Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

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Would a prominent public figure be allowed on NPR to defame a major U.S. corporation without challenge? For example, could a cabinet official assert that Microsoft is the main cause of global warming, with no evidence whatsoever to support this position, and not have anyone point out that this charge lacks merit? My guess is no.

Which raises the question of why Colorado Senator Michael Bennet was allowed to tell listeners on Morning Edition that if something is not done soon there will be no Social Security benefits for people his age (45). There are no, as in zero, nada, none, projections from any source that show Social Security will not be able to pay Mr. Bennet and his age cohort larger benefits (adjusted for inflation) than what retirees are receiving today.

That's right, you can look at projections from the Congressional Budget Office, from the Social Security trustees and any number of private sources and every last one shows that in any remotely plausible scenario Social Security will be paying benefits that are higher than what current retirees receive long after Senator Bennet passes into history.

This means that either Mr. Bennet is clueless about the financial status of the country's most important social program or he deliberately misled listeners. This issue would have been pursued by a serious news organization, instead of just passing along Mr. Bennet's falsehood unquestioningly to unsuspecting listeners.

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Don't turn up the heat, it's too cold! That seems to be the message from the rest of the world about the decline in the dollar that might result from the latest round of quantitative easing QE by the Fed.

The NYT told readers that:

"The Fed’s action, by lowering American interest rates, can also cause money to flood into other countries as investors seekhigher [sic] returns — which can threaten to overheat those countries’ economies."

Okay, here we have a statement from the NYT that QE is bad because it will lower interest rates in other countries and cause their economies to grow more rapidly. But, elsewhere we are told that the problem with QE is that it will lower the dollar which will make U.S. goods more competitive internationally. This will reduce the exports of developing countries and slow their growth.

So, other countries are mad about QE because it can both cause their economy to overheat and also because it will slow growth. Let's see, QE will make these countries both grow too fast and too slow. Now that's a really bad policy.

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The NYT got the story 100 percent wrong when it told readers that:

"International concerns about the high budget deficit in the United States, and Washington’s seeming willingness to print money rather than tackle tough debt-cutting measures, help partly explain the recent anti-American criticism from countries as diverse as Brazil, China and Germany."

Actually, the Fed is taking more expansionary monetary policy; the government is not engaging in more stimulus. It would likely print even more money if the government began raising taxes and cutting spending.

This article is written largely like an advocacy piece. It does not include the view of any economists or any economic analyst who points out that the high current deficits are primarily the result of the economic collapse. Nor does it point out that the advocates of economic austerity lacked the competence to recognize the enormous housing bubbles, the collapse of which wrecked much of the world's economy. Readers should know that the admonitions for austerity are coming from highly paid people of questionable competence.

 

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The NYT repeatedly refers to the credibility of the Federal Reserve Board. This is an interesting assertion. The Fed failed about as completely as a central bank possibly could in allowing the growth of an $ 8 trillion housing bubble. According to the Fed's own projections, the collapse of this bubble is likely to lead to more than $4 trillion in lost economic output, more than $13,000 for every person in the United States.

By comparison, the costs of the inflation that it was battling in the 70s and 80s were trivial. It is difficult to see how anyone who understands economics would give the Fed any credibility whatsoever based on its track record.

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This should have been the headline of an article in which Germany's finance minister both complained about the United States credit-led model of growth and the decline in the value of the dollar. A falling dollar is the mechanism through which the United States would get off its credit-led model of growth. It will make imports more expensive in the United States, leading us to buy fewer imports. It will also make our exports cheaper, leading us to increase exports. This will reduce the U.S. trade deficit and therefore its foreign borrowing.

Complaining about both the credit-led model of growth and then complaining about the decline in the currency is like complaining that the room is too hot and then complaining when someone turns on the air conditioner. Germany's finance minister apparently does not understand economics, which should have been the main point of this article.

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The media are filled with discussions about how the Democrats lost the elections because they over-reached or according to a front page Post article because President Obama was disconnected to the American people. However, there are number of models from political scientists that largely predicted the outcome based on the Democrats' past success (meaning a large number of seats in marginal districts) and the bad economy. It would have been useful to call attention to these models even if it undermines the story the media want to tell. Add a comment

In a major page two article the Post concealed the true nature of the major criticisms of the Fed's actions on the crisis. The article presents a secondary issue as to whether Greenspan's support of financial markets, for example his actions following the 1987 crash, led investors to underestimate risk.

