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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This fact would be worth mentioning in an article that discusses Federal Reserve Board Chairman Ben Bernanke's attitude toward the deficit. If Greenspan and Bernanke (who was a Fed governor from 2002) had paid attention to the $8 trillion housing bubble, and prevented it from growing to the point where it could do so much damage, then the country would not be in a serious downturn today, and we would not be running a large budget deficit.

It is only due to the incompetence of the people running the Fed that we are facing such severe economic problems. In other lines of work, like dishwashers and custodians, people would be fired for such incompetence, but those running the Fed are not held accountable in the same way as most workers.

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Why is it so hard for reporters to understand the idea of purchasing power parity? This is important if anyone is interested in understanding China's importance in the world economy. China produces and consumes more output in a wide variety of goods and services. This would not make sense for an economy that is just passing the size of Japan, putting China's economy at a bit more than one-third the size of the U.S. economy.

The more realistic measure is the purchasing power parity measure that puts China's economy at almost two-thirds of the size of the U.S. economy. This measure applies a common set of prices to all goods and services, regardless of which country they are produced in. This measure of China's GDP is far more consistent with a country that both buys and produces more cars than the United States, has more Internet users and twice as many cell phones users.

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The NYT told readers that the Fed's ability to take steps to boost the economy are limited because:

"The dramatic expansion of the national debt — which began in the Bush administration, via hefty tax cuts and two wars — has ratcheted up fears that, one day, creditors like China and Japan might demand sharply higher interest rates to finance American spending."

It may be true that such "fears" may prevent the steps to raise employment in the same way that children fear monsters in the dark, and therefore feel the need to keep the light on when they sleep, but reporters should also point out that such fears have no basis in reality. If China and Japan "demand sharply higher interest rates," then it would mean that the dollar would fall sharply against their currencies.

This is exactly the policy that the Obama administration is ostensibly committed to. The lower value of the dollar would lead to a sharp boost to U.S. exports and a fall in imports, lifting growth and employment. It is difficult to understand why anyone would fear the outcome that we are ostensibly committed to seeing. In short, the "fears" have no basis in reality and are promoted either out of ignorance or by people who have ulterior motives.

At one point the article tells readers that Germany has done relatively well in this downturn without using stimulus:

"Germany, which has long harbored particularly powerful fears of inflation, has done relatively well in the current downturn without large stimulus spending, and that experience is now cited by adherents of austerity."

Dishonest adherents of austerity do cite this experience, but it is easy to show that the Germany history does not support their case. According to the OECD, government consumption expenditures increased more in Germany since the downturn than in the United States.

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It is worth noting that Germany should have an easier time recovering from this downturn since its economy was not driven by a housing bubble. The main impact on Germany's economy has been through a decline in exports.

It would have been useful if this article had included the views of some economists who were able to see the $8 trillion housing, the collapse of which led to the downturn.

 

 

 

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The economists and central bankers attending the annual meeting of central bankers in Jackson Hole, Wyoming apparently have not noticed the collapse of the housing bubble and the wreckage it has caused. This is the only plausible explanation for a WSJ article that told readers about a paper on a new approach to fiscal policy that argues:

"fiscal policy could benefit from the more scientific approach taken by monetary policy over the past two decades."

The article continues:

"The former U.S. Federal Reserve economist [the person presenting the paper] noted how monetary policy has improved after central banks started to adopt goals such as inflation targeting and as central bankers started to articulate the 'science' in public speeches."

People who pay attention to the economy know that the monetary policy pursued over the last three decades has devastated the economy, leaving tens of millions of workers in the United States unemployed or underemployed. It would be hard to imagine a policy that could produce more disastrous results than the single-minded focus on inflation that central banks followed even as housing bubbles in the U.S. and elsewhere grew to ever more dangerous levels.

If the central bankers and economists at Jackson Hole still don't understand how harmful these policies have been then it should raise enormous concern in Congress and among the general public about the competence of the people controlling economic policy. This should have been the main focus of a news article on the meetings.

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The Washington Post's lead editorial told readers that there is not much the Fed or anyone else can do to get us out of an economic situation with near double-digit unemployment. It concludes its piece with a vague set of policy recommendations that include "education, tax reform and entitlement reform."

