Morning Edition touted the qualifications of Leon Panetta, President Obama’s pick to be Secretary of Defense, as budget cutter, noting that he will be asked to trim $400 billion from the Defense Department budget over the next decade. It would have been worth pointing out that is just over 5 percent of the almost $8 trillion that the department is projected to spend over the decade.
Morning Edition touted the qualifications of Leon Panetta, President Obama’s pick to be Secretary of Defense, as budget cutter, noting that he will be asked to trim $400 billion from the Defense Department budget over the next decade. It would have been worth pointing out that is just over 5 percent of the almost $8 trillion that the department is projected to spend over the decade.
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Business reporters seem to have very bad memories. All of the media accounts of Federal Reserve Board Chairman’s first press conference touted his commitment to Fed transparency.
These reporters are apparently too young to remember that the Fed strongly resisted giving out any information about the trillions of dollars of below market loans that it disbursed at the peak of the financial crisis. It only released this information when a coalition of conservative and progressive members of Congress, led by Ron Paul and Bernie Sanders, attached a provision requiring the release to the Dodd-Frank bill. Bernanke had claimed that releasing the information would jeopardize the stability of the financial system.
Bernanke also went to court to block the release of information about discount window borrowing from the Fed. He only gave up and released the requested data after all his legal options were exhausted. The description of Bernanke as unquestioned advocate of increased Fed transparency is wrong.
Business reporters seem to have very bad memories. All of the media accounts of Federal Reserve Board Chairman’s first press conference touted his commitment to Fed transparency.
These reporters are apparently too young to remember that the Fed strongly resisted giving out any information about the trillions of dollars of below market loans that it disbursed at the peak of the financial crisis. It only released this information when a coalition of conservative and progressive members of Congress, led by Ron Paul and Bernie Sanders, attached a provision requiring the release to the Dodd-Frank bill. Bernanke had claimed that releasing the information would jeopardize the stability of the financial system.
Bernanke also went to court to block the release of information about discount window borrowing from the Fed. He only gave up and released the requested data after all his legal options were exhausted. The description of Bernanke as unquestioned advocate of increased Fed transparency is wrong.
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Given the deficit obsession of the Washington media it is remarkable that none of the reporters covering Federal Reserve Board Chairman Ben Bernanke’s press conference noted the fact that he offered little help on dealing with the budget deficit. There were two obvious steps that he could have taken.
First, the main reason that the deficit has soared in the last few years is that the economy collapsed following the bursting of the housing bubble, which Bernanke apparently failed to see. (We are a very forgiving lot in Washington.) If the unemployment rate was brought down quickly by more aggressive monetary policy, then the deficit could be reduced by an enormous amount.
In 1996, the Congressional Budget Office (CBO) projected a deficit of almost $250 billion (@ 2.6 percent of GDP) for the 2000 fiscal year. The country actually had a budget surplus of almost the same size in fiscal 2000, representing a shift from deficit to surplus in the year 2000 of more than 5 percentage points of GDP.
Congress did not approve any major tax increases in this 4-year period, nor were there any major unscheduled cuts to spending. Rather this shift from deficit to surplus of more than 5 percentage points of GDP ($750 billion in today’s economy) was attributable almost entirely to better than expected economic performance.
In 1996 CBO projected that the unemployment rate would be 6.0 percent in 2000. Unemployment actually averaged just 4.0 percent. This was due to the fact that Alan Greenspan ignored the overwhelming consensus in the economics profession and allowed the unemployment rate to fall below the conventionally accepted levels of the NAIRU.
This decision, which was made over the objections of the Clinton appointees to the Fed, allowed millions of more people to get jobs than would have otherwise been the case. It also allowed strong wage growth for people at the middle and bottom of the wage distribution as their labor was then in demand. And it reduced the budget deficit. Because Bernanke offered little hope of more aggressive Fed actions to reduce unemployment, he is not offering any similar growth dividend on the budget deficit.
