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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In another fascinating piece of creative economics David Brooks tells us: "we can get distracted by short-term stimulus debates, but those are irrelevant by now." Okay folks, just get used to 9.6 percent unemployment, Mr. Brooks says that there is nothing can be done.

The column is chock full of observations that most people did not know, probably because they are not true. For example, Brooks tells us that if more people follow the recommendation of Michelle Obama and go into teaching and service occupations then it will make the country poorer.

That's an interesting thought. Would the country be worse off if most teachers came from the top quartile in their classes rather than further down the ladder? I certainly did not know this.

As for other service occupations, the country certainly could have used more competent and honest economists. We are losing more than $1.4 trillion a year (@$19,000 for a family of four) due to the recession caused by the collapse of the housing bubble. If we had more competent economists, then the bubble never would have been allowed to grow to such dangerous levels. We can call this $19,000 in lost output a year the "incompetent economist tax." (By way of comparison, toward the middle of next year the incompetent economist tax will exceed the size of the 75-year projected shortfall in the Social Security trust fund.)

Competent economists could make us richer in other ways. For example, we spend close to $300 billion a year on prescription drugs. These drugs would cost roughly one-tenth as much if patent monopolies did not allow drug companies to sell their drugs at prices far above their competitive market price. Competent economists could develop more efficient mechanisms for financing prescription drug research, thereby saving us hundreds of billions of dollars a year.

Even Mr. Brooks' key concern, a lack of people going into engineering, could be addressed in large part of a bit of competent economics. Manufacturing in the United States is at an enormous competitive disadvantage because of the over-valued dollar. If the dollar is 30 percent over-valued, then it means that we are effectively providing a subsidy of 30 percent for imports and imposing a tariff of 30 percent on exports. As people who understand economics know, the over-valued dollar is the main reason that we have a trade deficit.

If we got the dollar down, then our manufacturing industry would be much more competitive. This would make careers in engineering more attractive relative to the alternatives. Then we would have more people entering engineering and David Brooks would be happy.

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BTP doesn't ordinarily focus on blogs, but Paul Krugman's blog is widely read, and most of us expect him to be right, so it is a big deal when he gets an important point wrong. This morning he told readers that part of the explanation for Japan's decline in per capita income relative to the U.S. is due to its aging population. He argues that his has led to a drop in the percentage of working age people in the population, which has led to a drop in per capita output.

A quick trip over to the OECD's data base tells a somewhat different story. While the ratio of working age people to population did fall in Japan over this period, we also see a rather dramatic decline in average hours worked per worker. Average annual hours per worker dropped by 7.0 percent from 1992 to 2008.

This indicates that there was no shortage of potential labor in Japan over this period. If Japan had pursued policies that generated demand, there is no reason to believe that its workforce would not have supplied the necessary labor, inspite of the decline in the percentage of working age people in the population. In other words, Japan's economy was demand constrained, not supply constrained.

This doesn't mean that there are not circumstance under which Japan's population could become supply constrained, it's just that these circumstances did not exist in the stagnation of the last 18 years. This is sort of like a baseball team that is reduced by injuries to 23 players on its roster (rather than the usual 25), which gets beat 24-2 as a result of an awful performance by its starting pitcher and the early relievers. It may matter at some point that the team only has 23 players to draw upon, but that would not have been the issue in this particular loss.

This point is important because there is a whole industry devoted to scaring the public about the demographic changes that the United States is now experiencing. While these changes will certainly affect the economy, they will not be the main determinants of living standards. The success or failure of economic policy will dwarf the impact that projected decline in the ratio of workers to retirees will have on well-being.  

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The NYT has a front page piece on how low interest rates are hurting people who live on their saving. While interest rates are low, it would have been worth noting that the inflation rate is also very low. This is important to take into account in this sort of discussion, since the inflation rate had typically been higher in prior decades.

The real interest rate, the interest rate minus the inflation rate is the true return to savers. If the interest rate is 3 percent and the inflation rate is 3 percent, then the real value of a person's savings would erode by by 3 percent a year, if they spent all of their interest. Currently the inflation rate is close to 1 percent, which means that the real value of savings is only be reduced by 1 percent annually if a person spends their interest.

