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).
The NYT reported that inflation in China is higher than its leadership's targets. It might have been worth noting that a higher valued currency helps to lower inflation.
This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.
A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.
For some reason China is apparently not considered this obvious path for addressing its problems with inflation.Add a comment
Reuters decided to abandon evidence-based reporting in a news story that told readers that the United States is suffering from "structural" unemployment. The use of the term "structural" is important because it implies that the main reason that people are unemployed is that there is a mismatch between skills and the available jobs. The alternative explanation, is that we just need more demand in the economy to drastically increase employment levels.
There are certain pieces of evidence that economists would look to as evidence of structural unemployment. For example, there should be high rates of job openings, which would suggest that there are sectors of the economy or regions of the country in which employers are having difficulty finding workers. In fact, data from the Bureau of Labor Statistics show the job opening rate at 2.5 percent. This is above the 1.9 percent low hit last year, but only slightly higher than the 2.3 percent low from the last recession. It is well below the 3.4 percent pre-recession rate.
If the economy's main problem is structural unemployment then there also should be sectors where wages are rising rapidly as firms are forced to compete for an inadequate supply of skilled workers. There is no major sector of the economy where wages are rising substantially more than the rate of inflation.
If the main problem is structural unemployment then we should also expect to see sectors where workers are putting in large numbers of hours. The reason is that employers cannot find enough workers so they pay over-time wages and other premiums to get the available workers to put in more time. Again, there is no major sector of the economy where average weekly hours has even risen to its pre-recession level.
In short, this article presents no evidence whatsoever that the U.S. economy is suffering from structural unemployment. The focus of the article is the decline in the manufacturing industry, and especially the auto industry, in the Midwest. However, there are always declining sectors of the economy. The question is whether these sectors are large enough and the workers in these sectors sufficiently ill-prepared for other lines of work to lead to structural unemployment in an otherwise growing economy. This lengthy piece provides no evidence to suggest that this is the case.
Remarkably, in a piece that includes many references to international competition, there is no discussion whatsoever of the value of the dollar. In a system of floating exchange rates, like what we currently have, a large trade deficit is supposed to adjust through a decline in the value of a country's currency. Such adjustment has not happened in the case of the United States due to a deliberate policy of both the United States (in the Clinton administration) and some of our trading partners in keeping the value of the dollar up.
The piece also includes the bizarre assertion that manufacturing workers in the United States are uniquely unable to compete internationally. In fact, our more highly educated workers, like doctors, lawyers, and accountants are even less competitive with their counterparts in the developing world. However, professionals have the political power to sustain and even increase the barriers to foreign competition. By contrast, U.S. trade policy has been quite explicitly focused on subjecting U.S. manufacturing workers to such competition.
The article also seriously misrepresents the experience of Germany, its model of a successful wealthy country. While it did have substantial reforms of its labor market, it did not have a long period of double-digit unemployment as this piece implies. Germany also did not have sharp declines in wages. Compensation for manufacturing workers continued to rise over the last decade and is currently almost 50 percent higher than in the United States.Add a comment
The NYT printed a scare story about San Francisco's retiree health care costs in lieu of a printing news. The paper told readers that the projected cost of providing health care for retired city workers has been estimated at $4.4 billion and the city has put aside just $9.7 million to cover this cost.
That sounds really really scary. However those who read through the article would discover that the city is currently spending more than $138 million a year for retiree health care. This fact implies that the city has been in the habit of paying for these expenditures out of its current budget. Furthermore the projection that is the highlight of this article implies that there will be no substantial increase in this figure in the years ahead. (If the $4.4 billion is spend over the next 30 years it would imply an average annual cost of $147 million.)
It is possible that the San Francisco's health care burden is more onerous than this calculation suggests, but readers of this article would have no way of knowing since the point of the article seems to have been to scare readers rather than provide information.Add a comment
The headline of a Washington Post article told readers:
"Economic recovery gains momentum."
The report that provided the basis for this assertion was the Fed's release of data on industrial production for October. This report showed a rise in production of 0.4 percent in November, after a revised decline of 0.2 percent (previously reported as 0.0 percent) in October. However, this swing was entirely the result of a reversal in the output of utilities, which plunged in October and then jumped in November.
