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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Thanks to Senator Al Franken it appears the Senate took the obvious step to end the conflict of interest associated with issuers paying the credit rating agencies for rating their new issues. The Franken amendment to the financial reform bill requires the Securities and Exchange Commission (SEC) to assign the raters. This would mean that the rating agency has no reason to bend its rating to curry the favor of the issuer, since the issuer does not control whether they get hired in the future.

The Post reported on this amendment and then gave the rating agencies complaint, that this will remove the rating agencies incentive to improve their ratings. This is not true. As my friend Peter Eckstein has pointed out, it would be very easy for the SEC to keep a record of the accuracy of ratings (scoring upgrades and downgrades) and then assign business in proportion to the agencies' relative track record. This will ensure that the agencies have incentive to improve their rating systems.

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My colleagues at CEPR, Mark Weisbrot and David Rosnick gave me grief for saying that Argentina's economy shrank in the year following its default. Actually, Argentina's economy shrank in the first quarter of 2002, the quarter immediately following the December default, and then began growing robustly. It continued to have robust growth for 5 more years until it got caught up in the world recession. If we were having an honest debate over Greece, then everyone would be talking about Argentina's remarkable turnaround. Instead, we have experts telling us that the economy shrank 20 percent following the default.

 

 

 

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New York Times columnist David Leonhardt told readers today that the problem of the debt is “we, the people.” Is that so?

Was it we the people who were too dumb to see an $8 trillion housing bubble and recognize that its collapse would wreck the economy? No, that was the job of the great Maestro Alan Greenspan and his sidekick Ben Bernanke, the brilliant scholar of the Great Depression. It was also the job of all the economists who do research and opine to the public on the macroeconomy. Virtually all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time.

Our deficit today is due to the collapse of this bubble. There is no dispute about this. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).

Is our huge deficit a problem today? Not if you think people should have jobs. Private sector demand has plunged because of the collapse of the bubble. If the public sector does not fill the demand gap with deficit spending, then we have less demand and fewer jobs. That’s worth saying a few hundred thousand times since the deficit hawks have filled the airwaves and cyberspace with so much nonsense.

People who want smaller deficits want fewer jobs – that is the way the economy works right now. There is no plausible story through which cutting demand from the public sector will generate more jobs in the private sector.

How about those scary long-term deficit stories? It’s all health care; it’s all health care. Those who know arithmetic know this.

The deficit hawks tell us we can’t fix our health care system. What they actually mean is that they don’t want to confront the powerful interest groups that cause the United States to pay two or three times as much per person – with no obvious benefit – as people in other wealthy countries. It is easy to devise mechanisms that will get our costs more in line with other countries (e.g. this or this).

Because such measures threaten the incomes of powerful interest groups the politicians won’t push them. And, because they have not been endorsed by enough elite economists (you know, the folks that couldn’t $8 trillion housing bubble) elite journalists will not talk about them either. Instead, they will blame ordinary workers for thinking that they should be able to get a decent retirement and have the same sort of health care coverage as people in every other wealthy country. Add a comment

That could have been the title of this CNNMoney.com piece that touted the idea of "fixing" Social Security. The peice begins by quoting Robert Bixby, the director of the Concord Coalition, an organization that was founded by Peter Peterson and is still partially funded by him. Mr. Bixby described fixing Social Security as "low-hanging fruit" when it comes to deficit reduction.

The piece then went on to Mr. Peterson himself:

"While a Social Security fix would cure only a small part of the country's long-term fiscal shortfall, it could pay big dividends in terms of the U.S. standing internationally, deficit hawks say. 'It would be a confidence builder with our foreign lenders,' said Pete Peterson at a recent fiscal summit organized by his foundation, the Peter G. Peterson Foundation.

That could lessen the risk of a big rise in interest rates and buy the country more time to handle other debt-related issues, such as tax and budget reform and further changes in Medicare."

Mr. Peterson's ability to assess what builds confidence with foreign investors or anyone else is somewhat questionable. He managed to somehow completely overlook an $8 trillion housing bubble, the collapse of which gave us the worst downturn in 70 years.

