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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We need reporters to do this? In the course of the report NPR assured readers that there was nothing that could be done about AIG's explosive issuance of credit default swaps (CDS) because it was an insurance company that operates in hundreds of countries. And furthermore, the federal government doesn't even regulate insurance, states do.

Did this mean that the Fed could do nothing if it chose? Where were the statutory powers that allowed the Fed to arrange the unraveling of the Long-Term Capital Hedge Fund? Neither NPR's reporters nor anyone else would be able to find any statutory authorization for this action. The Fed used its authority and its ability to threaten non-cooperative actors to force most of the major banks to join this effort.

In the same vein, if it had decided that the issuance of trillions of dollars of CDS by AIG was a problem, there were certainly steps it could have taken. For example, it could have told the major banks that they should not be buying CDS from AIG. The Fed is also allowed to talk to other regulatory agencies, like the state insurance agency in NY, which would have had authority over much of AIG's activity. The Fed opted to do nothing in this case because it did not want to do anything, not because it lacked the ability to restrain AIG.

The piece also absurdly claims that the bills before Congress will take care of the problem of "too big to fail" banks. Few analysts would agree with this assessment. The bills leave in place huge financial conglomerates that would be extremely difficult to unravel in the event of a financial crisis.

Listeners would be better served if NPR focused on making the issues surrounding the bill understandable rather than spending its brief news time telling its audience how complicated it is.

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The Washington Post (a.k.a. Fox on 15th) feels so strongly that we should reduce the budget deficit that they ran yet another front page editorial on the topic. The piece told readers in the second paragraph:

"This mounting government debt poses a painful choice for developed countries such as Britain, Japan and the United States: either a deep reordering of public expectations about everything from the retirement age to tax rates, or slower growth as record levels of borrowing crimp economic activity."

Well, that's pretty clear. The Washington Post told us in no uncertain terms that things will have to be pretty bad, no two ways about it. Only those who bothered to read to page two would find out that there is actually considerable uncertainty about the point at which debt really poses a serious burden on the economy. On page two they would discover the United States actually had a debt to GDP ratio that was nearly twice as high as it is presently. This did not prevent it from having three decades of extraordinarily rapid growth.

The Post's sharp paragraph two warning also ignores the great Citigroup profit trick that the Post applauded last week. The Citigroup profit trick involved the government buying Citigroup stock, guaranteeing the company's survival when it otherwise would have been bankrupt, then selling the stock at a profit when the price rises because of the government guarantee.

The Post warmly applauded this move and saw it as giving the government money -- a great win-win story. Of course, the government can follow the same route pretty much without limit. It can take large stakes in all sorts of companies, then guarantee the companies' debts, thereby lowering borrowing costs and increasing profits. This will raise the stock price, thereby allowing the government to sell at a profit.

The real story of course is that the economy is well below its full employment level of output. This means that it can increase output by just printing money. However, superstitions held by the people who set economic policy and write about it at leading outlets like the Post are preventing the government from taking this simple and obvious step to increase demand. So, if the straightforward route is blocked by superstition, then we effectively accomplish the same thing by using Citigroup profit trick and win great applause the Post and other deficit hawks.

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The Washington Post (a.k.a. Fox on 15th Street) told readers that: "Social Security is already draining resources from the broader federal budget, as spending on benefits has risen above this year's Social Security tax collections."

Yes, Social Security benefit payments exceed the money currently being collected in Social Security taxes. The gap is being made up by the interest it earns on the $2.5 trillion in government bonds held in the Social Security trust fund. It is peculiar to describe spending money from its interest earning (or for that matter the bonds themselves) as "draining resources from the broader federal budget." However, if that is the standard the Post wants to use, then we should say that any individual or entity that draws interest from the federal government on bonds it holds is also "draining resources from the federal budget."

This means that billionaire Wall Street investment banker and long-time foe of Social Security Peter Peterson is also draining resources from the federal budget by the Washington Post standard (assuming that he owns some government bonds. No doubt the WAPO will have a story on this fact sometime in the near future.

