That should have been the headline of an article about Donald Kohn who is leaving the Fed's board of governors. Kohn said that he doesn't think the Fed could have done anything different to prevent the worst downturn in 70 years because:

"Everybody — but certainly the regulators and the markets — became complacent about the housing market and whether housing prices could ever decline across a broad front.”

He still doesn't know that the housing crash was entirely predictable? Why are the taxpayers paying for this guy's pension?

That mammoth waterfall of ignorance, Thomas Friedman, is at it again. The NYT allowed him to show his ignorance on economics in his Sunday column.

Friedman tells readers that the United States will be in bad financial shape because of all the money needed to bail ourselves out of the recession and also due to the growth in cost of Medicare, Medicaid, and Social Security.

The first point requires a knowledge of intro econ. It actually costs us zero to bail ourselves out the recession. The government can simply run deficits to boost demand. (Friedman apparently does not understand the problem is too little demand right now -- we can produce more goods and services than people are buying.)

The government can sell the bonds needed to finance the debt to the Fed (which it is already doing to some extent). The Fed then simply holds the bonds indefinitely. This creates zero burden on the government, since the Fed refunds the interest earned on these bonds to the Treasury. My intro econ students all used to understand this -- I guess Friedman never took econ 101 or didn't have a very good teacher.

Friedman then repeats what his "tutor and friend Michael Mandelbaum" told him:

"'In 2008', Mandelbaum notes 'all forms of government-supplied pensions and health care (including Medicaid) constituted about 4 percent of total American output.' At present rates, and with the baby boomers soon starting to draw on Social Security and Medicare, by 2050 'they will account for a full 18 percent of everything the United States produces.'"

Wow -- did Mandelbaum really say this? Did the NYT really allow Friedman to repeat it in its pages? Okay, in the real world, Social Security, Medicare, and Medicaid accounted for 9.4 percent of GDP in 2008. The projections show that the vast majority of the projected increase in costs in these programs is due to health care costs. However, people who want to cut Social Security lump the program in with the health care programs to advance their agenda.

The post health care reform projections actually show a much slower rate of growth for Medicare and Medicaid. Apparently, Mr. Friedman was not aware of the reform. If the U.S. paid per person health care costs that were comparable to those in any other wealthy country, then the country would be looking at huge long-term budget surpluses.

Most political experts believe that a strong economy favors incumbents, but the Post told readers the opposite in a front page piece that urged Democrats to embrace deficit reduction. The piece noted comments from several Democratic senatorial candidates urging budget cuts, then told readers:

"The new push for austerity could prove too little, too late for Democrats, who fear losing their majorities in both chambers of Congress. In dozens of House and Senate races, incumbent Democrats are struggling in polls, leading political analysts to raise the serious prospect of Republican takeovers in the House and even the Senate."

Of course the deficits that the country is now running are sustaining the economy. If the deficits were lower, then output would be lower and unemployment would be higher. The Congressional Budget Office (CBO) recently estimated that the stimulus has reduced the unemployment rate by between 0.7 and 1.8 percentage points.

The CBO estimates imply that if the Democrats had been earlier in their push for fiscal austerity and not pushed through the stimulus, then the current unemployment rate would be between 10.3 percent and 11.4 percent. This Post piece asserts that this situation would have improved their electoral prospects in November, although it cites no one who backs up this position.

The editorial, which is not labeled as such, includes several other unsupported assertions. At one point it told readers that government spending is out of control, commenting that "Democrats vow to bring spending under control," which of course is only possible if spending is already out of control.

It also implies that the Democrats have spent recklessly commenting about their "conversion to fiscal restraint" and the difficulty of convincing voters that they are serious. Of course the only budget surpluses in the last 40 years were run with Democrats in the White House, and the largest structural deficits were run under Republican administrations, so it is a bit bizarre that the article would imply that Democrats need to convert to "fiscal restraint."

The article also told readers the country's fiscal health is in danger and that the changes need to restore it are unpopular:

"Some fiscal hawks are skeptical that either party is willing to make the unpopular decisions necessary to restore the country to fiscal health."

The financial markets do not believe that the country's fiscal health is in danger, otherwise they would not make long term loans to the government at interest rates below 3.0 percent. It is also not clear that the steps needed to ensure that long-term budget deficits do not become a problem are unpopular.

While one source cited in the story (Robert Bixby, the director of the Concord Coalition) wants to cut Social Security, Medicare and Medicaid, it is only necessary to fix the U.S. health care system to ensure stable budgets into the indefinite future. If the United States paid the same per person health care costs as people in any other wealthy country we would face huge long-term budget surpluses rather than deficits.