Fluctuation in utility output are overwhelmingly determined by weather conditions, not the state of the economy. Economists usually focus on manufacturing output which is more stable. This increased by 0.3 percent in November, the same as the rate now reported for October (revised down from 0.5 percent). This is a somewhat slower pace of growth than the 5.3 percent rate over the last year.Add a comment
The Post showed once again why it is known as "Fox on 15th Street" when it used a front page news story to tell readers that members of Congress:
"acknowledged the need to avoid expiration of the Bush tax cuts and the likely shock to the economy that would result."
It may be the view of the Post's editors that there is a "need" to avoid expiration of the Bush tax cuts, but this is not an objective fact about the economy. While the expiration of the tax cut without any other action by Congress would be a hit to the economy, the impact is not larger than other negative shocks that the Post has largely ignored in the past, such as the collapses of the housing and stock bubbles or the run-up in the value of the dollar in the Clinton years.
It is also important to note that the failure to approve legislation now does not preclude Congress from acting next year as the Post's article implies. If the economy remains weak, as is likely, there will be substantial pressure on Congress to approve additional stimulus. It is highly unlikely that Congress would do nothing if the economy stagnated and unemployment continued to rise. There is no precedent for such behavior.Add a comment
It seems that he doesn't from the quote buried at the end of a NYT piece on U.S. trade with China. In reference to the trade deficit, Gary Locke, the Commerce Secretary said:
"The reality is that if we are to close the trade deficit, Americans need to export more and the Chinese need to purchase more."
Actually exports are only half of the story in trade. A trade deficit means that the United States imports more than it exports. Adjusting to more balanced trade almost always means both reducing imports and increasing exports. It is virtually impossible to envision a scenario in which the country moves to anything close to balanced trade without adjustments on both sides.
It is also worth noting that this piece very casually refers to "piracy" in reference to China's lack of respect for U.S. intellectual property claims. In many cases, the unauthorized copies of U.S. products may not violate current Chinese law. In such cases there is no piracy involved.
It also would have been wort mentioning that enforcement of U.S. intellectual property claims will impose substantial costs on Chinese consumers and is likely to sharply slow growth by reducing their purchasing power.Add a comment
It would have been worth mentioning this fact in a piece that discussed Germany's effort to insist on fiscal responsibility in the euro zone's member states in the context of support for bailouts. Most of the currently troubled countries, with the major exception of Greece, would have met almost any standard of fiscal responsibility prior to the crisis.
The current problems of these countries stem from the collapse of housing bubbles that for some reason the top officials of the European Central Bank either did not see or did not take seriously. It would have been worth pointing out that Germany's fiscal responsibility agenda would not have helped in the current situation.Add a comment
The auto industry put out a study that apparently assumes that if people don't spend money on cars, they will not spend it on anything. This was in the context of evaluating the employment impact of proposals to substantially increase mileage standards.
The NYT uncritically reported the projections from this study, which found that a large increase in mileage standards could reduce the number of jobs nationwide by 1.3 million. The article did not include the views of any economists who would have pointed out the unrealistic nature of this assumption.Add a comment
The interest rate on 10-year Treasury bonds plummeted in the summer, falling at one point to under 2.4 percent. It has recently risen back to a still very low rate just under 4.5 percent.
The Washington Post had a front page piece that highlighted this run-up in rates. The piece warned that higher rates will slow the economy and raise the government's borrowing costs. It suggested that the higher rates could be attributable to the tax deal between President Obama and the Republicans in Congress which will close to $900 billion in debt over the next two years.
It is worth noting that the recent rise in interest rates puts them at almost exactly the level projected by the Congressional Budget Office (CBO) last summer. CBO projected that the 10-year Treasury bill rate would average 3.4 percent for 2010 and 3.5 percent for 2011. The CBO projections suggest that the drop in interest rates was the development that needed to be explained, not the recent increase.Add a comment
The Washington Post has long expressed its disdain for the Social Security program in both its opinion and news section. It continued this practice by not even mentioning the potential impact of the tax compromise on Social Security in an article reporting on the progress of the bill in the Senate.
