Dean Baker
China/U.S. Focus, September 14, 2012

The NYT tells us that Moody's, the bond-rating agency that thought all those subprime mortgage backed securities were Aaa, is threatening to downgrade U.S. government debt if Congress doesn't meet its conditions. While the markets will probably ignore a downgrade from Moody's, just as they did the downgrade from Standard and Poor's last year (the price of U.S. Treasury bonds soared in the period immediately following the downgrade), it still would be worth asking what Moody's might mean by a downgrade.

In principle, Moody's is rating the risk of default. U.S. government debt is issued in dollars. The U.S. government prints dollars. Does Moody's believe that there is a growing probability that the United States will forget how to print dollars?

There is the issue that the Fed has control of the money supply and the Fed is distinct from the Treasury. As an anti-inflation policy, the Fed may limit its issuance of money even as interest rates on U.S. government debt soared. However in a crisis can anyone believe that the Fed would actually let the country default rather than buy up government debt?

Furthermore, at the end of the day the Fed is answerable to Congress. If a particular group of Fed governors and bank presidents was prepared to let the government default rather than buy up bonds, does anyone think Congress would just let this happen rather than replace the individuals or restructure the Fed altogether? That seems highly unlikely, but is this what Moody's now thinks could happen?

There is another story sometimes told that Moody's is simply indicating that it believes that there is an increased risk of future inflation if deficits are not brought under control. That is an interesting proposition, but it means that Moody's is making an inflation prediction, not assessing the risk of default.

Readers of his column on the Chicago public school strike will no doubt be asking this question as they wade through this morass of error of fact and logic. Brooks starts the piece by telling readers:

"Modern nations have two economies, which exist side by side. Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.

Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by."

The piece then goes on to warn of stagnation in Economy II and the risk that it will undermine the growth and dynamism of Economy I. The heroes in Brooks story are those who want to experiment with ways to introduce the dynamism of Economy I to Economy II. In health care these would be folks like Representative Ryan and Governor Romney. In education, the heroes are the school reformers, most notably at the moment, Chicago Mayor Rahm Emanuel.

Okay, let's look at Brooks' world more closely. Note that the third example in Brooks' Economy I is pharmaceuticals. Many of us know pharmaceuticals as the most rapidly growing cost in Brooks' Economy II. The reason that drugs were not covered by Medicare when it was created in the mid-1960s, was that they didn't cost anything. It would have been like including band aids. For all but the very poor, expenditures on prescription drugs were not a big deal.

Mark WeisbrotThe Guardian Unlimited, September 13, 2012

Dean Baker
The Guardian Unlimited, September 10, 2012

CEPR’s lengthy report, “Collateral Damage of a Drug War,” continues to receive attention from the media and policy makers. The report is based on an on-the-ground investigation of exactly what happened on May 11, when four people were shot and killed and four others wounded in a joint U.S. DEA-Honduran counternarcotics operation in the Moskitia region of Honduras, and was co-authored by CEPR’s Alex Main with Annie Bird and Karen Spring of Rights Action, a human rights advocacy organization with decades of experience working in Central America.

The CEPR/Rights Action report is based on extensive interviews with survivors and eyewitnesses of the shooting and related events, as well as with U.S. and Honduran government officials, including U.S. Ambassador to Honduras Lisa Kubiske, and the then-DEA attaché at the U.S. Embassy in Honduras, Jim Kenney, as well as Honduran officials who took part in the autopsies and evidence gathering for the Honduran authorities’ investigation into the incident. The U.S. government, despite the admitted role of the DEA in the events, and the admitted use of State Department-titled helicopters in those events, has not undertaken its own investigation, nor has it taken any responsibility for the victims or their ongoing struggle to recover from the physical, mental and emotional wounds left over from May 11.

On Friday evening –a time when breaking news typically receives very little attention – the Honduran government released its own report on the events to the Associated Press. AP summarized the report’s findings: “that two victims of a shooting during a joint U.S.-Honduran anti-drug operation were not pregnant and none of the gunfire that killed anyone came from a law-enforcement helicopter…” and that “forensic tests show the bullets that hit the four people killed were fired horizontally, not from above. In addition, the slugs were from lower-caliber bullets used by M-16 rifles and not the heavier weapon mounted on the helicopter…”

The Honduran authorities’ findings, as reported by AP, depart from the evidence and the common points of the various eyewitness statements. In a lengthier follow-up article, I told AP’s Alberto Arce that the claims made by German Enamorado, chief of Honduras' Office of Human Rights are “simply…not credible, when confronted with forensic evidence and so much eyewitness testimony to the contrary.”

Here’s why:

Dean Baker
Truthout, September 10, 2012