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 NYT reported on new projections from the Population Reference Bureau showing continuing increases in population in the developing world and slow or negative growth in wealthy countries. Low birth rates in the wealthy countries are projected to lead to a rise in the ratio of retirees to workers. The NYT described this prospect as "sobering."

There is no obvious reason that people in wealthy countries should be concerned about the prospect of a rising ratio of retirees to workers. This ratio has been increasing for a century. The projected increase in the elderly dependency ratio is largely offset by a decline in the number of dependent children. At the worst, the rise in the dependency ratio will offset some of the gains in wage growth associated with rising productivity, as has been the case in prior decades. So, it is not clear what the NYT wants readers to find "sobering" about this news.

The article also implied that a large jump in the share of GDP going to Social Security and Medicare is due to the aging of the population. Much of the cause of the projected increase in spending on these programs is the projected increase in per person health care costs. If per person health care costs in the United States fell to the levels in Germany or Canada, the share of GDP devoted to these programs in 2050 would be little different from what it is at present.

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Economics seems to be the science of forgetting. All the great truths that were pounded into our heads when we grad students, or even undergrads, seem to be missing from the thinking of those making pronouncements on the economy and economic policy.

For example, the housing wealth effect, a well-established economic doctrine firmly rooted in the center of the discipline, seems to have disappeared from most discussion of consumer spending patterns. The basic point -- that a dollar of additional housing wealth leads to 5-7 cents in additional consumption each year -- explains both the consumption boom at the peak of the bubble and the falloff in consumption in the wake of its collapse. Instead of noting the huge amount of lost housing wealth and recognizing the drop in the consumption and rise in the saving rate are permanent, economists and economics reporters are looking at consumer attitudes and hoping that greater optimism will lead to a new spending boom.

In the same vein, it is remarkable how little attention a very classic inventory cycle has received in explaining the changes in GDP over the last five quarters. The basic story is that firms were shedding inventory as fast as they could in the 4th quarter of 2008, with the rate of decline increasing into the first quarter of 2008. Although inventories continued to decline in the second quarter, they declined at a slower rate, which meant that inventories added to growth. Eventually firms stopped cutting inventories and began rebuilding. In the most recent quarter they were adding inventories at a very rapid pace, $85.9 billion a year.

With the latest figure, the inventory cycle has come to an end. I don't have a crystal ball telling me the rate of inventory accumulation in the next few quarters, but it is unlikely that it will be much higher than the current rate. This means that inventories will provide little boost to growth in future quarters, making GDP growth look like final demand growth and that is not very good.

While GDP growth has been erratic over the last four quarters, final demand growth has been much less so. It has been consistently weak, averaging just 1.2 percent. In the most recent quarter it was 1.3 percent. So unless we have some good reason for final demand growth increasing (state and local cutbacks, the end of the housing tax credit, and the phasing down of the stimulus all push the other way), we can expect very slow GDP growth for the next several quarters and rising unemployment.

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As we all know, there are two types of people in the world: those who say that there are two types of people in the world, and those who don’t. David Brooks tells us today that he is in the former category.

 

He etches out two fundamental positions in economic policy debates. On the one hand are the Obama liberals who believe in an expanded role for government in directing the economy. Brooks’ Obama liberals believe that the government has to rein in business and protect the citizenry.

 

His other pole is the Paul Ryan conservative. Paul Ryan conservatives believe in unleashing the power of individual entrepreneurs. They want to get the government out of the way by privatizing Social Security, Medicare, and other programs currently provided by the government.

 

The David Brooks categorization gives us a great fairy tale about the battle of big government liberals versus market-oriented conservatives. But, suppose we step back to the real world for a moment. Let’s imagine that we want to structure the government and market to provide services in the most efficient way and don’t particularly care about whether that means big or small government, which are not well-defined concepts in any case. Outside of David Brooksland, there are many people who hold this view.

 

When we consider a program like Social Security, we would ask how to carry through its purpose – ensuring workers a core retirement income— at the least possible cost. Any serious analysis would almost certainly show that some public Social Security type program fits the bill.

