Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

In an article reporting on the plunge in new home sales reported for July, the NYT wrongly told readers that "July was the first month that home buyers could no longer qualify for a tax credit of as much as $8,000, which analysts said may have contributed to the decline." The end of the tax credit was a major factor in the plunge in existing home sales reported on Tuesday, but not the drop in new home sales.

The existing homes series refers to the closings on existing home sales. These sales were typically contracted 6-8 weeks earlier. While the homes that were closed in June likely qualified for the homebuyers tax credit, this would not be true of the existing homes that closed in July.

However the new home sales refer to contracts signed for selling new homes. May, not July, was the first month in which contracts would not qualify for the tax credit.

Add a comment
Good piece in the NYT about enforcing the Volcker Rule, which limits the extent to which banks can trade on their own account. Add a comment

The copy editors at the NYT are apparently on vacation. The NYT told readers that: "the nonpartisan Congressional Budget Office (CBO) reported that the policies had lifted growth in the second quarter by up to 4.5 percent."

No, that's not quite right. CBO reported that the cumulative gain to GDP due to the stimulus by the second quarter of 2010 might have been as much as 4.5 percent. This does not refer to the growth rate in the second quarter itself.

Add a comment

The NYT has apparently decided to give up on the old-fashioned distinction between news and opinion. They recently ran a piece by Matt Bai insisting that there is no alternative to cutting Social Security to deal with the federal debt. The piece includes the bizarre assertion that Treasury bonds are "often referred to as i.o.u.’s."

This is, of course, absurd. The business pages of major newspapers are full of references to Treasury bonds all the time. The bonds are never referred to as "i.o.u.'s." The article then includes the bizarre assertion about government bonds that the only way for the government to make good on the bonds it has outstanding: "is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases — none of which seem like especially practical options for the long term."

Bai's opinion is radically at odds with perceptions in financial markets. These markets view it as almost inconceivable that the government will not honor its bonds, which is why the interest rate on long-term bonds is near its lowest level in the last 60 years.

While presenting what is supposed to be a non-partisan view of Social Security, remarkably, Bai never once examines the program's finances nor the financial situation of the people who would experience the cuts that are being considered.  

Add a comment

How else can we explain the fact that in a country suffering from the worst unemployment crisis in 70 years, CNN Money headlines a piece: "America's Debt Crisis"? CNN Money probably does not have access to financial market information. Otherwise it would know that the interest rate on U.S. government bonds are near 60-year lows.

This suggests that financial markets are not at all worried about U.S. government debt. The debt crisis exists only in the heads of people who are either unaware of financial markets or who are trying to spread fear in order to get political support for things like cutting Social Security.

The piece notes the opposition of many groups to cuts to Social Security, but then tells readers that: "nonpartisan deficit experts say the debt trajectory for the country is so worrisome that nothing in the federal budget can be off the table. That includes Social Security, which will only be able to pay out roughly three-quarters of promised benefits to future retirees by 2037."

This might be true, but nonpartisan deficit experts also point out that if the United States fixed its health care system then it would have massive budget surpluses as far as the eye can see. Nonpartisan deficit experts also point out that Social Security payments are already relatively meager compared to what most other countries pay their retirees. Nonpartisan deficit experts also point out that most retirees have very little other than Social Security to support themselves. And, they point out that Social Security's shortfall can be relatively easily made up with revenue increases that are comparable to those put in place in the decades of each the 1950s, the 1960s, the 1970s, and the 1980s.

It appears as though CNN Money only spoke to nonpartisan deficit experts who wanted to cut Social Security.

 

Add a comment

That should have been the headline of an article reporting on Representative John Boehner's call for President Obama to fire his top economic officials. The article reports that Boehner asserted: "business operators around the nation were anxious about investing in an uncertain business climate given the new policies coming out of Washington. 'The prospect of higher taxes, stricter rules and more regulation has employers sitting on their hands.'"

The data show businesses are actually increasing investment at a rapid pace. Investment in equipment and software has risen at more than an 18 percent annual rate over the last three quarters. It is newsworthy that Mr. Boehner is apparently unaware of the most basic economic data, since he is making strong assertions that are clearly at odds with reality. Mr. Boehner's ignorance of the state of the economy should have been a prominent item in the news.

 

Add a comment

The Post told readers that the July plunge in existing home sales "was nearly twice as large as forecast." This is a case where the Post apparently relied on the views of incompetent analysts.