This is pretty much the same agenda that the Post was pushing back in 2002-2007 when others were warning about the dangers of the housing bubble. The Post had no room on its news or opinion pages for these warnings. It seems that it still doesn't. Its policy prescriptions are remarkably impervious to evidence or changed circumstances.

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In his speech at the annual meeting of central bankers in Jackson Hole, Wyoming, Federal Reserve Board Chairman Ben Bernanke listed his options to counter a faltering economy. One of the three items on the list was reducing the 0.25 percent interest rate that the Federal Reserve Board now pays on reserves.

It is striking that Bernanke would include this item on his list because he just instituted the policy of paying interest on reserves last year. At the time there was no discussion of the possibility that paying interest on reserves would have any significant negative impact on growth. If paying interest does not slow growth, then reducing the interest rate paid on reserves cannot raise growth.

Reporters covering Mr. Bernanke's speech should have made this point, since it suggests that he does not have any real plans to deal with a weak economy. It would have also been worth pointing out that the economy is growing much slower than the 3.0 to 3.5 percent range that the Fed had forecast earlier in the year. The second quarter data showed the economy growing just 1.6 percent, with final demand growing at a 1.0 percent rate. If Bernanke is prepared to take action in response to a weak economy, this would appear to be the time, as the unemployment rate is likely to rise through the rest of the year.

It is worth noting that at this gathering 5 years ago the participants debated whether Alan Greenspan was the greatest central banker of all time.

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That's what NYT columnist Joe Nocera is apparently worried about. That doesn't quite fit the data. The Census Department data show that rental vacancy rates are at record highs.

The article also claims that many otherwise creditworthy borrowers are unable to get mortgages. This is inconsistent with the Mortgage Bankers Association data on mortgage applications. This series shows applications going through the floor since the end of the first-time buyers tax credit in May. (That is why people who follow the housing market were not surprised by the plunge in sales reported for July.)

If creditworthy borrowers were finding it difficult to get mortgages then it would be expected that the number of applications would be rising sharply relative to the number of sales, since many buyers would have to make multiple applications to get a mortgage and some would make several applications and still not get a mortgage.

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The Washington Post accomplished what might have seemed impossible: it had a major front page article on the trade deficit without once mentioning the over-valued dollar. The only vague reference comes near the end in a sentence that refers to "China's currency and other policies."

Those folks who took economics would remember that the main determinants of a country's trade deficit are its GDP and the value of its currency. Other things equal, when a country's economy expands, it buys more of everything, including more imports. This means that GDP could be a culprit in the trade deficit, but there would be few people who would claim that our GDP was too high in the years 2005 and 2006 as the trade deficit was hitting record shares of GDP.

This leaves the other culprit, an over-valued currency. The value of the dollar determines how expensive imports are relative to U.S. goods. If the dollar fell in value, we would buy fewer imports. This is a point which is widely accepted outside of the confines of the Washington Post. Of course, a lower dollar will also boost U.S. exports since it will make our exports cheaper to people living in other countries. For these reasons, a discussion of currency values would be featured front and center in a serious discussion of the trade deficit.

 

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Suppose Paul Krugman or Bob Herbert got just about everything wrong in their columns on a regular basis. Suppose that they were not just wrong on peripheral matters, but on facts that were central to their argument. What would happen?

These progressive columnists would almost certainly be sent packing. There are plenty of smart articulate progressive writers. If these two couldn't get their facts right, the NYT would have no problem finding someone to replace them who could.

Apparently, the same does not apply to conservative columnists as demonstrated by David Brooks. He gets his facts wrong on a regular basis and not just on side matters. Often the mistake is on an issue that is the central point of his column.

He gave us a beautiful example today. He told readers that the United States had decided to go the big government route to recover from the downturn whereas Germany had gone the austerity route. Brooks tells readers:

"This divergence created a natural experiment. Who was right? The early returns suggest the Germans were."

He then points to Germany's 9.0 percent growth in the second quarter compared to the near stagnation in the U.S. economy.

Brooks is good enough to note that, "results from one quarter do not settle the stimulus/austerity debate," but let's ask if they show anything.

The chart below shows the OECD's estimates of real government expenditures for Germany and the United States since the third quarter of 2008.