The other potential help that Bernanke is not offering is holding large amounts of government debt. The Fed now holds close to $3 trillion in government debt and other assets. If it continued to hold this debt throughout the decade, rather than selling it back to the private sector, it would reduce interest payments by close to $1.5 trillion over the course of the decade. It could deal with any inflationary pressures resulting from these holdings by simply raising reserve requirements. Bernanke is not offering this help either.
It would have been useful to readers to point out what the Fed is not doing to help address the deficit.
Given the deficit obsession of the Washington media it is remarkable that none of the reporters covering Federal Reserve Board Chairman Ben Bernanke’s press conference noted the fact that he offered little help on dealing with the budget deficit. There were two obvious steps that he could have taken.
First, the main reason that the deficit has soared in the last few years is that the economy collapsed following the bursting of the housing bubble, which Bernanke apparently failed to see. (We are a very forgiving lot in Washington.) If the unemployment rate was brought down quickly by more aggressive monetary policy, then the deficit could be reduced by an enormous amount.
In 1996, the Congressional Budget Office (CBO) projected a deficit of almost $250 billion (@ 2.6 percent of GDP) for the 2000 fiscal year. The country actually had a budget surplus of almost the same size in fiscal 2000, representing a shift from deficit to surplus in the year 2000 of more than 5 percentage points of GDP.
Congress did not approve any major tax increases in this 4-year period, nor were there any major unscheduled cuts to spending. Rather this shift from deficit to surplus of more than 5 percentage points of GDP ($750 billion in today’s economy) was attributable almost entirely to better than expected economic performance.
In 1996 CBO projected that the unemployment rate would be 6.0 percent in 2000. Unemployment actually averaged just 4.0 percent. This was due to the fact that Alan Greenspan ignored the overwhelming consensus in the economics profession and allowed the unemployment rate to fall below the conventionally accepted levels of the NAIRU.
This decision, which was made over the objections of the Clinton appointees to the Fed, allowed millions of more people to get jobs than would have otherwise been the case. It also allowed strong wage growth for people at the middle and bottom of the wage distribution as their labor was then in demand. And it reduced the budget deficit. Because Bernanke offered little hope of more aggressive Fed actions to reduce unemployment, he is not offering any similar growth dividend on the budget deficit.
The other potential help that Bernanke is not offering is holding large amounts of government debt. The Fed now holds close to $3 trillion in government debt and other assets. If it continued to hold this debt throughout the decade, rather than selling it back to the private sector, it would reduce interest payments by close to $1.5 trillion over the course of the decade. It could deal with any inflationary pressures resulting from these holdings by simply raising reserve requirements. Bernanke is not offering this help either.
It would have been useful to readers to point out what the Fed is not doing to help address the deficit.
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In NYC there is an effort underway to fine people for buying unauthorized copies of designer products. This story mistakenly refers to these products as counterfeit. They are not counterfeit for the simple reason that there is no effort to pass them off as the real thing.
When someone hands you a counterfeit $20 bill, they do not want you know that it is not real. According to the article, the customers know full well that the designer items are not in fact the real thing but rather copies of the real thing.
This distinction is important because the customer is benefiting from this transaction. If the government prevents them from buying unauthorized copies then these customers will have to pay more to buy a similar item — it is similar to imposing a tax. This price increase reduces customers’ real wages and thereby gives them less incentive to work.
The fact that the customer is not deceived also means that they will not be an ally in cracking down on unauthorized copies. On the other hand, if they were actually being sold counterfeit items then presumably they would be willing to assist law enforcement in cracking down on the people who ripped them off. (Thanks to CTC for the tip.)
In NYC there is an effort underway to fine people for buying unauthorized copies of designer products. This story mistakenly refers to these products as counterfeit. They are not counterfeit for the simple reason that there is no effort to pass them off as the real thing.
When someone hands you a counterfeit $20 bill, they do not want you know that it is not real. According to the article, the customers know full well that the designer items are not in fact the real thing but rather copies of the real thing.