While this is a reasonable criticism, there is the more direct point that the Fed stood by while an $8 trillion housing bubble built up in the years from 1996 to 2006. This bubble was easy for any competent economist to recognize. There was an unprecedented divergence in house prices from their long-term trend with no remotely plausible explanation in the fundamentals of the housing market.

This bubble was driving the economy. The housing bubble, along with a later bubble in non-residential real estate, led to an enormous building boom. The housing wealth created by the bubble led to a huge increase in consumption as the saving rate fell to zero.

It was 100 percent predictable that the bubble would burst. It was also inevitable that this would lead to a large decline in demand as construction plummeted in response to enormous over-building and consumption plummets in response to lost housing wealth. The lost demand is equal to approximately $1.2 trillion annually, close to 9.0 percent of GDP. There is no easy way to replace this amount of lost demand, which is why the economy is currently experiencing 9.6 percent unemployment.

All of this was entirely foreseeable by any competent economist. Greenspan and the Fed either failed to see what was going on, or saw this and failed to act anyhow. That is the nature of the criticism that the Post would not print.

It is also striking that the Post reports a debate at the meeting over whether the Fed's quantitative easing policy runs the risk of raising inflation above the Fed's 2.0 percent target. The fact that such a debate took place should have been a scandal and the headline of this article.

The Fed has a legal obligation to target full employment and price stability. The 9.6 percent unemployment rate is hugely above anyone's measure of full employment. It is leading to trillions of dollars of lost output and ruining the lives of tens of millions of people. The consequence of inflation edging above 2.0 percent are incredibly trivial by comparison. This is like someone worrying about the greenhouse gas emissions from the firetruck rushing to put out a school fire. The fact that ostensibly serious people involved in setting U.S. monetary policy could debate this point should be a scandal.

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The Washington Post editorial board, which thinks that Mexico's GDP quadrupled between 1988 and 2007 (due to NAFTA), is again pushing its trade agenda. The Post plays the usual game of calling trade agreements that increase protectionism in many areas (e.g. patents and copyrights) "free-trade" agreements. (Anyone out there opposed to "freedom?")

The "simplistic" ads against U.S. trade policy that the Post criticized reflect the fact that this policy has had the effect of redistributing income upward over the last three decades. These deals have been quite explicitly designed to put manufacturing workers in direct competition with low-paid workers in the developing world.

At the same time, these deals have done little or nothing to remove the barriers that make it difficult for students in Mexico, China, or India from training to work as doctors, lawyers, or other highly paid professionals in the United States. There would be enormous potential gains to consumers and the economy by bringing down the cost of medical care, legal services and other services provided by these workers.

This would be a trade policy that would promote both efficiency and equality, but you won't read about it in the Washington Post.

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Okay, let's wash away the ungodly stupidity. Doesn't anyone take intro econ anymore? Here's the test question and no one gets to write on currency or trade policy until they get it right.

If a country has a large trade deficit in a system of floating exchange rates how does it move to balance? Yes, that's right, its currency falls in value. That's the whole story, everything else is secondary.

So, the United States has a large and growing trade deficit. Do you want the trade deficit to fall? If so, then you want the dollar to decline in value. The value of the dollar determines the cost of U.S. exports to other countries and the cost of imports for people in the United States. The former is high now and the latter is cheap. That is why we have a trade deficit.

We shouldn't have to read any more pieces like this one in the NYT. Make these folks learn a little basic economics.

 

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Come on folks, the government did not make "a profit of $1.1 billion in the third quarter on its huge bailout of the mortgage finance giants Fannie Mae and Freddie Mac," as the NYT told us this morning. This money was the interest paid on the money that the government lent to the mortgage giants to keep them solvent. The government is still almost $140 billion in the hole on this deal, as is noted later in the piece.
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Does the pharmaceutical industry prevent the media from discussing alternatives to the patent system for financing drug research? That would seem to be the case, since an NYT article on the failure of the industry to pursue the development of new antibiotics never once mentioned alternatives to relying on the current patent system.

It does not plan to offer government subsidies in addition to patent monopolies or proposals to make these monopolies even longer, but never considers the possibility that the research would simply be financed directly through public funds with all the findings placed in the public domain. Is there just a mental blockage here or is something else going on? 

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This one should not be all that hard but the papers have numbers all over the place. Let's turn to our old friend, arithmetic, to shed some light on the topic. The Congressional Budget Office tells us that the labor force is growing at the rate of 0.7 percent a year. The current size of the labor force is 153.9 million. This implies that we need about 1.1 million jobs a year to keep even with the growth of the labor force. (The number would be a bit less if the 6 percent share of self-employed in the labor force held constant.) That translates into a bit over 90,000 a month.

