The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the “crushing deficit.” Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be “essential,” since demand and therefore GDP would plummet if the country were to balance its budget.
The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the “crushing deficit.” Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be “essential,” since demand and therefore GDP would plummet if the country were to balance its budget.
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The news stories are coming out on the Commerce Department’s release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite.
While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.
The reported rate of inventory accumulation in the 3rd quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.
It is very unlikely that this pace of inventory growth will be sustained. Suppose that in the 4th quarter the rate of accumulation falls back to the pace of the second quarter. This would mean that inventories would subtract 1.6 percentage points from the growth rate. If final demand growth is 2.5 percent in the quarter (higher than it has been in any quarter of the recovery so far), then GDP growth would be just 0.9 percent.
In short, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy’s growth prospects.
The news stories are coming out on the Commerce Department’s release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite.
While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.
The reported rate of inventory accumulation in the 3rd quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.
It is very unlikely that this pace of inventory growth will be sustained. Suppose that in the 4th quarter the rate of accumulation falls back to the pace of the second quarter. This would mean that inventories would subtract 1.6 percentage points from the growth rate. If final demand growth is 2.5 percent in the quarter (higher than it has been in any quarter of the recovery so far), then GDP growth would be just 0.9 percent.
In short, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy’s growth prospects.
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Way back in the last decade the United States had a huge housing bubble. The Wall Street banks made money hand over fist making and selling the loans that fueled this bubble. The economic policymakers and regulators who were supposed to prevent the growth of such dangerous bubbles, people with names like Greenspan, Bernanke, Paulson, and Geithner, assured the public that everything was just fine. When they were proved horribly wrong, they then congratulated themselves for avoiding a second Great Depression.
This background is important to any story on the financial problems facing state and local governments, since it is 90 percent of the picture. It also would be good if the public remembered this history, since many of the people who either profited from the bubble or failed to take measures to counter its growth are now at the forefront in demanding that state and local governments sharply reduce their budgets and that public sector employees take big cuts in pay and benefits.
On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that:
“in the two years, since the ‘great recession’ wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes.”
That’s not what the data show. If we look to the Commerce Department’s National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the “nearly half a trillion” number.
It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.
Another way to think about the size of the state and local government shortfall is that we could envision the Federal government giving state and local governments trillions of dollars in loans at below market interest rates as they did with the Wall Street banks through TARP and the various Fed special lending facilities. If the state and local governments got $3 trillion in loans at rates that were 4 percentage points below the market rate, and then they relent this money at market rates, it would largely make up for the shortfall in revenue they have faced. (It would provide them with $120 billion a year in additional revenue.)
When the governments repaid their loans, plus the below market interest, the Treasury and the Fed would then get all their money back, plus a small premium. This would allow people like Treasury Secretary Timothy Geithner and the Washington Post editorial board to declare that they made a profit, just as they have with the TARP. This would be one possible solution to the fiscal problems faced by these governments.
The piece also told viewers at the onset:
“There is also a trillion dollar hole in their public pension funds.”
In fact, this shortfall is overwhelmingly attributable to the plunge in the stock market that followed in the wake of the collapse of the housing bubble. According to Federal Reserve Board data (Table L.119) if pension fund assets had increased at just a 5 percent nominal rate since the 4th quarter of 2007, they would have $935 billion more money at the end of the third quarter than is currently reported.
While some of us did try to warn of the risks that the housing bubble posed to the economy and financial markets (we were not featured on 60 Minutes, which was busy touting deficit stories even then), the primary fault of state and local officials was listening to Wall Street and the mainstream of the economics profession, not excessive pensions.
It would also be useful to provide a basis for assessing this “trillion dollar hole” since it is virtually certain that almost none of CBS’s viewers regularly deal with such numbers. The discounted value of GDP will be more than $400 trillion over the next 30 years (roughly the period in which this shortfall will have to be addressed). This implies that additional revenue equal to 0.25 percent of GDP over this period should be sufficient to cover this projected shortfall. By comparison, the increase in annual defense spending associated with the wars in Iraq and Afghanistan is approximately 1.8 percent of GDP, more than 7 times larger than amount of revenue needed to cover the projected pension shortfall.