This distinction is important because the customer is benefiting from this transaction. If the government prevents them from buying unauthorized copies then these customers will have to pay more to buy a similar item — it is similar to imposing a tax. This price increase reduces customers’ real wages and thereby gives them less incentive to work.
The fact that the customer is not deceived also means that they will not be an ally in cracking down on unauthorized copies. On the other hand, if they were actually being sold counterfeit items then presumably they would be willing to assist law enforcement in cracking down on the people who ripped them off. (Thanks to CTC for the tip.)
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It is striking to see the difference in the NYT and the WAPO in their discussion of the Fed’s track record in the last two years. NYT columnist David Leonhardt raises the obvious point: the unemployment rate is far above anyone’s estimate of full employment with no signs of core inflation in sight. The question is why doesn’t the Fed do more to spur the economy?
By contrast the Post emphasizes the risk that Bernanke took with his quantitative easing policy. It told readers:
“But the central bank, with its decision last November, also put its reputation on the line, essentially shouldering responsibility for getting the economy on track. In that sense, the Fed now owns the crummy economy in the public mind to a degree that it wouldn’t have had Chairman Ben S. Bernanke and his colleagues followed a more cautious path in setting monetary policy.”
Actually it is the Fed’s mandate to maintain full employment, so Bernanke really does not have the option to decide to do nothing when the economy faces high unemployment due to a shortfall in demand. The only question is what is the most effective policy to raise demand. If he had opted to do nothing, then he should equally own the economy, assuming that the media reported the situation accurately.
The Post also wrongly asserts that Bernanke has set 2.0 percent as his inflation target. This is his target for the core inflation rate. This point is important because the overall inflation rate has been above 2 percent recently due to sharp increases in energy and food prices. However the core inflation has been just over 1.0 percent.
It is striking to see the difference in the NYT and the WAPO in their discussion of the Fed’s track record in the last two years. NYT columnist David Leonhardt raises the obvious point: the unemployment rate is far above anyone’s estimate of full employment with no signs of core inflation in sight. The question is why doesn’t the Fed do more to spur the economy?
By contrast the Post emphasizes the risk that Bernanke took with his quantitative easing policy. It told readers:
“But the central bank, with its decision last November, also put its reputation on the line, essentially shouldering responsibility for getting the economy on track. In that sense, the Fed now owns the crummy economy in the public mind to a degree that it wouldn’t have had Chairman Ben S. Bernanke and his colleagues followed a more cautious path in setting monetary policy.”
Actually it is the Fed’s mandate to maintain full employment, so Bernanke really does not have the option to decide to do nothing when the economy faces high unemployment due to a shortfall in demand. The only question is what is the most effective policy to raise demand. If he had opted to do nothing, then he should equally own the economy, assuming that the media reported the situation accurately.
The Post also wrongly asserts that Bernanke has set 2.0 percent as his inflation target. This is his target for the core inflation rate. This point is important because the overall inflation rate has been above 2 percent recently due to sharp increases in energy and food prices. However the core inflation has been just over 1.0 percent.
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It has become fashionable for billionaire types to offer big prizes for all sorts of things: new green technologies, teaching inner city kids, raising poor people in the developing world out of poverty. In this spirit, we really need some enterprising billionaire to offer a big prize for teaching basic national income accounting to the Post’s editorial board.
The lead Post editorial expresses great concern that the world may lose confidence in the dollar, first and foremost because of the country’s budget deficit and debt. If the Post’s editors knew national income accounting then they would understand the contradiction in this position. The only sustainable way to get the budget deficit down is by lowering the value of the dollar. In other words, if it wants lower budget deficits, it should want the dollar to fall.
The logic is simple. The trade surplus is equal to net national savings. This is a definition, sort of like 2+3 being equal to 5. There is no way around it: 2+3 will always equal 5 and the trade surplus will always be equal to net national savings.
