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).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

I often think it's too bad that Social Security isn't a private company. If it were, it could sue Marketplace Radio for libel for this sort of reporting. Does Marketplace's host have any idea what she is talking about when she says: "Social Security is in such a sorry state"? According to the Congressional Budget Office the program can pay all benefits for the next 34 years with no changes whatsoever and even after that can pay more than 75 percent of benefits indefinitely. The program is in much better shape in this respect that it was in the 40s, 50s, 60s, or 70s. So what on earth is this person talking about? Can Marketplace Radio pay all its expenses for the next 34 years?

Marketplace's expert then tells us that Social Security will probably be means-tested. This idea is extremely unpopular among both the public and policy experts, so it would be interesting to know the basis for this assessment. She also recommends raising the retirement age, apparently unaware of the fact that the retirement age has already been raised to 67. She also is apparently unaware of the fact that the vast majority of the huge baby boom cohort has almost nothing saved for retirement and therefore will be almost entirely dependent on Social Security.

Add a comment

It would be nice if the media didn't feel the need to rely almost exclusively on economists who are continually surprised by the economy. The Commerce Department's release of May data on retail spending surprised many economists by its weakness as noted by both the Post and the Times.

Economists who know economics were not surprised. Prior to the recession consumer spending was propelled by the $8 trillion in housing wealth created the bubble. This is the well-known housing wealth effect that economists were supposed to learn in their under-graduate training: annual consumption increases by 5-7 cents for every dollar of housing wealth. The bubble sent consumption soaring and pushed saving rates to record lows.

Now that most of the bubble wealth has disappeared, consumption is returning to more normal levels. Even now the savings rate , at around 4.0 percent, is well below its levels before the stock and housing bubbles, which averaged more than 8.0 percent. In fact, with most of the huge baby boom cohort in its 50s, with very little wealth accumulated for retirement, the demographics should be heavily tilted towards saving. This is why the small subgroup of economists who know economics are asking why consumption is so high, rather than so low.

Reporters should recognize that the economics profession doesn't have the same sort of internal controls as other occupations, like custodians or retail clerks, Therefore many economists are not good sources for information about the economy.

Add a comment

The Washington Post is famous for relying on David Lereah, the chief economist for the National Association of Realtors (NAR) and the author of Why the Housing Boom Will Not Bust and How You can Profit from It, as its main source for information on the housing market during the bubble. It apparently still has not learned that the NAR is not a neutral source of information on the housing market.

It printed without question an assertion from Lawrence Yun, Mr. Lereah's successor, that as many 180,000 people who qualify for the first-time homebuyers credit (which also applied to some existing owners), may have signed a contract by April 30th (meeting one deadline), but be unable to close by June 30th, a second requirement for the credit.

Let's look at this one. The number of existing homes sold in April was about 470,000. Since it generally takes 6-8 weeks between contracts and closings, this implies there were about 470,000 homes contracted in February. The pending sales index rose by about 13.5 percent between February and April, which means that there were about 540,000 existing homes placed under contract in April. The Commerce Department reports that there were 48,000 new homes put under contract April for a total of 590,000 homes.

Many of these homes would not qualify for the credit either because the buyer previously owned a home (but not long enough to qualify for the move-up credit) or due to the income caps. If we assume that 75 percent of the homes contracted in April qualify for the credit, this would mean that roughly 440,000 people signed contracts in April who qualify for the credit.

Mr. Yun's claim that 180,000 people who signed contracts before the deadline may not be able to close by June 30th would mean that more than 40 percent of these buyers are in this situation. While there was somewhat of a surge in buying in April, it did not approach the levels reached at the peak of the bubble in 2005-2006. It is therefore difficult to believe that it could have created too much of a backlog of paperwork. Furthermore, the mortgage applications index indicates that sales plummeted after the end of the month, so there would be few new sales for mortgage processors to deal with.

