The lead Washington Post editorial complained that the pro-stimulus crowd is not supporting its plan to cut Social Security benefits or to raise taxes on the middle class as a path to deficit reduction, insisting that this means they are not serious about reducing the deficit in the long-term. In fact, many progressives have supported measures that would address the long-term budget problem with items like a financial speculation tax.

There are also measures that would substantially reduce health care costs like publicly funded clinical drug trials which could allow all drugs to be sold as generics for $4 per prescription. This would save hundreds of billions annually in spending on prescription drugs. We could also allow Medicare beneficiaries to buy into the more efficient health care systems of other countries, with the government and the beneficiaries splitting the savings. This could save trillions of dollars in the decades ahead.

However, the Post does not even want these ideas discussed since they could hurt the powerful interest groups whom they favor. Rather, the Post insists on measures that will low and middle income families.

It is also worth noting that the reason the deficit has soared in the last few years has been due to the collapse of the housing bubble. If the Post had not almost exclusively on economists who could not see an $8 trillion housing bubble as its sources and for its oped page content, it is possible that policymakers would have noticed the bubble and acted to rein it in before it grew large enough to wreck the economy.

With so much focus on the deficit it's probably hard to keep track of things like the unemployment rate. This is the likely explanation for a USA Today article that told readers in its first sentence: "last week's disappointing report on the job market may not be as dreary as it appears."

The article explained that many of the 411,000 workers who took jobs with the Census may have taken private sector jobs had they not had the option of working for the Census. According to the article, these people opted to take what they viewed as relatively high-paying and easy temporary jobs rather lower paying permanent positions in the private sector. It refers to evidence of a similar effect in prior years when Censuses were conducted.

It is important to note that the question is not whether the Census workers would have taken other jobs (they may have), but whether anyone would have taken the other jobs. The argument in USA Today is that low-paying jobs have gone unfilled because employers, who would have hired the Census workers, view other applicants as being unqualified. The comparisons to past Census years is dubious. The unemployment rate was 4.0 percent in 2000 and 5.0 percent when the 1990 Census was being conducted.

In a short piece on consumer borrowing the Washington Post told readers that: "economists are hoping that households will soon borrow more and help sustain the recovery." This may be true of the economists who Post reporters rely upon as sources, but it is not true of economists in general. Most households, including those at the edge of retirement have very little savings. With deficit hawks like the Washington Post editors and news reporters insisting on the need to cut Social Security and Medicare, it would be very unfortunate if these households did not increase saving and reduce their current consumption. The economists cited by the Post must want these people to live in or near poverty in their old age.
The NYT reported on a speech by UK Prime Minister David Cameron in which he insisted on the need for large budget cuts and/or tax increases. The article included no assessment of this agenda from economists. Many prominent economists, such as Nobel Laureates Paul Krugman and Joe Stiglitz, have argued that deficit reduction in the near future will lead to higher unemployment and slower growth. Unlike the vast majority of proponents of fiscal austerity, these economists were able to see the $8 trillion housing bubble that wrecked the U.S. economy.

That could have been the headline of an NYT article that reported on Federal Reserve Board Chairman Ben Bernanke's warning that the government had to reduce its budget deficit. The article quotes Mr. Bernanke as saying:

“We can see what problems can arise in a country if investors lose confidence in the fiscal position of that country, so it is very important that we address this problem.”

This might have been a good place to point out that Mr. Bernanke could not see the $8 trillion housing bubble whose collapse gave us the worst economic crisis since the Great Depression. It could have also pointed out that it is not clear what he meant, since Greece his presumed point of reference, has very little in common with the United States. Greece is a small economy that is far more dependent on international trade than the United States. It also does not have its own currency.

For these reasons, economists who can see an $8 trillion housing bubble do not think that the experience of Greece tells us: "what problems can arise in a country if investors lose confidence in the fiscal position of that country." The NYT erred badly in not noting Mr. Bernanke's poor track record in discussing his latest pontifications on economic policy.

