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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Economists usually think that firms increase hiring when they see more demand for labor, but we have a new story coming from John Lott Jr, courtesy of Fox. Mr Lott argues that firms will hire more workers because the government is laying off workers.

Lott tells readers that:

"Democrats respond that government spending can’t be cut because it would eliminate jobs. Just the proposed $61 billion cuts by House Republicans in the current budget is said to “amount to a loss of 700,000 jobs.” The claim only counts the jobs funded by the government and assumes that this spending isn’t offset by the loss of private sector jobs. The notion is that if the government doesn’t spend the money, it never really exists."

Actually many of these lost jobs are not funded by the government. (The federal government only employs a bit over 2 million workers directly. It will not lose one-third of its work force as a result of these cuts.) Most of the lost jobs would be from reduced spending on private sector goods and services by the government or from reduced spending by workers who had formerly been employed by government agencies.

It is difficult to see how the government cutbacks would be offset by increased private sector hiring. If the economy were closer to full employment then we might expect to see interest rates fall in response to a cutback in government spending. This could spur increased consumption and investment, which would then lead to more hiring.

However in the current environment it is difficult to believe that these cutbacks would lead to any noticeable reduction in interest rates, nor that the reduction in interest rates would lead to any noticeable increase in spending. In other words, in the current circumstances it is likely that government cutbacks simply lead to a reduction in demand and employment as seems to be the case in the United Kingdom at present. (The OECD just lowered its growth projection for the UK this year to 1.0 percent. The UK adopted a Republican-type austerity program last summer.)

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Okay, we haven't seen this headline yet, but given current fashions in Washington policy circles it can only be a matter of time. Today the New York Times ran a column on Social Security by Alicia Munnell, the Director of the Center for Retirement Research at Boston College and a former member of President Clinton's Council of Economic Advisors.

This column made the claim that Social Security does contribute to the deficit, telling readers that:

"scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness."

This is an interesting observation. These projections are supposed to reflect current law. Under the law, as Munnell points out, Social Security is prohibited from spending anything beyond the money in its trust fund. This means that if these baseline projections show deficits from the program spending at levels beyond what can be supported by the trust fund, then they are not making projections based on what Social Security can legally spend.

The more obvious complaint would seem to be with the nature of the projections than with the Social Security program. In effect, the projections assume that Congress will opt to maintain the level of scheduled benefits without doing anything to increase revenues. While this is a possibility, that seems a rather strong assumption to include in a baseline projection.

The column also includes another serious stretch. It tells readers that people are taking Social Security at the earliest possible age of eligibility because they are worried that the program will not be there for them if they wait until a later age. The article links to a USA Today article which supports this view by noting that the percentage of people who began taking benefits at age 62 rose sharply in 2009.

The most obvious reason that the share of people age 62 who took benefits rose in 2009 is that the unemployment jumped by 5 percentage points from its 2008 level. There were undoubtedly many workers age 62 who unexpectedly lost their job and saw little prospect of finding a new one. Therefore they decided to start collecting their Social Security benefits.

There has been a lack of confidence in the Social Security system for decades. And there has been much more serious talk of reform at other times, notably the late 90s and 2005 when President Bush proposed to privatize the program. Concern about the future of the program is not a plausible explanation for the jump in people collecting early benefits in 2009, nor is it likely a major factor in the decision of workers to take early benefits more generally.

(Thanks to Eric Kingson, the co-director of Social Security Works, for calling this one to my attention.)

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That is what the NYT told readers this morning. Of course the NYT has no ability to determine what needs politicians actually see, if in fact they do see anything. Politicians get elected by appealing to powerful interest groups who can supply them the money and support needed to win elections. They are not required to have visions of the country or the economy. What they present to the public as their vision is what they say, it may have nothing to do with what they actually believe.

The correct way to have reported this information would have been to tell readers that many Republicans "say" they see a need to revamp Social Security. It may have also been worth reminding readers that the Social Security trustees project that the program could pay all scheduled benefits for more than a quarter century and that after this date it would still be able to pay close to 80 percent of scheduled benefits, even if nothing is ever done to change the program. The benefit that is payable after 2037 would always be considerably larger than the benefits that retirees receive on average today.

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There are few things that get David Brooks more excited than seeing a politician beat up on the elderly and because he has a column in the New York Times, we all get to share the thrill. As Brooks tells us, Representative Paul Ryan, the Republican chairman of the House Budget Committee, has a long list of budget reforms and most importantly is prepared to go after Medicare. Ryan would replace the current Medicare program with a voucher system. This would end the commitment of Medicare to provide decent health care to the elderly and disabled. If private sector health care costs grow as projected the vast majority of seniors would soon find themselves unable to afford health care under Mr. Ryan's plan.

Brooks' excitement for Ryan extends beyond his willingness to cut Medicare benefits for retired workers. He tells us that Ryan would even, "reform the tax code along the Simpson-Bowles lines, but without the tax increases." What a guy, Ryan is even prepared to reduce taxes as he ends the security that Medicare provides for retired workers.

