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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David Leonhardt's magazine piece on mis-estimating risk gets the story of BP largely right. The top executives felt free to take big gambles with safety and the environment because it was entirely a one-sided bet for them. Large profits from increasing production could mean millions or even tens of millions of dollars in additional compensation each year. On the other hand, the downside from even the worst possible disaster carried little consequence for top executives (who will still be hugely rich) or even the company since Congress capped liability at $75 million.

However he gets the story of the housing bubble and the budget deficit almost completely wrong. He argues that Greenspan and Bernanke missed the fact that the economy faced a nationwide housing bubble because we had never seen one before. While that may be partially true, this comment also ignores the incentives facing the Fed chairs. Large financial companies like Goldman Sachs and Citigroup were making enormous profits from the financing that fueled the bubble. If Greenspan or Bernanke had tried to clamp down on the bubble they would have been confronted by the full force of this powerful industry. They may have found themselves ridiculed and pushed to the side as happened to Brooksley Born when she tried to regulate derivatives in 1998 as head of the Commodities and Futures Trading Commission.

In contrast, their decision not to clamp down on the bubble led to catastrophic results leading to the worst economic downturn in 70 years with tens of millions of people unemployed or underemployed. Yet, both Greenspan and Bernanke are still wealthy men and highly respected. In fact, Bernanke was reappointed to a second term as Fed chair in spite of his disastrous first term.

In short, the problem was not that they underestimated risk. The problem is that they face an entirely assymetric tradeoff structure. Clamping down on financial speculation was sure to have serious consequences for their careers, even if they were right. By contrast, failing to regulate properly did not seem to damage either man's wealth or stature in any major way even though it led to just about the most distrous possible outcome.

Leonhardt also gets the story of the risks from the budget deficit largely wrong.  He writes:

"The big financial risk is no longer a housing bubble. Instead, it may be the huge deficits that the growth of Medicare, Medicaid and Social Security will cause in coming years — and the possibility that lenders will eventually become nervous about extending credit to Washington. True, some economists and policy makers insist the country should not get worked up about this possibility, because lenders have never soured on the United States government before and show no signs of doing so now. But isn’t that reminiscent of the old Bernanke-Greenspan tune about the housing market?"

First, it is pecular to include Social Security in this list. Social Security is growing at a relatively slow pace. It is projected to grow less rapidly than interest on the government debt. Like interest on the government debt, Social Security benefits have already been paid for in advance by their beneficiaries. Wall Street tycoons like Peter Peterson have been desperate to gut Social Security for decades and have invented numerous stories (e.g. that the Trust Fund does not exist) to advance their agenda. However a responsible newspaper should not be advancing this agenda under the guise of news reporting.

The projected growth of Medicare and Medicaid, driven by the explosive growth of health care costs in the private sector, will impose strains on the budget. However, if the growth in health care costs really follows the path assumed in budget projections it will provide a much greater burden on the private sector than the public sector. It is difficult to imagine that the public will itself to be priced out of the market for health care rather than taking simple and obvious steps that challenge the industry's power and ability to continually jack up prices. The point is that this is first and foremost a health care problem. It is only the Peterson Wall Street gang that insists on discussing the issue as a budget problem.

The second reason why the discussion of the budget is not entirely right is that we have been here before. The country has had ratios of debt to GDP in excess of 100 percent following World War II. In spite of this debt burden, interest rates remained low and the economy grew rapidly. Other countries, like the UK and more recently Japan and Italy have sustained much larger debt to GDP ratios without seeing any financial panics.

Finally, unlike Greece, which does not control its own currency, the debt of the United States is in dollars and the United States can always print more dollars. This means that the actual risk is not insolvency, but inflation, since the country would presumably print money rather than face bankruptcy. An honest discussion of the debt problem in the United States would discuss the risk from inflation. In the current environment, this is extremely low. In fact, according to a recent paper by Olivier Blanchard, the IMF's chief economist, the United States would actually benefit from a somewhat higher inflation rate (3-4 percent) since it would reduce debt burdens and lower the real interest rate.