The risk is that the Republicans will put pressure on President Obama to extend the payroll tax cut beyond this year by describing the end of the tax cut as a tax increase. This raises the prospect of a permanent reduction of 2 percentage points in the payroll tax. The loss of this revenue would effectively double the projected shortfall in Social Security over its 75-year planning horizon putting its future in serious jeopardy.
While this article reported the results of a poll on the package it ignored the most obvious implication. The extension of unemployment insurance benefits is hugely popular even among Republicans. This suggests that the benefit of extension would likely pass as a stand alone effort. That means that politicians who are raise concerns about the unemployed as a reason for supporting this package are not being honest.
It also would have been helpful if the numbers in this piece were expressed as a share of the budget and/or the economy. That way most readers may have been able to assign them some meaning. As it is, the Post could have just substituted the words "really big number," RBN to save space, and provided as much information to the overwhelming majority of its readers.Add a comment
Pozen first told readers that Social Security is not progressive even though its payback structure is highly progressive. (A low-wage earner will get a payment equal to about 90 percent of their average wage income, while a maximum wage earner [$106,800 in 2010], will get a benefit equal to less than 30 percent of their taxable wage.) He argued that the differences in life expectancy (wealthy people live longer), offset the progressivity of the payback structure.
While this is partially true, the differences in life expectancy do not fully offset the progressivity of the payback structure. Also, Social Security includes survivor and disability benefits that disproportionately benefit low and moderate-income earners.
The second myth created by Pozen’s piece is his claim that the proposed increase in the Social Security retirement age is no big deal. He described as a myth the claim that:
“The Budget Commission’s proposal raises retirement age too quickly, especially for physical laborers.”
First, the commission did not issue a proposal. The co-chairs, Erskine Bowles and Alan Simpson, issued a proposal that got the support of 9 other commission members, 3 short of the number needed to make it a formal proposal of the commission.
Pozen goes on to tell readers that the proposal increases the normal retirement age at a:
“much slower pace for increases in the retirement age than the projected increases in life expectancy. During the 48 years between 2027 and 2075, the normal retirement age will rise by only two years, but life expectancy in the United States will on average rise by more than 10 years.”
Actually, the Social Security Trustees project an increase in life expectancy of 6.4 years over this period. The bulk of gains in life expectancy in recent years have gone to high-end earners. If this pattern continues in coming decades, it is very likely that the gains in life expectancy for most workers will not exceed the increases in the normal retirement age proposed by Bowles and Simpson.
Pozen then assures readers:
“In their proposal to reform Social Security, the co-chairs would allow physical laborers to claim half of their benefits early and the other half at a later date. Moreover, the proposal directs the Social Security Administration to develop a new and more flexible method for delivering retirement benefits for those in “physical labor jobs.”
Actually, the suggestion by Bowles and Simpson that there would be different retirement schedules for different occupations is reversing a worldwide trend toward standardizing benefit schedules. The Bowles-Simpson proposal is precisely the policy for which Greece was widely ridiculed. Hairdressers were one of the occupations that qualified for early retirement based on the fact that they worked with dangerous chemicals. It is not clear that the government is well positioned to make this sort of assessment and that it can impose rules that prevent easy gaming.
The third myth created by Pozner’s when he labels as a myth the claim: “The proposal would constitute a large “cut’’ in Social Security benefits for American workers.”
Before addressing the benefit schedule, it is worth noting Bowles-Simpson propose a change in the annual cost of living adjustment (COLA) that would amount to roughly a 3.0 percent cut in benefits for someone who lives 20 years after starting to collect benefits. Whether or not this is “large” can be debated. However, it is worth noting that this proposed cut would have more impact on the after-tax income of most beneficiaries than the ending of the Bush tax cuts would have on most of the people who earn more than $250,000 a year.
For example, those earning more than $300,000 a year would see their income about $250,000 taxed at a 36 percent rate instead of a 33 percent rate. Since this higher rate would apply to just one-sixth of their income, it would reduce their after-tax income by just 0.5 percent. Only the very wealthy would see their after-tax income fall by a larger percentage due to the expiration of the Bush tax cut than the 3.0 percent cut in Social Security proposed by Bowles-Simpson from changing the annual COLA.
The media and members of Congress have certainly acted as though this change in taxes is “large,” so the proportionately bigger cut in benefits proposed by Bowles and Simpson must also be “large.”
