NPR presented a segment on the impact of the new health care bill on farmer this morning. It told listeners that employers of more than 50 workers who do not provide insurance will be required to pay a "hefty" fee. It is not clear how NPR determined that the fee was "hefty."
It would have been helpful to point this fact out in an article reporting on the Greek and eurozone financial crisis. While Greece did have serious fiscal problems prior to the economic crisis, the other countries now facing difficulties were not similarly troubled. Spain, the most important of the troubled countries, actually was running surpluses prior to the crisis. The difficulties now facing these countries is largely the result of the economic downturn, which has seriously worsened their fiscal situation.
The European Central Bank (ECB) could make the money available to these countries to sustain their economies through this downturn. (They would print it.) The ECB has opted not to go this route because of peculiar superstititions about inflation. It would be worth pointing out to readers that this crisis is largely the result of superstitions by Europe's central bankers, not fundamental economic problems.
The Washington Post (a.k.a. Fox on 15th Street) told readers that: "Official forecasts suggest that without sharp changes in federal spending or tax collections, the United States could enter into a downward spiral of indebtedness that by the end of this decade would erode the country's ability to educate its children, care for the elderly or mount a robust national defense."
Wow, that sounds really dire. It would have been great if they gave a source for this one because that is not what the standard sources say. For example, if we go to our most recent Budget and Economic Outlook from the Congressional Budget Office (CBO), we find the economy growing at an average annual rate of 2.4 percent over the years 2015-2020. CBO also projects average productivity growth for this period at 1.8 percent a year, meaning in principle that living standards can rise at roughly that rate. It also projects an average interest rate on 10-year Treasury bonds of 5.5 percent, this is only slightly higher than the low-point of the budget surplus years at the end of the Clinton administration.
In short, there is no evidence in these projections of the sort of crisis described in the Post article. It would be interesting to see the document(s) that provide the basis for the Post's assertion.
Federal Reserve Board Chairman Ben Bernanke, who famously missed the housing bubble and then insisted the problems in the housing market would be contained in the subprime sector, warned the country about the need to contain deficits in testimony before President Obama's deficit commission today. It would have been helpful to readers if reporters had noted Mr. Bernanke's track record so that they would be better able to assess the importance of his remarks.
Of course, his main statement: "History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability," is trivially true. Obviously something that is not sustainable cannot, by definition, persist indefinitely.
However, Bernnake's statement provides no basis for determining whether this is a need to act now, in 5 years, or in 20 years. It effectively says nothing. Reporters could have pointed this fact out to readers.
The Post has a piece this morning on Delaware Senator Ted Kaufman and his proposal for breaking up the big banks. At one point it presents a quote from Larry Summers, the head of President Obama's National Economic Council: "Most observers who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to try to serve large companies, and hurt the competitiveness of the United States."
It would have been worth pointing out to readers that Summers' asssertion is not obviously true. Many prominent experts on banking, including two current regional Federal Reserve Bank presidents and Simon Johnson, the former chief economist at the IMF, have argued that the country does not need banks that are as large as the too big to fail institutions that would be broken up under Senator Kaufman's amendment.
Oh yeah, the Post forgot to mention this part of the story. In an article that focuses on the debt burden facing an Italian city, the Post told readers: "analysts are also warning that national coffers could be further strained if heavily indebted countries are forced to spend precious resources to rescue local jurisdictions."
This is a problem for the euro zone countries who do not have the option to simply print money to boost their economy in the downturn. Since the basic probelm facing the world economy right now is inadequate demand, there is little reason that large economies cannot boost demand by simply printing money. The European Central Bank could do this on behalf of its member countries. It has chosen not to, thereby subjecting millions of people to unnecessary suffering. It is remarkable that the Post chose not to mention this fact.
