bernanke knows this. Add a comment

Andrew Ross Sorkin argued that assessing fines against companies for misleading shareholders is unfair because it punishes the shareholders a second time. Actually, if shareholders know that their companies will be punished, hurting its stock price, if its top executives lie about the company's performance, then they have more incentive to ensure that they do not get lying executives. This is a desirable outcome since their lying will distort stock prices, and in principle, lead to misplaced investment.

Of course if shareholders really have very little control over companies then this increased incentive will have little effect. However, that would be a very serious indictment of the system of corporate governance.  

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The NYT had an article on the hostility being directed toward the head of Hungary's central bank. The article implies that such hostility is misdirected, beginning the piece with the comment: "it’s not easy being a central banker in Europe — especially during the biggest economic crisis in a generation"

This comment is sort of like saying that it's not easy to be head of BP, especially in the middle of the largest oil spill in the history of the world. The reason that we are having the economic crisis is because of the failure of Europe's central bankers to notice the huge housing bubbles that were distorting economies throughout Europe and much of the world. If Europe's central bankers had been doing their job competently they would have acted to rein in these bubbles before they grew large enough to endanger the economy. Instead, they were obsessed with reaching their 2.0 percent inflation target.

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The media have played a huge role in fundamentally misrepresenting trade policy and thereby larger economic policy. As a result, the public is quite confused on key economic issues.

This is brought home in an article today about a study showing that foreign-born foreign-trained doctors perform slightly better than doctors who were born and trained in the United States. The article notes in passing that an extensive set of tests required for licensing make it difficult for foreign doctors to practice in the United States. The number of foreign medical residents who can enter the United States is also tightly constrained.

This suggests that the United States could get many more highly qualified foreign doctors if it eliminated these barriers so that they only ensured the quality of training. (It is easy to design mechanisms to ensure that the physicians' home countries benefit from having their doctors' practice in the United States, so this need not be a concern.) 

Remarkably, this point is never raised explicitly as an issue of trade and economics in this or other articles. Trade policy is usually only discussed in the context of trade agreements such as NAFTA (which are wrongly labeled "free-trade" agreements) even though the barriers that prevent foreign professionals like doctors from practicing in the United States cost our economy tens or hundreds of times as much as the money at stake in these agreements.

The failure to seriously discuss trade in the media leads the public to have the misleading view that less-educated workers, like those in manufacturing, can't compete in the modern world economy, while the most highly-educated workers have the skills and ability to prosper. In reality, the most highly educated workers prosper because they have the political power to limit the number of Chinese, Indian and other foreigners who are allowed to compete with them, unlike manufacturing workers.

If there was genuine free-trade in highly paid professional services then doctors, lawyers, and economists would see the same downward pressure on their wages as autoworkers and textile workers. The gains to the economy from lower prices for health care and other services that would result from free trade in highly-paid professional services would be enormous, but it is as hard for most economists to notice these gains as it is for them to see an $8 trillion housing bubble.

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Morning Edition told listeners that the shadow inventory of foreclosed homes will keep the housing market depressed for several years to come. Actually house prices are not depressed. House prices are still 15-20 percent above their trend levels. The housing market will not be back to normal until house prices fall back to a more sustainable level.

This is really getting annoying. NPR completely missed the housing bubble. During its run-up they relied almost exclusively on economists who did not have a clue, many of whom were on the industry payroll. Given the enormous damage that has been done to the country by the collapse of this bubble, can't NPR make a point even now of finding someone who knows something about the housing market? Isn't that what their reporters are paid for?

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That's right folks, you get to say whatever you want in the media now to further the cause of cutting Social Security. Today on This Week, Cokie Roberts told viewers that:

"You could close this capital or turn it into condos and you could close down every domestic program that we have and you would still have a deficit because of Social Security and Medicare and interest on the national debt."

Well that's not quite right, Social Security is running an annual surplus. The money that program takes in each year in taxes and interest on its bonds exceeds what is being paid out in benefits. It's not clear what Ms. Roberts had in mind when blaming Social Security for the deficit, but it has nothing to do with reality.


Thanks to Gene Devaux who watched so I wouldn't have to.

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The NYT ran a piece today on a growing tendency for producers of unauthorized copies of merchandise to copy less high end items. The piece uses the term "knockoff" and "counterfeit" interchangeably. In fact, there is a very important and fundamental difference.

A counterfeit item is intended to fool the buyer. Its sales price depends on the buyer believing that they are getting something they are not. By contrast, buyers of unauthorized copies that are not counterfeit understand that they are not purchasing the brand item.

This distinction is important because the buyer is not being ripped off when they buy a knockoff that is not a counterfeit. They are getting what they paid for. This means, among other things, that the buyer cannot be expected to cooperate in efforts to crack down on such sales. The buyer is benefiting like the seller. In the case of an actual counterfeit item, the buyer is being ripped off and can be expected to cooperate with efforts to clamp down on counterfeiters.

This distinction also would be useful in understanding the meaning of the unsourced assertion that: "the counterfeiting industry ... costs American businesses an estimated $200 billion a year." If this is the amount of lost business associated with actual counterfeits, then this would largely be a loss to the economy. People paid $200 billion for items that they did not actually receive.