Another point of comparison is the revenue that could potentially be raised from a financial speculation tax. Such a tax could easily raise more than 1.0 percent of GDP, four times the projected shortfall, with the incidence being born almost entirely by Wall Street banks and speculators.
The segment also includes assertions that imply state and local workers are overpaid. In fact, after adjusting for education and experience state and local workers earn slightly less than their private sector counterparts. Public sector workers do get higher pensions on average than workers in the private sector, but this does not offset the pay difference. It is also important to remember that many public sector workers are not covered by Social Security so that their pension is virtually all of their retirement income.
Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.
While such an approach may be an effective short-term strategy it is absolutely disastrous in the long-term. At any point in time it will be difficult for long-time workers to leave their jobs with the state and find comparable employment elsewhere, especially in the midst of the worst downturn in 70 years. However, as new workers come into the labor force, lower pay and worse benefits in the public sector will make these jobs less attractive. This means that New Jersey’s schools and other public agencies will have less choice in selecting their workforce, which is likely to lead to a deterioration in the quality of education and other public services. This is not obviously far-sighted thinking.
Way back in the last decade the United States had a huge housing bubble. The Wall Street banks made money hand over fist making and selling the loans that fueled this bubble. The economic policymakers and regulators who were supposed to prevent the growth of such dangerous bubbles, people with names like Greenspan, Bernanke, Paulson, and Geithner, assured the public that everything was just fine. When they were proved horribly wrong, they then congratulated themselves for avoiding a second Great Depression.
This background is important to any story on the financial problems facing state and local governments, since it is 90 percent of the picture. It also would be good if the public remembered this history, since many of the people who either profited from the bubble or failed to take measures to counter its growth are now at the forefront in demanding that state and local governments sharply reduce their budgets and that public sector employees take big cuts in pay and benefits.
On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that:
“in the two years, since the ‘great recession’ wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes.”
That’s not what the data show. If we look to the Commerce Department’s National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the “nearly half a trillion” number.
It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.
Another way to think about the size of the state and local government shortfall is that we could envision the Federal government giving state and local governments trillions of dollars in loans at below market interest rates as they did with the Wall Street banks through TARP and the various Fed special lending facilities. If the state and local governments got $3 trillion in loans at rates that were 4 percentage points below the market rate, and then they relent this money at market rates, it would largely make up for the shortfall in revenue they have faced. (It would provide them with $120 billion a year in additional revenue.)
When the governments repaid their loans, plus the below market interest, the Treasury and the Fed would then get all their money back, plus a small premium. This would allow people like Treasury Secretary Timothy Geithner and the Washington Post editorial board to declare that they made a profit, just as they have with the TARP. This would be one possible solution to the fiscal problems faced by these governments.
The piece also told viewers at the onset:
“There is also a trillion dollar hole in their public pension funds.”
In fact, this shortfall is overwhelmingly attributable to the plunge in the stock market that followed in the wake of the collapse of the housing bubble. According to Federal Reserve Board data (Table L.119) if pension fund assets had increased at just a 5 percent nominal rate since the 4th quarter of 2007, they would have $935 billion more money at the end of the third quarter than is currently reported.
While some of us did try to warn of the risks that the housing bubble posed to the economy and financial markets (we were not featured on 60 Minutes, which was busy touting deficit stories even then), the primary fault of state and local officials was listening to Wall Street and the mainstream of the economics profession, not excessive pensions.