So, the supposed threat from the deficits has been seriously misrepresented by the Wall Street deficit hawks. It is hardly irrational to disregard threats that are incoherent.



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The Washington Post reported that several state governments are now trying to remove a clause in the financial reform legislation that could limit the fees that credit card companies charge retailers. The article noted the states' claim that it cost them just 1.5 cents to load benefits like Food Stamp payments onto an electronic card while it can cost 60 cents to issue a check.

The article implies that states could be forced to go back to issuing checks for benefits if they were not able to take advantage of electronic cards that the credit companies now issue for free since they can get back their costs by charging retailers high fees. This is of course absurd. If the credit card fees are limited then states may have to pay a somewhat higher cost to the credit card companies so that they can recoup the cost of issuing the cards, however this would almost certainly be far below the cost of writing checks.

In effect, the credit card companies are using their market power to gouge retailers and sharing some of their gains with state governments to buy their support on this issue. The news article should have pointed this fact out to readers.

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The Washington Post notes the conventional wisdom of the Washington elite that there should be a run on U.S. bonds because of the size of the country's debt and deficits. It then points out that the markets seem to be contradicting the conventional wisdom. It is worth noting that nearly all of the purveyors of this conventional wisdom completely missed the $8 trillion housing bubble, the collapse of which wrecked the economy. Missing a bubble of this enormous size suggests that this convention wisdom is not grounded in a serious understanding of the economy. It would have been worth noting this point in discussing the conventional wisdom.

The article also asserts that: "the mix of spending cuts and tax increases that could close the gap [the budget deficit] are wildly unpopular." This is not true. During a period of extraordinarily high unemployment, like the present, there is no reason that the Fed could not simply buy and hold the debt being issued in order to prevent future interest burdens from increasing. To reduce future health care expenditures the government could publicly finance clinical trials for prescription drugs, thereby allowing all new drugs to be sold as generics for a few dollars per prescription. It could also allow Medicare beneficiaries to buy into the lower cost health systems in other countries, sharing the huge savings with the beneficiaries. The government could also roll back defense spending to the levels projected before the wars in Afghanistan and Iraq. And, to raise revenue the government could impose a financial speculation tax like the one that currently exists in the UK.

There is no evidence to suggest that any of these measures are wildly unpopular although powerful interest groups may object to them.

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I'm not sure of the point of David Brooks' column today other than to fill space and earn his paycheck, but one of the items on his list of complaints simply does not make any sense. He tells readers, presumably in reference to the stimulus, that "the money is spent."

It's not clear what Brooks thinks he means by this. Insofar as the country still suffers from high unemployment (Brooks tells us in the next paragraph, "unemployment will not be coming down soon") there is no lack of money for additional stimulus. The government can have the Fed hold the debt issued to finance the spending so as not to increase the interest burden on the Treasury in future years. (The Fed refunds its interest to the receipts.) So there is no plausible meaning to the idea that "the money is spent". This just seems to be a case of Brooks wanting to express his generic unhappiness with the current situation.

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Robert Samuelson invokes the cellphone standard of living in his column today which complains about the Obama administration's adoption of a new measure of poverty as an alternative to the official standard. The administration will use both.

Samuelson argues that we have failed to pick up all the gains for the poor over the last four decades noting, among other things, that 48 percent of poor households own cellphones. Needless to say, the reduction in price of many products in recent decades has made them accessible in ways that would not have been possible in the recent past, but it is not clear how much this tells us about living standards.

In China, there are more than 600 million cell phones in use. This means that roughly the same percentage of people in China have cell phones as do poor people in the United States. China's per capita income on a purchasing power parity basis is less than one-sixth as high as per capita income in the United States. By Samuelson's cell phone standard of living the average person in China has the same standard of living as do poor people in the United States.

There are a couple of other points worth noting about Samuleson's diatribe. The Obama administration did not just invent the measure that Samuelson denounces as a "propaganda device." This is a measure developed by the National Academies of Science based on research by many of the country's leading poverty experts. It is fine to criticize the measure, but Samuelson should have at least noted its origins.