In short, there is little reason to believe that the vast majority of sales qualifying for the credit could not be completed within two months of the contract date. (Remember also, sales were spread over the month. Someone who signed on April 15th has more almost 11 weeks to meet the deadline.) Mr. Yun's estimate likely exaggerates the number of people in this situation by an order of magnitude. The Post should learn that people who work for trade associations are not good sources for unbiased information.

Add a comment

David Brooks doesn't like the stimulus, as readers of his columns know. Today he engages in a bit of magical thinking in putting out his case for deficit reduction.

His first invention is telling us: "deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times." This is very interesting, what "debt crisis" is Brooks referring to? We can point to a debt crisis in Greece, and arguably Portugal and Spain, but it is not clear what that has to do with the argument for stimulus in the United States. There were debt crises in Latin America in the 80s, no one ever raised these in the context of the Reagan era budget deficits.

In the real world we would look to things like the ratio of debt to GDP in the United States (@60 percent) and compare it to the ratios in other countries and to the U.S. at other points in time. There are several countries with debt to GDP ratios of far more than 100 percent who are able to borrow money with no difficulty. For example, Japan has a debt to GDP ratio of more than 110 percent yet it pays less than 1.5 percent interest on its long-term debt. Right after World War II the debt to GDP ratio in the United States was also over 110 percent, yet interest rates were low and the economy had decades of solid growth.

The next thing we would do in the real world is look at the interest rates that the United States is currently paying. At present the interest rate on 10-year Treasury bonds is about 3.2 percent, near a post-World War II low. In short, the debt crisis is magic -- an invention of David Brooks -- not something that exists in the world.

Add a comment

For more than a month BP was telling the world that the rate of leakage from its well was just 5,000 barrels a day. It now appears that the size of the leak is actually an order of magnitude greater. How could BP be so far off the mark? Did they really not have a clue? (What do people get paid for at this company?) Or, where they deliberately not telling the truth?

And the question that we ask here at BP, why aren't the media asking this obvious question?

Add a comment
That's a question that NPR listeners might ask after being told that the differences between organized labor and President Obama were due to the President's political pragmatism. Many of the differences stem from President Obama's willingness to serve the interests of powerful business groups such as the pharmaceutical industry, the insurance industry, and the big banks. President Obama's positions may be viewed as politically "pragmatic" in that these are very powerful interests who can badly hurt politicians who cross them, but they are not politically pragmatic in terms of being responses to public sentiment. It would have been useful if this report had made that distinction. Add a comment

It's great that the Post is able to find the truth in such matters. It told readers:

"For all of Wall Street's money and power, it has been a different army of lobbyists that has proven most effective over the past year in shaping the financial overhaul legislation on Capitol Hill. Again and again, big banks have been outpaced by small-town interests, proving that even when it comes to overhauling financial regulation, politics really is local."

Let's see, two years ago the big banks were rescued from bankruptcy by the helping hand of Big Government. Today, they are again making record profits and awarding record bonuses to top executives. Congress never seriously considered breaking them up and taking away the implicit government security blanket of "too big to fail," a subsidy that could be as much as $36 billion a year. It also is unlikely to impose the sort of Glass-Steagall separations that would prevent the big banks from speculating with taxpayer insured dollars.

Some people might think that this outcome suggests that the big banks are calling the shots. Thankfully we have the Post to tell us otherwise.

Add a comment
Probably not, but most readers of the Post probably don't realize that this is what is at stake in the debate over a proposal by the Democrats that would raise taxes on the foreign earnings of U.S. corporations by $14 billion over the next decade. This sum is equal to approximately 0.05 percent of projected imports over this period. It would have roughly the same effect on trade overall as a drop in the value of the dollar relative to the euro from 1.2 dollars to the euro to 1.203 dollars to the euro. (The decline in the value of the dollar affects both imports and exports.) In other words, this tax will have no measurable effect on the trade balance even though many politicians will likely make a big issue out of it. Add a comment

That is what the Washington Post argued in an article on President Obama's deficit commission today. The article told readers that: "Adjusting Social Security benefits is a likely point of consensus, commission members say." [The word "adjusting" is presumably a typo. The only way to reduce the deficit is by cutting benefits.]