Real interest rates are low at present, which is a deliberate policy, but just reporting on the nominal rates presents a distorted picture of the situation facing savers.

 

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David Leonhardt has an interesting piece on house prices but ends up making a serious logical error. He argues that house prices typically keep pace with income, meaning that they have risen more rapidly than inflation. He bases this assessment on the fact that the portion of income that has been devoted to to housing has remained constant over roughly the last 80 years.

There is a logical problem in this analysis. In principle, the issue is the movement of a the price of a house of the same quality, not the amount that people actually spend on housing. If the price of a house of the same quality rises in step with income, and the share of income devoted to housing remains constant, then this logically implies (i.e. there is no way around the conclusion), that the quality of housing has not increased over this period.

This would mean that the homes that people are buying today are no bigger or better than the homes that people bought 80 years ago. This contradicts an enormous amount of data and common sense. It is unlikely that anyone would seriously argue this case. Therefore, we can conclude that house prices have not kept pace with income growth. 

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NPR told its listeners that they are this morning in its top of the hour news segment. It described President Obama's proposal to allow businesses to have 100 percent expensing of new investment as a "jobs program." In fact, the vast majority of the investment that will qualify for this credit would have taken place in any case. 

I am petitioning NPR to have my plan for tax cuts to Dean Baker labeled as a jobs program.

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The NYT says it isn't. The context is a discussion of President Obama's new stimulus program. The article tells readers that the word "stimulus,"

"has taken on negative political connotations since the original roughly $800 billion recovery plan and subsequent additions have failed to push unemployment down substantially."

According to the Congressional Budget Office the stimulus has reduced the unemployment rate by between 0.8 and 1.7 percentage points. This clearly was not enough to get the economy back to full employment, but arguably it was still substantial. People would likely view the economy very differently today if the unemployment rate was over 11 percent.

Arguably, the major cause for disenchantment with the stimulus was the fact that it was hugely oversold. The Obama administration badly underestimated the severity of the downturn and claimed that the stimulus would be sufficient to bring about a recovery.

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It is also equal to about 4 percent of the $1.2 drop in annual demand (@ $600 billion in lost consumption and $600 billion in reduced construction) due to the collapse of the housing bubble. These would be items worth including in discussions of President Obama's latest infrastructure proposal for those wanting to know the impact it will have on the budget and the economy. Add a comment

It appears to be a standard ritual to cite Japan's declining population as an evil in all discussions of things Japanese. Today the NYT refers to the declining population as one of the factors making life bad for young workers.

Actually, a declining population is likely a plus for young workers. It means less competition for employment than would otherwise be the case. Falling population should also lead to improvements in the quality of life that will not be picked up in conventional economic measures. For example, its transportation system will be less heavily utilized, allowing people to reduce the time spent traveling to work and for other purposes.

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The NYT had an article on a coming dispute over EU farm subsidies in its next budget. It told readers:

"Agriculture subsidies account for more than 40 percent of the E.U. budget — worth more than €130 billion, or $167 billion, each year."

Readers probably assumed that this sentence was saying that the E.U.'s agricultural subsides are 130 billion euros each year. In fact, that number was referring to the total E.U. budget. Agricultural subsidies come to a bit over 50 billion euros each year. 

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That should have been the headline of an article about Donald Kohn who is leaving the Fed's board of governors. Kohn said that he doesn't think the Fed could have done anything different to prevent the worst downturn in 70 years because:

"Everybody — but certainly the regulators and the markets — became complacent about the housing market and whether housing prices could ever decline across a broad front.”

He still doesn't know that the housing crash was entirely predictable? Why are the taxpayers paying for this guy's pension?

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That mammoth waterfall of ignorance, Thomas Friedman, is at it again. The NYT allowed him to show his ignorance on economics in his Sunday column.

Friedman tells readers that the United States will be in bad financial shape because of all the money needed to bail ourselves out of the recession and also due to the growth in cost of Medicare, Medicaid, and Social Security.