I'll confess to having gotten caught up in the excitement, but getting back to the facts that Brooks gets wrong, he tells readers that:

"The current welfare state is simply unsustainable and anybody who is serious, on left or right, has to have a new vision of the social contract."

Actually this is not true, as everybody who serious on the left or right knows. The U.S. health care system is unsustainable. If per person health care costs were the same as those in Germany, Canada or any other wealthy country, then the United States would be looking at long-term budget surpluses, not deficits. If the health care system is not fixed it will have a devastating impact on the economy regardless of what we do with public sector health care programs like Medicare and Medicaid.

Of course fixing the health care system requires going after powerful interest groups like the pharmaceutical and insurance industries and the doctors' lobbies. Attacking these powerful groups is less likely to draw praise from media pundits like Brooks. They don't get quite as excited when politicians attack the wealthy and powerful as when they attack ordinary workers.

Brooks is also excited by the fact that "the ex-chairmen of the Council of Economic Advisers and 64 prominent budget experts" signed letters stressing the urgency of reducing the budget deficit. While no one would want to question the credentials of these experts, they may want to question their competence.

Not one member of this group warned of the $8 trillion housing bubble, the collapse of which led to the worst downturn since the Great Depression. This downturn is likely to cost the economy close to $3 trillion in lost output and add a comparable amount to the nation's debt. In fact, if these budget hawks had a better understanding of the economy, they would have been focusing their concerns on the housing bubble instead of the deficit in the years from 2002-2006.

Their focus on the deficit distracted the public's attention from the economy's most pressing problem. Because of their prominence, these experts were able to draw media attention from those who were actually warning of the housing bubble. The result was the economic collapse that we are now experiencing and much larger deficits than the ones that had concerned them in the years prior to the collapse. There is no evidence that this group's understanding of the economy has improved in the last 4 years.

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That is what a real newspaper would have told readers when it quoted House Budget Committee Chairman Paul Ryan saying:

"There is nobody saying that Medicare can stay in its current path."

However the Rupert Murdoch owned Wall Street Journal did not provide this information. The Center for Medicare and Medicaid Services projects that health care costs will rise rapidly in coming decades. While health care is overwhelmingly provided by the private sector, the rise in costs is projected to lead to large budget deficits because more than half of health care is paid for through public sector programs like Medicare and Medicaid.

If these projections prove accurate then it will have a devastating impact on the economy regardless of what happens to the public sector health care programs. On the other hand, if per person health care costs were brought in line with costs in other wealthy country, the government would be facing large surpluses, not deficits.

This article also tells readers that the debate will cause Congress to debate the role of government in the economy. It is not clear why it would lead to a debate over the role of government, the immediate issue being debating is cutting Medicare. The WSJ may want a debate over the role in government, but politicians in Congress are unlikely to conduct such a debate.

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USA Today told readers that employers are disproportionately hiring college-educated workers. The data presented in the article actually do not make much of a case. While it is true that the employment to population ratio (EPOP) for college grads has risen, the increase has been very modest. The EPOP for college grads averaged 73.4 percent in the first three months of this year compared to 73.3 percent in the first three months of 2010.

As evidence that demand for college-educated workers is rising, the article reported that the professional and business services sector added 78,000 jobs in March. The article implies that these are jobs that require college degrees. In fact, more than a third of these jobs (28,800) were in the temporary help sector. Most of these jobs almost certainly did not require college degrees. Other sectors reporting good growth in March, such as restaurants and manufacturing, don't typically require that workers have college degrees. On the other hand, the government sector, which disproportionately employs workers with college degrees, shed jobs in March and the four prior months.

In short, it is not at all clear that the jobs being created by the economy at this point disproportionately require college degrees.

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The New York Times apparently missed the elections last fall. This is the only possible explanation for its assertion that the budget debate in Congress:

"is likely to spur an ideological showdown over the size of government and the role of entitlement programs like Medicaid and Medicare."

The people serving in Congress got their jobs because they are effective politicians. This means that they have the ability to appeal to powerful interest groups; there is no requirement that they have any background in, or adherence to, any political philosophy. 

The debates over competing plans for Social Security, Medicare, and Medicaid are most obviously about the distribution of income between the wealthy and the less wealthy. Most Republican plans for Social Security would substantially reduce benefits for middle-income, and sometimes lower-income, retirees. Democratic plans tend to be more likely to increase taxes on the wealthy. This is most immediately a question of whether money should come out of the pockets of middle-income people or wealthy people.

In the case of Medicare and Medicaid, the most obvious issue is between those who would want to revamp the health care system in ways that give less money to the pharmaceutical industry, physicians, and insurers, thereby bringing per person costs in the United States more in line with costs in the rest of the world, and those who want to protect the income of these interest groups and instead save money by denying health care to people. There could also be more taxes on the wealthy to support the maintenance of quality health care for the aged and the poor. 

It is inaccurate to describe this as an ideological issue or a debate over the role of government. Both paths involve large roles for government. In the case of the Republican path, the government must play an intrusive role in protecting the patent monopolies of the pharmaceutical industry which allows them to charge prices that can be hundreds or even thousands of times the competitive market price. The same applies to the medical device industry. The government also imposes extensive barriers that keep doctors' fees far above those of comparably trained physicians in other countries. 