The NYT told readers that Germany has to make big cuts in its budget because:

"Germany has its own reason for introducing cuts: It is legally bound by the “Schuldenbremse,” or debt brake, that Parliament passed last year. This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now. Net borrowing, which will rise to about €86 billion this year, or about €48 billion more than in 2009, is the largest since World War II, according to the Finance Ministry."

I can't tell what is intended here, but clearly not what the article says. Debt of course is a stock, but the subsequent discussion refers to annual deficits, which are flows. Furthermore, a debt limit of 0.35 percent of GDP is ridiculously low, the euro zone is supposed to set a cap of 60 percent for the debt to GDP ratio, although almost every member state is now above this cap.

Anyhow, something is clearly wrong here, hopefully an editor will get it straightened out.

Robert Samuelson tells us that the problem behind the Gulf oil spill and the housing bubble meltdown is not the corruption of industry and regulators, but rather complacency born of success. In the case of the oil industry, Samuelson noted that the industry has been drilling close to 1.6 million barrels a day, with only a few hundred barrels a year being spilled. He makes a similar argument about the financial sector, noting the sharp decline in daily stock market volatility.

It is worth noting that the sort of bad events that one expects in these sectors are almost by definition going to be very rare (we will not have huge spills or financial collapses on a weekly basis) and very costly. Any regulator must understand this fact and if they are competent would not allow their judgment to be affected by the absence of a bad event for a long period of time. The cost of the economic meltdown will be at least $5 trillion in lost output in the United States alone. By contrast, the benefits from reduced daily volatility are trivial. (How much do you care if you risk buying a stock at a price that is 0.2 percent too high, when you have an equal probability of getting it at a price that is 0.2 percent too low?)

So, if our regulators cannot understand the potential harm from extremely rare, but extremely costly, disasters, then the country has a very serious problem.


NPR had a segment on Morning Edition which badly misled listeners about the potential economic impact of a temporary ban on deepwater drilling. The piece focused on the impact of oil on the economy of Louisiana and the Gulf region. In doing so, it highlighted the total impact of the oil industry, not the marginal impact of additional drilling.

For example, it told listeners that oil accounts for 16 percent of Louisiana's state GDP compared to 1 percent for fishing and 4 percent for tourism. This is an interesting set of numbers but it has nothing to do with the impact of a ban on new deepwater drilling. No one is proposing that existing wells be shut down. This means that the vast majority of this 16 percent of GDP will not be affected by the ban. (It is also worth noting that the vast majority of this 16 percent accrues to BP and quickly leaves the state.)

The piece does later give an estimate from the state's development department that the bad on drilling could lead to a loss of 20,000 jobs (this presumably includes indirect effects). By comparison, Louisiana has approximately 120,000 construction jobs. If we assume that each construction job indirectly generates 0.5 jobs elsewhere then the ban on drilling would have roughly the same impact as a ten percent decline in construction employment.

There is no doubt that this is the steepest and longest downturn of the post-World War II period. However, the number of the long-term unemployed (more than 6 months) is not a good measure of its severity.

The reason is simple, benefits are available for a much longer period of time than has been the case in prior downturns. In some states benefits are available for as long as 99 weeks. This gives unemployed workers the opportunity to spend more time looking for work than would otherwise be the case. Therefore, they are less likely to take a job that means a large pay cut and/or does not fully utilize their skills. Also, some people who may otherwise drop out of the labor force continue to search for work (and get counted as unemployed) because looking for work is a condition for receiving benefits.

It is important to realize that this does not necessarily mean that extended benefits are raising the unemployment rate. If the long-term unemployed took low-paying jobs they would mostly be replacing other workers. However, the unusually long duration of benefits prevent a direct comparison of the number of long-term unemployed across recessions.

[Addendum: From some of the comments I realize that I may not have been very clear. I think that extended benefits are a good thing. We have a very severe problem of unemployment; the worst since the Great Depression. In this context, it makes sense to give unemployed workers more time to look for new jobs. That increases the probability of finding a job that fully utilizes their skills. (To take an extreme example, it would not only be bad for the worker, but a loss of skills for the economy if a brain surgeon was forced to take a job as a checkout clerk.)

