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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That is what readers of his column today must conclude. He insists that the United States and European countries can no longer afford their current welfare states because of an aging population.

This might be true if there was no productivity growth. However, unless something incredibly bizarre happens, the economy will continue to see productivity growth in the neighborhood of 2.0 percent annually. This means that in 2045 output per worker would be almost twice as high for each hour of work as it is today. This rise in productivity would allow large increases in both the generosity of the benefits provided for retirees and also the living standard of the working population.

 

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It seems that way since the Post used the term 8 times, including in the headline, in an article that reported on the proposed U.S.-Korea trade pact. (The NYT only found the need to use it once in its article.)

We know that newspapers ordinarily like to save space, which makes it hard to understand why they insist on using the term "free-trade" when they discuss trade agreements which increase protection in many areas. Specifically, deals like the U.S.-Korea trade pact currently in the news enhance protection for patents, copyrights, and other forms of intellectual property claims. They also do not free all trade, leaving in place most of the barriers that protect highly paid professionals (e.g. doctors, lawyers, and economists) from their lower paid counterparts in other countries.

For this reason, these trade deals cannot be accurately called "free-trade" pacts. It is true that these deals generally include the term "free-trade" in their name, but that is not a reason for neutral media outlets to adopt this favorable characterization. In the 1980s President Reagan dubbed the controversial MX missile system, the "Peacemaker." Media outlets did not follow his lead and begin referring to the missile with this term; there is similarly no reason why they should now be referring to trade agreements as "free-trade" agreements, when they clearly are not. 

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The NYT noted the increase in employment of temporary workers by 45,000 in November. This was by far the most rapid job growth in any sector. In attempting to interpret this rise it is important to keep in mind that temp employment rose by 107,000 last November. It seems as though many stores are opting to fill their seasonal demands for labor with temp employment rather than hiring workers who they may expect to keep on permanently after the holidays, however the pattern is less pronounced this year than last. Add a comment
Floyd Norris has a nice piece reporting on the recent patterns in house prices. He notes that the sharpest run-up in prices occurred at the lower end of the market and that these houses have also seen the sharpest price declines and that this process is continuing now. Add a comment

After long insisting that disclosure of the loans made by its special lending facilities would lead to a financial disaster, the Fed made many of the details public on Wednesday, as required by the Dodd-Frank bill. Now that this information has been released and there have been no financial troubles, the Post, which had backed the Fed's refusal to disclose, attacked the proponents of disclosure.

It misrepresented the views of Senator Bernie Sanders, the lead Senate sponsor of the disclosure measure. The Post claims that Sanders had wanted the information made available immediately, as the loans were being made. In fact, Sanders had argued that information on disclosure could have been made available sooner, but not necessarily immediately. It is difficult to contend that a delay of 2 years is necessary or that any disclosure would jeopardize the Fed's conduct of monetary policy, which had been the original position of the Fed and the Post.

The Post also trivializes the fact that many large banks may have made large sums of money by having access to the Fed's lending facilities at a time when liquidity commanded a very high price. This is consistent with the Post's general support for measures that redistribute money from ordinary workers to Wall Street. However, most of the public does not share this goal for public policy.

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The NYT concluded an otherwise useful article on the long-term unemployed by suggesting the country may just settle in with an 8-9 percent unemployment, which had become the norm in some European countries. It is important to note that these European countries have far more extensive welfare state supports than the United States. This allows the long-term unemployed to still enjoy a decent standard of living in European countries. This would not be the case in the United States. Add a comment

The Washington Post repeated the story that consumers have been reluctant to spend due to the bad economy. In fact, the savings rate has hovered around 5.0 percent through the last 2 years. This is well below the pre-stock bubble average, which was more than 8.0 percent. This implies that consumers have continued to spend at an unusually rapid clip, albeit not as fast as when their spending was driven by $8 trillion of housing bubble wealth.

The article also implied that house prices are no longer falling. This is not true, the September Case-Shiller 20 City index showed that prices were falling at an 8.5 percent annual rate. This would eliminate more than $1 trillion in housing equity over the course of a year.

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The Post continued its editorializing in its news section by gratuitously pointing out in a front page article that negotiations to extend tax cuts and unemployment benefits:

"would add hundreds of billions of dollars to future deficits, even as a bipartisan commission appointed by Obama is trying to build support for a plan to balance the budget."

If the Post was interested in informing its readers rather than pushing its budget agenda it could have pointed out that deficits during a period of high unemployment need pose no burden to the economy or future taxpayers since the Federal Reserve Board can simply buy and hold this debt. In Japan the central bank holds an amount of debt that is close to the size of its GDP, which would be $15 trillion in the United States.

This can be seen in the difference between the IMF's estimate of Japan's gross debt (227.2 percent of GDP) and its net debt (121.7 percent of GDP). In spite of these massive holdings of government debt by the central bank Japan continues to experience deflation instead of inflation.