Mr. Peterson's logic is also somewhat confused. If foreign investors lose confidence in the United States then the value of the dollar would fall relative to other currencies. This will make U.S. exports cheaper to foreigners and make foreign imports more expensive to people in the United States. The result would be that we would export more and import less. This improvement in the trade balance would increase employment and reduce the deficit. If the reporter has spoken to someone other than Mr. Peterson and his employees, she may have caught Mr. Peterson's mistaken logic and pointed it out to readers.

The rest of the piece is devoted to misrepresenting Social Security's financial situation. It notes that the program is projected to pay out more in benefits than it takes in as SS taxes this year. It then tells readers:

"When the system takes in less than it has promised to pay out, the government will need to make up the difference by paying back the surplus revenue that has been paid into Social Security over the years, but which Uncle Sam spent on other things."

This is true in the same way that if Mr. Peterson spends the interest from government bonds that he owns or cashs in bonds that hit their expiration date -- rather than reinvesting the money in government bonds --  the government will need to make up the difference by paying back the money that Mr. Peterson has lent over the years, but which Uncle Sam spent on other things.

In other words, the article is implying that there is something sinister about a normal business practice. The Social Security trust fund bought government bonds with its surplus, just like private pension funds do, as well as wealthy individuals. Under the law, this money will be paid back to Social Security  -- that is what governments do with their debts -- they pay them back -- unless they default.

 

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That's right, the Post wants the Germans to let out their belts. Its editorial board probably doesn't realize this (they think that Mexico' GDP quadrupled since NAFTA was passed -- the actual growth was about 80 percent), but the statement: "the European Union's more successful economies, especially Germany, must retool to depend less on exports for growth," means that these countries should consume more.

As an accounting identity the trade surplus is equal to the the excess of national savings over national investment. As a practical matter, it is very difficult to change rates of investment. This means that the Post's complaint about Germany's trade surplus is a complaint about excessive savings and insufficient consumption. So, this sounds like the Post wants Germany to make its generous welfare state even more generous. It would be good if the Post's editors could learn a little economics so that they could at least figure out what they are sternly lecturing people to do.

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The Washington Post (a.k.a. Fox on 15th Street) is getting ever more aggressive in pushing its anti-welfare state agenda. A front page news article on the Greek financial crisis told readers that: "And though economists and other analysts generally agreed that the program was necessary to prevent a full-blown financial crisis, they also agreed that it won't work unless European governments follow through on promises to bring down their large deficits and restructure their economies to become more competitive."

It then added: "'We can't finance our social model anymore -- with 1 percent structural growth we can't play a role in the world,' European Council President Herman Van Rompuy said Monday in remarks at the World Economic Forum in Brussels, just hours after European Union finance ministers approved the new program."

In fact, there is nothing resembling the consensus about the failure of Europe's social model that this editorial implies. Unlike the United States, Europe as a whole has generally run balance of trade surpluses, suggesting that the European economies are more competitive than the U.S. economy. It is also worth noting that the welfare states in the countries facing crises right now (Greece, Portugal, Spain, and Ireland) rank among the weaker ones in Europe. The relatively healthy economies of France, Germany, the Netherlands, and the Scandanavian countries all have much stronger welfare states.

It's also worth noting how Europe and the world got into this crisis. The problems originated in letting housing bubbles grow unchecked and creating enormous economic imbalances. Apparently, news of the housing bubble still has not reached the Post.

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The NYT had a question and answer session to inform readers about the issues surrounding the Greek crisis. Unfortunately, the experts didn't get things quite right. Carmen Reinhart, an economic historian at the University of Maryland, told readers that: "Argentina’s economy contracted 20 percent in 2001 after its default, as it was shut out of international markets for a time."

Actually, Argentina defaulted at the end of 2001. According to the IMF, it's economy then contracted 10.9 percent in 2002. It then turned around and grew at an average rate of almost 9.0 percent in the next five years. No one has such an optimistic set of projections for the Greek economy right now.

 

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That is the only thing that readers of his column on the "death spiral" of the welfare state can conclude. After all, he notes the size of the budget deficits facing various European countries, but discusses them entirely in the context of their wlefare states. He apparently does not know that these countries all face severe downturns as a result of the collapse of housing bubbles in the United States and elsewhere. During recessions budget deficits always expand as tax collections fall and spending on items like unemployment insurance and other benefits rise.

