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 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.

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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.

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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.

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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.

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The news outlets that insisted Congress approve TARP or the world will end have been anxiously touting the prospect of repayments and possible profits for the taxpayers from one-time basket cases like Citigroup and AIG. It is worth noting that the question of the government showing a profit or loss on its loans to these companies has little to do with whether the bailout was a net benefit to taxpayers.

Suppose the government uncovered a counterfeiting operation. Instead of shutting it down, suppose it allowed the counterfeiters to print $1 trillion in counterfeit money and buy up the stock of legitimate companies. The counterfeiters would then give ten percent of this stock, worth $100 billion, to the government and shut down their counterfeiting operations.

By the TARP accounting logic, the taxpayers made $100 billion on this deal. In reality, the counterfeiters were allowed to lay claim to $900 billion of the country's wealth based on their counterfeit currency.

The situation with the TARP is similar. Through the TARP and the much larger Fed lending operations, the Wall Street banks were able to borrow money at far below market interest rates. This allowed them to make substantial profits at the peak of the financial crisis. They are now using the profits made with government funds to repay the government with interest. However, the shareholders, creditors, and top executives of these banks are now far richer than they would be if they had not been given access to public money at below market rates.

To imply that this situation has profited the taxpaying public as a whole because the loans have been repaid is extremely misleading, just as it would be inaccurate to imply that the country had benefited by getting a cut of the counterfeiters' profits. 

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This is relevant because the Washington Post printed the assertion from Xie Zhenhua, China's chief negotiator at the climate talks in Cancun Mexico, that China's per capita income is $3,700. According to the CIA Factbook, China's per capita income in 2009 was $6,700 a year and it has grown by more than 10 percent over the last year.

Of course the rest of Mr. Xie's comments are accurate. China is a developing country that still has a per capita income that is less than one sixth that of the United States. It also did not play an important role in creating the problem, unlike the United States and wealthy European countries who have been spewing large amounts of carbon dioxide into the atmosphere for decades.

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New York Times columnist Thomas Friedman apparently believes that higher unemployment will make the United States better able to compete with highly educated workers in China and India. This is the logical implication of his argument that the United States should stop accumulating debt.

If the United States reduced its deficit in the current downturn, it would reduce demand in the economy, thereby leading firms and/or governments to lay off more workers. Friedman does not indicate why he believes that higher unemployment will make U.S. workers more competitive internationally.

He seems to think that the government's debt poses a problem. Of course the Federal Reserve Board can simply buy and hold debt incurred in a downturn like the present. In this case the debt creates no interest burden since the interest would be paid to the Fed which then refunds it to the Treasury at the end of the year.

While this practice could lead to inflation in more normal times, this is not an issue at present, when a somewhat higher inflation rate would be desirable in any case. Japan's central bank holds an amount of debt that is close to the size of its GDP ($15 trillion in the case of the United States) and it is still experiencing deflation. The Fed could raise reserve requirements at some future point if inflation threatens to be a problem.

There is no good economic argument for wanting to see a lower deficit at present. Apparently Friedman has some other rationale for wanting a lower deficit.

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In a news story the Post told readers:

"The fiscal crisis sweeping Europe, in which Ireland and Greece have already needed bailouts and Portugal, Spain, and Italy could come next, offers the United States a brutal lesson. By the time the bond market turns on a country - when investors demand higher interest rates or refuse to roll over debt at any price - policymakers have no good options left.

"When that day arrives, a government has little choice but to slash budgets or raise taxes if it wants to satisfy financial markets. But those actions make an already miserable economic situation worse and tend to be vastly unpopular, costing politicians their jobs. Just ask the Irish, who are in such a cycle now."

Actually this is not a story that the United States should ever face -- contrary to the Post's sanctimonious lesson for its readers. Unlike all the countries on its list, the United States has its own currency. This means that, in a worse case scenario, Congress could have the Fed buy government debt. This could create a problem of inflation, but it would not lead to a crisis of type that the article is describing.

The Post's misrepresentation here would be comparable to telling someone living in a steel high-rise that the fire in the straw house across the street shows what happens when you aren't careful with matches. While fire can also harm a steel high-rise, the nature of the risk is qualitatively different than the risk faced by someone living in a straw house. It is wrong to imply that the two risks are the same, as the Post asserts in this piece.

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The NYT reported that the cost of the compromise on extending the Bush tax cuts will be approximately $800 billion over two years. It notes that this amount is similar to the cost of President Obama's stimulus package.

It is important to realize that most of the money in this package is maintaining tax cuts in place that were scheduled to expire. This will prevent tax increases from having a contractionary impact on the economy, however there is very little, if any, net stimulus in this package compared with current levels of taxation and spending.

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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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