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 New York Times had a piece explaining what austerity (i.e. cuts in social services) has meant for the United Kingdom. While it is a useful account, at one point the piece tells readers:

"The austerity measures were imposed to eliminate budget deficits that ballooned to unsustainable levels in the aftermath of the financial crisis."

This seems to imply that the cuts were somehow economically necessary. This is not true. At the time, the UK had high rates of unemployment and large amounts of underutilized resources. There was no reason that it could not have continued to run deficits that were high because the economy was weak.

If the government had continued to run large deficits as the economy strengthened and approached full employment levels of output, it would have created inflationary pressures. This presumably would have resulted in the Bank of England pushing up interest rates to slow the economy, with negative hits to investment, housing, and the trade deficit.

However, at the time the budget cuts were put in place, there was no reason for the government to reduce its deficit. To say that it could not run deficits of that size forever is true in the same way that someone driving west in New Jersey can't keep going that way because they will eventually fall into the Pacific ocean. But that is not the reason most people in New Jersey stop driving west.

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Neil Irwin had an interesting Upshot piece pointing out that concerns about budget deficits have receded dramatically in recent years. This is, of course, true, as politicians of both parties have largely given up their concerns about the deficit. Many prominent economists have also moved away from previous positions that held that budget deficits were a major problem.

While the government can clearly run much larger budget deficits, without negative economic consequences, than many economists had previously viewed possible, for some reason the role of the trade deficit in this story is never mentioned. This is really front and center.

As every intro economics student learns, the components of GDP are consumption, investment, government spending, and net exports. If net exports are a large negative, in other words, we are running a large trade deficit, it means that GDP would be much lower, other things equal. If none of the other components rises, then we would have a large gap in demand.

It is this gap in demand that creates the room for larger budget deficits, without triggering inflation. If we envision a world where trade was balanced, instead of the United States running a $630 billion annual trade deficit (3.1 percent of GDP), we would almost certainly be seeing rapidly rising inflation with current budget deficits, unless the Fed offset the impact with high interest rates.

It is remarkable that the role of the trade deficit is almost always left out of this discussion. It is very basic economics.

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An article on United States trade policy with China dismissed the idea that the United States should push China to raise the value of its currency. It told readers:

"Mr. Trump’s advisers have also pressed China to refrain from further devaluing its currency to lift its economy as American tariffs bite. A drop in the value of the Chinese currency in the past year has already neutralized much of the economic effect of the 10 percent tariffs that Mr. Trump placed on roughly $200 billion of Chinese exports to the United States, said Eswar Prasad, a professor of international trade at Cornell University.

"Yet requiring China to manage its currency and keep it above a certain level would be a striking shift from the policy of past administrations, which have tried to encourage China to let the value of its currency rise and fall with market forces.

"'It’s a very odd way to approach this,' Mr. Prasad said, 'to tell China, after having told them for all these years, 'Let your currency be determined by market forces,' to say, 'Let your currency be determined by market forces only if it is appreciating.''"

This section implies that China is doing nothing now to hold down the value of its currency. However, China holds a huge amount of international reserves, with the sum coming to more than $4 trillion, counting its sovereign wealth fund. Earlier this month, the New York Times ran a piece noting Russia's extraordinary level of reserves, noting it had more than three times the reserves recommended by the IMF, relative to the size of its economy.

China's reserves are even larger relative to the size of its economy than Russia's, so unless the NYT has gone full Trump, China must have more than three times the reserve recommended by the IMF for a country its size.

This matters, because China's holdings of excess foreign reserves keeps down the value of its currency relative to the dollar and other currencies. This is similar to the story of the Federal Reserve Board's holding of assets. While the Fed long ago ended its quantitative easing program, which involved buying assets, it continues to hold more than $3 trillion in assets, which most economists agree is a factor keeping down long-term interest rates. In the same vein, even though China is no longer buying up large amounts of dollars and other foreign exchange, its holdings of foreign currencies continue to keep down the value of the Chinese yuan.

All of this should be pretty straightforward, but for some reason, the NYT seems determined to obscure issues here.

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(This post first appeared on my Patreon page.)

It’s not uncommon to read new stories that quite explicitly identify economic mismanagement. For example, news reports on the hyperinflation in Zimbabwe routinely (and correctly) attribute the cause to the poor economic management by its leaders. We will see similar attributions of mismanagement to a wide range of developing countries.