Contrary to what Samuelson claims in this column. Most European countries have been willing to pay the taxes needed to support their welfare states. And this has not prevented them from maintaining rates of productivity growth (the long-term determinant of living standards) comparable to the United States.

The economic crisis caused by the collapse of the housing bubble does make sustaining the welfare state more difficult, just as it makes every other aspect of economic life more difficult. This points to the need to have more competent people setting monetary policy (unfortunately, none of the incompetent central bankers have been fired), but it does not provide insights into the viability of the welfare state, which is most needed in times of economic hardship.

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Paul Krugman rightly notes the enormous regulatory failure that allowed BP to drill in the Gulf without an emergency plan to deal with a spill. However, he misses part of the story when describing the problem as one of anti-government sentiment.

The government actually played a big role in this spill. Congress passed a law following the Exxon-Valdez spill in 1991 that restricted the liability of oil companies in these incidents to $75 million. There are estimates that the damage from this spill to the fishing and tourism industry in the region could exceed $100 billion. Would BP be as anxious to drill recklessly if it knew that it could be picking up this tab?

The problem is not just a failure of the government to regulate. The problem was a government policy that effectively expropriated property rights from the people in the region and gave BP and other would be polluters the right to do damage without providing compensation. We need government to do the right things, but as a first step, let's not have it actively intervene on the wrong side.

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Ross Douthat gave us a quick morality discussion about the growing numbers of children born out of wedlock. It might have helped to add some of the economic dimension to this story, both positive and negative. The positive is that economic opportunities for women have increased enormously over the last four decades. This means that many women who might have felt trapped in a bad or abusive marriage years ago now feel that they can survive on their own.

The negative side is that wages for most workers have stagnated for the last three decades as the bulk of the gains from productivity growth have gone to the most highly educated workers. Lower and insecure income places more stress on families and undoubtedly has been a factor in family breakups in many cases.

Okay, now we can go back to Douthat's morality story.

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The NYT tells us that there is "heightened public concern over spending." How does the NYT know this? What does it mean? Has the public checked the amount that we are spending in Afghanistan? Has it noted the cost of government payments to first-time homebuyers?

Does the public know that -- according to the methodology used by President Obama's administration -- each billion reduction in spending will lead to the loss of roughly 10,000 jobs? Therefore, according to the Obama administration's assessment, when Democrats in Congress claim that they are cutting spending (as claimed by Representative Chris Van Hollen in this blog post) they are making plans to throw people out of work.

It would be helpful if the NYT devoted more space to the meaning of policies rather than gossip about who says what.

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The folks who couldn't see an $8 trillion housing bubble are spouting off like crazy about what the Greek debt crisis means. The NYT told us that: "While the immediate causes for worry are Greece’s ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the United States is unsustainable."

Fears that government borrowing in the United States is unsustainable should manifest themselves in higher interest rates on long-term government bonds. Unfortunately for this story, the interest rate on long-term government bonds fell last week. So, the NYT wants us to believe that investors are more fearful about the status of U.S. debt, but they were willing to hold it at lower interest rates?

Umm, no, this is a "night is day" line. The NYT is telling us something that it 180 degrees at odds with what we see in the world. There are large numbers of wealthy and politically powerful people who want to scare the public about the U.S. debt in order to advance their agenda of cutting Social Security and Medicare, but the events of last week point in the opposite direction. Investors still have great confidence in the ability of the U.S. government to pay its bills.

The theme of deficit hawks was further reinforced in the next paragraph which told readers:

"'Greece may just be an early warning signal,' said Byron Wien, a prominent Wall Street strategist who is vice chairman of Blackstone Advisory Partners. 'The U.S. is a long way from being where Greece is, but the developed world has been living beyond its means and is now being called to account.'"

The savings for the developed world as a whole is determined by its trade deficit or surplus with the developing world. The latter is determined primarily by currency values of the level of output in various countries. As a result of conscious policy by the United States and the IMF, the dollar rose sharply in value against the currencies of most developing countries in the late 90s (following the East Asian financial crisis). This laid the basis for the huge imbalances associated with the stock bubble and the housing bubble.