To some extent the Fed is already following a similar course. As a result of its holdings of government debt and other assets it refunded $77 billion to the Treasury last year, an amount that was more than one-third of the government's net interest payments. A newspaper that was interested in informing its readers rather than pushing an agenda would have explained that deficits in the current context do not impose a burden rather than gratuitously pointing out that spending and tax cuts add to the deficit.

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The Washington Post told readers today that the plan put forward by the fiscal commission: "could ignite a serious effort to reduce government debt and spare the nation from a European-style fiscal crisis." This assertion does not appear in an editorial, nor is it presented as the view of any expert or political figure cited in the article.

Rather this is an assertion of fact in a front page "news" story. Of course those who know economics would find this assertion laughable. Unlike the European countries facing fiscal crises, the United States has its own currency. This means that the country need never face the same sort of constraints as these countries. The worst case scenario would be the country would see a bout of inflation from an overstimulated economy. Of course the country is nowhere near this situation now and need never come close to it if the health care sector is fixed, a point never discussed in this article.

Unfortunately, this is not the only piece of editorializing in this article. The article describes the willingness of people on both the left and right to compromise as setting "aside ideological orthodoxy." This sort of condescending characterization of people's positions is left for the opinion pages at serious newspaper.

The article also took sharp issue with the judgement of financial markets telling readers that the Bowles-Simpson proposal: "would bring it [the debt] down to a more manageable 40 percent of gross domestic product over the next 25 years." This implies that the current debt to GDP ratio is not manageable, disputing the assessment of investors who are willing to make long-term loans to the government at interest rates of less than 3.0 percent. In Japan the debt to GDP ratio is 227 percent and investors are willing to make long-term loans to its government at interest rates of close to 1.0 percent. It would be interesting to know what metric the Post has used to determine that current debt to GDP ratios are unmanageable. 

The Post also implicitly patted itself on the back, telling readers that:

"the commission has already attracted more attention and received more respect than nearly anyone predicted." 

The extensive and almost completely uncritical coverage that the Post has given the commission co-chairs is a big part of the "more attention" and "more respect" to which this statement refers. More objective reporting might have noted an apparent conflict of interest when one of the co-chairs gets $335,000 from a major Wall Street bank and the financial industry somehow escapes unscathed from taxation in their proposal. It might have also highlighted the ill-informed and sexist e-mails of the other co-chair, which almost certainly would have led to the summary dismissal of a progressive member of the Obama administration.

 

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NPR again abandoned journalistic standards in pushing deficit reduction by insisting that doing so is courageous. Given the wealth of the people pushing for cuts to Social Security and Medicare, and the fawning attention that these people get from media outlets like NPR and the Washington Post, it is difficult to see what it is courageous about trying to take away benefits for middle class retirees.

It also wrongly described the deficit as "spiraling." Of course the deficit is not spiraling. The deficit rose in 2008-2010 because the housing bubble collapsed. NPR, like other news outlets, largely ignored the $8 trillion housing bubble. An honest discussion would point out that the deficit has temporarily ballooned because of the incompetence of people who carry through and report on economic policy.

In the longer term the deficit is projected to rise, but that is because of the projected explosion of U.S. health care costs. Our per person costs are projected to rise from more than twice the average in countries with longer life expectancies to more than three times as much.

Honest and courageous politicians and reporters would be talking about the real problem, a broken health care system. They would not be mis-representing it as a problem of a spiraling deficit.

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The NYT and other papers reporting on the Fed's disclosure of information on the beneficiaries from loans in its special facilities includes the Fed's justification that the loans required collateral and the taxpayers were well protected. It would have been worth including some context here.

At the time the special facilities were at their peak, liquidity carried an enormous premium. The Fed was giving out money to banks, non-financial companies, and foreign central banks at interest rates far lower than those available in the private market at the time. This allowed the recipients to make large profits with this money at the time and in many cases kept the companies in business.

It is not surprising that the vast majority of this money was paid back, since the economy did not collapse. However, this does not mean that the loans did not involve a large public subsidy. It is comparable to giving water to people in the middle of a drought. When it rains again, we can easily get the water back with interest, but that doesn't change the fact that providing water in the drought to the folks like Citigroup and Morgan Stanley who got large amounts of it. 

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The media almost completely overlooked the housing bubble on the way up. In the years 2002-2007 there were probably 1000 stories written about the deficit for every story that raised any questions about house prices being inflated.

Of course the bubble did eventually burst, giving us the worst economic disaster in 70 years. But hey, no one ever said that an economics reporter could learn anything. Yesterday's Case-Shiller data showed that house prices in its 20-City index fell 0.7 percent in September. This would be an 8.5 percent annual rate of decline, which would imply the loss of more than $1 trillion in housing wealth over the course of the year.