The first point requires a knowledge of intro econ. It actually costs us zero to bail ourselves out the recession. The government can simply run deficits to boost demand. (Friedman apparently does not understand the problem is too little demand right now -- we can produce more goods and services than people are buying.)

The government can sell the bonds needed to finance the debt to the Fed (which it is already doing to some extent). The Fed then simply holds the bonds indefinitely. This creates zero burden on the government, since the Fed refunds the interest earned on these bonds to the Treasury. My intro econ students all used to understand this -- I guess Friedman never took econ 101 or didn't have a very good teacher.

Friedman then repeats what his "tutor and friend Michael Mandelbaum" told him:

"'In 2008', Mandelbaum notes 'all forms of government-supplied pensions and health care (including Medicaid) constituted about 4 percent of total American output.' At present rates, and with the baby boomers soon starting to draw on Social Security and Medicare, by 2050 'they will account for a full 18 percent of everything the United States produces.'"

Wow -- did Mandelbaum really say this? Did the NYT really allow Friedman to repeat it in its pages? Okay, in the real world, Social Security, Medicare, and Medicaid accounted for 9.4 percent of GDP in 2008. The projections show that the vast majority of the projected increase in costs in these programs is due to health care costs. However, people who want to cut Social Security lump the program in with the health care programs to advance their agenda.

The post health care reform projections actually show a much slower rate of growth for Medicare and Medicaid. Apparently, Mr. Friedman was not aware of the reform. If the U.S. paid per person health care costs that were comparable to those in any other wealthy country, then the country would be looking at huge long-term budget surpluses.

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Most political experts believe that a strong economy favors incumbents, but the Post told readers the opposite in a front page piece that urged Democrats to embrace deficit reduction. The piece noted comments from several Democratic senatorial candidates urging budget cuts, then told readers:

"The new push for austerity could prove too little, too late for Democrats, who fear losing their majorities in both chambers of Congress. In dozens of House and Senate races, incumbent Democrats are struggling in polls, leading political analysts to raise the serious prospect of Republican takeovers in the House and even the Senate."

Of course the deficits that the country is now running are sustaining the economy. If the deficits were lower, then output would be lower and unemployment would be higher. The Congressional Budget Office (CBO) recently estimated that the stimulus has reduced the unemployment rate by between 0.7 and 1.8 percentage points.

The CBO estimates imply that if the Democrats had been earlier in their push for fiscal austerity and not pushed through the stimulus, then the current unemployment rate would be between 10.3 percent and 11.4 percent. This Post piece asserts that this situation would have improved their electoral prospects in November, although it cites no one who backs up this position.

The editorial, which is not labeled as such, includes several other unsupported assertions. At one point it told readers that government spending is out of control, commenting that "Democrats vow to bring spending under control," which of course is only possible if spending is already out of control.

It also implies that the Democrats have spent recklessly commenting about their "conversion to fiscal restraint" and the difficulty of convincing voters that they are serious. Of course the only budget surpluses in the last 40 years were run with Democrats in the White House, and the largest structural deficits were run under Republican administrations, so it is a bit bizarre that the article would imply that Democrats need to convert to "fiscal restraint."

The article also told readers the country's fiscal health is in danger and that the changes need to restore it are unpopular:

"Some fiscal hawks are skeptical that either party is willing to make the unpopular decisions necessary to restore the country to fiscal health."

The financial markets do not believe that the country's fiscal health is in danger, otherwise they would not make long term loans to the government at interest rates below 3.0 percent. It is also not clear that the steps needed to ensure that long-term budget deficits do not become a problem are unpopular.

While one source cited in the story (Robert Bixby, the director of the Concord Coalition) wants to cut Social Security, Medicare and Medicaid, it is only necessary to fix the U.S. health care system to ensure stable budgets into the indefinite future. If the United States paid the same per person health care costs as people in any other wealthy country we would face huge long-term budget surpluses rather than deficits.

The piece should have also pointed out Colorado Senator Michael Bennet's error when he asserted that we are borrowing from China because of our budget deficit. The United States is borrowing from China because of its trade deficit, which is in turn the result of an over-valued dollar. This is an embarrassing gaffe from a senator.

