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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In an article that discussed an IMF report on new taxes on the financial industry the Washington Post referred to a "financial activities Tax" (FAT) proposed by the IMF and said that: "The IMF's proposed fees would raise more money than the other options under debate, with an emphasis on discouraging the type of risk-taking that caused the recent crisis."

This is not true, a financial transactions tax (FTT), like the ones put forward in recent bills by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio, could raise more than $100 billion a year. This is considerably more money than the amount that would be raised by the FAT at the levels suggested by the IMF.

Remarkably, this article contains no mention of the FTT even though one of the main purposes of the IMF report was to assess its merits. The IMF unambiguously concluded that an FTT was an administratively feasible tax, directly contradicting one of the main objections put forward by many officials in the Obama administration and other opponents of the tax. Although the IMF report indicated its preference for the FAT, its assessment of the FTT's feasibility undermines one of the main arguments against the tax. This fact should have been noted in the article.

 

 

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That would have been an appropriate title for an article describing North Dakota Senator Kent Conrad's plan for sharp cuts in the budget deficit over the next four years. Conrad's plan would reduce the projected 2015 deficit by approximately 1.6 percentage points of GDP more than President Obama's budget. Since most projections still show the economy to be well below full employment levels of output by this year, the cuts in spending and higher taxes in Senator Conrad's plan will reduce the level of output. If we assume an average multiplier of 1, then output will be 1.6 percent lower in 2015 than would otherwise be the case. If employment falls by the same amount, then Senator Conrad's plan would throw roughly 2.3 million people out of work.

It is worth noting that our children will pay a substantial cost under Senator Conrad's deficit reduction scheme. He proposes especially large cuts for the Pell Grant program that helps children from moderate income families pay for college.

At one point, the article describes President Obama's plan to extend President Bush's tax cut for middle-income families and other tax measures as "expensive tax breaks." The more normal description in news stories is "tax breaks."

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Washington Post columnist Dana Milbank told readers that: "by the time President Obama faces reelection in 2012, there should be, as there was in 1984 and 1996, a beautiful sunrise on the horizon: Three years of solid economic growth, unemployment down to about 7 percent."

That's really good to hear. Unfortunately, almost no economists agree with Mr. Milbank. The consensus forecast is for extremely slow growth over the next two years. The Congressional Budget Office projects that the unemployment rate will still be close to 8.0 percent -- a level higher than the peak in the prior two recessions -- by 2012.

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It doesn't seem they can. They told readers that Colombia's GDP has doubled since President Uribe took office in 2002. That's not what the IMF says. According to the IMF, the increase has been just over 40 percent during this period. That's respectable growth, but it sure is not a doubling of GDP.

Calculating real GDP is a recurring problem at top media outlets. In December of 2007, in order to argue that the case that NAFTA had been a great success, a Washington Post editorial told readers that Mexico's GDP had quadrupled between 1988 and 2007. In reality, the increase had been just 84 percent. While a huge "nevermind" would have been in order, the Post lacked the integrity to print a correction and own up to this mistake.

 

[Addendum: BusinessWeek has corrected its mistake. We're still waiting on the Post.]

 

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David Leonhardt devoted his column today to an analysis of the relative merits of owning versus renting. It is useful question to raise, since many policy types have pushed homeownership in situations where it was virtually certain to lead to bad outcomes. (Did anyone lose their job for getting moderate income families to buy homes at the peak of the bubble, 2004-2007?)

While this is the right question, Leonhardt's math is off. He assumes a 20 to 1 price to rent ratio leaves a rough balance between owning and renting. In fact, the ratio would be closer to 15 to 1, it's long-term average.

The arithmetic is straightforward. The average real interest rate on mortgages is somewhat over 4.0 percent. Property taxes average 1.0 percent, as do the combination of maintenance costs and insurance. This brings average real annual costs to 6.0 percent of the sale price. Then there are turnover costs (realtor fees and various closing costs) that average roughly 10 percent of the sale price on a round-trip basis. The median period of homeownership is 7 years, which gives a cost of 1.4 percent a year, raising the total to 7.4 percent.

Even if the mortgage tax deduction knocks this down by a percentage point, this still leaves annual costs at 6.4 percent of sale price -- much closer to 15 to 1 ratio than Leonhardt's 20 to 1 ratio.  (A full percentage point tax benefit would be very high -- the actual tax benefit will be based on the difference between tax deductions including mortgage interest and the standard deduction. This will in the vast majority of cases be far less than the full mortgage interest deduction, since the overwhelming majority of homeowners would take the standard deduction if they were not owners.)