Finally, Samuelson reports on research from the American Enterprise Institute (AEI) that shows that spending on the poor from all sources may be as much as double their reported income. It is worth noting that much of this spending involves Medicaid expenditures, many of which may provide little benefit to the patient. For example, if a lab bills (or overbills) Medicaid for an expensive test that was not really needed, this would count as spending on the poor. For this reason, the AEI measure may not provide much insight into their well-being.

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The NYT asks the right questions in this piece on the European Central Bank's (ECB) policies. The ECB continues to insist that its main job is fighting inflation even though there is no inflation in sight. As the article points out, deflation is likely to pose the bigger risk for the immediate future. Add a comment

This could have reasonably been the headline of news articles on the decision of many moderate Democrats to demand a smaller package of unemployment benefits and assistance to state and local governments. Instead, neither article noted at all the negative impact that the cuts would be expected to have on growth. The NYT piece even invented an alternative history, telling readers that the current debt and deficit levels come from a "lavish spending spree engaged in by both parties over the past decade," as opposed to being the result of an economic collapse caused by the bursting of the housing bubble.

The plans by the deficit hawks seem likely to trim $30 billion in unemployment benefits and aid to the states from the bill. Using the methodology in the Romer-Bernstein paper put out by the Obama administration to promote its stimulus package, the cuts will reduce GDP by approximately $50 billion. This will correspond to a job loss of more than 300,000 people. It is irresponsible to report on plans to reduce deficits without noting their likely impact on the economy.

The Post piece included the comment that Congressional Democrats looking to cut benefits are "saying 99 weeks of unemployment benefits may no longer be justified after four consecutive months of job growth." It would have been worth reminding readers that the rate of job growth over the last four months has only slightly outpaced the growth of the labor force. Projections from both the Congressional Budget Officie and the White House show that it will be more than 5 years before the unemployment rate returns to a more normal level.

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Politicians sometimes don't say what they really believe. Therefore it is very impressive that the Washington Post is able to determine their true feelings about the world. An article about the failure of the Senate to approve an extension of unemployment benefits attributed the impasse to: " a growing concern among Democrats that government spending is out of control."

It's remarkable that the Post is able to determine the true concerns of politicians -- especially when it is easy to show that these concerns bear no relationship to the underlying reality. The main reason that the government deficit has expanded in the last three years has been due to the economic downturn. If the deficit were smaller right now, then more workers would be unemployed and more of our children would have unemployed parents.

If the Post is right in its assessment of Democrats' concerns then it owes its readers a good piece on how congressional Democrats became so far removed from reality and how this affects their views of other policies.

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Yes, I'm reusing blogpost titles, but that is only because the papers appear to be repeating their bad reporting. The Labor Department releaased its data on weekly unemployment claims on Thursday and it was moderately bad news. New claims were at 460,000 for the week, with claims for the prior week revised upward by 3,000 to 374,000. This put the 4-week moving average at 456,500.

Generally claims have to be below 400,000 a week before we see job growth. The current level is consistent with we would expect to see in a relatively mild recession. The 4-week average only reached this level in the 2001 recession in the immediate aftermath of the September 11th attack even though the economy continued to shed jobs for another two years.

Usually newspapers devote all or part of an article to reporting on weekly unemployment insurance claims. However, that was not the case this week.

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The NYT headline told us: "Geithner sees consensus on finance reform." USA Today's headline was: "Geithner: US, Europe broadly agree on financial reform." The Post took a different perspective: "United States and Germany remain divided over financial regulation issues."