The piece should have also pointed out Colorado Senator Michael Bennet's error when he asserted that we are borrowing from China because of our budget deficit. The United States is borrowing from China because of its trade deficit, which is in turn the result of an over-valued dollar. This is an embarrassing gaffe from a senator.

It is also worth noting that this editorial did not once mention the unemployment rate. This is remarkable for a piece discussing the Democrats' election prospects.



The Post has an oped by Edward Schumacher touting the benefits that undocumented workers have provided for the Social Security system. Many pay taxes without ever collecting benefits.

While his numbers don't seem quite right (he claims that annual payouts would exceed tax revenue over the years 2011-2015 without the $12 billion estimated net contribution from undocumented workers, the trustees report shows taxes exceeded benefits by more than $15 billion in the years 2012-2014), the more important problem is with his logic.

Presumably the point of immigration reform measures would be to normalize the employment situation of immigrants so that the workers who are here are on the books, both paying required taxes and receiving the benefits to which they are entitled, like Social Security. If immigrants get the benefits to which they are entitled, then it will make the finances of Social Security somewhat worse.

In reality this is a trivial issue for the program, which is fully solvent for the next 29 years according to the Congressional Budget Office. An increase in the payroll tax of 0.16 percentage points would fully offset the cost of the payment of benefits to undocumented workers. However, it seems bizarre to advocate that immigrants be brought into the country to pay taxes to a program from which they get no benefit, as Mr. Schumacher seems to be doing.

A report on the unemployment situation told listeners that the real problem in the economy is not a lack of demand, but rather inadequate investment. Actually investment in equipment and software has been growing at almost a 20 percent annual rate over the last three quarters. While it might be desirable to see investment grow even more rapidly, demand is a major determinant of investment growth. If the economy grew more rapidly as a result of a spur to consumption, it would almost certainly lead to more rapid growth in investment.

Since reporters feel the need to report nonsense from the Fed chairman without presenting anyone pointing out the obvious, BTP will fill the gap. The NYT reported on Ben Bernanke's testimony before the Financial Crisis Inquiry Commission.

It notes Bernanke's statement that in 2003-2004 it was not clear that the housing market was in a bubble and that by the time it was clear, it was too late for the Fed to do anything without seriously harming the economy. Of course it was clear as early as 2002 that the housing market was in a bubble, but more importantly, Bernanke's claim that the Fed could not act until it was clear is absurd.

The Fed always acts in an uncertain environment. For example, Alan Greenspan raised interest rates in anticipation of inflation on numerous occasions. The logic of this action was that it was worth slowing the economy and raising the unemployment rate rather than risk an increase in the rate of inflation. In effect, this action assumes that the certainty of higher unemployment from raising interest rates is better than the risk of higher inflation.

Had the Fed acted to burst the bubble in 2003-2004, the risk would have been that it temporarily depressed house prices by scaring people about excessive prices and limiting the exotic mortgages that were boosting demand. By contrast, if it had acted correctly in preventing the growth of a dangerous bubble, it would have prevented the worst downturn in 70 years.

Any serious weighing of the benefits and risks of bursting the bubble in 2003-2004 would have surely come down in favor of bursting the bubble. The Fed's decision not to burst the bubble was one of the most disastrous failures of monetary policy in history.

The NYT has long opposed agricultural price support programs. Ironically it supports house price support programs. It seems to want the Obama administration to take further steps to keep the housing bubble from deflating.

The basic story is that house prices are still 15-20 percent above their trend level. These prices seem relatively affordable given the extraordinarily low interest rates in the market at present. However, if we think that interest rates are a major determinant of price, then we must believe that prices will plummet if interest rates return to a more normal level.

Sound housing policy would accept the fall and focus on helping homeowners facing the loss of their home. It would not try to perpetuate the bubble.

Economics isn't that hard, but David Brooks seems to have trouble with it. He thinks everything would have been different if President Obama had pushed through a $713 billion stimulus that was centered on cutting the payroll tax, had pushed through an infrastructure bank instead of his pork barrel projects, and had focused on getting an energy bill rather than a health care bill.

There is no way of knowing how the politics would have played out, but in terms of the economics, it is difficult to see how Brooks' stimulus would have left us in a different place than the Obama stimulus. With stimulus, size does matter, and Brooks is basically talking about a stimulus of roughly the same size as the one President Obama got through Congress.

Payroll tax cuts are relatively progressive (the tax is regressive), so a cut has a fairly high multiplier since most of the money will be spent. Mark Zandi estimates the multiplier on these cuts at 1.3. This is better than for most tax cuts, but less than the 1.7 multiplier estimated for food stamps, the 1.6 for unemployment insurance benefits or infrastructure spending and the same as the 1.3 estimated for aid to state and local government. 