The headline of the CNNMoney.com piece is that: "Economists: The stimulus didn't help." This is striking. The independent economists at the Congressional Budget Office certainly think it helped, adding more than 2 percentage points to GDP growth and lowering the unemployment rate by over a percentage point. Many prominent private economic forecasting firms, including Moodys.com, Global Insights, and Macroeconomic Advisors, also believe that it helped.
So, what's the basis for this story? A survey of 68 members of the National Association of Business Economists (NABE) found that 73 percent thought that the stimulus had no impact on employment. This is not exactly a representative group of economists. NABE tend to be far more conservative than the economics profession as a whole. It is wrong for CNN to present their views as representative.
The Wall Street Journal told readers that: "the Congressional Budget Office said recently the social security trust fund will record a deficit in 2010, returning to the black briefly, before permanently going back into the red 2016." This is not true. The Social Security trust fund is projected to show a surplus of close to $100 billion in 2010 and will remain in the black until after 2020.
The Journal likely forgot to include the interest on the bonds held by the trust fund. If the WSJ is talking about the trust fund, then this money must included. It is remarkable that the paper's editors somehow missed this error.
A big part of the story of the housing bubble is that the bond rating agencies were willing to give issuers of mortgage-backed securities collaterized debt obligations investment grade ratings even when they were clearly junk. The explanation was that the rating agencies were being paid by the issuers, therefore they had an enormous incentive to bend their ratings. If they rated these issues honestly, they would lose their business.
The conflict of interest in this "issuer pays" system has been widely noted. Unfortunately it has prompted mostly strange genuflecting rather than serious thinking. The obvious way to fix the conflict is to take away the hiring decision from the issuer. The issuer would still pay the rating agency but a neutral party -- the SEC, the stock exchange on which the company is listed, the local baseball team -- would make the decision as to which agency gets hired.
Some of us have been pushing this one for a while (e.g. here and also Plunder and Blunder), but Congress has preferred much more complex regulations that would have no impact on the basic conflict of interest. However, Paul Krugman comes to the rescue in his column today. Maybe now someone in Congress will be able to think clearly on this issue.
This piece includes the information that the national debt "totaled $8,370,635,856,604.98 as of a few days ago." Boys and girls are you impressed by that big number? Are you scared yet? This is Fox on 15th here -- they'll keep trying.
This sentence continues by telling readers that this number is not "even counting the trillions owed by the government to Social Security and other pilfered trust funds." How did the author determine that the trust funds were "pilfered." The government didn't do what he wanted it to with the money? Wow, that gives a reporter the right to say the money was "pilfered." Apparently it does at the Post.
The article does not include the views of any experts who do not view the debt as a serious problem. It presents an inaccurate assertion (in the context presented) from Brookings economist Bill Gale that the debt: "This [running up the debt] is all an exercise in current generations shifting burdens on future generations."Actually, the debt being run up at present is helping future generations by keeping their parents employed, improving the infrastructure and providing them with a better education. There is little or no real burden associated with this debt since much of the debt being issued is held by the Fed. The interest on these bonds is therefore paid to the Fed, which in turn refunds the money to the government.
Last week, the NYT reported that the Fed paid more than $47 billion in interest to the government. So, where is the burden on our children? If we do get the economy back to normal levels of output the deficit will be at a manageable level. Over the long-term, if we don't fix the health care system, we will face serious budget problems, but this is an argument about the need to fix our health care system, not about the deficit.
The Washington Post's most widely cited source on the housing market during the run-up of the housing bubble was David Lereah, the chief economist of the National Association of Realtors, and the author of Why the Housing Boom Will Not Bust and How You Can Profit From It. In many articles, Lereah was the only expert cited. This was ungodly bad reporting.
Today's paper has a front page story, the main point of which appears to be that Goldman Sachs made bets against the housing market and stood to profit from the collapse of the bubble. (The story actually leaves this conclusion in question.) It's not clear what in this story would be newsworthy and especially what would make it front page news.