 

 

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NPR had a piece on regulating derivatives this morning in which it presented the industry view that effective regulation will cause the industry to move offshore. The show should have brought on an economist to denounce this protectionist view and the harm that it implies for the economy.

There is no more reason for people in the United States to be concerned about buying derivatives abroad than we are about buying shoes and clothes from abroad. If other countries choose to attract trade in derivatives with a more poorly regulated financial system -- implicitly having their taxpayers assume the risk of a meltdown (e.g. Iceland) -- then there is no reason that we should not simply buy our derivatives from these countries and concentrate our production on areas in which we enjoy a comparative advantage. NPR should have included the economist's position in this segment.

 

 

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Budget cutbacks at the state and local level make the downturn worse by reducing demand. This is econ 101. The NYT should have found someone to make this point so that readers would recognize that the members of Congress who refuse to allow more spending to prevent these cutbacks are raising the unemployment rate.

--Dean Baker

 

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Washington Post columnist Robert Samuelson makes a habit of using sleight of hand to promote fears about the budget deficit. He was in fine form yesterday in a column that argued that a value added tax offered little hope of addressing the deficit problem.

Samuelson told readers:

"By 2020, it could reach 25.2 percent of GDP and would still be expanding, reckons the Congressional Budget Office's estimate of President Obama's budgets. In 2020, the deficit (assuming a healthy economy with 5 percent unemployment) would be 5.6 percent of GDP. To cover that, taxes would have to rise almost 30 percent"

A 30 percent increase in taxes sounds pretty scary (that's percent, not 30 percentage points), but it is also beside the point. There is no reason to balance the budget in 2020 or ever. The key point is that the debt to GDP ratio cannot be growing indefinitely. To get the deficit down to a level that is consistent with a flat or declining debt to GDP ratio we would need to bring the deficit down to about 3.0 of GDP. The revenue needed to meet that target would involve a tax increase of a bit more than 10 percent or about 2.6 percentage points of GDP. That is not trivial, but not especially terrifying. We have been there before.

The problem is that once you move beyond the cheap tricks, Samuelson really doesn't have much of a story. Hence the need for cheap tricks.

 

--Dean Baker

 

 

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The folks who got it wrong when the housing bubble was growing seem determined to prove to the world that they are incapable of learning anything. The latest tales of Goldman designing CDOs are fascinating in that they reveal the incredible level of corruption at Goldman and on Wall Street more generally, but it was not the CDOs that gave us 10 percent unemployment.

Unemployment soared because demand collapsed. And the reason that demand collapsed is because housing bubble wealth disappeared. And housing bubble wealth disappeared -- well, because it was a bubble that was not supported by the fundamentals.

For the 87,865th time, the collapse of the bubble led to a falloff in annual construction (residential and non-residential) spending of more than $600 billion. The loss of $6 trillion in housing wealth led, through the housing wealth effect (this isn't radical -- it is as old an economics doctrine as you'll find) to a loss of close to $400 billion in consumption demand. That gives a combined loss in demand of more than $1 trillion and hence a really bad recession.

This story has nothing directly to do with CDOs. Insofar as CDOs and other games helped to drive the bubble beyond the levels it would have otherwise attained then they made the crash worse than it otherwise would have been, but the CDOs were not directly the problem. It was the bubble.

The folks who played games on Wall Street should be put safely behind bars for long periods of time, but it is important to know that the real story of this crisis was not the complex shenanigans of the Goldman gang. The real story was a huge bubble that was easy to see and guaranteed to burst. The fact that those involved in making and reporting on economic policy somehow did not see the bubble was a failure of immense proportions that should cost many many people their jobs.

 

--Dean Baker

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The Wall Street Journal told readers that the country will face a serious shortage of doctors in the next decade. It notes that in principle the country could bring in more foreign doctors, however, U.S. rules require foreign doctors to do a residency in the United States. Since U.S. residency slots are limited, the availability of foriegn-trained physicians will not help.

This article is remarkable because it does not include any quotes from economists about the enormous cost that the economy is being forced to bear as a result of the extreme protectionism used to maintain doctors' salaries. It would not be difficult to design residency programs in other countries that met U.S. standards. (Even a doctor should be smart enough to do that.) We can also include a subsidy to the countries of origin of foreign-trained physicians to ensure that they can train more than enough doctors to make up for those that come to practice in the United States.

This could hugely increase the supply of doctors in the United States. This would lower the wages of physicans and reduce the cost of health care. This article should have been reported as an example of protectionism by a powerful special interest group being carried to absurd levels (e.g. Buy American policies times 1000), but instead the issue was never even raised.

 

--Dean Baker

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