This means that if we compare David Brooks stimulus with President Obama's stimulus of roughly the same size, we should expect it to have roughly the same impact on the economy. President Obama's stimulus included some items that would be expected to have more impact (UI benefits and food stamps), and some that would have about the same impact (aid to the states and his own payroll tax cut, which was called "Make Work Pay"), and some that would have less impact if we include the alternative minimum tax fix as part of the stimulus.

As a result, if President Obama had done the David Brooks stimulus we should expect the unemployment rate to be around 9.5 percent, rising to 9.8 percent this morning, and headed to above 10.0 percent by the end of the year. I can't answer whether this would have made President Obama more popular than he is now.


Unfortunately, I am serious. It has a news article in today's paper with the headline: "five reasons for economic optimism." Real newspapers don't run pieces like this as news stories.

The Post seems to be claiming otherwise in an article that begins with the sentence: "will the U.S. government ever default?" The Washington Post editorial section has been near hysterical in its screaming about budget deficits for most of the last decade. In fact, it was so out of bounds in its rants that it found no space in either its news or opinion section for warnings about the $8 trillion housing bubble. Of course the collapse of this bubble led to the worst economic downturn in 70 years -- and sent the deficit soaring.

It is also worth noting that IMF completely missed the housing bubble and failed to warn of the imminent danger that it posed to the United States and other countries. No one at the IMF was fired over this failure and there has been no major restructuring of its staff, so there is little reason to believe that its understanding of economics is any better or its advice more accurate today than it was in the years before the bubble burst.

Of course the basic hypothesis is silly on its face since the United States issues debt in dollars. It can print as many dollars as it needs to pay off its debt. This could create a risk of inflation, but it rules out the possibility of default. Serious economists and reporters understand this simple point.

Apparently word of CBO's existence has not made its way to Fox on 15th Street. How else can we explain the Post's failure to mention CBO's analysis of the impact of the stimulus in an article reporting on a speech by Christine Romer, President Obama's departing chief economist?

The article reported Romer's view that the stimulus helped keep the economy from sliding into a depression and that additional stimulus would boost growth. It then tells readers that Republicans oppose additional stimulus and "argue that Democrats have run up record budget deficits without improving the economy."

This is where a serious newspaper would report the assessment of the stimulus by independent analysts, most obviously CBO. In an analysis released last month CBO estimated that the stimulus increased output by between 1.7  percent and 4.5 percent. It also calculated that the stimulus lowered the unemployment rate by between 0.8 and 1.7 percentage points. In other words, the CBO estimates imply that unemployment would be between 10.3 percent and 11.2 percent today without the stimulus. This would have been useful information to provide readers.

The NYT reports on a new set of papers from the IMF, one of which warns that many wealthy countries, including the United States, are very close to the limit of their ability to increase their national debt. It is worth noting that this paper's methodology indicated that Japan and Italy were already well above the limit of their ability to take on debt.

The financial markets apparently assess the situation differently than the IMF since both countries are still able to issue long-term debt at very low interest rates. The fact that the methodology is apparently quite wrong in predicting the situations faced by these two countries might suggest that it is not a very useful methodology for guiding U.S. policy.

It is also worth noting that IMF somehow did not see the $8 trillion housing bubble that wrecked the U.S. economy, nor the bubbles in Spain, Ireland, and the U.K. There have been no obvious changes in the IMF's structure that would lead one to believe that it is better at assessing economic prospects today than it was three years ago.

Fool or Liar? That is the question that should be posed of anyone who says that companies are not hiring because of concerns about taxes or regulations.

Exhibit A, the only one necessary to prove the case, is that there has been no unusual increase in average weekly hours. There is some uptick from the low-point of the downturn, but nothing unusual for an upturn, and we are still far below average weekly hours from before the recession.

The first sentence of a Washington Post article on the decision by the SEC not to pursue legal action against the company told readers that the rating agency "misjudged" many securities that subsequently plunged in value. This assertion is exactly what is in dispute.

The rating agency clearly mis-rated many securities, giving investment grade ratings to issues that were clearly junk, at least in retrospect. The question is whether the erroneous ratings were honest mistakes -- misjudgements -- or whether they were due to fact that Moody's knew that issuers wanted investment grade ratings and would not hire them in the future if they could not be relied upon to produce such ratings. The Post has somewhere determined that Moody's just made honest mistakes and told readers so in the very first sentence.

This would no doubt be how the Washington Post's economic reporters would have covered the World Cup final. They would not have bothered to tell readers that Spain in fact did win the World Cup, regardless of what the Netherlands' fans claim.

