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.

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I spend a lot of time on this blog beating up on the New York Times. There is a reason I pick on them; they are the best. There is no doubt that the NYT is far and away the most important newspaper in the country. There is no close second. They cover more news in more depth than anyone else by a large margin. Their judgments on what is news and how it is reported sets a standard that has an impact, either directly or indirectly, on every news outlet in the country.

For this reason, it is hugely important that the paper has committed itself to reevaluate how it reports budget numbers and to try to put these numbers in contexts that are meaningful to readers. As many polls have shown, the public is hugely misinformed on where their tax dollars are spent. Some of this misinformation undoubtedly reflects prejudices, but much of it is due to the fact that most budget reporting is not providing meaningful information to readers.

Telling readers that the government will spent $195 billion on transportation over the next six years is telling most readers nothing. They have no idea how large $195 billion is to the federal government over the next six years. On the other hand, if the paper reported that this amount is 0.78 percent of projected spending over this period (found in seconds on CEPR's extraordinary Responsible Budget Calculator) most people would understand the significance of this item to the budget and their tax bill.

Anyhow, we will see exactly how the NYT ends up dealing with the issue, but they deserve a great deal of credit for recognizing the problem and trying to address it. Margaret Sullivan, the paper's public editor, deserves special credit for taking this one on and pressing it with the paper's editors. Also Bob Naiman, at Just Foreign Policy, played an important role in initiating a petition at Move-On on this issue, which eventually got almost 19,000 signatures. That's pretty impressive for the ultimate wonk petition.

 

Addendum:

Media Matters also deserves serious credit for pushing this issue.

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Actually, it didn't explicitly say this, but that was the implication of comments from Adam Posen, the head of the Peterson Institute for International Economics. In a top of the hour news segment (sorry, no link), Posen said that the standoff will accelerate the pace at which countries throughout East Asia begin to trade in Chinese yuan instead of dollars. This will reduce demand for dollars, thereby lowering the value of the dollar.

A lower valued dollar will make U.S. exports more competitive in foreign markets. It will also make domestically produced goods more competitive in the United States leading to fewer imports. This will lead to a lower trade deficit, more growth, and jobs.

If we can reduce the trade deficit by one percentage point of GDP (@$165 billion), this would lead to close to 2 million additional jobs. With fiscal policy likely becoming more contractionary as a result of the deficit fighting craze, a lower valued dollar is the only plausible path to increased growth and more jobs in the foreseeable future.

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The NYT, along with most of the rest of the media, has been eager to highlight the costs and risks of a debt default and even the standoff over the debt. An article today pushed this line in part by misrepresenting the impact of the 2011 standoff. The piece quoted Beth Ann Bovino, chief United States economist at Standard & Poor’s:

"'We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter G.D.P. growing just 1.4 percent, ... Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.'"

The idea that third quarter GDP took a big hit from the standoff is more than a bit misleading. The sectors that might be expected to take a downturn from the uncertainty, consumption and investment, both did reasonably well. Consumption grew at a 2.1 percent annual rate in the quarter, up from a 1.8 percent rate in the first half of 2011. Fixed investment 14.8 percent annual rate in the quarter compared to a 4.1 percent growth rate in the first half of the year. Spending by the federal government and state and local governments did fall in the third quarter, but this was largely due to the end of the stimulus.

However the major drag on growth in the quarter was a slower pace of inventory accumulation. Inventories grew at a very rapid pace in the second quarter, adding 0.72 percentage points to growth for the quarter. The growth rate was considerably slower in the third quarter (this zigzag pattern in inventories is common). As a result, inventories subtracted 1.6 percentage points from GDP growth in the quarter. The 3.0 percent rate of final demand growth was the strongest of 2011.

 

Addendum:

This piece also mistakenly tells readers:

"Standard & Poor’s is more pessimistic, estimating that the shutdown will cut about 0.6 percent off inflation-adjusted gross domestic product, equivalent to $24 billion. Most analysts are predicting that growth will remain subpar, at an annual pace of 2 percent or less."