I'm inclined to agree with the Post. There is a push in Europe, led in part by Germany, for more extensive regulation of finance, including greater restrictions on hedge and private equity funds. It also seems likely that Europe will build up a reserve bailout fund in advance of a crisis, a provision that will likely be missing from the final bill coming out of Congress. And, Europe is very interested in taxes on financial speculation. The Obama administration is strongly opposed to any sort of financial transactions tax. Add a comment

The WSJ reported on Treasury Secretary Timothy Geithner's trip to Europe to push his agenda for financial reform and commented that:

"Mr. Geithner's European tour is reminiscent of the Asian financial crisis of a decade ago when many current Obama economic officials, including Mr. Geithner and White House economic adviser Lawrence Summers, traveled Asia doling out advice and worked behind the scenes at the International Monetary Fund to keep bailout cash flowing. Time magazine dubbed a trio of U.S. officials 'the Committee to Save the World.'"

It is worth noting that this prior effort at salvation did not turn out very well. In fact, it laid the groundwork for the current crisis. The IMF austerity plans were considered so painful that developing countries decided that they never wanted to be in a situation in which the IMF could impose the same sort of austerity plans on them. As a result, they began to accumulate massive amounts of reserves mostly in dollars. This reversed the normal flow of capital, with capital now going from poor countries to rich countries.

This led to the over-valuation of the dollar, which in turn caused the U.S. to run a massive trade deficit. The inflow of foreign capital, coupled with the trade deficit, also laid the basis for the continuation of the stock bubble in the 90s and the housing bubble in the next decade.The collapse of this bubble is the cause of the current economic crisis.

Hopefully, this effort at salvation will turn out better than the last one.

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With the deficit hawks in high gear, people are prepared to say anything in pursuit of the goal of deficit reduction. Remarkably, the NYT is apparently willing to print almost anything. Today the deficit cutting crusade is led by hedge fund manager David Einhorn. In a lengthy column Einhorn bemoans the fact that at least some people in the Obama administration are more concerned about getting people back to work than reducing the deficit.

Einhorn is a bit more knowledgeable about basic economics than many of those who worry that the United States will be unable to find investors to buy its debt. Since he has heard of the Federal Reserve Board, he recognizes that the actual concern should be inflation, not insolvency, since the Fed can always buy up government debt.

However, since one would have to struggle to find any evidence of inflationary pressures in recent economic data, Einhorn chooses to invent his own evidence:

"Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today."

The main source of the difference between the government statistics dismissed by Einhorn and the "Shadow Government Statistics" he cites is due to the inclusion of asset prices, like house prices, in the shadow statistics. There are good reasons for excluding asset prices from measures of inflation, but Einhorn's subsequent comments simply don't make sense.

He tells readers that. "lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity." Actually, this is not true insofar as asset prices are the cause of understated inflation. Asset prices do not affect GDP or productivity measures. It is remarkable that Einhorn apparently does not know this.

Einhorn also complains that his assessment of the understatement of inflation:

"doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)"

Actually, the government has a wide variety of inflation measures, many of which do include the full weight of health care expenditures. They all show the same thing as the consumer price index: inflation is very low and falling. In short, Mr. Einhorn either has no clue about government data, or he is deliberately trying to mislead readers.

The NYT has been far more responsible in discussing the deficit than most other news outlets. It is understandable that it would want to open up its oped columns to those with differing views. However, it should not allow them to simply make things up as Mr. Einhorn has done here.

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The first sentence of a Washington Post article told readers that the Democratic leadership in Congress is scaling back plans to help the jobless and deficit ridden state and local governments because of: "fire from rank-and-file Democrats worried about the soaring national debt." It is not clear how the Post knows the real concerns of these politicians.

A politician's first priority is usually getting re-elected. Politicians who claim to be worried about the "soaring" national debt tend to get favorable mention from news outlets like the Washington Post and the many organizations financed in part or in whole by Wall Street investment banker Peter Peterson. It is not clear how the Post has determined that as a policy question, these rank and file Democrats are really more worried about the deficit than the jobs that will be lost as a result of their efforts at deficit reduction.