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That is the only thing that readers can conclude from a statement in an article on Federal Reserve Board Chairman Ben Bernanke's urgings to reduce the deficit. The WSJ told readers that: "The government is running a budget deficit in excess of about $1.3 trillion, more than 10% of the nation's total economic output." Of course, the Commerce Department is telling us that GDP for the fourth quarter of 2009 was $14.5 trillion, which would mean that the deficit is less than 9.0 percent of GDP.

This trouble with numbers carries over to the substance of the piece which is supposed to be that the country faces an imminent crisis in being able to sell its debt. It warns readers that: "yields on 10-year Treasury notes have risen from around 3.25% in late November to just under 3.9% today, in part because of concerns in credit markets about the mountains of government debt investors are being asked to buy to fund U.S deficits."

Hmmm, we are paying 3.9 interest because there are concerns in credit markets about "mountains of government debt." Were investors also concerned about "mountains of government debt" when they demanded interest rates of more than 6.0 percent to hold federal debt back in 2000? Oh yeah, we had a $250 billion surplus back in 2000.

The reality is that the WSJ is just telling us that they don't like the government's debt. The markets did not tell them why interest rates rose from the extraordinarily low levels of last November. They are just making this stuff up and feeding it readers as truth.

We expect this sort of thing on the WSJ editorial page. We expect better in the news section.

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The NYT reports that China's government signed a deal with the state of California and General Electric to provide engineering expertise and high tech parts for the construction of high-speed rail. This is a fascinating and totally predictable story which cause great pain to many purveyors of the economic conventional wisdom (CW).

China has been building high-speed trains, the United States hasn't. This means that the country has substantially more expertise in this area than the United States. As a result the transfer of this green technology will go from China to the United States, the opposite direction assumed by purveyors of the CW.

More generally, this story shows the absurdity of the assumption of the purveyors of the CW that somehow the U.S. will transfer all its grunt work (i.e. manufacturing) to the developing world and leave the high tech stuff for our smart workers. The reality is that the developing world has hundreds of millions of smart workers who are able to do everything that our smart workers do, but are willing to accept much lower wages. If we subject our more highly educated workers to the same sort of international competition as we have subjected our low-wage workers, they will also lose. This will only change when currencies adjust and wages in the developing world move closer to U.S. levels.

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Steven Pearlstein often has insightful columns, not today. He discusses a conference he attended in which a repeated theme was how the media contributed to the crisis with its poor reporting. He then comments: "although it's a bit overdone, I'll admit there is a dollop of truth in it."

A "dollop?" How about an enormous ocean full of truth to it and Pearlstein continues to contribute to the crisis today by covering up the earlier failure. He tells readers that:

"Three years after the onset of what was then thought of as the "subprime crisis," there remarkably is still no consensus on why it happened, who is to blame, how necessary the government bailouts were and what needs to be done to prevent such a cataclysm from happening again. Over time, the issues have been overwhelmed by populist anger, infused with political ideology, distorted by partisan maneuvering and special-interest pleading, and ultimately eclipsed by economic recovery."

Yeah, it's all really really complicated. Except it isn't.

Nationwide house prices had diverged from a 100-year long trend, increasing by more than 70 percent in real terms. There was no remotely plausible explanation for this run-up. What is hard to to understand to about this? What is complicated? Third grade arithmetic was all that was needed. It's simple, not complicated.

The run-up in house prices was driving the economy. This was also really easy to see. The government publishes GDP data every quarter. The data showed that housing construction had exploded as a share of the economy. You just had to look at the data. It's simple, not complicated.

The data also showed that consumption was booming and savings had fallen to near zero. This was driven by the well-known housing wealth effect. It's simple, not complicated.

It was also easy to see the explosion in subprime and Alt-A loans that people were using to buy homes they could not otherwise afford. These loans were sure to reset at higher interest rates. This works until house prices stop rising. It's simple, not complicated.