The complaint about inadequate savings belongs at the door of the U.S. Treasury and IMF. It was the explicit and intended result of their policies. The moral haranguing about people not saving enough is utter nonsense that belongs in gossip pages, not in a serious newspaper.


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You get paid a really big premium for ignorance at the NYT, just ask Thomas Friedman who undoubtedly gets paid more than 99 percent of his generation. Thomas Friedman likes to tout the fact that there are still good paying jobs for people without skills in every column he writes.

He's in top form today, getting just almost everything wrong about the current economic situation as he tells readers: "My generation, 'The Baby Boomers,' turned out to be what the writer Kurt Andersen called 'The Grasshopper Generation.' We’ve eaten through all that abundance like hungry locusts."

Of course those who know anything about the economy know that the vast majority of baby boomers have not fared especially well. In the years before the baby boomers entered the workforce wages for most workers rose consistently between 1-2 percent a year, after adjusting for inflation. However wages began to stagnate in the mid-70s, when the oldest baby boomers were in their mid-twenties and the youngest were not yet teenagers. Baby boomers entered this labor market and most saw very little gain in living standards relative to what their parents had. Many had to go heavily into debt to buy and hold a home, to send their kids through college or to cover the cost of a serious illness.

There were gains in living standards during the last three decades, but they overwhelmingly went to the people at the top. This included the Wall Street crew, corporate executives, highly educated professionals, like doctors and lawyers, and elite columnists like Mr. Friedman. This was not an accident. These people designed economic policies that were intended to redistribute income upward. The government became openly hostile to unions. It pushed trade policies that made our factory workers compete with low-paid workers in Mexico and China while leaving our doctors and lawyers largely protected from the same sort of competition. The government also deregulated sectors like airlines, telecommunications, and trucking that offered good paying jobs for millions of workers without college degrees. The result of these and other deliberate policies was to ensure that most of the gains from productive growth went to those at the top rather than the vast majority of baby boomers.

Now the baby boom cohort is retiring. The vast majority have next to nothing to support themselves other than their Social Security. The vast majority of baby boomers do not have the defined benefit pensions that their parents did. They never had much money in 401(k) accounts and they lost much of what they did have in the stock crashes of 2000-2002 and 2008. More importantly, they lost most of their home equity, the major source of wealth for most families, with the collapse of the housing bubble.

We can blame the average auto worker, shoe salesperson and school teacher for not being smarter about the macroeconomy than Robert Rubin, Alan Greenspan, and other managers of economic policy, but the fact is that they made the mistake of listening to these people. They thought that stock prices and house prices would just keep rising forever. Sure, this was stupid, but Rubin, Greenspan and the rest were supposed to be really smart people, and it was their job to know the economy. Too bad Thomas Friedman was never smart enough to notice either the stock bubble or the housing bubble and to warn his readers.

Instead, Thomas Friedman wants to lecture us all about how we have been living too lavishly. We have to give up our Social Security and Medicare and accept lower living standards. This would be laughable except for the immense political power and the hundreds of billions of dollars that stand behind Friedman's agenda.

At the moment, the concern about deficits is painfully absurd. If only Friedman could learn the most elementary economics he would know that the economy's problem right now is too little spending, not too much. He probably hasn't noticed, but the unemployment rate is almost 10.0 percent. If we got frugal now, then the unemployment rate would go still higher -- of course that probably would not matter where Mr. Friedman lives.

Over the long-term we do face a problem with our broken health care system. This is the cause of our projected long-term budget problems. Of course fixing our health care system would hurt the health insurance industry, the pharmaceutical companies and highly paid medical specialists, so that is not on Mr. Friedman's agenda. Instead, he wants to tell school teachers and auto workers (both current and retired) that they have to tighten their belts. And, he gets paid big bucks for this.