The Social Security trust fund holds more than $2.6 trillion in government bonds. According to the Congressional Budget Office, this money will be sufficient, along with current tax revenue, to pay all scheduled benefits through the year 2044. The decision to cut benefits would effectively mean defaulting on these bonds -- denying workers the benefits that they have already paid for through the designated Social Security tax.

The article misrepresents the finances of the program by telling readers that: "Social Security has been self-supporting since 1935, with taxes paid by current workers financing benefits for current retirees." This has not been true since the Greenspan Commission's recommendations were implemented in 1983. The commission's plan raised taxes and the normal retirement age, thereby reducing benefits. This led to a substantial degree of pre-funding, allowing the trust fund to accumulate more than $2.6 trillion in government bonds over the last quarter century.

As a result of this prefunding, the article's comment later in the paragraph: "Sometime in the next few years, taxes will no longer cover benefits," has no relevance to anything. Under the law, Social Security benefits are paid out of the trust fund, it makes not an iota of difference whether annual Social Security tax revenue is greater or less than annual benefit payments. This is an invention of the Washington Post and critics of Social Security.

The next paragraph tells readers:

"The program's defenders argue that there is no crisis: If Treasury would repay billions of dollars in surplus Social Security taxes borrowed over the years, the program could pay full benefits through 2037. But many budget experts question whether supporting the existing benefit structure should be a cash-strapped nation's first priority."

It is worth noting that the decision not to "repay billions of dollars in surplus Social Security taxes," is effectively a decision to default on the portion of the government debt held by the Social Security trust fund. It is worth highlighting this point so that readers understand the position being advocated by "many budget experts."

 

Add a comment

The NYT discussed the likely path of fiscal and monetary policy. It noted that it was unlikely that the Fed would adopt a substantially more expansive path concluding with a quote from an economist: "A second round of quantitative easing at the moment would substantially increase inflationary risks."

It is worth noting that there is no economic theory that shows quantitative easing (the Fed buying long-term bonds) leads to inflation when the unemployment rate is far above normal levels, as is the case at present.

Add a comment

The lead Washington Post editorial complained that the pro-stimulus crowd is not supporting its plan to cut Social Security benefits or to raise taxes on the middle class as a path to deficit reduction, insisting that this means they are not serious about reducing the deficit in the long-term. In fact, many progressives have supported measures that would address the long-term budget problem with items like a financial speculation tax.

There are also measures that would substantially reduce health care costs like publicly funded clinical drug trials which could allow all drugs to be sold as generics for $4 per prescription. This would save hundreds of billions annually in spending on prescription drugs. We could also allow Medicare beneficiaries to buy into the more efficient health care systems of other countries, with the government and the beneficiaries splitting the savings. This could save trillions of dollars in the decades ahead.

However, the Post does not even want these ideas discussed since they could hurt the powerful interest groups whom they favor. Rather, the Post insists on measures that will low and middle income families.

It is also worth noting that the reason the deficit has soared in the last few years has been due to the collapse of the housing bubble. If the Post had not almost exclusively on economists who could not see an $8 trillion housing bubble as its sources and for its oped page content, it is possible that policymakers would have noticed the bubble and acted to rein it in before it grew large enough to wreck the economy. Add a comment

With so much focus on the deficit it's probably hard to keep track of things like the unemployment rate. This is the likely explanation for a USA Today article that told readers in its first sentence: "last week's disappointing report on the job market may not be as dreary as it appears."

The article explained that many of the 411,000 workers who took jobs with the Census may have taken private sector jobs had they not had the option of working for the Census. According to the article, these people opted to take what they viewed as relatively high-paying and easy temporary jobs rather lower paying permanent positions in the private sector. It refers to evidence of a similar effect in prior years when Censuses were conducted.