The 27 percent drop in sales is very much in line with what would have been expected given the sharp falloff in applications for purchase mortgages in May. The vast majority of people who buy homes need to get a mortgage. If they are not applying for mortgages, then the odds are that they are not buying a home. Given the 6-8 week lag between applying for mortgages and the closing of a home sale, it was entirely predictable that this plunge in sales would show up in the July sales data. 

The only surprising part of this picture is that professional economists somehow were surprised. Of course most of these people also missed the $8 trillion housing bubble.

Add a comment

The NYT must be having a tough time getting material in the late days of summer. How else to explain an oped from Joseph Massey and Lee Sands that claims that imports from China, and apparently also imports from Japan, do not depend on their price. That's right -- all of you people who wasted time in economics classes where we taught that higher prices meant less demand, you can just forget everything you learned.

It turns out that if the good is imported from China or Japan, price just doesn't matter. We would all gladly pay twice as much for the clothes, steel, computers etc. from China or Japan, rather than buy a domestically produced item, even if it is now cheaper. In fact, we would buy the item from China or Japan even if imports from other countries are now cheaper -- price doesn't matter!!!!!

The authors of this piece apparently do not believe in inflation either. They told readers that the trade deficit with Japan  "hit an all-time high of $90 billion" in 2006, in spite of the fact that the yen had tripled relative to the dollar since the 70s. Those of us old-fashioned economics types would point out that the 2006 deficit was equal to about 0.6 percent of GDP. By contrast, in 1986, when the value of the yen was much lower relative to the dollar, the trade deficit with Japan was more than 1.2 percent of GDP.

For those who are concerned that the United States should be producing more here and creating jobs, Massey and Sands have the answer: we should follow the Obama administration's National Export Initiative and focus "on the 99 percent of American companies that do business exclusively within the domestic market."

That's a great idea. I can't wait until my corner gas station and neighborhood barbershop start exporting to China. Of course, these sorts of businesses are the vast majority of that 99 percent that focus exclusively on the domestic market. It will be interesting to see how the Obama administration gets them to shift their focus to exports.

Pieces like this can really make you hope for the end of summer.

Add a comment

The NYT had an article this morning warning of the dangers of Japanese-style deflation. While Japan has suffered from weak growth since the collapse of its stock and housing bubble, deflation has not been a serious factor in this weakness. Consumer prices in Japan fell in 6 of the 19 years from 1991 to 2008. The largest decline in this period was a 0.9 percent decline in 2002. (Japan's CPI fell by 1.4 percent in 2009 and is projected to do the same this year.)

The consequences of relatively low rates of deflation are minor. While the article asserts that deflation causes consumers to delay purchases this is implausible on its face. A 1.0 percent rate of deflation would mean that if a person delayed buying a $500 television set for 6 months, they would save $2.50. The gains from delaying smaller purchases would be proportionately less.

The problem facing Japan (and now the United States) is that it would be desirable to have a lower real interest rate. Since nominal rates cannot fall below zero, an inflation rate that is negative makes matters worse by raising the real interest rate. However, the fact that prices are actually falling is not important. The drop in the rate of inflation from 0.5 percent to -0.5 is no different in its impact on the economy than the drop in the inflation rate by 1.5 percent to 0.5 percent. Both are hurtful because they raise the real interest rate by 1.0 percentage point.

The article also wrongly asserts at one point that Japan is prevented from doing more stimulus because its debt is twice the size of the Japanese economy. This is not a constraint at present. The Japanese central banks hold close to half of the debt, so it does not impose a substantial interest burden on the country. Furthermore, markets are willing to buy government debt at extremely low interest rates, so there is little fear about default or inflation.

It is also worth noting that the Japanese central bank could adopt a policy of targeting a higher inflation rate, such as 3-4 percent. This course of action has been advocated by Paul Krugman, Ben Bernanke, and Olivier Blanchard, the chief economist at the IMF. An article that is ostensibly examining the options available to Japan's policymakers should have noted included this one.

 

Add a comment

The Washington Post has a front page article telling readers that the debate over the Korean "free trade" agreement is actually "a dispute over free trade itself." The Korean trade agreement is not in fact a "free trade" agreement. It does not free trade in many areas, for example it does little to reduce barriers to trade for highly paid professional services, like doctors and lawyers' services. The deal also increases some barriers to trade, most notably by increasing copyright and patent protection.

The proponents of the deal use the term "free trade agreement," because "free" has a positive connotation which they hope will help sell the deal politically. They do not use the term because it is true.

Similarly, it is absurd to claim that the United States is having a "dispute over free trade itself." There are no prominent public figures who support free trade. Genuine free trade would eliminate barriers to trade in all goods and services. In areas where these barriers are greatest, like health care, free trade could have an enormous impact in improving living standards and reducing inequality since prices in the United States are so far out of line with prices in the rest of the world.