It is also worth noting that this editorial did not once mention the unemployment rate. This is remarkable for a piece discussing the Democrats' election prospects.

 

 

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The Post has an oped by Edward Schumacher touting the benefits that undocumented workers have provided for the Social Security system. Many pay taxes without ever collecting benefits.

While his numbers don't seem quite right (he claims that annual payouts would exceed tax revenue over the years 2011-2015 without the $12 billion estimated net contribution from undocumented workers, the trustees report shows taxes exceeded benefits by more than $15 billion in the years 2012-2014), the more important problem is with his logic.

Presumably the point of immigration reform measures would be to normalize the employment situation of immigrants so that the workers who are here are on the books, both paying required taxes and receiving the benefits to which they are entitled, like Social Security. If immigrants get the benefits to which they are entitled, then it will make the finances of Social Security somewhat worse.

In reality this is a trivial issue for the program, which is fully solvent for the next 29 years according to the Congressional Budget Office. An increase in the payroll tax of 0.16 percentage points would fully offset the cost of the payment of benefits to undocumented workers. However, it seems bizarre to advocate that immigrants be brought into the country to pay taxes to a program from which they get no benefit, as Mr. Schumacher seems to be doing.

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A report on the unemployment situation told listeners that the real problem in the economy is not a lack of demand, but rather inadequate investment. Actually investment in equipment and software has been growing at almost a 20 percent annual rate over the last three quarters. While it might be desirable to see investment grow even more rapidly, demand is a major determinant of investment growth. If the economy grew more rapidly as a result of a spur to consumption, it would almost certainly lead to more rapid growth in investment. Add a comment

Since reporters feel the need to report nonsense from the Fed chairman without presenting anyone pointing out the obvious, BTP will fill the gap. The NYT reported on Ben Bernanke's testimony before the Financial Crisis Inquiry Commission.

It notes Bernanke's statement that in 2003-2004 it was not clear that the housing market was in a bubble and that by the time it was clear, it was too late for the Fed to do anything without seriously harming the economy. Of course it was clear as early as 2002 that the housing market was in a bubble, but more importantly, Bernanke's claim that the Fed could not act until it was clear is absurd.

The Fed always acts in an uncertain environment. For example, Alan Greenspan raised interest rates in anticipation of inflation on numerous occasions. The logic of this action was that it was worth slowing the economy and raising the unemployment rate rather than risk an increase in the rate of inflation. In effect, this action assumes that the certainty of higher unemployment from raising interest rates is better than the risk of higher inflation.

Had the Fed acted to burst the bubble in 2003-2004, the risk would have been that it temporarily depressed house prices by scaring people about excessive prices and limiting the exotic mortgages that were boosting demand. By contrast, if it had acted correctly in preventing the growth of a dangerous bubble, it would have prevented the worst downturn in 70 years.

Any serious weighing of the benefits and risks of bursting the bubble in 2003-2004 would have surely come down in favor of bursting the bubble. The Fed's decision not to burst the bubble was one of the most disastrous failures of monetary policy in history.

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The NYT has long opposed agricultural price support programs. Ironically it supports house price support programs. It seems to want the Obama administration to take further steps to keep the housing bubble from deflating.

The basic story is that house prices are still 15-20 percent above their trend level. These prices seem relatively affordable given the extraordinarily low interest rates in the market at present. However, if we think that interest rates are a major determinant of price, then we must believe that prices will plummet if interest rates return to a more normal level.

Sound housing policy would accept the fall and focus on helping homeowners facing the loss of their home. It would not try to perpetuate the bubble.

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Economics isn't that hard, but David Brooks seems to have trouble with it. He thinks everything would have been different if President Obama had pushed through a $713 billion stimulus that was centered on cutting the payroll tax, had pushed through an infrastructure bank instead of his pork barrel projects, and had focused on getting an energy bill rather than a health care bill.

