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 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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment
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.Add a comment