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Before its collapse, Lehamn Brothers played a series of games with its balance sheets to hide its true level of indebtedness. Apparently, the games continue. The WSJ has a nice piece showing that three major banks, Bank of America, Citigroup, and Deutsche Bank AG have all been sharply reducing their borrowings just before the end of the quarter so that their quarterly reports would not reflect the true extent of their leverage. Add a comment

Just a quick note to prevent some mistaken reporting. The Census Department reported a 14.8 percent jump in new home sales in April from March and a 47.8 percent increase from April of 2009. However, this increase in sales was accompanied by a 9.7 plunge in the median house price.

These numbers should not be seen as contradictory. The new home sales series measures contracts. The first-time home buyers tax credit expired at the end of April, which meant that people had to have a signed contract by the end of the month. This gave them incentive to rush out and buy homes. First-time buyers are likely to be concentrated in the low end of the market. This means that a surge in home sales coupled with a skewing to lower priced homes is exactly what we should have expected.

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The Washington Post wrongly implied that a provision in the Senate bill that prohibits banks from brokering derivatives will prevent them from offering trades in derivatives to clients. The Post article contrasted this restriction with "one-stop-shopping" offered by European banks.

Actually, this provision would only prevent the bank itself from brokering derivatives which would mean that this trade would not be provided with the protection of the FDIC and the Fed that are intended to apply only to insured deposits. Under this provision, there is nothing that would prevent bank holding companies from establishing derivative trading divisions, which would have to be independently capitalized, or from contracting with independent brokers to offer services to their clients.

In both cases, the banks would be able to offer the same one-stop-shopping provided by their European counterparts. Therefore, one-stop-shopping is clearly not an issue in the debate over this provision.

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The NYT reports on how the euro crisis may end up impeding the U.S. recovery. By lowering growth in Europe and reducing the value of the euro, it will reduce U.S. exports which were expected to be an important engine of growth for the U.S. economy. The article included a quote from Joseph Stiglitz making this point. However, it later presents a comment from James Bullard, the President of  the Federal Reserve Bank of St. Louis that directly contradicts Stiglitiz and appears to defy basic national income accounting, claiming that the United States:

"must 'directly address' its fiscal problems if it is to retain credibility with credit markets. After all, along with the countries of the euro zone, Britain and the United States are running outsize deficits, compounded by their spending to stimulate the economy."

As a matter of accounting identity, net national saving is equal to the trade surplus. Since the United States is running a large trade deficit, because of the over-valued dollar, it must have negative net national saving. This means either very large budget deficits and/or very low private saving. If the government were to reduce its deficit, then either private saving would have to fall, which would mean even further declines in consumer saving from already low levels, or we would see a fall in output and a rise in the unemployment rate.

It is not clear whether Mr. Bullard advocates more consumer indebtedness or higher unemployment, but it would have been useful to point out the logical implications of the policy that he was advocating. Add a comment

Back when I learned economics, companies were supposed to make profits and economies were supposed to grow. That doesn't seem to be the case anymore. We have "saavy" businessmen like Goldman Sachs CEO Lloyd Blankfein who took his company to the edge of bankruptcy only to be rescued by bailouts from the Fed and Treasury. Most of the crew of Wall Street multi-millionaires would be on the unemployment line today without the big helping hand from the Nanny State.

In the same vein, the NYT is now citing research from Deutsche Bank reporting : "that euro-area countries 'can learn some valuable lessons from the Baltics’ experience over recent quarters.' Those countries survived drastic budget consolidation without devaluing their currencies."

The article then continues to quote the Deutsche Bank experts: "Restoration of competitiveness and weighty fiscal consolidation in the absence of currency adjustment is difficult but doable ... as long as politicians and the general public are willing to accept some up-front pain in return to longer term gains.”

Just to give a clearer idea of what the Deutsche Bank crew is talking about, the IMF projects that GDP in each of the Baltic countries will drop by close to 20 percent from its 2007 levels. In the United States this would be equivalent to losing $3 trillion in annual output. By 2014, the last year for the projections, GDP is expected to be 7.1 percent lower than its 2007 level in Lithuania, 9.1 percent lower in Estonia, and 14.5 percent lower in Latvia. Unemployment in these countries is more than 15 percent in Estonia and Lithuania and more than 20 percent.