It would also be useful to provide a basis for assessing this “trillion dollar hole” since it is virtually certain that almost none of CBS’s viewers regularly deal with such numbers. The discounted value of GDP will be more than $400 trillion over the next 30 years (roughly the period in which this shortfall will have to be addressed). This implies that additional revenue equal to 0.25 percent of GDP over this period should be sufficient to cover this projected shortfall. By comparison, the increase in annual defense spending associated with the wars in Iraq and Afghanistan is approximately 1.8 percent of GDP, more than 7 times larger than amount of revenue needed to cover the projected pension shortfall.
Another point of comparison is the revenue that could potentially be raised from a financial speculation tax. Such a tax could easily raise more than 1.0 percent of GDP, four times the projected shortfall, with the incidence being born almost entirely by Wall Street banks and speculators.
The segment also includes assertions that imply state and local workers are overpaid. In fact, after adjusting for education and experience state and local workers earn slightly less than their private sector counterparts. Public sector workers do get higher pensions on average than workers in the private sector, but this does not offset the pay difference. It is also important to remember that many public sector workers are not covered by Social Security so that their pension is virtually all of their retirement income.
Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.
While such an approach may be an effective short-term strategy it is absolutely disastrous in the long-term. At any point in time it will be difficult for long-time workers to leave their jobs with the state and find comparable employment elsewhere, especially in the midst of the worst downturn in 70 years. However, as new workers come into the labor force, lower pay and worse benefits in the public sector will make these jobs less attractive. This means that New Jersey’s schools and other public agencies will have less choice in selecting their workforce, which is likely to lead to a deterioration in the quality of education and other public services. This is not obviously far-sighted thinking.
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Okay, I was going to ignore this one. After all, it is in an opinion piece in the Washington Post, so a lot of leeway is granted, but give me a break.
This sentence is given as an example of “obfuscation through language distortion,” in a column by Kathleen Parker. She goes on to say:
“Pardon? How does money in someone’s own pocket add to another’s debt?”
Umm, is this one really hard? I owe my bank $200,000 for my mortgage. I don’t pay the money. Is it hard to understand that my decision to keep the $200,000 in my own pocket adds to the bank’s financial woes?
More practically, the deficit is the difference between spending and tax collections. Anything that reduces tax collections adds to the deficit just as anything that increases spending adds to the deficit. We all may not like certain taxes just as we don’t like some areas of spending, but that doesn’t change this accounting identity.
One would hope that accounting identities held true even on the opinion pages of the Washington Post, but apparently not.
Okay, I was going to ignore this one. After all, it is in an opinion piece in the Washington Post, so a lot of leeway is granted, but give me a break.
This sentence is given as an example of “obfuscation through language distortion,” in a column by Kathleen Parker. She goes on to say:
“Pardon? How does money in someone’s own pocket add to another’s debt?”
Umm, is this one really hard? I owe my bank $200,000 for my mortgage. I don’t pay the money. Is it hard to understand that my decision to keep the $200,000 in my own pocket adds to the bank’s financial woes?
More practically, the deficit is the difference between spending and tax collections. Anything that reduces tax collections adds to the deficit just as anything that increases spending adds to the deficit. We all may not like certain taxes just as we don’t like some areas of spending, but that doesn’t change this accounting identity.
One would hope that accounting identities held true even on the opinion pages of the Washington Post, but apparently not.
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The NYT showed that there were still good paying jobs for unskilled workers in the economics profession by citing two economists who touted the growth in temporary employment as evidence for the growth of structural unemployment in the economy. Structural unemployment results when there is a mismatch between skills and the available jobs.
Economists with skills would have noted that temporary employment plummeted in the downturn and is only now beginning to recover lost ground. After the recent gains in hiring in temporary employment the number of jobs in the sector is still down by almost 20 percent from its pre-recession level. In the real world, this is not evidence of structural unemployment.
The NYT showed that there were still good paying jobs for unskilled workers in the economics profession by citing two economists who touted the growth in temporary employment as evidence for the growth of structural unemployment in the economy. Structural unemployment results when there is a mismatch between skills and the available jobs.