The data for the bottom third of the housing market looked even worse. Prices for homes in this segment of the market had a 2.6 percent one-month decline in both Seattle and Boston. They fell by 3.4 percent in Phoenix and 3.7 percent in Portland. Prices for homes in the bottom tier fell by 3.9 percent in both Tampa and Chicago. They fell by 7.0 percent in Atlanta and 7.4 percent in Minneapolis.

The sharp decline in house prices in the bottom tier since the expiration of the first-time buyers tax credit means that the loss of home equity for many recent buyers will have exceeded the value of the credit. In such cases the credit effectively went to the seller, or in the case of underwater mortgages, to the bank that held the mortgage.

For one more interesting data point, the Census Bureau released data on new home sales prices for October last Wednesday. This release reflects much more up-to-date data since it is based on contract prices. The Case-Shiller index is a 3-month average that is based on closings, which typically occur 6-8 weeks after a contract is signed. The report showed that the price of a median home fell 13.6 percent in October hitting its lowest nominal level in 7 years.

These data on falling house prices were largely invisible in business and economic news reporting yesterday. Instead, the focus was the budget deficit and the deficit commission reports. After all, if we don't do anything and the deficits follow their projected course, we will have a really high budget deficit in 2025.

What does it take to get economic/business reporters to pay attention the economy?

 

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The Washington Post, which long ago abandoned rules of journalistic objectivity in pushing its agenda for cutting Social Security and Medicare, today covered up the plans by deficit commission's co-chairs to violate the commission's charter. The Post reported that the commission expects to delay voting on a plan until December 3. This means that the commission will miss the December 1 deadline for a final report specified in both its by-laws and its charter.

If the Post were not so committed to Bowles and Simpson's agenda then it would have called readers attention to the fact that they are violating the rules under which the commission was established. Of course, if it were following standard journalistic practices, the Post would have pointed out that the deficit increased not because of out of control spending, as the co-chairs have repeatedly claimed, but primarily due to the downturn caused by the collapse of the housing bubble.

It also would have pointed out that the huge long-term projected deficits are entirely attributable to the broken health care system. If the United States paid the same amount per person for health care as countries with longer life expectancies we would be facing huge budget surpluses, not deficits. However, because it editorial position dominates its news section, almost no readers of the Post would know this simple and important fact.

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Suppose that school teachers could keep teaching and get regular promotions year after year no matter how badly they performed in the classroom. Suppose also that there was no incentive to teach well. Economic theory predicts that we would get a large number of unmotivated mediocre teachers.

Okay, suppose that the people who design economic policy never need to worry about getting fired no matter how badly their policies turn out. They continue to hold their jobs and get regular promotions. Under such circumstances we should expect that we would get mediocre economists.

This simple fact should have been included in an interesting WSJ discussion of efforts to promote new directions in economics. If there is no incentive to get things rights, then economists should expect that economic policy will be largely done by people who are not competent.

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A new report from the Congressional Budget Office prompted another round of celebrations in the media over how little the program cost taxpayers. In fact, the program kept the major Wall Street banks in business preserving trillions of dollars in paper wealth for stockholders, bondholders, and top executives at these institutions.

The situation can be compared to one in which the government prints up a trillion dollars and hands it to the Wall Street gang. Since the money was just printed, it does not require any tax revenue. Nonetheless, this transfer will be a burden on all non-Wall Street types in future years, since the Wall Street crew will have a claim on society's resources that they would not otherwise have.

In the case of the TARP and related Fed and FDIC programs, the government made trillions of dollars in loans and loan guarantees available to the banks at far below market rates. This allowed them to survive in a situation where they would have gone under if the market had been left to work its magic. The fact that Goldman Sachs, Citigroup, Morgan Stanley and the rest still exist and its top executives are hugely wealthy is a direct result of the taxpayers' generosity.

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Nearly all economists speak derisively of tariff barriers that raise the price of imported goods above their marginal cost. In addition to the inefficiency this causes, tariff protection also invites corruption as the protected industries try to maximize the value of the rents they receive.

The identical logic applies to patent protection, except patents can raise the price of goods by tens or hundreds of times the competitive market price, not the 15-30 percent that would be more typical of tariff protection. It would be useful if this point was made in the context of an article reporting on how a drug company had ghost authored a textbook for two medical researchers.

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In the NYT they are. In a world where we have 9.6 percent unemployment and the deficit is problem #1, anything is possible.

The NYT reported on evidence of serious labor shortages in export centers and then told readers today:

"China can point to the labor shortage in the export hubs as one reason not to let the renminbi’s value rise, since companies are already grappling with the possibility that higher wages could make their goods less competitive. A significant currency appreciation could help cause a wave of business failures and bankruptcies, Chinese officials say."