The 0.6 percentage point drop is in the growth rate for the quarter, not GDP. (The drop in GDP would be roughly one fourth this amount, on an annualized basis.) Growth in the fourth quarter should increase by roughly the same amount as the third quarter falloff, although the loss in output in the third quarter will be permanent. Government workers cannot retroactively work the days they missed.

Thanks to Robert Salzberg for calling this to my attention.

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The NYT should have pointed out this fact in its discussion of the implications of the standoff on the debt. The piece noted the uncertainty created by the standoff and then told readers:

"Any long-term turn away from Treasury bonds would most likely be driven in large part by foreign investors, like the Chinese and Japanese governments, which are some of the biggest holders of Treasury debt. The willingness of these governments to buy bonds has long held down the cost of credit in the United States and helped keep the dollar as the world’s reserve currency."

It would have been appropriate to point out that the move by the Chinese and Japanese governments away from holding Treasury debt is a longstanding official policy goal of both the Bush and Obama administrations. Both have complained about currency "manipulation" by these governments. The way these governments manipulate their currencies is by buying up U.S. government bonds. This keeps down the value of their currency against the dollar, making their goods relatively more competitive in international markets.

If China and Japan bought fewer U.S. government bonds their currencies would rise against the dollar, making U.S. goods more competitive and increasing net exports. This could lead to millions of jobs in the United States. The NYT should have pointed out this potential positive benefit from the uncertainty created by the debt standoff.

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The NYT ran a column by Topher Spiro which defended the medical device tax. The column neglected to give the main rationale for the tax, it will recoup some of the excess profits that the industry will accrue as a result of the Affordable Care Act (ACA).

The logic here is fairly straightforward, medical devices are like prescription drugs, they can cost a lot to develop, but are cheap to produce. Companies get back their research costs by charging prices that are far above their production costs, which they are able to do as a result of patent monopolies.

To take a simple example, suppose a medical device company has a new screening device that it sells for $1 million. It cost $100,000 to manufacture, so it will make $900,000 from each device it sells. Before the ACA it had expected to sell 1000 copies of this screening device. That would gross it $1 billion, or $900 million in excess of its production costs.

As a result of the ACA more people will have access to health care and therefore demand for the screening device will increase. Suppose it were to rise by 10 percent. In this case the industry's revenue would rise to $1.1 billion and the profit over production costs will increase to $990 million.

Since the industry had not anticipated the ACA when it developed the screener, and had not expected these extra sales, this additional $90 million is pure gravy in the form of unanticipated profits. The logic of the tax is to take away this gravy to limit the windfall that device manufacturers enjoy as a result of the ACA.

It is also worth noting that the corruption cited in Spiro's column is the predictable result of a situation in which a product sells at price far above its marginal cost as a result of government protection. This is the same problem that we see in the prescription drug industry.

The economist's solution would be to devise a mechanism for funding research that would allow drugs and medical equipment to be sold in a free market. However because of the power of the affected industries and the dominance of protectionists in national politics, the efficiency of patent protection in these sectors is rarely discussed.

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The Washington Post article on the budget agreement told readers:

"Senate Budget Committee Chairman Patty Murray (D-Wash.) was to have breakfast Thursday morning with her House counterpart, Rep. Paul Ryan (R-Wis.), to start a new round of talks aimed at averting another crisis. Obama repeated his vow to work with Republicans to rein in a national debt that remains at historically high levels.

It obviously felt it necessary to the not especially accurate tidbit that the debt remains at historically high levels. (It was considerably higher immediately after World War II.) Since the Post is playing the game of adding in random pieces of information, it could have equally well ended this this sentence by telling readers that efforts at deficit reduction came in spite of the fact that the ratio of interest to GDP is at historically low levels at 1.5 percent of GDP. While this ratio is projected to rise (because of projections of higher interest rates), in a decade we will just be getting back to the interest share of GDP we saw in the early 1990s.

Also, since the Fed is refunding roughly $80 billion a year from its asset holdings, the true interest burden to the Treasury is less than 1.0 percent of GDP. The Fed is projected to reduce its asset holdings and therefore the size of this refund later in the decade, but that is a policy choice. If the Fed feels the need to pull out reserves to raise interest rates and slow the economy, it can also accomplish this by raising reserve requirements for banks. It may opt not to go this route, but if the concern is that interest payments will be a serious burden, this is a problem that could be easily avoided. 