When the United States has a large trade deficit, as it does today, then it means that net national savings are negative. This means that either private savings must be negative or public savings must be negative (i.e. we have big budget deficits) or some combination of the two.
In the last decade, we had very low private savings as the budget deficit shrank to just 1.0 percent of GDP. The low private savings were the result of the housing bubble. The bubble led to a huge amount of wasted construction (which counts as investment) and very low household savings as consumers spent based on bubble generated housing equity. While the Post may want a return to bubble driven growth, this is disastrous for the economy and it is certainly not sustainable.
In the absence of very low private sector saving, there is no alternative to having the government run large budget deficits to make the identity balance. (In principle, other investment could rise, but it is very difficult to find formulas to make that happen.) This means that the current trade deficit essentially requires a large budget deficit.
The way out of this story is for the dollar to fall. The Post and its deficit hawk buddies can jump up and down and call all sorts of people all sorts of names but the trade deficit is not going to fall by much unless the dollar falls. A lower valued dollar makes U.S. exports cheaper to foreigners, leading them to buy more of them. It makes imports more expensive for people in the United States, leading us to buy fewer imports.
For this reason, a lower valued dollar is an essential part of any sustainable recovery plan. If the Post’s editors knew national income accounting they were be putting pressure on Bernanke and Geithner to reduce the value of the dollar, not pleading for pledges to a strong dollar.
Unfortunately, the Post’s editors don’t understand national income accounting so we get this confused editorial calling for lower budget deficits and a strong dollar. Isn’t there some billionaire out there willing to put up the prize money so that these people can be taught? Please.
It has become fashionable for billionaire types to offer big prizes for all sorts of things: new green technologies, teaching inner city kids, raising poor people in the developing world out of poverty. In this spirit, we really need some enterprising billionaire to offer a big prize for teaching basic national income accounting to the Post’s editorial board.
The lead Post editorial expresses great concern that the world may lose confidence in the dollar, first and foremost because of the country’s budget deficit and debt. If the Post’s editors knew national income accounting then they would understand the contradiction in this position. The only sustainable way to get the budget deficit down is by lowering the value of the dollar. In other words, if it wants lower budget deficits, it should want the dollar to fall.
The logic is simple. The trade surplus is equal to net national savings. This is a definition, sort of like 2+3 being equal to 5. There is no way around it: 2+3 will always equal 5 and the trade surplus will always be equal to net national savings.
When the United States has a large trade deficit, as it does today, then it means that net national savings are negative. This means that either private savings must be negative or public savings must be negative (i.e. we have big budget deficits) or some combination of the two.
In the last decade, we had very low private savings as the budget deficit shrank to just 1.0 percent of GDP. The low private savings were the result of the housing bubble. The bubble led to a huge amount of wasted construction (which counts as investment) and very low household savings as consumers spent based on bubble generated housing equity. While the Post may want a return to bubble driven growth, this is disastrous for the economy and it is certainly not sustainable.
In the absence of very low private sector saving, there is no alternative to having the government run large budget deficits to make the identity balance. (In principle, other investment could rise, but it is very difficult to find formulas to make that happen.) This means that the current trade deficit essentially requires a large budget deficit.
The way out of this story is for the dollar to fall. The Post and its deficit hawk buddies can jump up and down and call all sorts of people all sorts of names but the trade deficit is not going to fall by much unless the dollar falls. A lower valued dollar makes U.S. exports cheaper to foreigners, leading them to buy more of them. It makes imports more expensive for people in the United States, leading us to buy fewer imports.
For this reason, a lower valued dollar is an essential part of any sustainable recovery plan. If the Post’s editors knew national income accounting they were be putting pressure on Bernanke and Geithner to reduce the value of the dollar, not pleading for pledges to a strong dollar.
Unfortunately, the Post’s editors don’t understand national income accounting so we get this confused editorial calling for lower budget deficits and a strong dollar. Isn’t there some billionaire out there willing to put up the prize money so that these people can be taught? Please.