The debate is not over whether the government should play a large role in the health care sector. The debate is whether the government's efforts should be devoted to maintaining the incomes of health care providers or whether they should be devoted to providing health care to the public. The NYT badly misrepresents the issue in a way that strongly favors the Republican position by implying that this is an ideological argument over the size of government in the economy. It isn't. 

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Okay, this celebration around the jobs report is really getting out of hand. Both the Post and Times had front page pieces touting the good news. The Post gets the award for being the more breathless of the two:

"The jobs numbers come amid other promising signs that the recovery is building momentum. The stock market wrapped up the first quarter this week with a 6.4 percent gain in the Dow Jones industrial average and continued to tack upward Friday, adding another 0.5 percent. Investors were pleased that the job growth was continuing — but not so fast that the Federal Reserve might want to apply the brakes by raising interest rates anytime soon.

"Also contributing to the buoyant markets were reports from automakers Friday showing that auto sales rose in March. Sales of new vehicles were up 11 percent over a year before at General Motors, 16 percent at Ford and 23 percent at Honda.

"A separate report Friday also showed continued strong growth in the manufacturing sector, with the Institute for Supply Management’s index of activity at the nation’s factories edging down to 61.2 from 61.4. Numbers above 50 indicate expansion."

First off, no one should include the stock market as indicator of the economy's well-being. Rich people are happy -- that's nice -- it has little to do with the economy. The car buying is positive, but with so many of the cars now imported or largely comprised of imported parts the impact of this surge in sales is much less than would have been the case 30 years ago. The drop in the Institute for Supply Management's index suggests that manufacturing is likely to make a marginally smaller contribution to growth in the months ahead, not good news. (The Bureau of Labor Statistics employment diffusion index for manufacturing, a measure of the percent of sectors that expect to add workers, fell from 66.0 in February to 63.0 in March, it had been 73.5 in January.)

As noted above, 216,000 jobs is not especially impressive, especially given the depth of the hole that our economic policymakers put us in. In only 15 of the 52 months from February 1996 to May of 2000 did the economy create fewer than 216,000 jobs. In most cases the weakness was caused by bad weather. And this was at a time when the working-age population was more than 10 percent less than today.

It is also striking that neither paper seems to have mentioned the Commerce Department's report on construction in February, which showed a 1.4 percent decline in February, following even larger declines in December and January. (The big news in this report was the 2.6 percent downward revision to the data originally reported for January.) Much of the story here is in non-residential construction as the building boom that resulted from the bubble in that sector is leading to a bust. The largest declines are in manufacturing construction where bio-fuel subsidies had led to a boom in ethanol plants in 2009-2010.

Anyhow, construction is certain to be a big drag on growth in the first quarter. It should knock at least a percentage point off GDP growth for the quarter. I am forecasting many surprised economists and reporters.

I have one more point skunk to toss over at the celebrators. Here is the path of the employment to population ratio (EPOP) over the downturn. Note that we have only risen slightly from the low hit in December of 2009 and the EPOP is actually a hair lower today that it was a year ago. The drop in the unemployment rate over this period was entirely due to people leaving the labor force. Now is that good news or what?


Employment to Population Ratio in the Dowturn




Source: Bureau of Labor Statistics.

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It seems that the current contingent of economics reporters are too young to remember a healthy economy. This is the only way to explain the extraordinary celebration of the gain of 216,000 jobs reported for March. While this news is certainly in the "could have been worse" category, this is hardly an impressive rate of job growth, especially for an economy recovering from a severe recession. Remember, job growth averaged 250,000 a month for the 4 years from 1996 to 2000, and that was starting from an unemployment rate that was already under 6 percent.

For those folks too young to remember how an economy is supposed to grow, I constructed a simple chart showing monthly job growth in the two years following the 74-75 recession, the 81-82 recession, and the 91-92 recession and compared them to the 216,000 job growth reported for March. (In making comparisons it is worth noting that the period following the 90-91 recession was known as the "jobless recovery.") The numbers shown are labor force adjusted which means that I multiplied the number of jobs created each month by the ratio of the March 2011 labor force to the labor force in the month given.



Source: Bureau of Labor Statistics and author's calculations.

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The description of his strategy in a Washington Post article suggests that he is. According to the article, President Obama wants the United States to reduce its dependence on foreign oil because the price is high.

This strategy makes no sense in the current context because there is a world market for oil. Increased production of oil in the Gulf of Mexico or Alaska has no more impact on the price that people in the United States pay for their gas than increased production in Venezuela or Saudi Arabia. The only way that focusing more on domestic production would substantially reduce the price of oil relative to the rest of the world would be if President Obama plans to put export restrictions on U.S. oil.

Of course since the U.S. doesn't have enough oil to ever be close to self-sufficient, this would be impossible in any case. The Post should have pointed out to its readers that President Obama's strategy for reducing the cost of oil does not make sense.

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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.

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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.

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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.
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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.

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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.

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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.

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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.

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