One place we will never see the term mismanagement, or any equivalent term, applied is in reference to the austerity imposed on the eurozone countries by the European Commission, acting largely at the direction of the German government. In fact, major news outlets, like The New York Times, seem to go out of their way to deny the incredible harm done to eurozone economies and to the lives of tens of millions of people in these countries, as a result of needless austerity.

A decade ago it would at least have been an arguable point as to whether austerity, meaning budget cuts, in the wake of the Great Recession, was reasonable policy. There was some research suggesting that the boost to confidence from lower budget deficits could spur enough investment and consumption to offset the impact on demand of reductions in government spending.

However, since then we have far more evidence on the impact of deficit reduction in the context of an economy coming out of recession. There have been numerous studies, most importantly several from the International Monetary Fund’s research department, which show that lower deficits in this context slow growth and raise unemployment.

Furthermore, they show that periods of high unemployment have a lasting impact as a result of workers losing skills and companies and governments foregoing investment in a downturn that they would have undertaken if the economy were closer to its potential level of output. This means that insistence on deficit reduction not only led to one-time drops in output and employment but could reduce potential output by trillions of dollars over subsequent years.

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The Washington Post had a rather confused piece that complained that investment encouraged by accelerated depreciation, which was a provision of the Trump tax cut (also the Obama stimulus), is "helping companies replace workers with machines." This is reported as though it is some sort of scandal, when it is in fact precisely the point of this provision.

The stated goal of the Trump tax cut was to promote investment. This was their rationale for having the bulk of the tax cut go to businesses. Their argument was that a lower tax rate would provide businesses with more incentive to invest. More investment would lead to more rapid productivity growth. If workers got their share of gains in productivity, then they would benefit from having higher wages.

The key question in this story is whether the tax cut actually led to more investment. The evidence to date is that it has had at most a minimal effect on investment, with investment running slightly higher in 2018 than before the tax cut in 2017. There certainly has been no boom. There also is zero evidence that it led to any uptick in productivity growth, as productivity growth remained very slow through the year. So, by their own standard, the tax cut seems to be failing badly.

However, if we did see more investment and productivity growth, it would mean displacing workers. Higher productivity means more output can be produced with the same number of work hours, or alternatively, the same output can be produced with fewer work hours. (Fewer work hours doesn't have to mean fewer workers. In other countries, much of the gain from higher productivity has been realized in the form of shorter work years. Workers have 5–6 weeks a year of vacation, paid family leave, paid sick days, and other forms of paid time off.)

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(This post first appeared on my Patreon page.)

I don’t consider myself an MMTer, but there is a basic Keynesian concept which has been associated with MMT, which is both true and important. For the federal government, taxes are not about raising revenue, taxes are about reducing consumption to prevent inflation.

The point is that the federal government does not need taxes for revenue since it can just print money. It instead taxes to create the room in the economy for government spending. This view is sometimes wrongly taken as a “get out of jail free” card, where the government can spend whatever it wants without worrying about raising revenue.

That could be true in a deep downturn. However, if the economy is near its full employment level of output, where additional demand will lead to rising inflation, we are pretty much back in the world where we need taxes to offset spending. Any major increase in government spending will lead to higher inflation unless we have higher taxes or have some other mechanism to reduce demand in the economy.

We can, of course, argue about how close the economy is to its full employment level of output. This is not easy to determine and the mainstream of the economics profession has badly erred on the high side in arguing that we were near full employment, when in fact the unemployment rate could (and did) go much lower.

But leaving the argument about where we hit full employment aside, we still have the basic truth that when we are near full employment, we do need higher taxes to offset additional spending. A small qualifier is worth adding here. We have a $20 trillion economy. We don’t have to worry about inflation because we spend another $2 billion or $5 billion a year on some program we think is important. (That would be 0.01 percent to 0.0025 percent of GDP.) We do have to worry about inflation if we want to spend another $200 billion a year on a big education or health care program.

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CBS News had a piece warning its audience about the problems of large government debt. It noted projections of rising US government debt, commenting:

"The only countries with a higher debt load than the US are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan's lost decade of economic stagnation is a mainstay of economic textbooks."

The first three countries are all in the euro zone. They do not have their own currency, but rather must adhere to rules set by the European Central Bank and the European Commission. Their situation is comparable to that of a state in the United States. No one disputes that it would be a big problem for Utah or California to run up very large debts.

Japan is the country most comparable, but the textbooks CBS refers to seem not to be very reliable. According to the IMF, Japan's per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States. 