It is important to note that the question is not whether the Census workers would have taken other jobs (they may have), but whether anyone would have taken the other jobs. The argument in USA Today is that low-paying jobs have gone unfilled because employers, who would have hired the Census workers, view other applicants as being unqualified. The comparisons to past Census years is dubious. The unemployment rate was 4.0 percent in 2000 and 5.0 percent when the 1990 Census was being conducted.

Add a comment
In a short piece on consumer borrowing the Washington Post told readers that: "economists are hoping that households will soon borrow more and help sustain the recovery." This may be true of the economists who Post reporters rely upon as sources, but it is not true of economists in general. Most households, including those at the edge of retirement have very little savings. With deficit hawks like the Washington Post editors and news reporters insisting on the need to cut Social Security and Medicare, it would be very unfortunate if these households did not increase saving and reduce their current consumption. The economists cited by the Post must want these people to live in or near poverty in their old age.
Add a comment
The NYT reported on a speech by UK Prime Minister David Cameron in which he insisted on the need for large budget cuts and/or tax increases. The article included no assessment of this agenda from economists. Many prominent economists, such as Nobel Laureates Paul Krugman and Joe Stiglitz, have argued that deficit reduction in the near future will lead to higher unemployment and slower growth. Unlike the vast majority of proponents of fiscal austerity, these economists were able to see the $8 trillion housing bubble that wrecked the U.S. economy. Add a comment

That could have been the headline of an NYT article that reported on Federal Reserve Board Chairman Ben Bernanke's warning that the government had to reduce its budget deficit. The article quotes Mr. Bernanke as saying:

“We can see what problems can arise in a country if investors lose confidence in the fiscal position of that country, so it is very important that we address this problem.”

This might have been a good place to point out that Mr. Bernanke could not see the $8 trillion housing bubble whose collapse gave us the worst economic crisis since the Great Depression. It could have also pointed out that it is not clear what he meant, since Greece his presumed point of reference, has very little in common with the United States. Greece is a small economy that is far more dependent on international trade than the United States. It also does not have its own currency.

For these reasons, economists who can see an $8 trillion housing bubble do not think that the experience of Greece tells us: "what problems can arise in a country if investors lose confidence in the fiscal position of that country." The NYT erred badly in not noting Mr. Bernanke's poor track record in discussing his latest pontifications on economic policy.

Add a comment

The NYT told readers that Germany has to make big cuts in its budget because:

"Germany has its own reason for introducing cuts: It is legally bound by the “Schuldenbremse,” or debt brake, that Parliament passed last year. This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now. Net borrowing, which will rise to about €86 billion this year, or about €48 billion more than in 2009, is the largest since World War II, according to the Finance Ministry."

I can't tell what is intended here, but clearly not what the article says. Debt of course is a stock, but the subsequent discussion refers to annual deficits, which are flows. Furthermore, a debt limit of 0.35 percent of GDP is ridiculously low, the euro zone is supposed to set a cap of 60 percent for the debt to GDP ratio, although almost every member state is now above this cap.

Anyhow, something is clearly wrong here, hopefully an editor will get it straightened out.

Add a comment

Robert Samuelson tells us that the problem behind the Gulf oil spill and the housing bubble meltdown is not the corruption of industry and regulators, but rather complacency born of success. In the case of the oil industry, Samuelson noted that the industry has been drilling close to 1.6 million barrels a day, with only a few hundred barrels a year being spilled. He makes a similar argument about the financial sector, noting the sharp decline in daily stock market volatility.

It is worth noting that the sort of bad events that one expects in these sectors are almost by definition going to be very rare (we will not have huge spills or financial collapses on a weekly basis) and very costly. Any regulator must understand this fact and if they are competent would not allow their judgment to be affected by the absence of a bad event for a long period of time. The cost of the economic meltdown will be at least $5 trillion in lost output in the United States alone. By contrast, the benefits from reduced daily volatility are trivial. (How much do you care if you risk buying a stock at a price that is 0.2 percent too high, when you have an equal probability of getting it at a price that is 0.2 percent too low?)