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Yes, that's right. David Brook's austerity model has seen a sharper increase in government spending since the crisis than his stimulus model. This suggests that the Germany/U.S. comparison might be somewhat less compelling then he implies.

How long would Krugman or Herbert be working at NYT if they made mistakes like this on a regular basis?

 

 

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In an article reporting on the plunge in new home sales reported for July, the NYT wrongly told readers that "July was the first month that home buyers could no longer qualify for a tax credit of as much as $8,000, which analysts said may have contributed to the decline." The end of the tax credit was a major factor in the plunge in existing home sales reported on Tuesday, but not the drop in new home sales.

The existing homes series refers to the closings on existing home sales. These sales were typically contracted 6-8 weeks earlier. While the homes that were closed in June likely qualified for the homebuyers tax credit, this would not be true of the existing homes that closed in July.

However the new home sales refer to contracts signed for selling new homes. May, not July, was the first month in which contracts would not qualify for the tax credit.

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Good piece in the NYT about enforcing the Volcker Rule, which limits the extent to which banks can trade on their own account. Add a comment

The copy editors at the NYT are apparently on vacation. The NYT told readers that: "the nonpartisan Congressional Budget Office (CBO) reported that the policies had lifted growth in the second quarter by up to 4.5 percent."

No, that's not quite right. CBO reported that the cumulative gain to GDP due to the stimulus by the second quarter of 2010 might have been as much as 4.5 percent. This does not refer to the growth rate in the second quarter itself.

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The NYT has apparently decided to give up on the old-fashioned distinction between news and opinion. They recently ran a piece by Matt Bai insisting that there is no alternative to cutting Social Security to deal with the federal debt. The piece includes the bizarre assertion that Treasury bonds are "often referred to as i.o.u.’s."

This is, of course, absurd. The business pages of major newspapers are full of references to Treasury bonds all the time. The bonds are never referred to as "i.o.u.'s." The article then includes the bizarre assertion about government bonds that the only way for the government to make good on the bonds it has outstanding: "is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases — none of which seem like especially practical options for the long term."

Bai's opinion is radically at odds with perceptions in financial markets. These markets view it as almost inconceivable that the government will not honor its bonds, which is why the interest rate on long-term bonds is near its lowest level in the last 60 years.

While presenting what is supposed to be a non-partisan view of Social Security, remarkably, Bai never once examines the program's finances nor the financial situation of the people who would experience the cuts that are being considered.  

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How else can we explain the fact that in a country suffering from the worst unemployment crisis in 70 years, CNN Money headlines a piece: "America's Debt Crisis"? CNN Money probably does not have access to financial market information. Otherwise it would know that the interest rate on U.S. government bonds are near 60-year lows.

This suggests that financial markets are not at all worried about U.S. government debt. The debt crisis exists only in the heads of people who are either unaware of financial markets or who are trying to spread fear in order to get political support for things like cutting Social Security.

The piece notes the opposition of many groups to cuts to Social Security, but then tells readers that: "nonpartisan deficit experts say the debt trajectory for the country is so worrisome that nothing in the federal budget can be off the table. That includes Social Security, which will only be able to pay out roughly three-quarters of promised benefits to future retirees by 2037."

This might be true, but nonpartisan deficit experts also point out that if the United States fixed its health care system then it would have massive budget surpluses as far as the eye can see. Nonpartisan deficit experts also point out that Social Security payments are already relatively meager compared to what most other countries pay their retirees. Nonpartisan deficit experts also point out that most retirees have very little other than Social Security to support themselves. And, they point out that Social Security's shortfall can be relatively easily made up with revenue increases that are comparable to those put in place in the decades of each the 1950s, the 1960s, the 1970s, and the 1980s.

It appears as though CNN Money only spoke to nonpartisan deficit experts who wanted to cut Social Security.

 

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That should have been the headline of an article reporting on Representative John Boehner's call for President Obama to fire his top economic officials. The article reports that Boehner asserted: "business operators around the nation were anxious about investing in an uncertain business climate given the new policies coming out of Washington. 'The prospect of higher taxes, stricter rules and more regulation has employers sitting on their hands.'"

The data show businesses are actually increasing investment at a rapid pace. Investment in equipment and software has risen at more than an 18 percent annual rate over the last three quarters. It is newsworthy that Mr. Boehner is apparently unaware of the most basic economic data, since he is making strong assertions that are clearly at odds with reality. Mr. Boehner's ignorance of the state of the economy should have been a prominent item in the news.