And, it was easy to see that house prices would stop rising. Vacancy rates were running at record levels. There is a concept called "supply and demand" in economics and the data showed that we had serious amounts of excess supply. It's simple, not complicated.

And when house prices started to fall, we knew that millions of loans would go bad, construction would plummet and consumption would fall back to more normal levels. This implied a really bad recession and serious financial problems. It's simple, not complicated.

So, Pearlstein is badly misleading reading when he tells us that it is all very complicated. Obviously the buffoons and hacks who either could not see the bubble or deliberately misled the public about it have good reason to tell everyone that it is all very complicated, but it isn't and was not. They did not do their job.

Include the Post high on the list of those who did not do their job. They had no space in their pages for anyone warning of the dangers of the bubble. The paper's main source for information on the housing market was David Lereah, the chief economist of the National Association of Realtors and the author of Why the Real Estate Boom Will Not Bust and How You Can Profit From it.

The Post and the rest of the media failed disastrously at their job to inform the public and they continue to do so. It's simple, not complicated.

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David Leonhardt had a column discussing overuse of expensive medical care in the NYT today. Remarkably, this discussion did not mention the effect of patents in complicated decisions on treatment and raising costs.

Patents are essential to this discussion for two reasons. First, drugs and medical tests that are very expensive are generally expensive because of government granted patent monopolies, not their inherent cost. For example, a new generation of cancer drugs that can cost tens of thousands per year would be relatively cheap in the absence of patent protection. These drugs were expensive to develop, but once they have been developed, the production is cheap. By forcing patients to pay the high patent protected price, an otherwise simple decision (use the cheap drug) can instead be made very complicated.

The other reason why patents play such an important role in this discussion is that they give a party (the patent holder) a huge stake in misrepresenting the issues. Because drug companies or makes of medical equipment stand to make patent rents on the use of their product, they have an enormous incentive to promote its use even in cases where it may not be appropriate. This can lead to overuse and misuse, especially since the patent holder has the most information on their product. They may conceal evidence that it is less beneficial than claimed or even that it is harmful.

This column is the sort of place where it would be expected that readers would find a serious discussion of the role of patents in complicating decisions on appropriate care. It is disappointing that this issue is not addressed.

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California has done some really really stupid things (like a tax credit for first time homebuyers), but the NYT did the state and its readers a disservice in going after California's pension fund liabilities. The basic story is that if you assume a 4.14 nominal rate of return on pension fund assets, then the state's pension liabilities look really really bad.

The big question that readers should ask is, so what?

There have been few people who have been more critical of assuming exaggerated market returns than me, but 4.14 percent nominal? Anyone want to take a bet that California's pension funds will do better than this?

Look, the market has plummeted from its prior levels. This is good news for future returns. Lower price to earnings ratios open the door for higher future returns. The logic is simple: you are paying much less for each dollar of profits. For this reason, the assumption of 4.14 percent average nominal returns (that gives us just over 2.0 percent real, assuming a 2.0 percent inflation rate) is ridiculously low.

Suppose we assume that pension liabilities grow at the nominal rate of 5 percent a year. If we sum the liabilities over 40 years, using a 4.14 percent discount rate gives a 70 percent higher cost than using a 7.0 percent discount rate. Stocks have historically provided a real return of 7 percentage points above the inflation rate, so assuming a nominal return of 7.0 percent for the mixed portfolio is hardly unreasonable.

In short, the story of outsized pension liabilities in this article is driven largely by a ridiculous assumptions about pension returns. There is no reason whatsoever that the state of California should use this 4.14 percent discount rate in assessing its pension liabilities. This calculation would lead it to exaggerate its pension liabilities and therefore raise taxes or cut pensions and/or other spending unnecessarily.

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Okay, it's not quite that bad, but when someone who pretends to be serious wants his readers to celebrate the fact that: "the average American worker is nearly 10 times more productive than the average Chinese worker," it's getting pretty silly. (Actually it's probably closer than 7-8 times, but this is David Brooks we're talking about.)