So, if our regulators cannot understand the potential harm from extremely rare, but extremely costly, disasters, then the country has a very serious problem.

 

Add a comment

NPR had a segment on Morning Edition which badly misled listeners about the potential economic impact of a temporary ban on deepwater drilling. The piece focused on the impact of oil on the economy of Louisiana and the Gulf region. In doing so, it highlighted the total impact of the oil industry, not the marginal impact of additional drilling.

For example, it told listeners that oil accounts for 16 percent of Louisiana's state GDP compared to 1 percent for fishing and 4 percent for tourism. This is an interesting set of numbers but it has nothing to do with the impact of a ban on new deepwater drilling. No one is proposing that existing wells be shut down. This means that the vast majority of this 16 percent of GDP will not be affected by the ban. (It is also worth noting that the vast majority of this 16 percent accrues to BP and quickly leaves the state.)

The piece does later give an estimate from the state's development department that the bad on drilling could lead to a loss of 20,000 jobs (this presumably includes indirect effects). By comparison, Louisiana has approximately 120,000 construction jobs. If we assume that each construction job indirectly generates 0.5 jobs elsewhere then the ban on drilling would have roughly the same impact as a ten percent decline in construction employment.

Add a comment

There is no doubt that this is the steepest and longest downturn of the post-World War II period. However, the number of the long-term unemployed (more than 6 months) is not a good measure of its severity.

The reason is simple, benefits are available for a much longer period of time than has been the case in prior downturns. In some states benefits are available for as long as 99 weeks. This gives unemployed workers the opportunity to spend more time looking for work than would otherwise be the case. Therefore, they are less likely to take a job that means a large pay cut and/or does not fully utilize their skills. Also, some people who may otherwise drop out of the labor force continue to search for work (and get counted as unemployed) because looking for work is a condition for receiving benefits.

It is important to realize that this does not necessarily mean that extended benefits are raising the unemployment rate. If the long-term unemployed took low-paying jobs they would mostly be replacing other workers. However, the unusually long duration of benefits prevent a direct comparison of the number of long-term unemployed across recessions.

[Addendum: From some of the comments I realize that I may not have been very clear. I think that extended benefits are a good thing. We have a very severe problem of unemployment; the worst since the Great Depression. In this context, it makes sense to give unemployed workers more time to look for new jobs. That increases the probability of finding a job that fully utilizes their skills. (To take an extreme example, it would not only be bad for the worker, but a loss of skills for the economy if a brain surgeon was forced to take a job as a checkout clerk.)

However, if we extend the period of benefits to allow workers to take more time to find an appropriate job, then it should not be surprising that workers take more time to find an appropriate job. The duration of unemployment is no longer a consistent measure of the severity of the unemployment problem. This is just a measurement issue that reporters (and many economists) have been getting wrong.]

Add a comment

Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs. In this context, the downward revision of the first quarter number to 2.8 percent yesterday should have been good news. We know longer need to worry about rapid productivity preventing job growth. The 6.1 percent growth rate from the first quarter of 2009 to the first quarter of 2010 is only slightly faster than the 5.4 percent increase from the third quarter of 2002 to the third quarter of 2003 and the 5.3 percent growth from the first quarter of 1970 to the first quarter of 1971. It is the same as the rate from the first quarter of 2001 to the first quarter of 2002. In short, the rapid rate of productivity growth coming out of the recession should not have been a surprise.

It is also worth noting that better than expected productivity reflects directly on the intergenerational issues that the deficit hawks constantly rise. If productivity grows more rapidly than expected, then future generations will be wealthier on average than our projections show. This suggests that deficits are not having a negative impact on their well-being.

Add a comment