Economists with skills would have noted that temporary employment plummeted in the downturn and is only now beginning to recover lost ground. After the recent gains in hiring in temporary employment the number of jobs in the sector is still down by almost 20 percent from its pre-recession level. In the real world, this is not evidence of structural unemployment.
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That doesn’t seem quite right. But the NYT reported that Iran’s president, Mahmoud Ahmadinejad, claimed that the country spends $114 billion a year on energy subsides. This would imply that the country spends almost one-third of its GDP on energy subsidies. That doesn’t seem plausible.
That doesn’t seem quite right. But the NYT reported that Iran’s president, Mahmoud Ahmadinejad, claimed that the country spends $114 billion a year on energy subsides. This would imply that the country spends almost one-third of its GDP on energy subsidies. That doesn’t seem plausible.
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USA Today touted the portion of the recent tax package that allowed for 100 percent expensing of new investment. The piece neglected to mention the fact that the stimulus package already allowed for 50 percent expensing. This is likely to reduce the impact of going to 100 percent expensing.
USA Today touted the portion of the recent tax package that allowed for 100 percent expensing of new investment. The piece neglected to mention the fact that the stimulus package already allowed for 50 percent expensing. This is likely to reduce the impact of going to 100 percent expensing.
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The NYT reported that inflation in China is higher than its leadership’s targets. It might have been worth noting that a higher valued currency helps to lower inflation.
This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.
A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.
For some reason China is apparently not considered this obvious path for addressing its problems with inflation.
The NYT reported that inflation in China is higher than its leadership’s targets. It might have been worth noting that a higher valued currency helps to lower inflation.
This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.
A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.
For some reason China is apparently not considered this obvious path for addressing its problems with inflation.
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The Post has a nice piece examining the situation of a group of construction workers in the Las Vegas area one year after a major project on which they had worked was completed. The piece does a good job of examining the difficulty that these workers are facing finding new jobs without leaping to the unsupported claim that the bulk of the unemployment that the economy is now experiencing is structural (as opposed to cyclical) in nature.
The Post has a nice piece examining the situation of a group of construction workers in the Las Vegas area one year after a major project on which they had worked was completed. The piece does a good job of examining the difficulty that these workers are facing finding new jobs without leaping to the unsupported claim that the bulk of the unemployment that the economy is now experiencing is structural (as opposed to cyclical) in nature.
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The NYT printed a scare story about San Francisco’s retiree health care costs in lieu of a printing news. The paper told readers that the projected cost of providing health care for retired city workers has been estimated at $4.4 billion and the city has put aside just $9.7 million to cover this cost.
That sounds really really scary. However those who read through the article would discover that the city is currently spending more than $138 million a year for retiree health care. This fact implies that the city has been in the habit of paying for these expenditures out of its current budget. Furthermore the projection that is the highlight of this article implies that there will be no substantial increase in this figure in the years ahead. (If the $4.4 billion is spend over the next 30 years it would imply an average annual cost of $147 million.)
It is possible that the San Francisco’s health care burden is more onerous than this calculation suggests, but readers of this article would have no way of knowing since the point of the article seems to have been to scare readers rather than provide information.
The NYT printed a scare story about San Francisco’s retiree health care costs in lieu of a printing news. The paper told readers that the projected cost of providing health care for retired city workers has been estimated at $4.4 billion and the city has put aside just $9.7 million to cover this cost.
That sounds really really scary. However those who read through the article would discover that the city is currently spending more than $138 million a year for retiree health care. This fact implies that the city has been in the habit of paying for these expenditures out of its current budget. Furthermore the projection that is the highlight of this article implies that there will be no substantial increase in this figure in the years ahead. (If the $4.4 billion is spend over the next 30 years it would imply an average annual cost of $147 million.)
It is possible that the San Francisco’s health care burden is more onerous than this calculation suggests, but readers of this article would have no way of knowing since the point of the article seems to have been to scare readers rather than provide information.
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