This comes up in the context of the impact of the stimulus where the Post treats us to a he said/ she said. The Post has a quote from an economist at the Center on Budget and Policy Priorities who says the stimulus was a good idea and helped the economy. It also features a quote from an economist at the CATO Institute who says that it didn't help the economy and just added to the debt.

Maybe we could check with the ref. The Congressional Budget Office says it increased GDP by between 1.7 percent and 4.5 percent. They also calculate that it reduced the unemployment rate by between 0.7 and 1.8 percentage points. Private forecasters, such as McCain economic adviser mark Zandi, come up with similar estimates. This would have been useful information to include in this article.

This time it is in UK. It begins an otherwise good article about how proposed budget cuts will disproportionately hit women with the line: "as Britain prepares for the deepest budget cuts in generations to tackle a crippling mound of public debt."

How has it been determined that Britain faces a "crippling mound" of public debt? Certainly the markets have not made this determination since they are still willing to lend money to the UK at very low interest rates. This is simply the view of the writer and or editor, not a fact in the world.

A real newspaper would write: "as Britain prepares for the deepest budget cuts in generations to reduce its public debt." This increases accuracy and saves words.

Mr. Sorkin noted Wall Street's shift of funding to Republicans and told readers that:

"Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality."

Is that so? Well, business leaders were never more angry at the government than during Franklin Roosevelt's New Deal. And, let's see what they did in those years. Here are the growth rates for non-residential fixed investment in the first four years of the New Deal.

1934   27.4%

1935   26.7%

1936   35.2%

1937   19.8%

It looks like the business leaders were able to put their anger aside and invest where it was profitable. Of course business leaders always stand to gain if they convince the public of the argument that Mr. Sorkin is making -- if the government doesn't give them everything they want then they won't invest. However, the evidence does not seem to support Mr. Sorkin's assertion.


The Washington Post told readers that the Korean trade pact would raise the price of hogs by $10 each, roughly a 20 percent increase. The context was a claim that the pact would be very important to Indiana farmers. If this is true, then it implies that the Korean trade pact will put serious upward pressure on food prices in the United States.

It is extremely unlikely that more open agricultural trade with a relatively small market could have such a dramatic impact on farm prices. More likely, it is one of the nonsense stories that proponents of trade pacts routinely circulate with the expectation that news outlets like the Washington Post will repeat them unquestioningly. Of course a serious newspaper would point out the implications of such a claim, if it were true.

Robert Samuelson seems to think that the problem with the recovery is that people are still saving. While this is in part right, Normal 0 he is wrong to suggest that anyone should be surprised by the current level of saving.

The current saving rate is approximately 6 percent of disposable income. While Samuelson implies this is high, it is actually very low by historic standards. The saving rate averaged more than 8 percent through most of the post-war era until the wealth effect of the stock and housing bubbles drove it toward zero in the last 15 years.

Samuelson seems to think that after a couple of years of a 6 percent saving rate, saving will again fall to its bubble levels of near zero. There is no reason to expect this. As the housing bubble deflates further, households will see a further decline in wealth. They will likely increase their saving rate to the 8 percent pre-bubble range.

In fact, demographics suggest that the saving rate could rise even higher. The huge baby boom cohort is at the edge of retirement, with most having almost nothing other than their Social Security to depend upon. This provides a strong incentive to save, especially in an environment where much of the political leadership is pushing for cuts to Social Security.

This fact would be worth mentioning in an article that discusses Federal Reserve Board Chairman Ben Bernanke's attitude toward the deficit. If Greenspan and Bernanke (who was a Fed governor from 2002) had paid attention to the $8 trillion housing bubble, and prevented it from growing to the point where it could do so much damage, then the country would not be in a serious downturn today, and we would not be running a large budget deficit.

It is only due to the incompetence of the people running the Fed that we are facing such severe economic problems. In other lines of work, like dishwashers and custodians, people would be fired for such incompetence, but those running the Fed are not held accountable in the same way as most workers.

Why is it so hard for reporters to understand the idea of purchasing power parity? This is important if anyone is interested in understanding China's importance in the world economy. China produces and consumes more output in a wide variety of goods and services. This would not make sense for an economy that is just passing the size of Japan, putting China's economy at a bit more than one-third the size of the U.S. economy.

The more realistic measure is the purchasing power parity measure that puts China's economy at almost two-thirds of the size of the U.S. economy. This measure applies a common set of prices to all goods and services, regardless of which country they are produced in. This measure of China's GDP is far more consistent with a country that both buys and produces more cars than the United States, has more Internet users and twice as many cell phones users.

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