 

The administrative costs of the Social Security program are approximately 0.6 percent of what is paid out in benefits each year. By contrast, the administrative costs of privatized systems like the ones in Chile and the U.K. are on the order of 15-20 percent of the benefits paid out annually.

 

Furthermore, these privatized systems do not allow individuals to do what they want with their money. They threaten them with jail if they don’t turn over a fraction of their earnings to the financial industry each year. So the commitment to a privatized Social Security system seems more like a commitment to force people to give money to Merrill Lynch than a commitment to individual freedom.

 

The same applies to privatizing Medicare. We can hand people vouchers and tell them to buy the health care they want. However, this would require a massive array of laws and bureaucracy to ensure that the providers accepting these vouchers were not gaming the system and ripping off beneficiaries and the government. This approach can increase profits for insurers and providers but there is no evidence whatsoever to suggest that it would make it possible to provide the elderly with health care at a lower cost.

 

We can take steps to lower costs and reduce the role of government that will send David Brooks’ small government types fleeing in horror. Suppose that we got rid of government patent monopolies and allowed all prescription drugs to be sold at generic prices in a competitive market. Free market types should love this one. Instead of drugs selling for hundreds, or even thousands, of dollars per prescription, they could be bought at chain drug stores for five or ten bucks.

 

The research could be supported by government research grants awarded through competitive contracts. The government already spends $30 billion a year on biomedical research through the National Institutes of Health. If this sum was doubled, then it would probably be sufficient to replace the industry’s funding; especially if a requirement of getting grants was that all research findings would be posted on the Internet where they would be freely available to other researchers.

 

We could also try a variation of the Paul Ryan approach to Medicare vouchers. Instead of creating an incredibly burdensome task of policing a privatized system in the United States, we can allow beneficiaries the option to buy into the much more efficient systems in Europe, Canada and elsewhere. Free market types should love this win-win situation where giving beneficiaries a choice will allow taxpayers to save money on Medicare and put large sums of money (more than $10,000 a year in many cases) into the pockets of our retired workers. But, this voucher system means less money for the insurers, the drug companies and other providers, so Paul Ryan would not support it.

 

There are many other cases where smaller government can be used to accomplish the progressive goals of providing basic needs and limiting inequality[CSN]. But Paul Ryan and his friends are not likely to be interested in these policies. This might suggest that, in spite of what David Brooks tells us, Mr. Ryan’s concern is not reducing the size of government, but rather redistributing income upward.

 

Of course, upward redistribution of income is not a very good political platform since there are many more people who end up losers in this story than winners. And, in a democracy, politicians are unlikely to win elections if they promise to take money out of most voters’ pockets.

 

So, Mr. Ryan and David Brooks come up with stories about how conservatives want to limit government and unleash individual entrepreneurs. The story might have little basis in reality, but that doesn’t mean that you can’t get it in the NYT and persuade lots of people to take it seriously.   

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This surprising result -- that the failure to eat chicken leads to starvation -- would be shown true using the same methodology of a new study on the impact of the TARP. The study, by Princeton University Professor Alan Blinder and Mark Zandi, the chief economist at Moody's Analytics, examines the impact of the TARP and the stimulus on economic growth and unemployment. It finds that GDP would be 11.5 percent lower in 2010 had it not been for these two policies, with about three quarters of the benefits attributable to the TARP and various Fed/Treasury/FDIC policies that provides aid to the financial sector.

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

This is comparable to doing an analysis of the benefits of eating chicken where the counterfactual is that people eat nothing. Needless to say, we would find very large benefits to eating chicken in such a study.

Suppose as an alternative counterfactual, we let the market do its work. Citigroup, Goldman Sachs, Bank of America, Morgan Stanley would be out of business, with their highly paid CEOs walking the unemployment lines. Rather than doing nothing, we could have the Fed flooding the system with liquidity (much as it did), without having to worry about money being siphoned off by bonuses for the honchos who led these banks to ruin.