People in the United States are used to comparing their living standards to countries like Canada and Germany, not China. While China is a rapidly developing country, it is still a relatively poor country in a process of catching up. It's more than a bit silly to tell people in the United States that our productivity is many times higher than that of a poor peasant agricultural worker in central China.

Brooks seems fascinated by the fact that our income is on average projected to rise. This is true and always has been true and it is true for almost every other country in the world. Incomes rise, incomes rise, incomes rise. Let's say that a few thousand more times so that no columnist will ever again write it up as though it is news.

This is the normal state for economies. Incomes rise through time because people become more educated, we get more and better capital, and our technology improves. The real issue is the rate at which incomes rise. For most people in the United States the rate of increase in income or living standards (this can also be the result of more leisure) has been extremely slow in the last three decades. Projections show that rising health care costs will eat up much of the projected gains in income over the next three decades. This is the sort of issue that serious people would look at.

Instead, Brooks touts our growing population -- hey we should be like Congo or Ethiopia, they even faster population growth. It's hard to know what planet Brooks lives on, but on this one, population growth is not a measure of prosperity. In fact, in a world where there is a desperate need to limit greenhouse gas emissions, population is decidedly unhealthy.

Well, Brooks did warn serious people to not read his column. They would be well advised to take this advice.

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I don't ordinarily use BTP for addressing items that mention me or my work, but I'll make an exception in the hope of getting a good exchange going. Brad DeLong was good enough to begin a review of my book False Profits on his blog. After graciously giving me credit for recognizing the housing bubble and the dangers it posed, Brad goes on:

"But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

Okay, let's go point by point.

  1. "Its argument about how excessively-low interest rates caused the housing bubble is exaggerated."

    That doesn't sound like my book. I argued that the weak economy caused by the crash of the stock bubble demanded stimulatory policy. Low interest rates were the right policy -- we needed them to recover from the stock bubble. However, this did create an environment that was conducive to the growth of bubbles. If the Fed had kept the Federal Funds rate at 5.0 percent I feel pretty confident in saying that we would not have had a housing bubble -- very high unemployment, but no housing bubble.

  2. "I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity."

    Let's see, my policy prescription was to have every last staffer at the Fed devoting all of his/her time to documenting the evidence for the bubble and the dangers it would cause to the economy. I would have had Alan Greenspan use his congressional testimonies and other public speaking engagements to warn of the risks of the bubble. This doesn't mean mumbling "irrational exuberance," it means carefully showing with charts and graphs how house prices have followed an unprecedented and unsustainable path. He also should have warned explicitly what would have happened to the banks that had made big bets on the bubble when it burst.

    In addition, they should have made full use of their regulatory power (including working with other regulators) to crack down on the issuance and securitization of junk mortgages. The "who could have known" line is crap. These loans were being issued by the million, there is no way Greenspan could not have known about them.

    Would this have worked? Brad for some reason is very confident it would not have. It certainly would have been nice if the Fed had tried (what was more important?), then we would both know for sure.

    As a last resort I would have raised interest rates. I hate to throw people out of work (except Wall Street bankers and economists), but it would have been better to preemptively burst the bubble rather than let it run its course and be where we are today.

  3. "It overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

    There is a pretty direct line from the falloff in residential construction due to the overbuilding caused by the bubble, the falloff in non-residential construction due to the overbuilding caused by the bubble, and the falloff in consumption as a result of the lost housing bubble wealth and where the economy is today. I don't see much obvious room for a financial crisis in this explanation. The crisis may have brought the downturn on more quickly, but it seems that the basic problem is the loss of the demand generated by the bubble.

    I have a strong ally in this argument: Spain. Spain did not have a financial crisis, but it now has 19 percent unemployment, the highest in the EU. The explanation is that Spain had a really huge housing bubble. It is not easy to find new sources of demand to replace 8-10 percentage points of GDP.

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