The 151,000 jobs reported for October is about 60,000 more than is needed to keep the unemployment rate from raising. At this pace it would reduce the pool of unemployed workers by 720,000 over the course of a year. With a gap of about 10 million jobs at present, this rate of job growth would fill the gap in around 14 years.

In order to fill this gap in a reasonable period of time, say 3 years, we would need job growth of 370,000 a month. This would bring the economy back to normal levels of unemployment by late 2013, six years after the onset of the recession.

 

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In pushing its editorial line that Social Security and Medicare must be cut the Post told readers in a news story that:

"Cantor acknowledged that any effort to solve the nation's budget problems 'is going to have to deal with entitlements' - big, popular programs such as Social Security and Medicare (emphasis added)."

A real newspaper would have used a term like "asserted" or "claimed." Of course it is not necessary to deal with programs like Medicare and Social Security to fix the country's projected long-term budget problems as can be easily shown. It is necessary to fix the country's health care system. If per person health care costs in the United States were comparable to costs in other wealthy countries then our budget problems would be easily manageable.

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In an article on the challenges faces Jerry Brown, California's newly elected governor, the NYT tells readers that the state faces a $20 billion dollar budget deficit. It notes that Brown left his successor with a $1.8 billion deficit when he left office in 1982.

These numbers will be completely meaningless to almost all of the NYT's readers since few have an idea as to how large California's economy is today compared with 1982. The current deficit is equal to roughly 1.1 percent of $1.8 trillion California's gross state product (GSP). By contrast, the $1.5 billion deficit in 1982 would have been equal to a bit less than 0.4 percent of California's $390 billion GSP in that year. This means that the burden posed by California's current deficit is almost three times as large as the burden that Brown passed on to his successor.

Reporters are supposed to have time to look this stuff up, readers don't. 

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I have no idea if Bill Gates has any land where he may have taken out flood insurance that was provided by the federal government, but let's suppose that he did. If there was a flood, should he be able to collect on his insurance? After all, he certainly doesn't need the money.

This probably seems like a nutty question. After all, he paid for the insurance, why shouldn't he be able to collect on it like anyone else?

While that seems pretty straightforward, for some reason the same question apparently causes people great pain when applied to Social Security. Today Floyd Norris labors over the fact that rich people will collect Social Security benefits. Of course, they collect much less relative to what they paid in than poor people, so the structure of the program is progressive. But, they do get something back, so even Bill Gates and Warren Buffet will be able to pocket around $2,400 a month.

The reality is that the genuinely affluent get very little money from Social Security because they are few of these people. The discussion about cutting benefits for "affluent" retirees is aimed at people like school teachers and firefighters who may have had incomes in the range of $50,000 to $70,000. Such incomes don't fit the usual definition of "affluent," but folks use different logic when it comes to Social Security.

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Morning Edition told listeners that consumers are not spending because they are worried about their jobs. While they undoubtedly are worried about their jobs, they are spending nonetheless. The savings rate for the 3rd quarter was 5.3 percent, well below the post-war average, which is close to 8.0 percent. This level of consumption is a falloff from the peak housing bubble years when the saving rate fell to near zero, but it is still higher than we should expect when house prices fully adjust.

The point is important because it is ridiculous to expect increased consumer spending to lead a recovery. Households, especially those near retirement, must rebuild their wealth after seeing close to $6 trillion in housing wealth disappear. Those who bemoan the lack of consumption apparently still have not recognized the housing bubble and its impact on the economy.

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That seems to be the argument in a Washington Post column by David M. Smirk. I'm not kidding, here is the essence of the argument laid out in the 3rd and 4th paragraph of the piece:

"A more compelling theory [than inadequate stimulus] is that global assets remain overvalued. Specifically, the price of real estate debt and sovereign debt on bank balance sheets, propped up by government actions, remains too high. The economy can't gain traction until these prices reflect realistic valuations.

Asset prices are important because America has never had a recovery without residential housing leading the way. Real estate values are still high by historic standards. The value of all real estate is roughly $18 trillion, with mortgage debt about $10 trillion. The ratio of mortgage debt to GDP value is 56 percent. In the 1960s and 1970s, the ratio was 29 percent. In the late 1990s it was only 38 percent."

Smirk is right that real estate is still over-valued, but it is hard to understand how a decline in real estate prices will boost the economy. What matters for a residential housing lead recovery is the need for residential housing. This results from excess demand for housing. We have record levels of vacant housing in the country right now. We will have to see quite a drop in housing prices in order to fully absorb the existing supply.