Instead, the trade agenda of the United States had been about reducing barriers to trade in manufactured goods with the purpose of putting non-college educated workers in direct competition with much lower paid workers in other countries. The predicted and actual result of this policy is to reduce the pay of non-college educated workers, thereby increasing inequality in the United States. This is a policy of one-sided protectionism. It has nothing to do with "free trade."

Add a comment

Last week, the NYT highlighted the fact that China's GDP had surpassed Japan's to become the world second largest economy, an event that had happened many years ago using more realistic measures of purchasing power parity. Today the NYT tells readers that India's population growth: "threatens to turn its demography from a prized asset into a crippling burden." 

Actually, India's population has long been a crippling burden on the country. All its natural resources are severely taxed. The country has almost 4 times the population of the United States with considerably less land. Large portions of the population do not have access to clean water. Continued rapid population growth will make the situation worse, but the size of its population is already a serious problem.

The article includes the bizarre statement:

"With almost 1.2 billion people, India is disproportionately young; roughly half the population is younger than 25. This “demographic dividend” is one reason some economists predict that India could surpass China in economic growth rates within five years. India will have a young, vast work force while a rapidly aging China will face the burden of supporting an older population."

It would have been interesting to see the names of the economists to whom the article refers. Economists usually concern themselves with per capita GDP growth. The fact that a country enjoys more rapid overall growth because it has a growing population, while another country may have a stagnant or even declining population, would not be seen by most economists as a virtue. This is especially the case since the more rapid population growth will be associated with environmental degradation.

The reference to China facing a "burden" of supporting a growing population of retirees is also bizarre. First, what matters is the change in the ratio of dependents, both young and old, to workers. With children comprising a smaller share of China's population, this ratio will not be increasing very rapidly.

Furthermore, if China's rapid growth continues, there is no reason that both workers and retirees cannot enjoy substantial improvements in living standards through time. An increase in the ratio of retirees to workers of 0.5 percent a year would be very rapid. China's economy has been growing at a 10 percent annual rate. Even if this rate were cut in half to 5.0 percent, only a tenth of its growth would be absorbed by the need to support a higher ratio of retirees to workers. The notion that this is a serious burden on a rapidly growing country is silly. 

 

Add a comment

The Washington Post interviewed several business leaders who told them that additional stimulus would cause them to hire more workers. However, because of its poor grasp of economic relationships, it failed to understand what the business leaders were saying.

The article begins by asserting that:

"Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.... But here in the heartland of America, senior executives say neither side's diagnosis fits."

The article then cites several top executives who say that they will not hire until they see more demand. This is of course exactly the argument of those who urge more stimulus. Stimulus spending will hire workers and/or put money in their pockets through tax breaks. This will cause them to spend more money (the saving rate is still quite low by historical standards), which will translate into more demand for businesses. According to the executives interviewed in this article, additional demand will lead them to hire more workers.

The article also attributes a reluctance to hire workers to uncertainty about the future or pessimism. There is zero evidence that the failure to hire more workers is attributable to anything other than weak demand.

If firms were changing their hiring behavior due to pessimism, then we would expect to see an increase in hours worked per worker. We don't. The increase in average weekly hours since the low-point last fall has not been more rapid than in other recoveries and average weekly hours are still far below their pre-recession level. So, there is no evidence to support the view that hiring patterns are responding to demand any differently than they had in the past.

 

 

 

Add a comment

In an article on the rise in weekly unemployment claims reported yesterday the Post told readers that: "economists say that the weekly claims number needs to get into the low 400,000s and stay there before employers will start hiring new workers and bringing back laid-off ones." Actually, employers are already hiring more than 4 million workers a month. The problem is that roughly 4 million workers a month are also leaving their jobs, half voluntarily and half involuntarily. The decline in claims is an indication of an improving labor market, it is not a signal to employers to start hiring.

It is also worth noting that claims are likely to have to fall below 400,000 before we see a substantial uptick in hiring. Weekly claims had fallen to the 370,000-380,000 range before the economy started generating jobs in the fall of 2003 following the last recession. And the economy has roughly the same number of jobs today as it did then.

Add a comment

The Washington Post, which is losing subscribers at the rate of 10 percent a year, felt the need to tell readers in a front page story that many people at a congressional campaign event: "recognized the need to fix Social Security, which is on track to go bankrupt in the coming decades without changes." Actually, the projections show that if no changes are ever made to the program it will only be able to pay 78 percent of scheduled benefits 27 years from now. The program would not go bankrupt.