It is nice to see that German bankers applaud this pain. Needless to say, it is unlikely that many bankers will ever have the pleasure of making similar sacrifices for the long-term good of their own countries. Of course, it is not clear how long the Baltic countries will have to endure this pain before GDP is back on a healthy growth path and the unemployment rate is at a more normal level. The IMF tends to be overly optimistic in evaluating the prospects of the countries adopting policies it favors.

It would have been worth explicitly discussing the alternative strategy that some countries may wish to pursue -- devaluation and debt restructuring. Argentina pursued this path at the end of the 2001. While the IMF and virtually all economic authorities insisted that this path would lead to disaster, the economy only contracted for six more months. It then turned around and grew robustly for the next six years until it followed the world economy into recession. At its pre-recession peak in 2008 Argentina's economy was more than one-third larger than it had been in 1998 when its crisis first sent GDP downward.

While the bankers may be more inspired by the tales of sacrifice by the Baltic peoples, many non-bankers may find the Argentine experience more interesting. Responsible reporting should note both options.

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At its peak in 2006, the median house price in the United Kingdom was 10 percent higher than the median price in the United States, even though its per capita income is more than 10 percent lower. This bubble was driving the economy in the UK in the same way that it was driving the economy in the U.S.. The collapse of this bubble led to the recession in the UK and its financial crisis in the fall of 2008.

The bubble was completely absent from the NYT's discussion of the UK's current economic problems. Instead, it attributed fiscal profligacy for the UK's problems. In particular, it focused on the UK's public health care system, which it tells readers: "soared to 9 percent of G.D.P. from 3 percent."It also described the public health care system as " elephantine."

It was many decades ago when health care costs in the UK were just 3.0 percent of GDP. Health care costs in the UK have increased in GDP like as in all other wealthy countries. When the Labor government took office in the mid-90s, health care costs in the UK were close to 6.0 percent of GDP.

With the increase in spending, the UK is still spending only a bit more than half as much as the United States, which spends 17 percent of GDP on health care. When adjusted for the difference in per capita income, the US still spends more than twice as much per person on health care as the UK. It therefore seems somwhat bizarre to describe the UK system as elephantine, especially when life expetancy is longer in the UK than the US.

It is also worth noting that the build up of a large debt burden during the housing crash recesssion is the result of the policy decision by the Bank of England not to simply buy and hold the debt issued to finance the deficits currently needed to support the economy. If the Bank of England followed this strategy, then the debt burden would not increase as a result of the downturn.

The Bank of England created this crisis by failing to take steps to rein in the UK's housing bubble. It now appears to be compounding the crisis by failing to use appropriate monetary policy.


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I'm back -- thanks for all the nice wishes.From my occasional glimpses at the newspapers the last week and a half I see that I have a lot of work to do.

I'll start with a cheap shot. The NYT just noticed that the pay or play provision in the health care bill makes no sense. The issue here is the extent to which larger employers will be obligated to pick up a portion of their workers' health care costs. The final bill included a provision that subjected employers of more than 50 workers to penalties if employees' health care costs exceeded a certain percent of family income.

The problem with this sort of penalty structure is that employers do not have control over workers family income and in general should not even know it. This sets up an absurd penalty structure where employers do not have the knowledge they need to act to avoid the penalty -- it's sort of like enforcing speed limits that randomly change and are never posted.

The problem with the NYT coverage is its description of this problem as: "a little-noticed provision of the law." Yes, it is true the provision got relatively little attention, but the NYT played a big role in this. Had the NYT opted to pick up on a problem that some people were trying to call attention to, notably Robert Reichsauer, the President of the Urban Insititute and also the former director of CBO (also CEPR), then maybe this ill-conceived penalty never would have made it into the final law.




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I'm on vacation until Tuesday, May 25th. Remember, don't believe anything you read in the paper until then and while I'm gone, take a look at the CEPR Blog for some good reads on economics and policy analysis. Add a comment