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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- Written by Dean Baker
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.Add a comment
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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