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David Brooks is worried because:
“Raising taxes on the rich is popular, but nearly every other measure that might be taken to address the fiscal crisis is deeply unpopular. Sixty-three percent of Americans oppose raising the debt ceiling; similar majorities oppose measures to make that sort of thing unnecessary.”
Actually this is not true. Insofar as it is necessary to deal with long-term budget issues there is is widespread support for most of the measures that would be required. Polls consistently show majority support for a quick end to the wars in both Iraq and Afghanistan, as well as sharp cuts in the military budget. Polls also show support for negotiating Medicare drug prices with the prescription drug industry, as well as opening up the Medicare program for anyone who chose to buy into it.
These measures and the others put forward in the Progressive Caucus budget last week would be sufficient to reach a balanced budget in a decade. Brooks apparently does not approve of the items in the Progressive Caucus budget, but that is not the case of the public at large.
This budget does not even include other items that would produce large budget savings that would almost certainly produce no negative public reaction. For example, Congress could require the Fed to buy and hold substantial amounts of government debt. If the Fed held $3 trillion in debt (a bit more than its current holdings) throughout the decade, it would save close to $1.5 trillion in interest. (The Fed refunds the interest on the debt it holds to the Treasury.) It can offset the potential inflationary impact of increasing reserves by raising reserve requirements.
There are also huge potential long-term savings from allowing Medicare beneficiaries to buy into the health care systems of countries that provide care more efficiently (i.e. everyone). The savings could be split between the government and the beneficiary. This would hand beneficiaries tens or even hundreds of thousands of dollars over their retirement while saving taxpayers an equal amount. It is difficult to see why there would be opposition from the general public to giving beneficiaries this choice.
In short, people who are familiar with the numbers know that the middle class can easily live with the changes that might be needed to address long-term budget problems. The wealthy and powerful interest groups, like the insurance and pharmaceutical industries, are the more obvious problem.
Brooks also gets some basic facts wrong. The stagnation of middle class incomes is not new. It dates from mid-70s. Furthermore, the middle class has not consumed lavishly, as he claims. They don’t have the money to spend lavishly. It has been the wealthy, who have benefited from a huge upward redistribution of income over the last three decades, who have been spending lavishly.
It is also worth noting that Brooks is warning of a potential calamity if the deficit is not addressed. He apparently is not aware of the collapse of the housing bubble which has cost tens of millions of workers their jobs and wiped out much of the savings of tens of middle class families. If he were, he would know that the crisis is here now.
David Brooks is worried because:
“Raising taxes on the rich is popular, but nearly every other measure that might be taken to address the fiscal crisis is deeply unpopular. Sixty-three percent of Americans oppose raising the debt ceiling; similar majorities oppose measures to make that sort of thing unnecessary.”
Actually this is not true. Insofar as it is necessary to deal with long-term budget issues there is is widespread support for most of the measures that would be required. Polls consistently show majority support for a quick end to the wars in both Iraq and Afghanistan, as well as sharp cuts in the military budget. Polls also show support for negotiating Medicare drug prices with the prescription drug industry, as well as opening up the Medicare program for anyone who chose to buy into it.
These measures and the others put forward in the Progressive Caucus budget last week would be sufficient to reach a balanced budget in a decade. Brooks apparently does not approve of the items in the Progressive Caucus budget, but that is not the case of the public at large.
This budget does not even include other items that would produce large budget savings that would almost certainly produce no negative public reaction. For example, Congress could require the Fed to buy and hold substantial amounts of government debt. If the Fed held $3 trillion in debt (a bit more than its current holdings) throughout the decade, it would save close to $1.5 trillion in interest. (The Fed refunds the interest on the debt it holds to the Treasury.) It can offset the potential inflationary impact of increasing reserves by raising reserve requirements.
There are also huge potential long-term savings from allowing Medicare beneficiaries to buy into the health care systems of countries that provide care more efficiently (i.e. everyone). The savings could be split between the government and the beneficiary. This would hand beneficiaries tens or even hundreds of thousands of dollars over their retirement while saving taxpayers an equal amount. It is difficult to see why there would be opposition from the general public to giving beneficiaries this choice.