 

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The Post told readers that the July plunge in existing home sales "was nearly twice as large as forecast." This is a case where the Post apparently relied on the views of incompetent analysts.

The 27 percent drop in sales is very much in line with what would have been expected given the sharp falloff in applications for purchase mortgages in May. The vast majority of people who buy homes need to get a mortgage. If they are not applying for mortgages, then the odds are that they are not buying a home. Given the 6-8 week lag between applying for mortgages and the closing of a home sale, it was entirely predictable that this plunge in sales would show up in the July sales data. 

The only surprising part of this picture is that professional economists somehow were surprised. Of course most of these people also missed the $8 trillion housing bubble.

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The NYT must be having a tough time getting material in the late days of summer. How else to explain an oped from Joseph Massey and Lee Sands that claims that imports from China, and apparently also imports from Japan, do not depend on their price. That's right -- all of you people who wasted time in economics classes where we taught that higher prices meant less demand, you can just forget everything you learned.

It turns out that if the good is imported from China or Japan, price just doesn't matter. We would all gladly pay twice as much for the clothes, steel, computers etc. from China or Japan, rather than buy a domestically produced item, even if it is now cheaper. In fact, we would buy the item from China or Japan even if imports from other countries are now cheaper -- price doesn't matter!!!!!

The authors of this piece apparently do not believe in inflation either. They told readers that the trade deficit with Japan  "hit an all-time high of $90 billion" in 2006, in spite of the fact that the yen had tripled relative to the dollar since the 70s. Those of us old-fashioned economics types would point out that the 2006 deficit was equal to about 0.6 percent of GDP. By contrast, in 1986, when the value of the yen was much lower relative to the dollar, the trade deficit with Japan was more than 1.2 percent of GDP.

For those who are concerned that the United States should be producing more here and creating jobs, Massey and Sands have the answer: we should follow the Obama administration's National Export Initiative and focus "on the 99 percent of American companies that do business exclusively within the domestic market."

That's a great idea. I can't wait until my corner gas station and neighborhood barbershop start exporting to China. Of course, these sorts of businesses are the vast majority of that 99 percent that focus exclusively on the domestic market. It will be interesting to see how the Obama administration gets them to shift their focus to exports.

Pieces like this can really make you hope for the end of summer.

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The NYT had an article this morning warning of the dangers of Japanese-style deflation. While Japan has suffered from weak growth since the collapse of its stock and housing bubble, deflation has not been a serious factor in this weakness. Consumer prices in Japan fell in 6 of the 19 years from 1991 to 2008. The largest decline in this period was a 0.9 percent decline in 2002. (Japan's CPI fell by 1.4 percent in 2009 and is projected to do the same this year.)

The consequences of relatively low rates of deflation are minor. While the article asserts that deflation causes consumers to delay purchases this is implausible on its face. A 1.0 percent rate of deflation would mean that if a person delayed buying a $500 television set for 6 months, they would save $2.50. The gains from delaying smaller purchases would be proportionately less.

The problem facing Japan (and now the United States) is that it would be desirable to have a lower real interest rate. Since nominal rates cannot fall below zero, an inflation rate that is negative makes matters worse by raising the real interest rate. However, the fact that prices are actually falling is not important. The drop in the rate of inflation from 0.5 percent to -0.5 is no different in its impact on the economy than the drop in the inflation rate by 1.5 percent to 0.5 percent. Both are hurtful because they raise the real interest rate by 1.0 percentage point.

The article also wrongly asserts at one point that Japan is prevented from doing more stimulus because its debt is twice the size of the Japanese economy. This is not a constraint at present. The Japanese central banks hold close to half of the debt, so it does not impose a substantial interest burden on the country. Furthermore, markets are willing to buy government debt at extremely low interest rates, so there is little fear about default or inflation.

It is also worth noting that the Japanese central bank could adopt a policy of targeting a higher inflation rate, such as 3-4 percent. This course of action has been advocated by Paul Krugman, Ben Bernanke, and Olivier Blanchard, the chief economist at the IMF. An article that is ostensibly examining the options available to Japan's policymakers should have noted included this one.