The Post could have also ended the sentence by pointing out that this focus on deficit reduction was occurring in spite of the fact that the economy is still down almost 9 million jobs from its trend levels of employment.

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Many young people may have been misled by Thomas Friedman's column, titled "Sorry Kids: We Ate It All," which implied that our children might somehow suffer because we are paying so much to seniors for Social Security and Medicare. The reality of course is that if our children and grandchildren do not enjoy much higher standards of living than do current workers and retirees then it will be because the rich have rigged the deck so that they can accrue most of the gains from economic growth.

This is easy to show. For example, if we look at the Social Security trustees report we see that average annual wages are projected to grow at more than a 1.3 percent annual rate between now and 2050. As a result, the average before tax wage will be more than 60 percent higher in 2050 than it is today. If our children and grandchildren get to share equally in these gains then they will be far richer than we are today.

It's true that we will have a higher ratio of retirees to workers in 2050, just as we have a higher ratio of retirees to workers than we did in 1970. Just as the increase in the ratio of retirees to workers over the last 4 decades did not prevent an increase in average living standards over this period, there is no reason to think it will prevent an increase in average living standards over the next four decades.

This is easy to show. Imagine that we saw an increase in the payroll taxes needed to supported to Social Security of 10 percentage points, far more than any plausible projections would imply is necessary. In this case, the average after-payroll tax wage would still be more than 40 percent higher than it is today. Should that make us apologize to our kids?

Of course these are averages. If we continue to see the pattern of the last three decades, in which the wealthy were able to secure for themselves most of the gains from growth, then our kids may not see a rise in living standards. But that would be a problem of upward redistribution, not an issue of the old benefiting at the expense of the young.

Furthermore, a large and growing cost of caring for our elderly is the cost of health care provided through Medicare and Medicaid. These costs are grossly out of line with costs in other wealthy countries. This is not due to our elderly getting better care, but rather due to the excessive payments made to doctors, drug companies, insurers, and medical supply companies. This is also a story of upward redistribution since the rich are the main beneficiaries of these excess payments.

 

 

health care -budget 844 image001

 

If our health care costs were in line with costs elsewhere in the world we would be looking at huge budget surpluses and would have all sorts of money freed up for improving infrastructure, education, and research. (Of course this is a long-term story assuming we get back to something like full employment. At the moment the only thing keeping us from increasing spending in these areas is people with a bad understanding of economics.)

So kids, Thomas Friedman unfortunately may have misled you. There is no reason to worry about your parents or grandparents Social Security and Medicare putting you in poverty. The real problem is the money being redistributed from your parents, grandparents, and quite possibly you, to Wall Street traders, private equity barons, CEOs, drug companies, doctors, and others who are masters at gaming the system.

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The media seem to be on a crusade to scare readers into thinking that hitting the debt ceiling will be the end of the world. One item that has been useful in this process is the story that a technical default (a missed interest payment) in the spring of 1979 led to lasting rise in interest rates.

This story is apparently derived from an obscure 1989 article by Terry Zivney that claims this default led to a lasting 60 basis point increase in Treasury bill rates. NPR highlighted this study in the last debt crisis and it is apparently enjoying a resurgence of popularity in the current crisis.

There is nothing necessarily wrong with a study being obscure. That doesn't mean it is wrong. After all, my warnings about the housing bubble from 2002-2007 were pretty damn obscure. However the fact that the study is obscure means that the economics profession does not accept its conclusion.

Interest rates are one of the most heavily studied topics in economics. None of the major analyses of trends in interest rates over the last four decades has the debt default in 1979 as a major explanatory variable. Thousands of economists have looked at the movement in interest rates over this period and none (other than Zivney) thought there was an unusual jump in interest rates in the spring of 1979 that need to be explained.

Here's what the data look like:

fredgraph-treasury

See the jump in late April and early May when the default took place? Yeah, I don't either. Of course there is the possibility that interest rates otherwise would have fallen, but the default prevented this drop from occurring, but that seems like a big lift.