In spite of having a debt-to-GDP ratio that is more than twice as large as the United States, the country does not provide evidence to support the warnings CBS gives about large deficits. Its long-term interest rates are near zero, meaning the debt is not crowding out investment. Its interest payments on its debt are roughly 0.5 percent of GDP ($100 billion in the United States), indicating that they are not crowding out other spending priorities. And, its inflation rate is just over 1.0 percent, indicating that profligate spending has not led to a problem with inflation. 

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The New York Times ran a piece headlined "Europe's middle class is shrinking. Spain bears much of the pain." The gist of the piece is that the middle class in Europe, and especially Spain is disappearing as the result of some mysterious process.

It tells readers:

"Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. By summer, they figure they will no longer be able to pay their mortgage." [The "they" refers to a formerly middle class couple who lost jobs in the downturn and had to find new jobs at far lower pay."

The piece continues:

"It is a precarious situation felt by millions of Europeans.

"Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union, echoing a similar decline in the United States and reversing two decades of expansion. While middle-class households are more prevalent in Europe than in the United States — around 60 percent, compared with just over 50 percent in America — they face unprecedented levels of vulnerability. ...

"The hurdles to keeping their status, or recovering lost ground, are higher given post-recession labor dynamics. The loss of middle-income jobs, weakened social protections and skill mismatches have reduced economic mobility and widened income inequality. Automation and globalization are deepening the divides."

Just about every part of this story is wrong, as a quick look at the data would show. To start with, Spain and most other European countries are not growing faster than before the recession. According to the IMF, Spain's economy grew at a 2.7 percent rate in 2018 and is projected to grow 2.2 percent this year. By comparison, it grew at an average rate of more than 3.9 percent in 2006 and 2007, the last two years before the recession.

Spain's per capita GDP was just 3.0 percent higher in 2018 than it was in 2007. By comparison, coming out of the Great Depression in the United States, per capita income in 1940 was more than 8.0 percent higher than in 1929.

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I guess we can always count on The Washington Post to print misleading pieces calling for cuts in Social Security. After all, what are newspapers for? Anyhow, Robert Samuelson gives us one of his usual tirades, misrepresenting most of the key items in the debate.

The basis of his outrage is a bill proposed by Representative John Larson to increase Social Security. The proposal is for a modest overall increase in benefits with a larger increase for the poor. The proposal also calls for indexing benefits to a cost of living index designed to monitor the expenses faced by seniors, instead of the population as a whole. Samuelson complains that this could lead to higher benefits.

The gist of Samuelson's argument is that seniors are doing very well right now. He cites a recently done study by C. Adam Bee and Joshua Mitchell, two economists who were at the Census Bureau at the time, that found, based on tax filings that seniors had higher incomes than we had realized.

While the study did show seniors were doing better than earlier survey data, the picture is not altogether positive. For example, the average income for seniors in the bottom decile is just $7,500, for the second decile it's $13,000. It probably would not seem too outrageous to most people to want to give these people somewhat higher benefits. Even for the 5th decile, the average income was only $32,500. (These figures are all in 2012 dollars, so add about 15 percent to put them in today's dollars.)

But perhaps more importantly, the main reason Bee and Mitchell found higher income levels than previous data is under-reported pension income. Samuelson misleading reports the issue by saying that most of the "underreporting involve income from IRAs, 401(k) plans and traditional pensions." Actually, for middle-income households under-reporting of 401(k) income was pretty much irrelevant. The problem was missed pension income.

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Of course, he wouldn't do that. Steven Rattner isn't concerned about the hundreds of billions (perhaps more than $1 trillion) that the government redistributes upward each year in the form of patent and copyright rents. These rents, which come to close to $400 billion annually for prescription drugs alone, are a direct and intended result of the monopolies that the government gives companies and individuals as a way of paying for innovation and creative work.

But Steven Rattner isn't concerned about this enormous burden on our children, which makes folks like Bill Gates incredibly rich. Instead, he is worried about the much smaller burden of the interest on the debt, which currently nets out (after deducting money rebated by the Federal Reserve Board) to around $200 billion a year or 1.0 percent of GDP. He also is not concerned about the fact that the income of our children may be $1 trillion a year less, which has the same effect on living standards as paying another $1 trillion a year in higher taxes ($3,000 per person), because of the austerity that people like him demanded in the years following the Great Recession.

For some reason, no matter how much damage these people cause and how little sense their arguments make, we are still supposed to take their views seriously. Any ideas why?

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