As a political reality, it is close to absurd to imagine that at a time when beneficiaries are almost 50 percent larger as a share of the voting population that Social Security would be allowed to substantially reduce benefits. Congress has in the past responded quickly to shortfalls in the program and it would almost certainly take steps to ensure that close to full benefits are paid, even if nothing is done over the next 27 years and the projections prove accurate.

It also would have been useful to point out that the discussion of Social Security privatization is largely a diversion of the real issue concerning Social Security. The co-chairs of President Obama's deficit commission have both publicly suggested that they would support cuts to Social Security, such as an increase in the retirement age. Such cuts are the most immediate issue affecting the program, not privatization.

Add a comment
In Morning Edition's top of the hour news segment, Carol Van Dam described federal deficits as "out of control." Serious news organizations leave such comments for the editorial section. This is an especially bizarre comment since people with familiar with economics would likely argue that current deficits are too small given the falloff in private sector spending associated with the collapse of the housing bubble. Add a comment

Actually, they made this assertion about the United States and the United Kingdom, which makes considerably less sense than saying Bill Gates is broke. There is no evidence that either country is coming up against any sort of spending limit. The bond markets are willing to lend both governments at very low interest rates and there is certainly no shortage of people who are willing to accept the currency of the two countries.

Since it has no basis in fact, the Post's assertion that these countries are broke is presumably an expression of its unhappiness with how these governments spend their money. This is the sort of sentiment that newspapers are supposed to leave for the opinion pages.

Add a comment

The Federal Reserve Board reported a big uptick in industrial production in July. A large part of the increase was attributable to the fact that the Detroit auto manufacturers did not shut down in July for model changes as they ordinarily do. This led to a reported 8.8 percent rise in auto output for the month since the seasonal adjustments assume that this shutdown takes place. This virtually guarantees a large decline in output for August and is not by itself an indication of improvement in the auto industry.

The Post missed this fact and touted the upturn in auto production.

Add a comment

Thomas Friedman begins his piece today by telling readers that: "over the past few weeks I’ve had a chance to speak with senior economic policy makers in America and Germany." This might lead readers to believe that he is about to share some great insights that would only be possible for someone with special access to these senior economic policy makers.

Readers with this expectation will be seriously disappointed. There is nothing here that is more insightful than what can be found on the Washington Post's editorial pages on an average workday. Friedman rehashes the usual cliches, with the usual lack of thought. In doing so, he gets both the story of the recent past and the present seriously wrong.

Starting with the past, he badly misrepresents the prior business cycle:

"we’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines."

The main problem facing the U.S. economy of the last decade was a lack of demand. This was in large part due to the fact that China lent to us. China's lending was its policy of propping up the value of the dollar in order to maintain its export market in the United States. (At the start of the decade, the Clinton administration had also tried to promote an over-valued dollar.) The over-valued U.S. dollar made imports from China and other countries very cheap in the United States and made our exports expensive in other countries. This led to a large and growing trade deficit over most of the business cycle. The trade deficit replaced domestic demand, preventing the economy from approaching normal levels of employment (even with the boost from the housing bubble) until just before the crash.

There is no reason whatsoever to believe that China's decision to prop up the dollar was in any way affected by the Bush tax cuts. In other words, neither the Bush tax cuts nor the growth in entitlements had anything to do with our borrowing from China. The issue was China's decision to lend and thereby prop up the dollar. Given the weakness of demand through most of the decade, these expenses could have been easily filled by domestic production without borrowing from abroad.

Friedman does no better when he shifts the discussion from the past to the present. He refers to businesses' reluctance to hire as the result of "unusual uncertainty," a phrase attributed to Federal Reserve Board Chairman Ben Bernanke. Of course there is no reluctance to hire, there is simply a lack of demand for labor. A reluctance to hire would be reflected in an increasing number of hours per worker, as employers sought to meet their demand for labor by working the existing workforce more hours.

This is not happening. There is a modest uptick in hours from the low point of the downturn, but the increase in hours per worker is certainly no more rapid than in other recessions and the average workweek is still far shorter in just about every sector than it was before the downturn.

Later he tells readers:

"America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever."

This is a great story -- social networking is soaring, IPads are everywhere -- does Friedman have any evidence whatsoever that this development has increased the demand for educated workers and reduced the demand for less educated workers? If so, this would be the place in his column to present the evidence. Otherwise, readers might think that the 4.7 percent unemployment rate for college grads (nearly triple the pre-recession level), coupled with a decline in their real wages over the decade, implies a reduced demand for the labor of highly educated workers as well as less educated workers.