There is no way of knowing how the politics would have played out, but in terms of the economics, it is difficult to see how Brooks' stimulus would have left us in a different place than the Obama stimulus. With stimulus, size does matter, and Brooks is basically talking about a stimulus of roughly the same size as the one President Obama got through Congress.

Payroll tax cuts are relatively progressive (the tax is regressive), so a cut has a fairly high multiplier since most of the money will be spent. Mark Zandi estimates the multiplier on these cuts at 1.3. This is better than for most tax cuts, but less than the 1.7 multiplier estimated for food stamps, the 1.6 for unemployment insurance benefits or infrastructure spending and the same as the 1.3 estimated for aid to state and local government. 

This means that if we compare David Brooks stimulus with President Obama's stimulus of roughly the same size, we should expect it to have roughly the same impact on the economy. President Obama's stimulus included some items that would be expected to have more impact (UI benefits and food stamps), and some that would have about the same impact (aid to the states and his own payroll tax cut, which was called "Make Work Pay"), and some that would have less impact if we include the alternative minimum tax fix as part of the stimulus.

As a result, if President Obama had done the David Brooks stimulus we should expect the unemployment rate to be around 9.5 percent, rising to 9.8 percent this morning, and headed to above 10.0 percent by the end of the year. I can't answer whether this would have made President Obama more popular than he is now.

 

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Unfortunately, I am serious. It has a news article in today's paper with the headline: "five reasons for economic optimism." Real newspapers don't run pieces like this as news stories. Add a comment

The Post seems to be claiming otherwise in an article that begins with the sentence: "will the U.S. government ever default?" The Washington Post editorial section has been near hysterical in its screaming about budget deficits for most of the last decade. In fact, it was so out of bounds in its rants that it found no space in either its news or opinion section for warnings about the $8 trillion housing bubble. Of course the collapse of this bubble led to the worst economic downturn in 70 years -- and sent the deficit soaring.

It is also worth noting that IMF completely missed the housing bubble and failed to warn of the imminent danger that it posed to the United States and other countries. No one at the IMF was fired over this failure and there has been no major restructuring of its staff, so there is little reason to believe that its understanding of economics is any better or its advice more accurate today than it was in the years before the bubble burst.

Of course the basic hypothesis is silly on its face since the United States issues debt in dollars. It can print as many dollars as it needs to pay off its debt. This could create a risk of inflation, but it rules out the possibility of default. Serious economists and reporters understand this simple point.

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Apparently word of CBO's existence has not made its way to Fox on 15th Street. How else can we explain the Post's failure to mention CBO's analysis of the impact of the stimulus in an article reporting on a speech by Christine Romer, President Obama's departing chief economist?

The article reported Romer's view that the stimulus helped keep the economy from sliding into a depression and that additional stimulus would boost growth. It then tells readers that Republicans oppose additional stimulus and "argue that Democrats have run up record budget deficits without improving the economy."

This is where a serious newspaper would report the assessment of the stimulus by independent analysts, most obviously CBO. In an analysis released last month CBO estimated that the stimulus increased output by between 1.7  percent and 4.5 percent. It also calculated that the stimulus lowered the unemployment rate by between 0.8 and 1.7 percentage points. In other words, the CBO estimates imply that unemployment would be between 10.3 percent and 11.2 percent today without the stimulus. This would have been useful information to provide readers.

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The NYT reports on a new set of papers from the IMF, one of which warns that many wealthy countries, including the United States, are very close to the limit of their ability to increase their national debt. It is worth noting that this paper's methodology indicated that Japan and Italy were already well above the limit of their ability to take on debt.

The financial markets apparently assess the situation differently than the IMF since both countries are still able to issue long-term debt at very low interest rates. The fact that the methodology is apparently quite wrong in predicting the situations faced by these two countries might suggest that it is not a very useful methodology for guiding U.S. policy.

It is also worth noting that IMF somehow did not see the $8 trillion housing bubble that wrecked the U.S. economy, nor the bubbles in Spain, Ireland, and the U.K. There have been no obvious changes in the IMF's structure that would lead one to believe that it is better at assessing economic prospects today than it was three years ago.

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