Pozen wrongly asserts that:
“The proposal would actually increase the current schedule of Social Security benefits for low-wage workers. It accomplishes this result by expanding the concept of minimum benefits available to any worker.”
In fact, most low-wage earners would not have enough years of earnings to qualify for the step up in benefits proposed by Bowles and Simpson.
Pozen then notes that, in addition to the cut in the COLA, scheduled benefits will be cut for “more affluent workers.” It is worth noting that “more affluent workers” in this context means anyone with average earnings above $10,000 a year.
Pozen also claims that the schedule of benefits proposed by Bowles and Simpson must be compared to the payable benefit in years after 2037, since the program is not projected to have enough money to pay full benefits in years after 2037.
In fact, there are literally an infinite number of ways to fill the gap in funding. The idea that if Congress does not endorse the Bowles and Simpson plan that there would be no other way to close the projected shortfall in the next 27 years is absurd on its face.Add a comment
In an article that discussed the benefits of the tax deal for the middle class the NYT told readers:
"And other provisions that benefit the middle class have gotten virtually no attention, including a temporary repeal of a limit on itemized deductions and repeal of the phaseout for personal exemptions. Together, those tax breaks will cost nearly $21 billion."
The phaseout of the personal exemption only begins to kick in for couples with incomes over $250,000. This places them above 98 percent of the population in income.Add a comment
Yep, that's when you know when your economy is really in trouble. The NYT told readers today that China is suffering from inflation:
"Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year.
"That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation."
One might think a good remedy for this situation would be to raise the value of China's currency, which would reduce exports and the demand for labor in export industries. This would alleviate the labor shortage and the upward pressure it places on wages and thereby inflation.
But, "Beijing contends that raising the value of its currency would hurt coastal factories that operate on thin profit margins, forcing them to lay off millions of workers."
Okay, so Beijing is worried that measures to alleviate the labor shortage that it is concerned about will lead to layoffs of workers. There is either something being seriously misreported in this news story or China's leadership has less understanding of economics than the leaders in the United States.Add a comment
Dana Milbank is really excited as he tells readers in the first sentence of his column:
"For the first time in my adult lifetime, I am really proud of President Obama."
Wow, and why is Mr. Milbank so excited? Has President Obama stood up to the Wall Street banks, the health insurance industry, the pharmaceutical companies, or the oil industry? Well, not exactly, Milbank tells us that: "I'm proud that he has finally stood firm against the likes of Peter DeFazio."
For those who don't know of him, Peter DeFazio is a 12 term Congressman from Oregon. He has never held a leadership position in the party and has not played an important role in designing any major piece of legislation. (In other words, he does not have much power.) He has also backed President Obama on all the key items in his legislative agenda.
But, Mr. DeFazio has criticized President Obama's tax deal with the Republicans. This got President Obama angry and he told DeFazio and his types to get lost. That passes for being tough at the Washington Post.
Milbank is also impressed that:
"That display [telling the liberals to get lost] was coupled with some hardball politics (Larry Summers's warning that rejecting the package would return the economy to recession)."
That's really cool. Larry Summers told the liberals that if this deal does not got through that the economy would go into a recession. How tough can you get?
Does Larry Summers have a model that shows the economy will fall back into recession without this deal? This certainly is not the forecast that the administration is using in its budget modeling. This modeling projects 4.3 percent as the growth rate for 2011. This modeling assumes the continuation of the Bush tax cuts, a continuation of UI benefits, and a couple of other items that would not happen if the Obama-Republican package and no subsequent language is approved. However, there are no (as in zero, nada, not any) models that show the items assumed in the President's budget projections, which may not happen absent this deal, boosting the growth rate by 4.3 percentage points relative to a situation without these items.
This means that when Larry Summers was playing hardball and telling Congressional Democrats that failure to the pass the compromise would lead to a recession he was saying something that is not true. Outside of polite Washington circles this is known as a "lie." (It is also worth noting that Larry Summers has a proven track record of being wrong about almost every major macroeconomic development in the last 15 years, the stock bubble, the housing bubble, the over-valued dollar, and financial deregulation.)
Apparently, at the Post, saying things that are not true to advance a political agenda is something to be applauded.