It would be difficult to fully flesh out the counterfactual in this scenario, but it is certainly more plausible than the one described by Blinder and Zandi. If we need a study to make us feel good about the fact that the Wall Street is rich while the rest of the country is poor, it fits the bill, but it is not serious analysis and the media should not treat it as such.

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The Post noted the weak economic data in recent weeks and then told readers:

"fits and starts are common during early stages of economic expansion."

This is not true for recoveries from steep downturns like the one the U.S. has just experienced. In the first four quarters of recovery following the 1974-75 recession the economy grew 3.1 percent, 6.9 percent, 5.3 percent and 9.4 percent. In the first five quarters following the 1981-82 recession the economy grew by 5.3 percent, 9.3 percent, 8.1 percent, 8.5 percent, and 8.0 percent.

We should be seeing robust economic growth right now based on past patterns. It is a very bad sign that we are not.

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It is incredible that economists and economic reporters still focus on consumer confidence. Consumers are actually spending at a relatively high rate. (The savings rate is well below historic levels.) The problem is that they lost $8 trillion in housing wealth. The housing wealth effect on consumption is something that economists have known about for more than 60 years. It's too bad that they seem to have forgotten and so have the reporters who cover this issue.

The problem is not confidence. It is a lack of money. That is why consumers are not spending more and will not anytime soon regardless of how happy they are.

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The Washington Post had an article discussing the debate over how central banks can prevent future economic collapses like the current one. As is its practice, the Post relied exclusively on economists who were not able to see the crisis coming. As a result, it fundamentally misrepresents the crisis as being primarily financial in nature.

In fact, the main problem was that the housing bubble was driving the economy, generating $1.2 trillion in annual demand through construction and housing equity driven consumption. There is no easy mechanism through the economy can replace this much lost demand. That would be the case whether or not the collapse of the bubble was associated with a financial crisis.

The article also fails to list one of the most simple and obvious ways that central banks can combat a bubble: talk. During the run-up of the housing bubble, Federal Reserve Board Chairman Alan Greenspan repeatedly said that everything was fine in the housing market, as did Ben Bernanke, who was a governor at the Fed for most of the period. This helped undermine the case of those who were warning of the bubble.

By contrast, if Greenspan had explicitly warned of the bubble and documented its existance and potential dangers with extensive research from the Fed staff, it may have been effective in containing its growth. The financial industry cannot simply ignore research from the Fed and there was no serious response to the evidence that the Fed could have presented.

There is no reason the Fed and other central banks cannot use the full capabilities of their research staff to attempt to counter dangerous financial bubbles. There is a virtually costless strategy with enormous potential payoffs.

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The Washington Post reported that House Democrats who voted for the energy bill are worried that it will hurt them in the election because their opponents have labeled it as a job killer. It would have been worth noting that there is no reason to believe that the bill would have led to a substantial loss of jobs. If opponents of the bill are able to score political points by describing the bill as a job killer it is only because the media have done a poor job in describing its impact. Add a comment

The NYT notes that recent documents suggest that Goldman Sachs was largely hedged against a potential AIG bankruptcy and that it had taken collateral from AIG and other counter-parties that would have almost fully compensated for any losses.

It is not clear that Goldman was as hedged as the documents suggest since, as the article mentions in passing, a bankruptcy court may not have clawed back some of the collateral posted. The other issue that would have been worth mentioning in this piece is that the government and Goldman resisted the release of documents at every point in this process. For 6 months after the initial bailout of AIG the government provided no information whatsoever about the counter-parties who had been paid with the money.

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I'm just asking. By the way, what measure is he using that shows that the United States has declining human capital? All the data with which I am familiar shows the workforce is getting more educated through time. Add a comment

That is what readers of an NYT article on higher shipping fees for faster service must be wondering. The article tells readers that shippers now have a shortage of space because:

"With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant."

Okay, so we are seeing a big run-up in prices and, "fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates — in some cases."

ummm, what happened to the 11 percent of shipping fleet that is now idle? The article does make a brief reference to this idle capacity later, noting that firms are reluctant to bring it back on line. This sounds a bit like a case of collusion to keep prices high. It might make for a good article by an enterprising reporter.