Friedman's proposed fix also seems a bit wide of the mark. He insists:

"There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers $40 an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. There is no other way."

We better hope there is another way. A wage of $40 an hour would put a worker well over the 90th percentile on the wage distribution. Even if we double the number of jobs in this pay range -- an incredible accomplishment -- what happens to the other 80 percent of the workforce?

Friedman then warns us of the challenge from Europe by getting Germany's past and present wrong:

"Keeping up with Germany won’t be easy. A decade ago Germany was the 'sick man of Europe.' No more. The Germans pulled together. Labor gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidized firms to keep skilled workers on the job in the downturn."

Germany clearly has done some changes that benefited its economy, like work sharing, and some that haven't, but its past as the "sick man of Europe" is an invention of Friedman or his highly placed sources. Germany always ran a trade surplus. That is the most basic measure of a country's competitiveness: foreigners are buying its goods. Germany's unemployment rate in 2000 averaged 7.5 percent, not hugely different than its current 7.0 percent rate.

The story here is that Friedman seems to have completely missed the basics of the current economic crisis in spite of his weeks of conversing with senior economic policy makers. The current crisis is due to a lack of demand pure and simple. If we generate demand either through more expansionary Fed monetary policy, greater fiscal stimulus, or increased exports due to a falling dollar, there is no reason to believe that the economy will not return to high levels of employment. Certainly Friedman has presented no evidence that increased demand will not generate increased employment as it always has.

The longer term debt problem is overwhelmingly a health care story. Apparently Mr. Friedman's sources don't have access to documents like the Medicare trustees report, which imply that U.S. health care costs will be controlled and there will be no serious long-term deficit problem. This may prove wrong, but it seems that it would have at least been worth noting in his column. Of course, if we have not fixed our health care system, we can always achieve huge saving by relying on the more efficient health care systems in other countries.

If Friedman's intention was to scare us, he succeeded. After all, if senior economic policy makers in the U.S. and Germany are as badly misinformed as Friedman implies, then we can expect some very bad times ahead.

 

 

 


 

Add a comment

Yep, I paid for the paper this morning. Okay, most people would not call that "raiding." But where on earth does the WSJ get off saying that the government has been "raiding" Social Security for decades? Was this article a paid political advertisement? (It reads that way.)

Of course, it makes as much sense to say that WSJ raided my bank account as to say the government raided Social Security. (Perhaps more, I thought I was buying a newspaper.) There was absolutely nothing improper done with Social Security money. It was used to buy government bonds. Readers of a business paper like the WSJ may have thought that its reporters understood how U.S. government bonds work.

The Social Security trust fund will redeem the bonds when they are needed to pay benefits, just as private citizens and corporations often buy bonds and then sell them off when they need the money for some other purpose. In the meantime, the government used the money it borrowed for other purposes. That is the way government bonds and other bonds work. It is also exactly how the law was been written, and it has been followed.

It also would have been helpful to point out that there is no obvious problem with the deficit and debt levels discussed in the article. The text seems to have been written by a hyperventilating reporter, when the numbers should raise about as much concern as a 4-2 baseball score.

The economy of course does face a crisis. The collapse of the housing bubble has left 15 million people unemployed and is costing us $1.5 trillion a year in lost output. Remarkably, these basic facts are largely absent from the article as the WSJ seeks to get readers and voters to focus on the deficit and its goal of cutting programs like Social Security and Medicare.

 

Add a comment

Contrary to what the NYT apparently wanted readers to believe when it told them: "But sustaining a benevolent nanny state is proving to be challenging even for the notably generous Danes."

Actually, Denmark's debt to GDP ratio is just over 40 percent, roughly one-third less than the United States. Its deficit for the year will be around 3 percent of GDP, approximately one-third of the size of the U.S. deficit. Denmark has also consistently been running large trade surpluses, building up claims against foreigners in contrast to the United States, which has been running large trade deficits.

Add a comment

Yes, NPR looked into the eyes and now they know what the Republican leaders believe:

"In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy."

In Journalism 101 reporters are told not to say things that they don't know to be true. And high on the list of things that reporters do not know is what politicians really believe.  

News flash! Politicians sometimes say things that they do not believe to be true. The Republican allegations about Fannie and Freddie would likely be on this list, since they are so obviously not true as one of the sources in this piece points out.

Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage-backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.

It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.

Responsible reporters would simply present the facts here. They would not try to tell us what the politicians really believe, since they really have no idea.  

 

Add a comment