 


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Apparently our news stories are being written by people too young to remember the 90s and unable to find anyone with the competence to look up the data. The economy added 290,000 jobs in April. It is important to note that 66,000 of these jobs were temporary jobs associated with the 2010 census. There is nothing wrong with census jobs, but the point is that these are temporary and have nothing to do with the underlying strength of the economy. So, we can ignore that fact and boast about 290,000 jobs, but if we are then going to be consistent, we should be sure to ignore the loss of these temporary jobs in July and August.

Of course, ignoring that these are temporary jobs generated by the census would give us a poorer understanding of the economy, but would at least be consistent. What is not consistent is ignoring that these jobs are temporary now and then highlighting their loss in July and August. We'll see.

But, back to the fundamental issues. Is 290,000 jobs in a month (224,000 excluding the census jobs) strong job growth coming out of the worst downturn in 70 years. Well the economy created more than 250,000 jobs a month in the years from January 1996 to January 2000. If we adjust for the larger labor force, it generated 400,000 jobs a month for the year following the employment trough of the 74-75 recession and 420,000 jobs a month for the year following the 81-82 recession. Put another way, if we assume an underlying rate of growth of the labor force of 100,000 a month, then it will take 80 months (6 2/3 years) to make up the job deficit from the downturn at the current rate of job growth. Now, let's go celebrate!

 

 

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The Washington Post (a.k.a. Fox on 15th Street) pulled out the stops in pushing its deficit reduction agenda today. Its news section includes a lengthy story on the euro crisis that makes things up in order advance the Post line about evil budget deficits.

It starts by misrepresenting the central problem: "and the currency that was designed to rival the U.S. dollar for power and influence is foundering because of a lack of fiscal discipline among its weakest members." While Greece's problems can be attributed in large part to a lack of fiscal discipline, this is clearly not the case with Spain and Ireland, both of whom had budget surpluses and low debt to GDP ratios prior to the downturn. Portugal is a more ambiguous case. The euro would not be facing a crisis if only Greece and Portugal, two relatively small economies, were facing difficulties.

The euro's problem stem from the fact that many economies across Europe were driven by a housing bubble. The European Central Bank (ECB), like the Fed, thought that bubbles were fun and opted to ignore the growth of dangerous housing bubbles in many countries.

For this reason, the sentence: "The euro, created 11 years ago, has always stood upon two unequal legs: a disciplined European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate," could perhaps be more accurately written: "The euro, created 11 years ago, has always stood upon two unequal legs: an incompetent European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate." Had the ECB done the proper job of a central bank it would have taken steps to pierce the bubble (which could have involved many measures other than raising interest rates) before it grew to such dangerous proportions.

It is worth noting that the Post consistently ignored the economists who warned of the dangers of the housing bubble in the build up to the crisis. It is continuing to ignore the bubble even after its collapse led to the worst economic crisis in 70 years.

The Post also gets the necessary remedies confused. It tells readers: "If Greece still had its own currency instead of being tethered to the euro zone, a sudden devaluation would have already slashed the value of the country's wages and benefits." Actually, the important point is not the absolute fall in Greece's wages and benefits, but rather their decline in value relative to those of other countries in Europe.

This is the key point, the issue is less the budget problems, but rather that the fixed exchange rate precludes and effective process of economic adjustment to a period of lower budget deficits. Because Greece and the other troubled countries are stuck in the euro zone, they can neither lower interest rates nor decrease the value of their currency to offset the contractionary impact of deficit reduction. As a result, deficit reduction can lead to a downward spiral in which lower output leads to a higher budget deficit, requiring further cuts, and therefore causing a further drop in output.

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The Washington Post devoted a whole article to the views of a delegation of "senior U.S. executives " selected by the American Chamber of Commerce in Beijing. These executives told readers that China's industrial policy was a far bigger concern than the value of its currency.

It is understandable that executives of U.S. corporations operating in China would argue this case. A drop in the dollar relative to the yuan will improve the U.S. trade situation for two reasons. First, it will make U.S. exports cheaper for buyers in China, leading them to buy more. Second, it will make Chinese imports more expensive for people in the United States, leading the U.S. to consume fewer goods from China and more domestically made goods.