(I'm back from the DC power failure - 32 hours in my hood.)

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CNN had a segment on inequality in Brazil in which it told viewers:

"The country's Gross Domestic Product -- the value of goods and services it produces -- was $2 trillion in 2009, the 10th largest in the world, according to the CIA World Factbook. But per capita income for the same year was estimated at $10,200, the 105th highest in the world. Simply stated, most of the wealth being produced is not finding its way down to most Brazilians."

Actually, per capita income reveals nothing about inequality. It is simply GDP divided by the population. Brazil has a relatively low per capita income because it has a large population. The number for per capita income would be the same if everyone had the same income or one person had it all.

The piece could have referred to Brazil's Gini index, which is a measure on inequality. At 56.7, it is one of the highest in the world, although it has been dropping in recent years.

(HT to Robert Naiman.)

 

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The lead article in the Sunday Post reported on the battle over extending President Bush's tax cuts. At one point it told readers that: "because they [the tax cuts] were expected to eventually cause huge deficits, Republicans wrote them to expire in 2010."

Actually the story is somewhat more pernicious. President Bush had set a budget target for his tax cuts. Had they run through 2011 the cost would have exceeded his target. Therefore they wrote the law so that the cuts ended in 2010, keeping the 10-year cost within his target.

The article also includes the bizarre statement: "And with unemployment at 9.5 percent, even some Democrats are queasy about raising taxes on high earners -- a category that includes many small-business owners -- when policymakers are trying to encourage them to create jobs."

Actually, there is little evidence that raising taxes on high income households will have any notable impact on job creation. (Job growth was quite rapid under the Clinton era tax rates.) Furthermore, many of the Democrats who oppose raising taxes on the wealthy have opposed many or all of President Obama's stimulus measures, indicating that they have little concern about job creation.

It is certainly more plausible that these politicians are worried about campaign contributions from high income households, an issue that remarkably was never mentioned once in this article.

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In an article that discussed the two-tier pay system that Chrysler and GM adopted as part of their rescue plan, the Post told readers that the debate over autoworkers' wages during the bailout pitted "the advocates of the free market against those for a 'fair wage.'" Actually, there was no one in this debate advocating a free market. Those who wanted to see the wages of union auto workers cut were still very supportive of the licensing and professional restrictions that protect doctors and other highly paid professionals from foreign competition. These people also support other major forms of interference with market outcomes such as copyrights and patent protection.

The only clearly recognizable view held by those who insisted that autoworkers wages lowered to $14 an hour was that they wanted to see autoworkers get paid less money. The Post should simply report what people say and not attribute an ideology to them which almost certainly does not fit reality.  

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Sometimes the Post just leaves readers speechless. It has a front page article with the headline: "GOP finds grist for campaigns in projections of record deficits [this headline only appears in the print edition]."
The article goes on to explain how Republicans are yelling about the new record deficits.

There are two striking features to this article. First, Republicans have criticized President Obama for everything under the sun, including a speech encouraging children to work hard in school. That the Republicans are critical of the latest budget projections is not news and certainly not front page news. Although it might merit a front page story if they did not criticize the projections.

The other striking feature of this story is that the front page only presented the Republican criticisms. Only those who read to the jump page saw that Democrats response that the deficits were the result of the economic collapse in 2008. Even this point is largely left as a matter of "he said, she said," rather than being reported as the fact that it is.

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The folks who thought the housing bubble was cool are now working overtime to make the victims of its collapse suffer as much as possible. This presumably explains the reason that Washington Post columnist Michael Gerson claimed that a Goldman Sachs study of 44 countries found that a study of 44 countries found that: "reducing government expenditures by one percentage point, in contrast, increases average annual growth by 0.6 percentage points."

What the study actually found was that a one percentage point decline in government consumption expenditures was associated with a 0.63 percent increase in growth. However, it found that a one percentage point increase in government investment expenditures (spending on education, research, infrastructure etc. ) was associated with a 1.25 percentage point increase in growth. This would mean, for example, that a one percentage point decline in spending that was split evenly between cuts to government consumption and cuts to investment would lead to 0.31 percentage point decline in GDP growth.