If Goldman did bet against the housing bubble, then its actions were helping to bring the bubble to an end before it caused even further damage to the U.S. economy. Goldman's actions would have the effect of making homes more affordable for new buyers. It would also help to increase the national saving rate (a top Washington post priority), by eliminating bubble generated wealth that was spurring consumption. In short, while Goldman's actions were undoubtedly taken for profit, they would be beneficial to the economy as a whole.
Goldman has been accused by the Securities and Exchange Commission of misrepresenting its issues of collaterized debt obligations in order to get investors to take the long-end of the housing market. This is a serious accusation and presents the possibility of substantial civil, if not criminal penalties. However, there is nothing at all improper about placing a bet against a bubble in the market. It is not clear what the Post thought to be the news in this story.
That's what the Washington Post told readers this morning. This claim would news to hundreds of millions of people around the developing world. Back in the 90s the IMF came to be known as the "Typhoid Mary" of emerging markets as its policy prescriptions led to sharp economic downturns in one country after another. It tried to impose a harsh austerity plan on Argentina in 2001 and did everything it could to sabotage its economy when the country refused to go along. Its sabotage effort included economic growth projections that were likely politically motivated, since they consistently under-projected growth. This would have the effect of scaring away potential efforts. By contrast, the IMF consistently over-projected Argentina's growth in the years when it was following policies recommended by the IMF.
The theme of the article is that people in wealthy countries will have to accept lower living standards, as indicated by its headline: "for nations living good life, the party is over, IMF says." Of course, nations don't live the good life, individuals within nations do. In the United States, and to a lesser extent, most other wealthy countries, the last three decades have been marked by an upward redistribution of income. This has led to a situation in which most of the gains from growth have gone to those at the top end of the income distribution. This would suggest policies that focused on cutting back on their good life, for example a financial transaction tax or the financial activities tax (FAT) that was proposed by the IMF last week. This would cutback on the high incomes of Wall Street's "top performers" while leaving most of the rest of the country largely unaffected.
The distributional issue is also important in the context of one of the other policies highlighted by the IMF: reducing the value of the dollar against the yuan and other currencies. This will raise the price of imports and in that way lower living standards in aggregate. However, by making U.S. manufacturing more competitive, it will increase the demand for manufacturing workers, allowing many workers without college degrees to get relatively high-paying jobs. This is likely to lead to an improvement in living standards even if these workers have to pay somewhat more for imported goods. (Imagine a worker can get paid $20 in auto factory instead of $10 working in a convenience store. They will be much better off even if they have topay 20 percent more for their clothes, shoes, and toys.)
Finally, this article includes an assertion that the United States might need: "roughly $1.4 trillion annually, to be cut from government programs or raised through new taxes." There is no remotely plausible story that would give a number even half this large. This is the size of the government's current budget deficit. More than half of this shortfall is attributable to the fact that the economy is operating well below full employment. If the country were at normal levels of output, the current deficit would be less than 5 percent of GDP.
And, there is no reason that the country must balance its budget. Deficits equal to 2-3 percent of GDP are consistent with a stable or declining debt to GDP ratio. This means that the adjustment needed to get the budget on a stable fiscal footing are likely less than one-quarter of what is implied by this Post article. Furthermore, much of this gap can be made up simply by allowing freer trade in medical services.
Actually, that is not what the Post said about the implications of Greece defaulting on its debt. A front page story told readers:
"A default in Greece could also ripple across the Atlantic, hitting banks and pension funds holding Greek bonds and heightening investor worries about the national debt of the United States"
Yes, it "could" have this effect, just like it could lead to a run on calamari and lamb as people read about Greece in the newspapers and get the urge to eat calamri and lamb. But, that is not likely to happen. To date, as has been reported in the Post and elsewhere, the prospect of a default by Greece has been associated with the opposite reaction: a flight to the dollar as a safe haven, which has meant lower interest rates.
It is of course the Post's editorial to promote concerns about the U.S. debt and deficit. Most newspapers try to keep a separation between their news pages and their editorial pages.