In short, people who are familiar with the numbers know that the middle class can easily live with the changes that might be needed to address long-term budget problems. The wealthy and powerful interest groups, like the insurance and pharmaceutical industries, are the more obvious problem.
Brooks also gets some basic facts wrong. The stagnation of middle class incomes is not new. It dates from mid-70s. Furthermore, the middle class has not consumed lavishly, as he claims. They don’t have the money to spend lavishly. It has been the wealthy, who have benefited from a huge upward redistribution of income over the last three decades, who have been spending lavishly.
It is also worth noting that Brooks is warning of a potential calamity if the deficit is not addressed. He apparently is not aware of the collapse of the housing bubble which has cost tens of millions of workers their jobs and wiped out much of the savings of tens of middle class families. If he were, he would know that the crisis is here now.
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This point should have been raised in an NYT article that discussed efforts by state and local governments to reduce their pension obligations. At present, state and local employees get somewhat lower compensation (including pension and health care benefits) than workers in the private sector with comparable education and experience. If pensions are cut back then the penalty for public sector workers will get larger. In the short-run most public employees will probably remain at their jobs even with pay cuts, however in the longer term economic theory predicts that governments that pay below market rates will have difficulty getting and keeping good workers.
This point should have been raised in an NYT article that discussed efforts by state and local governments to reduce their pension obligations. At present, state and local employees get somewhat lower compensation (including pension and health care benefits) than workers in the private sector with comparable education and experience. If pensions are cut back then the penalty for public sector workers will get larger. In the short-run most public employees will probably remain at their jobs even with pay cuts, however in the longer term economic theory predicts that governments that pay below market rates will have difficulty getting and keeping good workers.
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An article that reported on Detroit’s plans to cut wages and benefits for its employees told readers:
“meanwhile, entry-level office workers earn just $17,000 a year. Similar work paid $7,000 a year in 1970.”
It would have been helpful to point out that prices have roughly quintupled in the last 40 years. This means that it would take a salary of $35,000 a year to be equivalent to the $7,000 a year that was reportedly paid in 1970. This means that the real wage for entry level positions has been more than cut in half even though productivity has more than doubled over this 40 year period.
It would also have been helpful to point out that many public sector employees are not covered by Social Security. This means that the 911 operator, whose $24,000 pension was highlighted in the article, may not have any other source of retirement income.
An article that reported on Detroit’s plans to cut wages and benefits for its employees told readers:
“meanwhile, entry-level office workers earn just $17,000 a year. Similar work paid $7,000 a year in 1970.”
It would have been helpful to point out that prices have roughly quintupled in the last 40 years. This means that it would take a salary of $35,000 a year to be equivalent to the $7,000 a year that was reportedly paid in 1970. This means that the real wage for entry level positions has been more than cut in half even though productivity has more than doubled over this 40 year period.
It would also have been helpful to point out that many public sector employees are not covered by Social Security. This means that the 911 operator, whose $24,000 pension was highlighted in the article, may not have any other source of retirement income.
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The NYT reports on how drug companies are getting access to databases that allow them to track individual doctors’ prescribing practices. This information can be helpful in better pitching their drugs to doctors. This is yet another abuse of the sort that economists predict happens when the government imposes monopolies (i.e. patents) that raise prices far above marginal cost. If economists paid attention to the $300 billion industry, they would be looking for more efficient mechanisms for financing prescription drug research.
The NYT reports on how drug companies are getting access to databases that allow them to track individual doctors’ prescribing practices. This information can be helpful in better pitching their drugs to doctors. This is yet another abuse of the sort that economists predict happens when the government imposes monopolies (i.e. patents) that raise prices far above marginal cost. If economists paid attention to the $300 billion industry, they would be looking for more efficient mechanisms for financing prescription drug research.
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