The U.S. executives in China only care about the former effect. The latter effect -- the impact of a lower dollar on imports from China -- is likely to be the far more important one, since we import far more than we export. Rather than presenting the views of these executives as the simple truth about U.S. trade with China, the Post should have presented them as the views of a narrow interest group. It should have presented the views of independent experts or representatives of other groups to put these views in context.

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In an article on the Greek crisis, the Post noted that the European Central Bank (ECB) could: "use its essentially limitless ability to create money to stanch the crisis." It then added: "though doing so could hurt the long-term credibility of the central bank as an inflation fighter that does not yield to politics."

It is not clear how rescuing Europe's economy implies that the ECB had decided to "yield to politics." This is an invention by the Washington Post. Central banks are supposed to intervene to help economies in this sort of crisis, that is why governments create them. If the ECB fails to act to stem this crisis, when it obviously has the power, its reputation and Europe's economy will suffer serious consequences.

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Morning Edition ran a segment this morning telling us about the tragic plight of the poor doctors who don't know how much their reimbursements will be from Medicare next month. It gave us the doctors' perspective and also the perspective of a Medicare beneficiary who complained that she could not find doctors who are willing to work for Medicare's pay rate.

It would have been helpful to include the perspective of an economist who could have told listeners that physicians are the most highly paid profession. An economist also could have told listeners that our physicians are paid far more than doctors in countries like Germany and Canada, which is one reason that the U.S. health care system is so uncompetitive. An economist also could have discussed the protectionist measures that keep the pay of U.S. physicians so far above world levels.

Finally, an economist could have ridiculed the idea that physicians will en masse stop accepting Medicare patients. The logic is very simple. There is no large group of wealthy potential patients that is underserved now. In other words, wealthy people already have all the doctors that they need. This means that if the nations' physicians decide that they will not accept the 40 million Medicare beneficiaries then they will have no way to make up this lost income. They will have to get by on a lower income. The threat to just serve higher paying patients is nonsense.

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The Washington Post told readers that Freddie Mac needed an additional $10.6 billion from the government to cover its losses. The article never discusses the extent to which these losses are due to loans purchased before Freddie Mac was taken over by the government in September of 2008 or losses on loans purchased after this date.

This distinction is important because when Fannie and Freddie lose money, it means that they paid banks too much for the loans they purchased. If they paid too much for loans before they were taken over then this was presumably the result of bad business decisions. However, if they lose money on loans purchased after September of 2008, then the government is effectively subsidizing banks by paying too much money for their loans. This was the original intention of the TARP program.

Taxpayers have a right to know if Fannie and Freddie are being used to subsidize banks by overpaying for their loans. The Post and other news outlets should be trying to answer this question.

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A front page Washington Post article told readers that: "The basic problem in Greece, and in the other struggling European countries, is that the government debts have grown as large, or nearly as large, as the gross domestic product, making the government's repayment difficult, if not impossible. The countries' imperiled finances, meanwhile, push up the rates at which they can borrow. (emphasis added)"

This is the sort of assertion that belongs on the editorial pages, not in a news story. There have been and are many countries with considerably higher ratios of debt to GDP than Greece than manage to borrow in financial markets without major problems. The more obvious problem with Greece is that it is in the euro.

This means that when it make budget cutbacks to reduce its deficit, it leads to large falls in domestic output. It has no ability to counteract these declines with expansionary monetary policy or a devaluation that will increase its net exports by making Greece more competitive. Greece's budget austerity therefore risks putting it in a downward spiral, where budget cutbacks further depress GDP, leading to a larger budget shortfall, requiring further cutbacks. Washington Post reporters should understand this situation.

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That is what readers of this election eve article must assume. The bubble and its collapse are not mentioned once in an article that tells readers how the citizens of the UK will have to sacrifice in the years ahead. Remarkably, one of the people who is cited as an authority on this topic is Mervyn King. Mr. King, as the head of the Bank of England is the person who is most responsible for the country's economic devastation. Like Alan Greenspan in the United States, King just sat back as the housing bubble in the UK grew to ever more dangerous levels. While the collapse and the resulting economic damage were totally predictable, Mr. King chose to do nothing to prevent this catastrophe.

The economic collapse following in the wake of the housing crash is the main source of the country's current fiscal problems, not profligate spending, as the piece implies.

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