Economists across the political spectrum believe that the Federal Reserve Board and other central banks failed miserably in the Great Depression, failing to respond quickly to the financial collapse in the U.S. and elsewhere. In addition, they extended the downturn by refusing to pursue aggressive monetary policy that would have countered the deflationary trends in the world economy.

While the media are not actively discussing the history of the Great Depression, the deference in current reporting to central banks certainly implies that they would not have reported any criticisms of the central banks' behavior in the Great Depression. For example, the Washington Post today reported on concerns expressed by the IMF and others over a wave of refinancing that will be necessary in the next few years. Central banks, like the Fed and the European Central Bank (ECB), could provide the money needed to support this refinancing.

While this would involve pumping trillions of dollars into the world economy, there is little basis for concern about inflation given the enormous excess capacity in nearly every sector and every country. Tens of trillions of private sector wealth has disappeared with the collapse of the housing bubble in the United States and elsewhere, so even very aggressive monetary policies would only replace a fraction of the paper wealth that existed a few years ago.

In a similar vein, NPR ran a piece on the economic crisis in Spain and never once mentioned the possibility that overly-restrictive policy by the ECB was a factor in the country's double-digit unemployment rate. Whatever other problems Spain has, it certainly would be in better shape if the euro region had a 3-4 percent inflation rate rather than the near zero rate that has resulted from current ECB policy.

Central banks often make mistakes. They made horrendous mistakes in the 30s that led to enormous suffering. This downturn was the result of their failure to recognize housing bubbles and to take steps to counter them. If an economic reporter is unable to recognize the fallibility of central banks then they should be in a different line of work.


Like the school kid who is always coming up with silly excuses for not doing their homework, corporations always blame the government for their failures. Lately they have been whining that the reason they don't hire more workers is the uncertainty created by government regulations. The Washington reported these complaints on the front page.

While the article did present the views of some economists, there is actually a very simple way to disprove the businesses' claim. The number of hours worked per worker has plunged in this downturn and risen only modestly from its lowpoint. The current average of 34.1 hours is almost 2 percent lower than the 34.7 average in December of 2007, the month the recession began.

If firms would otherwise hire workers but are being discouraged by uncertainty or regulations then the number of hours worked per worker should be increasing, not decreasing. Firms would be working their existing workforce longer rather than hiring new workers. Since firms are actually using their existing workforce less, this implies that the problem is a lack of demand pure and simple.

Businesses pay their lobbyists lots of money to develop stories that will make regulations more pro-business. Reporters should be able to assess these arguments, not just pass along to readers any silly story that a lobbyist can dream up.

In an article on the jump in the trade deficit reported for May the Post referred to trade deals as "free trade" agreements. This is not accurate since the deals actually increase many protectionist barriers and do little or nothing to reduce the protectionist barriers that sustain high wages for many professionals. The Post could save space and increase accuracy if it just left out the word "free."

NPR wants to convince listeners that the European welfare state is on its last legs. While it tells listeners this, nothing in the piece actually supports this case.

For example, it implies that growth is grinding to a halt in Europe because of its generous welfare state, noting that Europe is expected to grow just 1.0 percent this year, while the U.S. is projected to grow by 3.0 percent. Actually, GDP growth in the U.S. is projected as being close to 2.1 percent this year by the Congressional Budget Office and most other forecasters, but this is really beside the point. More importantly, no one would draw any conclusions about growth based on a single year, especially one in the middle of a downturn.

Any economist could have explained to NPR that growth in the European Union (EU) is being constrained right now by lack of demand, not lack of supply. This means that the cause of weak growth in the EU right now cannot be welfare state restrictions on supply but rather bad policies from the European Central Bank and the Bank of England (they claim to fear inflation, which in the real world ranks slightly below an invasion from Mars on the list of risks right now). If the central banks pursued more expansionary monetary policy, there is little doubt that economies across Europe would be growing more quickly. It is almost inconceivable that NPR could do a piece referring to Europe's weak growth and not note this fact.

It is also important to note that Europe has much slower population growth than the United States. Economists usually focus on per capita income as a primary measure of economic well-being, not total GDP. (Indonesia has a much higher GDP than Denmark, but because it has 40 times the population, no one would claim that Indonesia is richer.) The difference in population growth is approximately 0.9 percentage points, which means that per capita growth in the EU and the U.S. are projected to be very comparable this year.