However, if we extend the period of benefits to allow workers to take more time to find an appropriate job, then it should not be surprising that workers take more time to find an appropriate job. The duration of unemployment is no longer a consistent measure of the severity of the unemployment problem. This is just a measurement issue that reporters (and many economists) have been getting wrong.]

Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs. In this context, the downward revision of the first quarter number to 2.8 percent yesterday should have been good news. We know longer need to worry about rapid productivity preventing job growth. The 6.1 percent growth rate from the first quarter of 2009 to the first quarter of 2010 is only slightly faster than the 5.4 percent increase from the third quarter of 2002 to the third quarter of 2003 and the 5.3 percent growth from the first quarter of 1970 to the first quarter of 1971. It is the same as the rate from the first quarter of 2001 to the first quarter of 2002. In short, the rapid rate of productivity growth coming out of the recession should not have been a surprise.

It is also worth noting that better than expected productivity reflects directly on the intergenerational issues that the deficit hawks constantly rise. If productivity grows more rapidly than expected, then future generations will be wealthier on average than our projections show. This suggests that deficits are not having a negative impact on their well-being.

Good piece in USA Today discussing the usefulness of job training in the middle of a downturn.

Probably not the medical profession either. In discussing school reform today he applauded the fact that the Obama administration was making it easier to fire teachers, telling readers: "in every other job in this country, people are measured by whether they produce results." How many economists suffered any career consequences after failing to foresee the largest economic crisis in 70 years? You can't mess up more than Chairman Bernanke and company. Yet, they all still have high-paying jobs -- they probably didn't even miss a scheduled promotion.

The same obviously applies to many of those Wall Street high-rollers who would have sank their companies had it not been for the bailout from the nanny state. (I will refrain from commenting on reporters and columnists.) So, insofar as teachers are not evaluated based on their performance, they are clearly not alone.

It is also worth noting that it is not as easy to measure teacher quality as Brooks and many others seem to believe. Berkeley economist Jesse Rothstein found that "good" 5th grade teachers improved the scores of their students in 4th grade. The issue here is obviously one of selection. Parents who are very involved in their kids education make sure that their kids are taught by a teacher who is considered to be good. This means that part of the explanation for their better student test scores is that they are getting better students.


USA Today told readers that, "small businesses usually help drive job creation during recoveries but credit clogs have hurt hiring," in the context of covering a speech by Federal Reserve Board Chair Ben Bernanke. Mr. Bernanke did not actually say that credit clogs are hurting small businesses in his speech, noting the possibility that banks have reduced lending because they see fewer good lending opportunities.

If it is the case that banks have reduced lending because of inadequate capital then we should be seeing two things:

1) Banks that do not have weak capital conditions should be lending aggressively, since there are many good loan opportunities that are not being met by their competitors; and

2) Larger firms, who can raise capital directly on capital markets (e.g. by issuing bonds or commercial paper) should be expanding rapidly to take advantage of opportunities that are closed to their capital constrained competitors.

There is no obvious evidence of either #1 or #2, suggesting that the issue is not a problem of capital constraints by weak banks, but rather a situation where firms weakened by the recession are less creditworthy than they were formerly.

In the weeks since the end of the extended first time homebuyers tax credit purchase mortgage applications have fallen sharply. They dropped another 4.1 percent last week reaching their lowest level since April of 1997. This deserved some attention since it implies that home sales are falling sharply. This suggests that the price declines seen in recent months are likely to accelerate in the summer.

Morning Edition did a brief overview of the prospects for the financial reform bill as it heads to a conference committee. The piece concluded by citing Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation:

"He says that over the next two years, as regulators work out the details of the Volcker rule, the current anti-bank anger will probably subside. Litan says that will allow more rationality and less emotion to be applied to the issue."

The anger at the conduct of the bank has brought much more public involvement into an area that is normally the exclusive preserve of bank lobbyists. If the anger dies down, then the only people left in the room will be the bank lobbyists. This may not bring more rationality to the debate, but it will likely ensure that the final provisions more closely reflect the interest of the financial industry.

Steven Pealstein hits a homerun with his column today. He notes the efforts of the Blue Dog Democrats to increase payments to doctors under Medicare. These are the same folks who have gained notoriety in recent days for opposing the extension of jobless benefits and funding to support state Medicaid programs.