This gets back to the mortgage debt part of the story which has nothing to do with current real estate values, but rather with their past values. Of course the mortgage debt to GDP ratio is too high, that is what happens when you have a housing bubble. People borrow against inflated housing values. Unfortunately, the Washington Post did not have room for columns from people making this point in the years from 2002-2006 when the housing bubble was growing.

It is not clear how Smirk thinks that a drop in housing prices helps this picture. This will worsen the debt burden of homeowners, leaving them with less wealth thereby further reducing consumption. The decline in house prices must happen (we can't sustain bubble-inflated prices indefinitely), but it makes the immediate economic situation worse, not better.

In the real world, this recovery cannot be led by housing construction because this is not the traditional sort of recession. The normal recession comes about because the Fed raises interest rates to slow the economy. This leads to a plunge in housing construction creating pent-up demand. When the Fed decides to take its foot off the brakes and get the economy going again it just lowers interest rates, triggers the pent-up demand for housing and the economy takes off.

This recession was the result of the collapse of a housing bubble which led to a huge excess supply of housing. Interest rates are also just about as low as they can possibly be, taking away the option of further declines by simple Fed actions.

Apparently Smirk and the Post failed to notice the difference between this recession and prior downturns. Therefore we get this attack on Obama and Paul Krugman that is incoherent in just about every way.

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That is what the NYT is asking readers to believe when it told them that a rally in Asian markets on Friday was due to the Fed's decision on Wednesday to engage in another round of quantitative easing. Usually, analysts think of markets as forward looking, anticipating events. The NYT is asking us to believe that the Asian markets are still rising in response to a widely anticipated move by the Fed that was announced two days earlier.

It is worth noting that explanations for movements in financial markets is always guess work. The markets do not tell anyone why they moved in the way they did. The movements are the result of millions of individual decisions, some carrying much more weight than others. In some cases it may be evident why a particular movement took place (e.g. a high inflation number leading to a drop in bond prices), but in many cases the explanations are an analyst's interpretation, which may well be wrong.

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The NYT seems very concerned that the dollar will fall if the budget deficit is not reduced. Usually economists believe that a large budget deficit will increase the value of the dollar. The logic is that higher budget deficits are believed to cause higher interest rates, which makes holding bonds and other dollar denominated assets more attractive. This is how a budget deficit can cause a trade deficit.

The mechanics of this process are somewhat dubious in that there is very little relationship between budget deficits and trade deficits. (In 2000, when the country was running a huge budget surplus, we also had a large and rapidly growing trade deficit.) However, there is a relevant accounting identity which is always true. The trade surplus is equal net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.

This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

A drop in the value of the dollar is the main mechanism for adjusting the trade deficit. This decline is exactly what would be expected in a system of floating exchange rates. However, the people who are concerned about the decline in the dollar, and also want the U.S. government to reduce its budget deficit, must want to see the level of output in the United States to fall and its unemployment rate to rise. That is the only plausible way that the accounting identities can be kept in balance.

The NYT should have pointed out to readers that the people concerned about the decline in the value of the budget deficit lowering the value of the dollar apparently want to see an increase in the unemployment rate in the United States.

This article also includes inappropriate adjectives, like "huge" before "budget deficit" and "expensive" before "entitlement programs." Such adjectives should be left to the opinion page. This would be a more accurate and shorter article without them.

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It would seem pretty obvious that politicians respond to the concerns of interest groups. A successful politician manages to garner the support of enough powerful interest groups to get the money and votes to put himself or herself in office. They don't have to pass tests in political philosophy.

Therefore it is peculiar that a NYT article would refer to the "the core philosophical disagreements" between Republicans and Democrats. It is not clear what this means since there is little evidence that either side is guided by philosophy rather than political expediency. Philosophy does not win elections.

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That would have been a reasonable question for the Post to ask him after he said:

"We should not allow any tax increases, period, because it's going to slow the economy down ...If you want to get this deficit down, you need two things: economic growth and spending cuts."

While tax increases in a depressed economy so would firing government workers or other forms of spending cuts. Both actions take money out of people's pockets at a time when the economy desperately needs demand.

Representative Ryan should know this fact, but the quote printed by the Post implies that he doesn't. Since Mr. Ryan is in line to be head of the House Budget Committee this is the sort of gaffe that should draw huge attention. It is about five orders of magnitude more important than the sort of comments (e.g. then Senator Obama's reference to "bitter" working class whites in the campaign) that tend to draw attention in the media.

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