The moral of this story is that a debt default would be bad news for reasons that I and others have written about, but there is also a lot of silliness going around on the topic. We have a disastrous economy right now that is almost 9 million jobs below its trend level simply because we don't have enough demand (e.g. government spending). That is really awful news. A debt default makes things worse, but I'm afraid that I can't join the panic.

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There's a lot of silliness going around about how the dollar may lose its status as the world's reserve currency if we default. The ordinarily astute Floyd Norris contributed to this confusion in a column last week implying that we may no longer be able to borrow internationally in dollars if this happened.

In reality, it is unlikely that we do risk being the world's preeminent currency in any plausible scenario. (This is also Norris' conclusion.) Furthermore, the immediate result of this loss of status would be positive in any case.

A first point is useful just for clarification. Being a reserve currency is not a zero-one proposition. The dollar is the preeminent reserve currency, which means that most of the world's reserves (@70 percent, last time I checked) are held in dollars. However other currencies like the euro, the British pound, the Japanese yen, and even the Swiss franc are also held as reserves.

If there was a loss of confidence in the dollar, we are presumably talking about a drop in the ratio of reserves held as dollars. Maybe it would fall to 40 percent, perhaps 30 percent. It is almost impossible it will fall anywhere near zero as long as the United States is in one piece with a functioning economy.

The effect of this loss of confidence would not be to deny the United States the ability to borrow in its own currency. Many countries borrow in their own currency, including countries like Malaysia and Colombia, which are not ordinarily thought of as titans of the world financial system.

Less stable countries typically pay somewhat of risk premium based on the risk of inflation in that country's currency and the risk of the demise of the country (think Yugoslavia). In several cases this risk premium is negative. For example, the interest rates on Japanese, Swedish, and Danish bonds are all lower than the interest rates on U.S. bonds. These countries do not appear to have suffered from not having the world's preeminent reserve currency. 

There is the second issue of the dollar falling in value relative to the currencies of other countries if the dollar loses its status as the preeminent reserve currency. This possibility should be cause for celebration, not fear. First of all, a lower valued dollar was the ostensible goal of both the Bush and Obama administration when they demanded that China and other countries stop "manipulating" their currency.

In this context, "manipulation" means holding down the value of their currency against the dollar. In other words, it means pushing up the value of the dollar. In spite of it being official policy that we want a lower valued dollar we are now supposed to be terrified that we might get a lower valued dollar. Welcome to economics in Washington.

The reason why we would want a lower valued dollar is that it would make U.S. goods more competitive in the world economy. We would cut back our imports and increase our exports. This is hardly a novel theory, this is econ 101. And, in fact the world follows pretty closely on what the textbooks say should happen. The trade deficit exploded in the late 1990s when the value of the dollar soared following the East Asian financial crisis. (This is when developing countries like China first decided that they needed massive amounts of dollar reserves). The trade deficit then shrank in the last decade, with a lag, after the dollar fell in value. The chart shows the non-oil deficit, since we would not expect the demand for oil to be very responsive to the value of the dollar. (The chart does not include the increase in oil exports, since that data was not immediately available when I put the chart together and BEA's website is now down.)

btp-2013-10-15

 

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The Washington Post had an article reporting on a commentary from a Chinese government owned news outlet that implied the country might move away from holding dollars. The article should have pointed out that such a move would be consistent with the publicly stated demand of both the Bush and Obama administrations that China stop "manipulating" its currency.

The way that China would "manipulate" its currency (keep its price down against the dollar) is by buying up huge amounts of dollars. If it sold dollars then its currency would rise against the dollar. That would make Chinese imports more expensive for people living in the United States, causing us to buy less of them. It would make U.S. exports cheaper for people living in China, leading them to buy more U.S. exports.

This change could go far toward reducing the U.S. trade deficit, especially if other developing countries follow China's lead as they have in the past. The result would be millions of new jobs and also an important boost to wages. In other words, if China follows through on the path suggested in this article it would be good news for most of the country. Importers like Walmart and companies that have established production facilities in China, like General Electric, might be less pleased.

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