 

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The Washington Post has a front page article telling readers that the debate over the Korean "free trade" agreement is actually "a dispute over free trade itself." The Korean trade agreement is not in fact a "free trade" agreement. It does not free trade in many areas, for example it does little to reduce barriers to trade for highly paid professional services, like doctors and lawyers' services. The deal also increases some barriers to trade, most notably by increasing copyright and patent protection.

The proponents of the deal use the term "free trade agreement," because "free" has a positive connotation which they hope will help sell the deal politically. They do not use the term because it is true.

Similarly, it is absurd to claim that the United States is having a "dispute over free trade itself." There are no prominent public figures who support free trade. Genuine free trade would eliminate barriers to trade in all goods and services. In areas where these barriers are greatest, like health care, free trade could have an enormous impact in improving living standards and reducing inequality since prices in the United States are so far out of line with prices in the rest of the world.

Instead, the trade agenda of the United States had been about reducing barriers to trade in manufactured goods with the purpose of putting non-college educated workers in direct competition with much lower paid workers in other countries. The predicted and actual result of this policy is to reduce the pay of non-college educated workers, thereby increasing inequality in the United States. This is a policy of one-sided protectionism. It has nothing to do with "free trade."

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Last week, the NYT highlighted the fact that China's GDP had surpassed Japan's to become the world second largest economy, an event that had happened many years ago using more realistic measures of purchasing power parity. Today the NYT tells readers that India's population growth: "threatens to turn its demography from a prized asset into a crippling burden." 

Actually, India's population has long been a crippling burden on the country. All its natural resources are severely taxed. The country has almost 4 times the population of the United States with considerably less land. Large portions of the population do not have access to clean water. Continued rapid population growth will make the situation worse, but the size of its population is already a serious problem.

The article includes the bizarre statement:

"With almost 1.2 billion people, India is disproportionately young; roughly half the population is younger than 25. This “demographic dividend” is one reason some economists predict that India could surpass China in economic growth rates within five years. India will have a young, vast work force while a rapidly aging China will face the burden of supporting an older population."

It would have been interesting to see the names of the economists to whom the article refers. Economists usually concern themselves with per capita GDP growth. The fact that a country enjoys more rapid overall growth because it has a growing population, while another country may have a stagnant or even declining population, would not be seen by most economists as a virtue. This is especially the case since the more rapid population growth will be associated with environmental degradation.

The reference to China facing a "burden" of supporting a growing population of retirees is also bizarre. First, what matters is the change in the ratio of dependents, both young and old, to workers. With children comprising a smaller share of China's population, this ratio will not be increasing very rapidly.

Furthermore, if China's rapid growth continues, there is no reason that both workers and retirees cannot enjoy substantial improvements in living standards through time. An increase in the ratio of retirees to workers of 0.5 percent a year would be very rapid. China's economy has been growing at a 10 percent annual rate. Even if this rate were cut in half to 5.0 percent, only a tenth of its growth would be absorbed by the need to support a higher ratio of retirees to workers. The notion that this is a serious burden on a rapidly growing country is silly. 

 

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The Washington Post interviewed several business leaders who told them that additional stimulus would cause them to hire more workers. However, because of its poor grasp of economic relationships, it failed to understand what the business leaders were saying.

The article begins by asserting that:

"Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.... But here in the heartland of America, senior executives say neither side's diagnosis fits."

The article then cites several top executives who say that they will not hire until they see more demand. This is of course exactly the argument of those who urge more stimulus. Stimulus spending will hire workers and/or put money in their pockets through tax breaks. This will cause them to spend more money (the saving rate is still quite low by historical standards), which will translate into more demand for businesses. According to the executives interviewed in this article, additional demand will lead them to hire more workers.

The article also attributes a reluctance to hire workers to uncertainty about the future or pessimism. There is zero evidence that the failure to hire more workers is attributable to anything other than weak demand.

If firms were changing their hiring behavior due to pessimism, then we would expect to see an increase in hours worked per worker. We don't. The increase in average weekly hours since the low-point last fall has not been more rapid than in other recoveries and average weekly hours are still far below their pre-recession level. So, there is no evidence to support the view that hiring patterns are responding to demand any differently than they had in the past.

 

 

 

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