There are reasons that this study is inapplicable to current circumstances. Most notably, the bulk of the benefit from spending cuts appears to come through the channel of lower interest rates inducing more investment. This is unlikely to be a important channel given that interest rates are already extremely low, however, even ignoring this issue, Gerson has seriously misrepresented the findings of the study that he cited.  

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The housing bubble -- you know that $8 trillion run up in house prices. When it burst it led to a financial crisis that almost brought down the financial system. It also pushed the economy into the worst downturn in 70 years, since its collapse caused construction to plummet and consumption (which had been fueled by bubble created home equity) to plunge.

You would think that people who report on the housing market would have noticed the bubble -- sort of like environmental reporters taking note of global warming -- but that doesn't seem to be the case at NPR. It ran two separate stories this morning on the housing market, neither of which made any reference to the housing bubble.

The second included an extended presentation of the views of Nicolas Retsinas, the director of the Joint Center for Housing Studies at Harvard. Mr. Retsinas gained notoriety for insisting that there was no bubble during the peak years of the run-up in house prices and insisting that it was still a good time for moderate income families to buy homes. 

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The NYT portrayed the Fed as facing a serious dilemma in dealing with its portfolio of mortgage backed securities (MBS). It argued that it can either start selling them now and risk slowing the economy or wait until the economy has recovered more and risk losing money by selling them in a higher inflation environment.

There actually is another option that would address the deficit concerns that appear constantly in the NYT and other media outlets. The Fed could simply hold the bonds indefinitely and then reinvest the proceeds in Treasury bonds when the MBS are paid off. This means that the Fed would have a constant flow of interest income which would be rebated to the Treasury, reducing the interest burden from the debt to the Treasury. Insofar as it is worried about inflation, the Fed could raise bank reserve requirements (on a fixed schedule) among other actions.

This option should have been discussed in the article. Japan's central bank has gone the route of holding large amounts of long-term debt for long periods of time. In spite of this fact, the country remains far more concerned about deflation than inflation.  

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The NYT had a peculiar front page article in which it portrayed Defense Secretary Robert Gates as a budget cutter even though he wants to increase the defense budget by 1.0 percent a year in excess of inflation. It notes that he doesn't want the government to buy some of the weapons system being pushed by Congress. It then comments:

"In one of the paradoxes of Washington budget battles, Mr. Gates, even as he tries to forestall deeper cuts, is trying to kill weapons programs he says the military does not need over the objections of members of Congress who want to protect jobs."

It is not clear what the article views as paradoxical. Increasing the defense budget by 1.0 percent a year in excess of inflation does not imply an austere budget. Nonetheless it also doesn't imply an infinite budget. There is nothing paradoxical about the defense secretary having to set priorities in this context.

The article also includes the peculiar comment that defense spending:

"has averaged an inflation-adjusted growth rate of 7 percent a year over the last decade (nearly 12 percent a year without adjusting for inflation), including the costs of the wars."

Inflation has not averaged anywhere near 5 percent over the last decade, so the 12 percent nominal growth rate is inconsistent with the 7 percent real growth rate.

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USA Today wrongly told readers that: "private employers are uncertain about the economy's health and are hesitant to add jobs." The uncertainty of businesses does not explain their reluctance to add workers. If this were the case, then businesses would be increasing the number of hours worked per worker. While average weekly hours are up somewhat from the low hit last fall, they are still down by 0.7 hours from their pre-recession level. This indicates that firms are not hiring because they have no need of additional labor.
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But the article did not quite support the headline. Businesses always want more from the government. As the article points out, the Chamber of Commerce has won some big battles in limiting aspects of the financial reform bill, the health care bill, and other pieces of legislation. Naturally, the Chamber will complain about its losses and insist that business is being attacked, but this is a political tactic, not reality. The Post's headline writers should know this. Add a comment