Okay, black is white, night is day. This makes zero sense. China would have a good case against raising the value of the currency if the opposite were the case. If it had high unemployment so that reducing its exports could create serious deprivation and social unrest, then it would have a good argument against raising the value of its currency, but low unemployment?

If high labor costs push a firm out of business then this is because it uses its labor less efficiently than other firms. This is known as "capitalism." Firms that cannot compete are supposed to go out of business. Furthermore, in the context of a tight labor market, the bankruptcy does not even hurt workers, since the employees of a bankrupt firm just go over to one of the other firms that are desperate for workers.

The evidence in this article should support the case of those who believe that China should raise the value of its currency. That case should have been made to readers.

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Using the economic analysis that his advisers relied upon in designing the stimulus package, this would be the projected effect of President Obama's proposal to freeze the pay of federal employees. According the NYT, this will reduce the amount of money that federal employees have to spend by $2 billion in 2011 and by $5 billion in 2012.

Following the multipliers in the Romer-Bernstein paper released by the Obama transition team, we can assume that roughly half of this money would be re-spent. This means that consumption would fall by $1 billion in 2011 and $2.5 billion in 2012. The Romer-Bernstein analysis assumed that an increase in GDP of 1 percent would lead to an increase in employment of 1 million. In this case, GDP will be about 0.007 percent lower in 2011 and about 0.018 percent lower in 2012, implying drops in private sector employment in these years of 7,000 and 18,000 jobs, respectively. The NYT should have noted the impact that the Obama administration's economic team expects to result from this proposed pay freeze.

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It's actually pretty easy to do what the rich and powerful people want you do. After all, they are the ones that can give you jobs and money. This is why it is dishonest for reporters to describe the decision by people associated with the several of the deficit commissions to refer to proposals to cut Social Security and Medicare as "tough" decisions.

Given the constellation of power in the United States, these are relatively easy decisions. The really touch decisions would be to confront the doctors' lobbies, the pharmaceutical industry, the health insurance industry and Wall Street. People like the co-chair's of President Obama's commission, Erskine Bowles and former Senator Alan Simpson, lacked the courage for these tough decisions.

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Where is Michelle Rhee when we need her? That's what readers of Fareed Zakaria's column on the economy must have been asking.

Mr. Zakaria comments that the stimulus was helpful, but then says that it is not the right medicine to boost the economy. He tells readers:

"In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement."

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

Ironically, one policymaker who seemed to understand this was Barack Obama. Twelve weeks into his presidency he gave a speech at Georgetown University making the case for the long-term rebuilding of the American economy, away from an overreliance on debt and consumption and toward productive investment. Obama should have given 25 versions of that speech by now and relentlessly offered policies that expand on its basic focus on long-term growth."

Okay, Zakaria's wants more investment. That sounds good, but how much more does he think that President Obama's 25 versions of his Georgetown speech would prompt. In 2007, before the recession, investment in equipment and software were slightly less than 8 percent of GDP.

Private sector demand has fallen by close to 9 percent of GDP as a result of the collapse of the bubbles in residential and non-residential real estate. Roughly half of this decline is due to the end of the bubble driven construction booms and the other half is due to the loss of consumption that followed the destruction of close to $8 trillion of housing bubble wealth.

Does Mr. Zakaria really think that investment will double as a share of GDP in an environment where demand has collapsed. Mr. Obama can be a great speaker, but I think this one would exceed even his capabilities.

If only the people who wrote about economic policy for major news outlets had to know 3rd grade arithmetic we could be saved from having to deal with such arguments.

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This is the general policy being pushed by the Washington Post, various Peter Peterson funded deficit commissions, and of course Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's deficit commission. What is great about Robert Samuelson is that he is comes right and tells readers that he wants ordinary people to suffer for the greed and incompetence of the bankers and the people who design economic policy.

Samuelson says that bailouts in Ireland, Greece, Spain and elsewhere are about:

"persuading ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions."

Of course there is no economic reason whatsoever that ordinary people should be accepting lower pay, higher taxes, and reduced Social Security and pensions. The economies of Europe and the United States are no less productive than they were before the collapse of the housing bubble that the economic policymakers (almost none of whom have been fired) failed to see. In fact, in the United States productivity has risen substantially in the last 3 years.

The reduced output and unemployment stems from lack of demand. This in turn stems from the failure of the same group of economic policymakers to find ways to increase demand sufficiently to make up for the demand lost by the collapse of the bubble. Rather than trying to generate demand, policymakers are doing exactly what Mr. Samuelson said they are doing. They are trying to force ordinary people to endure high unemployment and accept cuts in pay, benefits, and public welfare programs.

And, as Mr. Samuelson says, he hopes that austerity can be accomplished "without [the public] resorting to paralyzing street protests or ineffectual parliamentary coalitions."

 

 

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