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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The NYT had an article on the growth on India's pharmaceutical industry in which it raised its enforcement of patent laws as an issue affecting manufacturers' decision to locate in India. There is no obvious reason why there should be any relationship between the two.

Scientists in India can gain the knowledge to manufacture patent protected drugs regardless of where the manufacturing operations are located. Placing the facilities within India would minimally increase this ability. It is difficult to believe that this additional risk would be an important consideration for drug companies although they may use their location decision as a way to coerce India and other countries to adopt more protectionist patent regimes.

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It is standard in the United States to report GDP growth and other economic data as annual rates. That is not the case in other countries where it is common to use quarterly growth rates. Rather than just picking up the number as reported in other countries, reporters should convert it to an annualized rate so that their audience in the United States will understand what is being reported. (This is the point, right?) Usually, just multiplying by 4 gets you there, although for higher growth numbers, it would be best to do it right and take the number to the 4th power.

The NYT got it wrong this morning in telling readers that the UK grew 0.3 percent in the first quarter. Its annual rate of growth was 1.2 percent.

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That is the way reporters are supposed to report on the opposition by members of Congress to extending unemployment benefits and aid to the states. Reporters do not know the actual reason that these representatives are voting against these measures, they only know what they say.

That is why NPR got it wrong when it said that opponents of more stimulus spending are concerned about the deficit. This misled listeners this morning.

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The NYT warned readers that rising labor costs in China pose a serious threat to many companies that manufacture products there:


"makers of personal computers, cellphones and other electronics — including Dell, Hewlett-Packard and LG — deal with much slimmer profit margins [than Apple] according to several analysts. 'The challenges are going to be much bigger for them,' Ms. Lai said. Most other industries, from textiles and toys to furniture, are under considerably more pressure."

Actually, since China is the low-cost producer, it is not clear that rising wages there will pose a serious threat to even low margin firms. If costs for competitors rise also, due to the higher wages, then all the firms in the industry will be able to raise their prices to cover their costs leaving their margins little affected.

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Morning Edition ran a piece (not on its website) today that presented the view of the Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, that the national debt is the greatest threat to the security of the United States. According to the piece, Mr. Mullen claimed that in a couple of years the United States would be spending $600 billion a year in interest, an amount that he claimed was larger than the defense budget.

According to the Congressional Budget Office, the government is projected to spend $298 billion in interest in 2012 (@ 2 percent of GDP), less than half of projected spending on defense.

 

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David Brooks has decided to jump into the debate over stimulus with both feet. In a column in which he warns against arrogance he tells readers that additional stimulus would: "risk national insolvency on the basis of a model."

Mr. Brooks doesn't tell readers how he has determined that further stimulus carries this risk. He doesn't explain how raising the country's debt to GDP ratio by 4-8 percentage points over the next few years would jeopardize the creditworthiness of the U.S. government. This is certainly a rather strong assertion, given that even with this additional indebtedness, the debt-to-GDP ratio in the United States would still be far lower than it had been at prior points in its history.

Even after a decade of accumulating debt at a rapid pace, the U.S. would still face a lower debt burden than countries like Italy do today. Italy is currently able to borrow in financial markets at very low interest rates. Projections for 2020 show that the debt burden of the United States would still be less than half of the current debt burden of Japan, which still pays less than 2.0 percent interest on its long-term debt.

Financial markets also don't seem to share Mr. Brooks view that national insolvency is a serious concern. The people who are putting their money on the line are willing to buy 10-year Treasury bonds at just 3.0 percent interest rates. That would seem to suggest that insolvency is not a real concern, but Mr. Brooks insists that President Obama should hesitate on stimulus because he thinks that insolvency is a problem anyhow, and the people who disagree with him are arrogant.

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In an article reporting on the weak jobs report for June, the NYT quoted Alan Krueger, the chief economist at the Treasury Department, as saying "economic recoveries don’t move in straight lines.” Actually robust recoveries from steep downturns, like the one we just experienced do move in pretty much straight lines.

When the economy first start creating jobs rapidly in April of 1983, following the 1981-82 recession, it generated more than 200,000 jobs a month for 20 straight months. The one exception was in August of 1983 when a strike at AT&T led to a reported loss of 308,000 jobs. This was more than offset by a gain of 1,114,000 jobs in September. Given the growth in the labor force, 200,000 jobs in 1983 would be equivalent to more than 300,000 jobs a month in 2010.

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The NYT's Ross Douthat gave pessimism a new meaning when he noted the economy's poor jobs performance in June and commented that:

"It’s now been 30 months since the beginning of the recession, and it looks as if it could take another 30 or so to regain the level of employment we enjoyed in the autumn of 2007." Actually, we are down about 7.7 million jobs right now from the pre-recession peak. Making this up in 30 months would require creating jobs at a rate of more than 250,000 a month. This is a faster pace than we have seen in any month of the recovery thus far (excluding Census jobs). There are few forecasters who are this optimistic about the economy's performance over the next two and a half years.

It is also worth noting that his claim that the economy was harmed by pessimism surrounding the stagflation of the late 70s is somewhat dubious. Investment, the component of output most sensitive to attitudes, was at a record share of GDP at that time. The investment share of GDP in the late 70s still has not been exceeded. 