The piece also briefly commented on the universal health care provided in Europe and implied that this may no longer be affordable. It would have been worth noting that European countries pay on average less than half as much per person as the United States for health care. In fact, the government spends more money per person on our private health care system than governments do in Europe on their more publicly controlled systems. It is absurd to imply that a switch to a U.S.-type system would somehow save money.


When the co-chairman of President Obama's deficit commission gets his deficit numbers off by 100 percent, you would think this would be worth a little media attention. But apparently this is not the case.

Therefore when Erskine Bowles warned the National Governors' Association that the country would be spending $2 trillion a year in interest on the debt in 2020, virtually no reporters thought it was worth mentioning that he had exaggerated the interest burden by a factor of more than 2 the Congressional Budget Office's "alternative scenario" (Table 1-2). 

It is difficult to believe that if Speaker Pelosi or some other prominent Democrat argued for a stimulus package because the unemployment rate is 19.0 percent that the media would ignore their disconnect with reality. It is hard to understand why neither Mr. Bowles nor his co-chair, former Wyoming Senator Alan Simpson, are not held to comparable standards of accuracy.

(Thanks to Jed Graham who got it right.)


The NYT ran a front page story about how SmithKline Beecham concealed test results showing that its diabetes drug, Avandia, increased the risk of heart attack. It would have been worth including some economic analysis pointing out that this sort of behavior is a predictable result of government granted patent monopolies.

The huge mark-ups that drug companies get as a result of this monopoly give drug companies an enormous incentive to misrepresent the results of drug trials. Not mentioning patent protection in the context of an article like this would be like reporting on the black market in blue jeans in the Soviet Union without pointing out that there was a shortage of jeans at the prices set in stores run by the government.

The Post yet again tells us that members of Congress are political philosophers, telling readers that: "Congress's inaction [in approving an extension of unemployment benefits] has been accompanied by a growing sentiment among lawmakers that long-term unemployment benefits create a disincentive for the jobless to find work."

How does the Post know what sentiments members of Congress have? Furthermore is there any reason to believe that their sentiments explain their votes on important issues?

Members of Congress get elected and re-elected by getting the support of powerful interest groups, not on their abilities as political philosophers. While the opponents of extending unemployment benefits may believe that they are bad policy, this is likely less relevant to the their votes than the political considerations behind this vote.

At the moment, the Republicans appear to have adopted a strategy of blocking anything that President Obama tries to do, with the idea that a bad economy will be good for them on Election Day. While the Post may not want to assert in a news story that this is the explanation for their opposition to extending unemployment benefits, it is certainly inappropriate to provide an alternative explanation for which it has zero evidence.

Erskine Bowles, the co-chair of President Obama's Deficit Commission and a director of the Wall Street investment bank Morgan Stanley, claimed that the current economic crisis (which is projected to add more than $4 trillion to the national debt) was "largely unforeseen." This is not true. Competent economists saw the crisis as an inevitable outcome of the housing bubble. It is remarkable that the deficit commission seems to be relying exclusively on economists who could not see this $8 trillion bubble, the collapse of which wrecked the economy.

The commission also does not appear to be considering any measures that would challenge powerful interest groups like the pharmaceutical industry, the insurance industry, highly-paid medical specialists, or the Wall Street banks. Rather than incur the wrath of these powerful interest groups by reining in medical expenses or reducing the rents earned by Wall Street bankers, the commission seems intent on taking back Social Security and Medicare benefits for ordinary workers. The reporters covering the commission should be reporting on the failure of the commission to follow its mandate in this respect.

The people who could not see an $8 trillion housing bubble before it wrecked the economy are still having a hard time seeing it even after it wrecked the economy. They fail to understand that the economy's problem is due to a loss of demand. We have seen more than $16 trillion in wealth vanish. The demand generated by this wealth cannot be easily replaced without strong action from the government.

While this basic point seems pretty straightforward, the media repeatedly refer to the downturn as a financial crisis, implying that the problem is that the financial system is not operating properly. In this vein, the NYT had a lengthy piece that reported on the difficulties that franchise owners are having in getting financing in order to maintain or expand their operations.

It is undoubtedly true that franchise owners are having more problems getting credit, but this is primarily due to the weak economy, not the state of the financial system. In a weak economy, any operation's prospects are more questionable, which makes them a greater credit risk for lenders.