[Addendum and apology to readers. I foolishly accepted Milbank's characterization of Summers' remarks rather than reading the remarks myself.
Summers did not say that rejection of the budget deal would throw the economy back into recession as Milbank claimed. Summers said that rejection of the deal would increase the risk of recession. This claim is true, since the deal would be a net stimulus to the economy if enacted. If the economy does not get this stimulus, then it would be weaker and therefore at greater risk of recession. So, Summers statement is true; it is Milbank's inaccurate representation of his position that would be a lie.]
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That could have been the lead of a front page Washington Post news story reporting on a press conference in which former President Bill Clinton touted the budget deal that President Obama negotiated with the Republicans. Remarkably, President Clinton's record on these issues was never mentioned in the article.
As many former aides have acknowledged, President Clinton had been considering a variety of options for partially privatizing Social Security in the beginning of 1998 when the Lewinsky scandal exploded. With his presidency in jeopardy, Clinton had to rely on his core constituencies -- labor, the African American community, women's organizations -- all groups that would have been infuriated by an effort to privatize Social Security. As a result, Clinton was forced to abandon this effort.
President Clinton also set the economy on a path of bubble-led growth, touting the stock market bubble that drove growth in the late 90s. He also pushed for the financial de-regulation that helped clear the way for the abuses of the housing bubble era. In addition, he also actively promoted the high dollar policy that led to the enormous trade deficit, which was another major imbalance distorting the economy's growth path.
During his campaign, President Obama openly criticized this bubble-led growth path. Competent news reporters would have pointed out the irony that at this moment Obama now appears to be embracing the economic legacy he criticized. They also would have pointed out that Obama is relying on a Democratic president who was actively planning to privatize Social Security, ostensibly to curb fears that his deal could lead to the privatization of Social Security.Add a comment
The statement about "at least two schools" is a quote in an NYT article from Germany's Foreign Minister Guido Westerwelle. However, one will look in vein in this article for anything other than the view from Mr. Westerwelle that:
"People used to think that it would be the next generation that would some day have to deal with the issue of public debts. ... And now everybody is surprised that it doesn’t take that long, that it hits us now in the shape of the ever increasing price of credits."
One alternative view is that unnecessarily tight monetary policy in the wake of the collapse of housing bubbles across Europe and the United States is forcing unnecessary austerity on Ireland, Spain, and other European countries. Proponents of this position point out that these countries are not suffering from a shortage of labor and capital, but rather a lack of demand.
This means that if the European Central Bank and/or national governments stimulated these economies by creating additional demand, this demand could easily be met without inflation. From this perspective, the imposition of austerity is simply pointless pain. Furthermore, the people who bear the brunt of the suffering are ordinary workers, not the bankers whose greed fueled the bubbles or the incompetent central bankers and other policymakers who allowed the housing bubbles to grow to such dangerous levels.Add a comment
Reporters don't always know what politicians actually believe, they only know what they say. This is why the Post should not have told readers in describing the White House's view of Senator Charles Schumer's effort to block President Obama's tax deal:
"But to the White House, it is Schumer who is acting recklessly by seeking to wage class warfare with just days left on the legislative calendar, risking the health of the economy and the pocketbook of every middle-class household with his threat to carry the fight into next year."
The Post does not know that the White House actually views Schumer's effort as reckless and risking the health of the economy. The Post only knows that some unspecified person in the White House made this assertion.Add a comment
The NYT tells us that cutting corporate taxes is:
"a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness."
Corporate profits are equal to about 16 percent of the value of output in the corporate sector. Businesses pay roughly a third of their profits in taxes, which means that taxes are equal to about 5 percent of the value of output. If taxes were reduced by 20 percent, a very large tax cut, then this would reduce the cost of doing business in the United States by 1 percent relative to foreign countries.
Suppose the dollar falls by 10 percent against other currencies. This would reduce the price of goods produced in the United States by 10 percent relative to goods produced elsewhere in the world, or ten times as much as the boost to competitiveness that businesses would receive from even a very large reduction in tax rates.
It is understandable that businesses would claim that cutting their taxes is important for U.S. competitiveness. People often make false claims in order to enrich themselves. However, newspapers are not supposed to simply accept such claims as being true and present them to their readers this way.Add a comment