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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The Washington Post likes to run columns that are chock full of mistakes so that readers can have fun picking them apart. That is why George Will's columns appear twice a week. Let's have a little fun with the latest, which is an attack on President Obama's economic agenda.

First, Will is anxious to tell readers that Democrats are telling the public that stimulus did not work because many think we need more stimulus. Actually, people who think we need more stimulus simply note that the stimulus was helpful, but not large enough for the task. According to the Congressional Budget Office, the stimulus added between 1.7 and 4.5 percent to GDP since its enactment (that's between $240 billion and $740 billion in additional output). It also lowered the unemployment rate by between 0.7 and 1.8 percentage points.

This was not enough to fully offset the damage from the collapse of an $8 trillion housing bubble. The collapse wiped out more than $1.2 trillion in annual demand (roughly $600 billion in lost consumption and $600 billion in lost construction). By comparison, the stimulus injected about $300 billion a year into the economy in 2009 and 2010. Roughly half of this was offset by cutbacks at the state and local level. So, we were looking at a net increase government sector stimulus of $150 billion, which was being used to counteract a decline in private sector demand of $1.2 trillion. 

Is anyone surprised that this was not enough? Will's conclusion that stimulus does not work is like seeing someone throw a few buckets of water on their burning house and then telling the fire department not to waste time with their hoses, because obviously water will not be effective against the fire.

Will then goes on to tell readers that Herbert Hoover was a great supporter of fiscal stimulus. Actually, real spending did increase under Hoover, but this was primarily because of the huge deflation of the era. In any case, the facts do not support Will's claim that:

"Real per capita federal expenditures almost doubled between 1929, Hoover's first year as president, and 1932, his last."

Actually, real federal expenditures rose by less than 20 percent if we follow Will and take 1932 as the endpoint. If we include 1933, which was partially a Hoover budget, then the increase is still just 44.9 percent. That is substantial, but certainly not "almost doubled."

Will goes on to complain that:

"Barack Obama has self-nullifying plans for stimulating the small-business sector that creates most new jobs. He has just endorsed tax relief for such businesses but opposes extension of the Bush tax cuts for high-income filers, who include small businesses with 48 percent of that sector's earnings."

Actually, most of the businesses whose taxes will be affected by the increase will only be trivially impacted. According to an analysis from the Congressional Joint Committee on Taxation, the average tax hit from Obama's plan on filers earning between $200,000 and $500,000 (the overwhelming majority of the affected small business owners) is $400. It is unlikely that a tax increase of $400 will have a big effect on the investment or hiring decisions of a business netting $350,000 a year. 

Therefore, the answer to question posed by Will: "does this increase anyone's confidence?" is almost certainly that it probably has almost no impact on anyone's confidence since it is largely irrelevant to the decisions of the vast majority of businesses.

Finally, Will ends by making a simple mistake of logic. He wants to beat up on the Cash for Clunkers program by arguing that only 1 in 6 of the cars purchases under the program were actually induced by the tax credit, as opposed to simply moving up a purchase that would have taken place anyhow.

While one may hope for a better ratio (and others have calculated higher ratios), since spending at a time of very high unemployment is essentially free, who cares? If we did not have the cash for clunkers program, fewer people would have bought more fuel efficient cars. The unemployment rate would be higher and we would be consuming more energy and emitting more greenhouse gases. How is that good? 

Will also complains that Cash for Clunkers hit poor people by raising the price of used cars. While it definitely did raise the price of used cars, most poor people already own cars. This means that Cash for Clunkers raised the price of the cars they own. For poor car owners this picture is largely a wash, their next car will cost more, but they will get more money on a trade-in. First time buyers are unambiguously hurt, but this is a minority of the poor.

 

 

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Then they wouldn't write ridiculous things like: "our generation’s leaders never dare utter the word 'sacrifice.' All solutions must be painless." If someone told Friedman about the recession, that nearly 15 million people are unemployed, that nearly 9 million are underemployed, and millions more have given up working all together, then he would not be saying nonsense about how baby boomers are looking for painless solutions.

On this planet, the vast majority of baby boomers, who have to work for a living, are already experiencing vast amounts of pain. What planet does Mr. Friedman live on and why on earth is he given space in the NYT to spew utter nonsense?

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Apparently not, since they feel the need to constantly tell readers in the news section that the paper considers the deficit/debt to be too large. There is no information added by the inclusion of the word "ballooning" in this sentence: "The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire." 

The sentence could have been more accurate and shorter if told readers that Mr. Greenspan claims (the reporter does not know Greenspan's real views on the economy) that concerns over the national debt cause him to advocate letting the tax cuts expire. 

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The Post ran a badly confused article on unauthorized drugs and the harm they allegedly cause. The article uses the terms "counterfeit" and "fake" indiscriminately. It reports that some of the drugs bear the names of major manufacturers, indicating that many do not. Only the former can be viewed as "counterfeits."

The drugs that are not falsely sold as the products of major manufacturers are bought by people who understand that they are not buying a drug produced by a major drug company. This means that they are likely buying the drug because it sells for a price that is far below the price of the drugs sold by the major manufacturers.

For this reason, the article's assertion that:

"Experts say the global fake-drug industry, worth about $90 billion, causes the deaths of almost 1 million people a year and is contributing to a rise in drug resistance,"

is absurd on its face. The vast majority of the people buying these drugs would almost certainly not be able to afford the drugs produced by the major drug companies. If the $90 billion figure is true, then this implies that people around the world are buying tens of billions of prescriptions of unauthorized drugs. (Legal generics often sell for $4 at major retail chains in the United States. Presumably, unauthorized copies sell for much less in the developing world.)

While not all of these prescriptions involve life-saving drugs, even if just one in a thousand of these prescriptions is for a life-saving drug then the information in the article implies that unauthorized drugs are saving tens of millions of lives every year. Of course if we used a more efficient mechanism than patents to finance research then people around the world would be able to get high quality drugs at low prices.

 

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Wessel did not use exactly those words, but he told listeners that the only option that the Fed still has to boost the economy is to buy more long-term bonds. In 1999, when he was still a professor at Princeton, Bernanke wrote that, in similar circumstances Japan's central bank should deliberately target a higher inflation rate in the range of 3-4 percent.

This was an idea that was originally proposed by Paul Krugman and has more recently been suggested by Greg Mankiw, President Bush's top economic advisor, and Olivier Blanchard, the chief economist at the IMF. It would be interesting to know how Mr. Wessel determined that this idea is not a possible policy option.

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That's right, the Dallas Cowboys scored 14 points. In a separate game, the New York Giants got 9 points. This is what the Post's sports section would look like if it reported on football the same way the business section reports on trade.

An article on a Steelworkers' complaint against China for unfairly subsidizing its clean energy industries concluding by reporting that:

"Undersecretary of Commerce for International Trade Francisco Sanchez noted that the overall numbers showed 'very bright spots' for U.S. exports to fast-growing Asian and Latin American nations. He added that exports throughout major southeast Asian nations were up 40 percent this year amid strong regional economic growth."

The employment impact on trade is determined by the trade balance, as Mr. Sanchez presumably knows. The trade deficit with most developing countries has been worsening over the last year. For example, the trade deficit in goods with India was $2.8 billion through July of 2009, the deficit with Thailand was $6.4 billion. The corresponding numbers for 2010 are a deficit of $6.0 billion with India and $7.4 billion with Thailand. In other words, the trends are going the wrong way, the United States is losing more jobs because of trade, not fewer.   

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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