ProPublica has a good piece on the dealings of Magnetar, one of the hedge funds that shorted the housing market, while at the same time taking a long position that it used to finance its short position. While the piece involves solid investigative reporting, it is more than a little oversold. The piece begins:
"In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe."
According to the article, Magnetar raised a total of $40 billion. This is equal to roughly 0.2 percent of the $20 trillion value of the housing market at the time. Did Magnetar's long investments help to prop up the market? Probably a bit, but it's hard to see it going too far. Furthermore, by last 2005 the bubble was already pretty close to its peak (that came in the summer of 2006), so it's unlikely that they could have pushed prices much higher than they would have otherwise gone, although it may have slowed the process of the air leaving the bubble. (Actually, a full assessment of its impact would have to factor in its short positions, which would have gone the other way.)
As a purely practical matter, business reporters like to focus on the financial crisis and blame it for the severity of the current downturn, but this really makes little sense. The financial crisis clearly sped things along, but is there any reason to believe that house prices would be higher today in the absence of the crisis. (I'm betting they will fall another 15-20 percent in real terms.) If house prices would be at current levels, is there any reason to believe that consumers would be spending more absent the crisis, that businesses would be investing more, that builders would be putting up more homes or malls? I see zero evidence on any of these fronts, hence I don't attribute the severity of the downturn to the financial crisis. But, I'm open to persuasion.
That's what readers of a Washington Post article on the possibility of a default by Greece might be wondering. The Post told readers that:
"Other large nations, including the United States, that carry increasing levels of debt have worried that the Greek crisis could be a small-scale sketch of their own future. Sovereign debt is coming under increasing scrutiny by global markets, and many analysts fear that U.S. government bonds are not as attractive as they once were?
Of course "nations" cannot worry, only individuals within nations can worry, but the Post doesn't identify any who do. Nor does it identify the "analysts" who are finding U.S. government bonds less attractive. These analsysts are apparently offset by analysts who continue to view U.S. government debt as a very attractive asset since the yields on U.S. government bonds remain extremely low.
If there was an interest in making comparisons to Greece it would have been useful to remind readers that the United States government, unlike the Greek government, can print as much money as it wants to finance its debt during a period of economic weakness like the present. It also has a large diversified economy which is still largely self-sufficient, unlike Greece.
These differences make the comparisons to Greece highly inappropriate. While there may be people who make these comparisons as the Post claims, these unnamed individuals probably have little knowledge of economics.
The Washington Post ran a news article complaining that value added taxes are not being taken more seriously in debates over the budget. (A value added tax is effectively a national sales tax that would impose taxes in proportion to consumption.) The first sentence complained that the lack of interest in this tax stemmed from the "hyperpartisan political atmosphere" in Washington.
"Hyperpartisan" is a peculiar term to use in the context of the deficit debate since it actually does not divide people closely along partisan lines. There are both people on the left and right who argue that concerns on the deficit have been hugely overblown. There are also many deficit hawks in both political parties. "Hyperpartisan" is a favorite term of the people connected with the Peter G. Peterson Foundation, but apart from this association, there is no obvious reason that it should appear in the budget debate.
Okay, I don't know Paulson's exact role in the Goldman deal. If he helped to deliberately mislead investors about his own role, pretending to be long on a deal that he was actually betting against, then the SEC should hang him. But there was nothing at all wrong or anti-social about betting against the housing market near the peak of the bubble, as Tina Brown implied on this Morning Edition segment.
By that point, house prices had grown hugely out of line with the fundamentals of the housing market. This priced them out of the reach of millions of middle income people. The temporary run-up in prices also led tens of millions of homeowners to spend based on bubble wealth that would disappear when prices returned to more normal levels.
Betting against the bubble was not "ghoulish," as Tina Brown asserts, it was a public service. It was helping to return house prices to more normal levels. Of course this was not Paulson's motive, but it was a side effect of his bet.