However, if this represents someone's estimate (a source would be helpful) of the lost sales to business associated with unauthorized copies, then this figure could be consistent with a net gain to the economy. Consumers were able to buy products at lower prices -- often much lower prices -- than would have been possible without the copies. In this case the gains would likely dwarf the benefits from NAFTA or other trade agreements.

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The NYT had a piece comparing efforts to detect financial crises to efforts to detect earthquakes. This implies that some fundamental new methodology is needed.

In fact, the economic crisis was entirely predictable and predicted by people who understand economics. The more obvious problem is the incentive structure within the economics profession. It provides economists with no incentive to break with conventional wisdom even when it is obviously wrong and provides no sanction against those whose failure to break with conventional wisdom led to disastrous consequences for the economy and the country.

Unless this incentive structure is changed, no improvements in methodology will make any difference at all.

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The WSJ has an article today about Senate Banking Committee Chairman Chris Dodd's efforts to promote FDIC Chair Sheila Bair as the head of the new Consumer Financial Protection Bureau. Near the end, it notes the support for Harvard Professor Elizabeth Warren, the leading contender, but then tells readers that: "others worry that choosing someone seen as too activist—a charge leveled at Ms. Warren—could turn public sentiment against from the agency."

This naturally leads readers to wonder about the identity of these mysterious "others." Do they have names? Do they have specific positions relevant to this discussion (e.g. CEOs at Bank of America and Citigroup) or are they just a random cross-section of America?

And what does it mean that activism will "turn public sentiment from the agency?" It is believable that the financial industry will be upset about the agency if they block many of their initiatives, but do we really think this would spark a mass uprising?

If only we knew who these mysterious others are then we could ask them such questions. But as it stands --- it's all so mysterious.

 

Hat tip to Gary Therkildson.

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The Washington Post simply cannot let go on its deficit obsession. The day after a new GDP report indicates that the unemployment rate will remain near double-digit levels long into the future, the Post's lead editorial warns people that something really bad could happen ten years out if we don't deal with the deficit. As is their way, the Post never discusses the situation honestly. It begins by telling readers that:

"increasingly, 'the public' [in "publicly held debt] means foreign governments and investors."

Why does it matter that foreigners hold government debt? Why would anyone care? There is an issue about foreign ownership of U.S. assets, which means that future income on these assets will flow abroad rather than to people in the United States, but this is as much or more of an issue of foreigners holding private assets like U.S. stocks and bonds. Furthermore, foreigner's acquisition of U.S. assets is tied to the trade deficit and the value of the dollar. If the Post is upset about foreigners holding too many U.S. assets than it should be editorializing for a reduction in the value of the dollar. Hasn't anyone on its editorial board taken econ 101?

The Post fails to mention the two factors that are driving its deficit/debt horror story. First is the debt that is being accumulated simply due to the downturn. I guess since they don't seem to have access to government data at the Post's editorial board they don't know about the high level of unemployment and the severe recession driving up deficits. The prospect of these deficits creating a high interest burden for future generations can be largely eliminated if the Federal Reserve Board just bought and held the bonds used to finance this deficit.

If that seems implausible, there is a good example of exactly this being done on a small island nation called "Japan." Over the last 15 years, Japan's central bank has bought up an amount of government debt that is almost equal to Japan's GDP. As a result, Japan's interest burden is less than 2.0 percent of GDP (@ $290 billion a year in the U.S.) even though its ratio of debt to GDP is close to 220 percent. In spite of this massive intervention by the central bank, Japan continues to be plagued by deflation, not inflation.

The other factor driving the deficit projections is the projected explosion of U.S. health care costs. If the U.S. faced the same per person health care costs as people in other wealthy countries we would be looking at surpluses, not deficits. However, the Post -- as a bastion of deficit chicken hawkism -- doesn't like to talk about health care reforms that would threaten the interests of the pharmaceutical industry, insurance industry and other powerful groups. They just want to cut programs like Social Security and Medicare that benefit ordinary workers.
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The NYT reported on new projections from the Population Reference Bureau showing continuing increases in population in the developing world and slow or negative growth in wealthy countries. Low birth rates in the wealthy countries are projected to lead to a rise in the ratio of retirees to workers. The NYT described this prospect as "sobering."

There is no obvious reason that people in wealthy countries should be concerned about the prospect of a rising ratio of retirees to workers. This ratio has been increasing for a century. The projected increase in the elderly dependency ratio is largely offset by a decline in the number of dependent children. At the worst, the rise in the dependency ratio will offset some of the gains in wage growth associated with rising productivity, as has been the case in prior decades. So, it is not clear what the NYT wants readers to find "sobering" about this news.

The article also implied that a large jump in the share of GDP going to Social Security and Medicare is due to the aging of the population. Much of the cause of the projected increase in spending on these programs is the projected increase in per person health care costs. If per person health care costs in the United States fell to the levels in Germany or Canada, the share of GDP devoted to these programs in 2050 would be little different from what it is at present.

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