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The lead editorial of the Washington Post today mourned the "TARP martyrs" (seriously) who lost their seats in Congress for having supported the bank bailout. The Post's main points are that we were threatened with "financial Armageddon" had TARP not passed (talk about shrill), and it really didn't cost us any money.

Starting with "financial Armageddon," let's use a little common sense. Suppose TARP had not passed. The Fed actually already had enormous power to lend money to keep the financial system operating. The most immediate threat to the system, which Fed Chairman Ben Bernanke and others highlighted, was the risk that the commercial paper (CP) market would shut down. They claimed that even healthy corporations were unable to borrow in the CP market. Since most large corporations depend on the CP market to finance their payroll and other ongoing expenses, the loss of this market would quickly cause the economy to grind to a halt.

While there is some debate as to how bad things were in the CP market at the time (the Minneapolis Fed disputes the claim that the market was shutting down), the more important point is that this issue was irrelevant to TARP. The Fed had the power to single-handedly support the CP market. In fact, the weekend after Congress approved the TARP Ben Bernanke announced the creation of a special lending facility to support the commercial paper market. So, that part of the financial Armageddon story was just a fairy tale for children, reporters and columnists, and members of Congress.

Suppose the TARP money had not started flowing and we saw the chain of bank collapses continue. The two remaining independent investment banks, Goldman Sachs and Morgan Stanley, would surely have been killed absent TARP and other special assistance from the Fed. It is all but certain that Citigroup and Bank of America would have gone belly up as well, along with many other large financial institutions.

Would this have led to financial Armageddon? Well, it surely would have created considerable disorder in the financial markets and led to a few million lawsuits, but the Fed and FDIC no doubt would have taken over these institutions to keep the system of payments operating. The Fed had a contingency plan to take over the money center banks in the 80s when they were threatened by large amounts of bad debt in Latin America. It is inconceivable that it did not have a similar plan in place following the collapse of Bears Stearns in March.

This means that "financial Armageddon" would have meant the demise of Goldman Sachs, Morgan Stanley and most of the other Wall Street titans, but probably would not have led to a qualitatively worse economic situation for the rest of us than what we actually saw. In fact, there would have been a great benefit from this financial Armageddon in that it would let the market wipe out the fast dealing high flying Wall Street gang in a single blow.

This would eliminate the culture of synthetic CDOs and naked credit default swaps that provide ever more sophisticated and expensive ways to gamble. It would also eliminate many of the huge multi-million dollar paychecks that the Wall Street boys take home every year (or week). In other words, this is not obviously a bad story.

The other misleading aspect of the Post piece is its haughty claim that the TARP did not cost taxpayers any money. It is not clear whether this is an assertion based on ungodly stupidity or is just plain dishonest.

The TARP money was a form of insurance. The vast majority of insurance policies are never paid off, but that does not mean they have no value. The point here is that the banks were on the edge of going bankrupt. Private investors would not touch them. The government, through the TARP and the Fed, gave the banks the loans and the guarantees that assured the markets that the banks would survive. This meant that private investors could trust their money with the banks. That allowed the banks to weather the crisis that they had themselves created. They are now back on their feet and again paying their "top performers" tens of millions a year in bonuses.

Does the Post really not understand that TARP money was enormously valuable and imposed huge cost on society? If, back in the fall of 2008, the government had given a thousand community groups hundreds of billions of dollars of loans, accompanied by trillions of dollars of loan guarantees, these organizations could have used this money to make loans at very high interest rates and buy up assets at bargain basement prices. In this story, there would be no risk to the community groups, since if things went badly the government would be out the money. Of course, if the economy recovered, then they would be enormously rich, with large claims on society's resources as a result of successfully betting with the government's money.  In the Post's account, the prosperity created for these community groups would have cost taxpayers nothing.

This is the story of the TARP. If the government had not been so generous with the Wall Street banks, Goldman Sachs shareholders would not have claims to $67 billion of the economy's output. Morgan Stanley's shareholders would not have claims to $32 billion of the economy's output. This is all a gift from the taxpayers to some of the richest people in the country. It is hard to believe that the Post's editorial writers do not understand this fact.

 

 

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That is what readers can infer from an article that celebrated efforts by governments to weaken public supports for workers and to undermine their bargaining power. The article is filled with vague assertions about these measures are being celebrated, for example the first sentence telles readers that"

"In the ashes of Europe's debt crisis, some see the seeds of long-term hope (emphasis added)."

It continues:

"That's because the threat of bankruptcy is forcing governments to implement reforms that economists argue are necessary to help Europe prosper in a globalized world – but were long viewed as being politically impossible because of entrenched social attitudes."

The article does not point out that there are actually sharp differences among economists on whether Europe needs to make changes to "prosper in a globalized world." Unlike the United States, which has huge trade deficits, Europe has consistently had near balanced trade.

Some countries like Germany and Denmark have consistently run large trade surpluses, in spite of having very strong welfare states. This is why many economists, including the OECD in its official assessment of member state economies, argue that strong welfare states are entirely consistent with international competitiveness. This article implies that there is a consensus among economists that European welfare states must be weakened. There is not the case.

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