David Leonhardt devoted his column day to consider the dilemma of the deficit hawks who are trying to decide whether to support the jobs bill. It outlines several of the main arguments as to why it would make sense to support additional jobs measures, while also noting (and exaggerating) the basis for concerns about the deficit.

However, the article neglected one important factor in the debate. We are in this situation because the deficit hawks, like Representative Jim Cooper who is featured in the piece, were unable to see the $8 trillion housing bubble that eventually sank the economy. In other words, we have 9.9 percent of the workforce unemployed, with almost as many either involuntarily working part-time or having left the workforce altogether, because people like Jim Cooper could not see the largest financial bubble in the history of the world.

Mr. Cooper enjoys a hefty six-figure salary and can look forward to a comfortable pension. This makes him far better off than the tens of millions of workers who are now suffering because of the incompetence of Mr. Cooper and his colleagues.

In any debate over jobs measures it is worth noting the irony that the people who are suffering at present are suffering due to the incompetence of people who are very comfortable, in spite of having failed disastrously at their jobs. And, the incompetents are now torn deciding the fate of those who are suffering as a result of their incompetence.

David Leonhardt's magazine piece on mis-estimating risk gets the story of BP largely right. The top executives felt free to take big gambles with safety and the environment because it was entirely a one-sided bet for them. Large profits from increasing production could mean millions or even tens of millions of dollars in additional compensation each year. On the other hand, the downside from even the worst possible disaster carried little consequence for top executives (who will still be hugely rich) or even the company since Congress capped liability at $75 million.

However he gets the story of the housing bubble and the budget deficit almost completely wrong. He argues that Greenspan and Bernanke missed the fact that the economy faced a nationwide housing bubble because we had never seen one before. While that may be partially true, this comment also ignores the incentives facing the Fed chairs. Large financial companies like Goldman Sachs and Citigroup were making enormous profits from the financing that fueled the bubble. If Greenspan or Bernanke had tried to clamp down on the bubble they would have been confronted by the full force of this powerful industry. They may have found themselves ridiculed and pushed to the side as happened to Brooksley Born when she tried to regulate derivatives in 1998 as head of the Commodities and Futures Trading Commission.

In contrast, their decision not to clamp down on the bubble led to catastrophic results leading to the worst economic downturn in 70 years with tens of millions of people unemployed or underemployed. Yet, both Greenspan and Bernanke are still wealthy men and highly respected. In fact, Bernanke was reappointed to a second term as Fed chair in spite of his disastrous first term.

In short, the problem was not that they underestimated risk. The problem is that they face an entirely assymetric tradeoff structure. Clamping down on financial speculation was sure to have serious consequences for their careers, even if they were right. By contrast, failing to regulate properly did not seem to damage either man's wealth or stature in any major way even though it led to just about the most distrous possible outcome.

Leonhardt also gets the story of the risks from the budget deficit largely wrong.  He writes:

"The big financial risk is no longer a housing bubble. Instead, it may be the huge deficits that the growth of Medicare, Medicaid and Social Security will cause in coming years — and the possibility that lenders will eventually become nervous about extending credit to Washington. True, some economists and policy makers insist the country should not get worked up about this possibility, because lenders have never soured on the United States government before and show no signs of doing so now. But isn’t that reminiscent of the old Bernanke-Greenspan tune about the housing market?"

First, it is pecular to include Social Security in this list. Social Security is growing at a relatively slow pace. It is projected to grow less rapidly than interest on the government debt. Like interest on the government debt, Social Security benefits have already been paid for in advance by their beneficiaries. Wall Street tycoons like Peter Peterson have been desperate to gut Social Security for decades and have invented numerous stories (e.g. that the Trust Fund does not exist) to advance their agenda. However a responsible newspaper should not be advancing this agenda under the guise of news reporting.