This can be easily demonstrated. Many firms that compete with the franchises do not franchise their operations. Instead, the company owns the individual outlets. These large companies (e.g Wal-Mart and many McDonalds) have no difficulty getting access to credit right now, in fact interest rates are currently at historic lows. If there was a market for franchises who want to expand, but can't get access to credit, we should expect to see the large chains jumping in to fill the gap. In fact, the opposite is happening, most major stores have curtailed their expansion plans because of the downturn.

So, chalk this one up as fiction.

Yes, that would be another way of saying that the May increase was larger than the April rise, but that is what USA Today told readers. Actually inventories are a very important part of the recent pattern of growth in the economy.

During a recession inventories fluctuations tend to amplify swings substantially since it is the rate of change in the change of the stock of inventory (acceleration or deceleration) that affects GDP growth. During the downturn firms start to run down their inventories making a negative contribution to growth. When inventories stabilize, the fact that they are no longer declining adds to growth. Then when firms start to rebuild their inventories it adds even more to growth. Once firms have attained a normal rate of inventory accumulation, then inventories will provide little additional boost to growth even if firms continue to add to their inventories. 

This is very clear in the current recovery. The economy shrank at a -0.7 percent annual rate in the second quarter of 2009, it rose at a 2.2 percent rate in the third quarter, a 5.6 percent rate in the fourth quarter. The growth rate fell back to a 2.7 percent rate in the first quarter of this year. Nearly all of this variation was due to changes in the rate of inventory accumulation. There was little change in the pace of final demand growth over the last four quarters.


The rate of inventory accumulation in the first quarter of 2010 was approaching its normal level. While inventory accumulation can be faster in any given quarter, it is unlikely to provide the sort of boost to growth that it did over the last three quarters. This means that GDP growth will be closer to the rate of final demand growth, which is looking pretty weak at the moment.

The Miami Herald took first place in the contest to have the most inaccurate article on Social Security when it printed without challenge an assertion that: "For awhile, there's been a consensus among economists that raising the retirement age makes a lot of sense." This is obviously not true, since there is no shortage of economists who do not agree with this view and it is quite possible that a majority of economists do not agree with this position. Any reporter who had researched this topic at all would know that the assertion is not true and would not present it to readers as being true. 

Instead the article presented almost exclusively the views of people calling for cuts in Social Security. Remarkably, the article included no discussion at all of the likely financial situation of the retirees who would see their benefits cuts as a result of an increase in the retirement age. These workers have seen most of their savings wiped out by the collapse of the housing bubble and the plunge in the stock market. No "adult discussion" [a term used in the article] of Social Security can occur with assessing the situation of the people who would be affected by proposed benefit cuts. 

The article also never once mentions the possibility of addressing the projected long-term shortfalls in Social Security by raising the cap on income subject to the Social Security tax or by raising the tax rate. Polls consistently show that these positions are far more popular than the raising the retirement age.

In fact, the people attending a set of public meetings last week held by America Speaks, an organization funded by Peter Peterson, a long-time foe of Social Security, overwhelmingly preferred raising the cap on the Social Security tax to increasing the retirement age. This was even after being presented with a heavily biased budget book prepared by America Speaks. There is no way to write a balanced story on Social Security without mentioning revenue options.

The article also makes a point of discussing the increases in life expectancy without noting that tax rate has been increased substantially over the last 70 years, precisely to cover the cost of a longer retirement. Again, it is impossible to write a balanced article without pointing out that current workers have paid higher tax rates in order to finance a longer retirement.

The article also implies that it would be reasonable to cut Social Security benefits to finance other parts of the government. This would mean describing the payroll tax as a "Social Security" tax even though the money was being used to finance the war in Afghanistan or other expenditures. It is unlikely that this would be a popular position. If people realized that their representatives in Congress wanted to use taxes designated for Social Security for other purposes -- in effect defaulting on the government bonds held by the Social Security trust fund -- it is likely that many would be voted out of office.

Impartial reporters should be pointing out to readers what members of Congress are trying to do with their Social Security tax dollars. There would be few items that would qualify as a greater political scandal.

In a discussion of trade imbalances the Washington Post told readers that: "it was that risk -- of a collapse in the value of the dollar and of U.S. government securities -- that kept many economists up at night."Actually, competent economists were not terribly worried about this nearly impossible scenario.

China and other countries were deliberately propping up the value of the dollar in order to sustain their exports to the United States. While these countries may at one point back away from this policy because they decide it is no longer in their interest, it is almost inconceivable that they would flip overnight to the opposite policy of allowing their currencies to soar against the dollar. The idea that China would allow an exchange rate of say 4 yuan to the dollar or that Europe would tolerate an exchange of 2 dollars to the euro is almost absurd on its face. The market for these countries' exports in the United States would collapse at these exchange rates, while U.S. exports (we still export more $1.7 trillion annually) would become hypercompetitive in other countries, wiping out domestic competition.

Since the story of a dollar collapse was so far-fetched, competent economists did not lose sleep over it. They did lose sleep over the housing bubble, the collapse of which produced the economic disaster the country is now witnessing. (Unfortunately, the folks running economic policy were not among the group of economists paying attention to the housing bubble.)

Strangely, currency prices receive only passing mention in this piece on trade imbalances. This is the mechanism for adjustment. In order to move the U.S. trade deficit closer to balance, the dollar will have to fall against other currencies. There is no other plausible mechanism. It is difficult to understand why this point was not mentioned.

It is worth noting that the savings rate has increased by about 2.0 percentage points more than is implied in this article. This is the result of the statistical discrepancy in GDP accounting. At the peak of the bubble, capital gains income was showing up on the income side as ordinary income. This overstated true income and therefore overstated the savings rate. With the collapse of the housing bubble and plunge in stock prices capital gains income is no longer showing up as income in GDP accounts to the same extent. Therefore the savings rate is no longer overstated. This adjustment means that the savings rate has risen by about 2.0 percentage points more than the official data show.


[Addendum: In response to comments about the capital gains issue -- I am referring to the NIPA measure of income and savings, which is not supposed to count capital gains income. However, capital gains income did show up in this measure during the years near the peak of the stock and housing bubbles. The statistical discrepancy turned strongly negative during these years, which means that measured income side GDP was larger than measured output side GDP. (By definition, they should be equal, although measured output side is usually larger.)

We regressed the statistical discrepancy on lagged increases in stock and housing prices. The fit was extremely strong, with a very simple regression explaining almost 60 percent of the variation in the statistical discrepancy. Based on this analysis, I think it's pretty clear that the official data substantially overstate income and therefore the saving rate both at the end of the 90s and the years 2004-2007.]

In his column this morning, Paul Krugman takes issue with the claim that the Obama administration's anti-business attitude is responsible for the economy's weak investment. Krugman makes the obvious point that, given the sharp falloff in output, investment is not especially weak.

However, it would be fair to turn the tables on the people making this argument, where is the evidence that Obama's regulations have hurt investment? Some firms are affected by new regulations more than others, if his regulations are hurting investment then we should see the weakest performance in the firms that are most affected.

For example, the health care bill (the most-often cited "job-killer") imposes new requirements on business. This is true and it gives us what in principle would be a testable hypothesis. Are the
businesses that are going to be subject to new requirements (mid size firms) performing worse relative to firms that already overwhelming met these requirements (large firms that overwhelming provided
coverage) or firms that are not going to be subject to requirements (fewer than 50 workers). None of the "Obama is killing investment crowd" have even tried to sketch this one out. A similar analysis could be constructed with regards to most other regulations.

It would be interesting to see if the evidence actually supported the anti-business hypothesis in the case of health care or any other regulation. My guess is that it doesn't, but until someone produces such evidence, the anti-business explanation for weak investment is basically just name calling.

In an article discussing measures that the Fed could take to provide a boost to the economy, the Washington Post tells readers:

"When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now."

The markets don't tell anyone why they moved in a certain direction at a specific time. It is not clear what spike the article is referring to, but the cause of the spike is entirely the interpretation of the Post and should clearly be identified that way. The Post does not really know what caused interest rates to rise, it is presenting its speculation to readers as a fact that is then used to support the case for a more cautious monetary policy.

The NYT noted the split within the Democratic Party between those who want to see more stimulus and those who want the government to focus on deficit reduction. It then told readers:

"But in a more fundamental way, the argument over fiscal policy represents the churning of a cultural fault line that has defined and destabilized Democratic politics pretty much since the onset of the Great Society."

Umm, "cultural fault line?" I remember the 60s. There were student and anti-war types on one side and the Democratic Party establishment on the other side, a key bulwark of which were the unions. What does this split have to do with the current divide, which places anti-war types and unions on the same side against Wall Street and business oriented Democrats on the other side?