The projected growth of Medicare and Medicaid, driven by the explosive growth of health care costs in the private sector, will impose strains on the budget. However, if the growth in health care costs really follows the path assumed in budget projections it will provide a much greater burden on the private sector than the public sector. It is difficult to imagine that the public will itself to be priced out of the market for health care rather than taking simple and obvious steps that challenge the industry's power and ability to continually jack up prices. The point is that this is first and foremost a health care problem. It is only the Peterson Wall Street gang that insists on discussing the issue as a budget problem.

The second reason why the discussion of the budget is not entirely right is that we have been here before. The country has had ratios of debt to GDP in excess of 100 percent following World War II. In spite of this debt burden, interest rates remained low and the economy grew rapidly. Other countries, like the UK and more recently Japan and Italy have sustained much larger debt to GDP ratios without seeing any financial panics.

Finally, unlike Greece, which does not control its own currency, the debt of the United States is in dollars and the United States can always print more dollars. This means that the actual risk is not insolvency, but inflation, since the country would presumably print money rather than face bankruptcy. An honest discussion of the debt problem in the United States would discuss the risk from inflation. In the current environment, this is extremely low. In fact, according to a recent paper by Olivier Blanchard, the IMF's chief economist, the United States would actually benefit from a somewhat higher inflation rate (3-4 percent) since it would reduce debt burdens and lower the real interest rate.

So, the supposed threat from the deficits has been seriously misrepresented by the Wall Street deficit hawks. It is hardly irrational to disregard threats that are incoherent.



The Washington Post reported that several state governments are now trying to remove a clause in the financial reform legislation that could limit the fees that credit card companies charge retailers. The article noted the states' claim that it cost them just 1.5 cents to load benefits like Food Stamp payments onto an electronic card while it can cost 60 cents to issue a check.

The article implies that states could be forced to go back to issuing checks for benefits if they were not able to take advantage of electronic cards that the credit companies now issue for free since they can get back their costs by charging retailers high fees. This is of course absurd. If the credit card fees are limited then states may have to pay a somewhat higher cost to the credit card companies so that they can recoup the cost of issuing the cards, however this would almost certainly be far below the cost of writing checks.

In effect, the credit card companies are using their market power to gouge retailers and sharing some of their gains with state governments to buy their support on this issue. The news article should have pointed this fact out to readers.

The Washington Post notes the conventional wisdom of the Washington elite that there should be a run on U.S. bonds because of the size of the country's debt and deficits. It then points out that the markets seem to be contradicting the conventional wisdom. It is worth noting that nearly all of the purveyors of this conventional wisdom completely missed the $8 trillion housing bubble, the collapse of which wrecked the economy. Missing a bubble of this enormous size suggests that this convention wisdom is not grounded in a serious understanding of the economy. It would have been worth noting this point in discussing the conventional wisdom.

The article also asserts that: "the mix of spending cuts and tax increases that could close the gap [the budget deficit] are wildly unpopular." This is not true. During a period of extraordinarily high unemployment, like the present, there is no reason that the Fed could not simply buy and hold the debt being issued in order to prevent future interest burdens from increasing. To reduce future health care expenditures the government could publicly finance clinical trials for prescription drugs, thereby allowing all new drugs to be sold as generics for a few dollars per prescription. It could also allow Medicare beneficiaries to buy into the lower cost health systems in other countries, sharing the huge savings with the beneficiaries. The government could also roll back defense spending to the levels projected before the wars in Afghanistan and Iraq. And, to raise revenue the government could impose a financial speculation tax like the one that currently exists in the UK.

There is no evidence to suggest that any of these measures are wildly unpopular although powerful interest groups may object to them.

I'm not sure of the point of David Brooks' column today other than to fill space and earn his paycheck, but one of the items on his list of complaints simply does not make any sense. He tells readers, presumably in reference to the stimulus, that "the money is spent."

It's not clear what Brooks thinks he means by this. Insofar as the country still suffers from high unemployment (Brooks tells us in the next paragraph, "unemployment will not be coming down soon") there is no lack of money for additional stimulus. The government can have the Fed hold the debt issued to finance the spending so as not to increase the interest burden on the Treasury in future years. (The Fed refunds its interest to the receipts.) So there is no plausible meaning to the idea that "the money is spent". This just seems to be a case of Brooks wanting to express his generic unhappiness with the current situation.

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