The focus on "culture" rather than economics leads to further confusion throughout the piece. The article argues the need to rein in entitlement spending. No one disputes the need to reduce the trend growth rate in spending on Medicare and Medicaid. The question is how this is accomplished.

The Wall Street Democrats want to cut spending by reducing benefits under these programs. The "traditional" Democrats want to reduce spending by making the U.S. health care system more efficient. If per person health care costs were the same as in the U.S. as any other wealthy country, then the United States would be looking at enormous surpluses in the long-term, not deficits. However, fixing the U.S. health care system would involve reducing the profits of the insurance industry, the pharmaceutical industry and other powerful interest groups in the health care sector. The Wall Street Democrats do not want to hurt these interest groups while the traditional Democrats do.

In her column bashing AFL-CIO President Rich Trumka, Washington Post columnist Ruth Marcus complains that Trumka got angry at the suggestion that the retirement age for Social Security be raised in response to the increase in life expectancy in recent decades. Apparently, Ms. Marcus did not know that the retirement age has been raised already. In 1983, Congress voted to raise the normal retirement age from 65 to 67 over the period from 2002 to 2022. Ms. Marcus seems unaware of this 27 year-old law.

Marcus also implies that Trumka believes that the country's fiscal problems can be solved exclusively by taxing the rich. This is  not true. Trumka and the AFL-CIO have consistently been strong proponents of measures that would make the U.S. health care system more efficient, such as a public health insurance option and negotiated prices for prescription drugs.

Such measures would make health care much more affordable for both the public and private sector. If per person health care costs in the United States were the same as in any other wealthy country, the United States would be looking at huge long-term budget surpluses rather than deficits. It is difficult to understand how Marcus could have missed this aspect of Trumka's political  agenda.

It is important also to note that measures that reduce the trend toward growing inequality, such as improved corporate governance that reins in CEO pay or a trade policy that is not designed to increase inequality, would also have beneficial budgetary impact. As more income goes to those at the middle and bottom, there would be less need for various government transfer programs. It would be useful if Post columnists would try to directly address the agenda of the unions, rather than caricature it in order to discredit it.

The NYT had an article on the growth on India's pharmaceutical industry in which it raised its enforcement of patent laws as an issue affecting manufacturers' decision to locate in India. There is no obvious reason why there should be any relationship between the two.

Scientists in India can gain the knowledge to manufacture patent protected drugs regardless of where the manufacturing operations are located. Placing the facilities within India would minimally increase this ability. It is difficult to believe that this additional risk would be an important consideration for drug companies although they may use their location decision as a way to coerce India and other countries to adopt more protectionist patent regimes.

It is standard in the United States to report GDP growth and other economic data as annual rates. That is not the case in other countries where it is common to use quarterly growth rates. Rather than just picking up the number as reported in other countries, reporters should convert it to an annualized rate so that their audience in the United States will understand what is being reported. (This is the point, right?) Usually, just multiplying by 4 gets you there, although for higher growth numbers, it would be best to do it right and take the number to the 4th power.

The NYT got it wrong this morning in telling readers that the UK grew 0.3 percent in the first quarter. Its annual rate of growth was 1.2 percent.

That is the way reporters are supposed to report on the opposition by members of Congress to extending unemployment benefits and aid to the states. Reporters do not know the actual reason that these representatives are voting against these measures, they only know what they say.

That is why NPR got it wrong when it said that opponents of more stimulus spending are concerned about the deficit. This misled listeners this morning.

The NYT warned readers that rising labor costs in China pose a serious threat to many companies that manufacture products there:

"makers of personal computers, cellphones and other electronics — including Dell, Hewlett-Packard and LG — deal with much slimmer profit margins [than Apple] according to several analysts. 'The challenges are going to be much bigger for them,' Ms. Lai said. Most other industries, from textiles and toys to furniture, are under considerably more pressure."

Actually, since China is the low-cost producer, it is not clear that rising wages there will pose a serious threat to even low margin firms. If costs for competitors rise also, due to the higher wages, then all the firms in the industry will be able to raise their prices to cover their costs leaving their margins little affected.

Morning Edition ran a piece (not on its website) today that presented the view of the Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, that the national debt is the greatest threat to the security of the United States. According to the piece, Mr. Mullen claimed that in a couple of years the United States would be spending $600 billion a year in interest, an amount that he claimed was larger than the defense budget.

According to the Congressional Budget Office, the government is projected to spend $298 billion in interest in 2012 (@ 2 percent of GDP), less than half of projected spending on defense.


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