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Millions of Children are Growing Up With Unemployed Parents Because of Fix the Debt and Other Deficit Hawks Print
Tuesday, 12 February 2013 08:03

While a Washington Post piece gave extensive coverage to the Post's favorite deficit hawks in a piece on the budget deficit, it did not include anyone who could present the basic economic facts to readers. The reason the deficit expanded from just a bit more than 1.0 percent of GDP in 2007 to more than 10 percent of GDP in 2009 and 2010 was that the economy plunged following the collapse of the housing bubble. The deficit was and is filling in a demand gap in the private sector as a result of this collapse.

The fact that deficit hawks would not allow the government to spend more money is keeping the economy from returning to full employment. As a result, close to 9 million people are out of work who would be employed if the economy were operating near its potential. This is forcing millions of children to grow up in families with one or both parents unemployed. It would have been helpful if the Post had presented the view of someone familiar with basic economics who could have reminded readers of these facts.

It also would have been helpful to include the views of someone who could have ridiculed the obsession with a debt to GDP number. When interest rates rise, as the Congressional Budget Office projects, the price of the long-term debt that we are issuing today (e.g. 10-year and 30-year bonds) will plummet. This means that the government could buy these bonds back at sharp discount rates eliminating trillions of dollars in debt. (For example, a 30-year bond issued with a 2.75 percent interest rate last year, would sell for less than 60 cents on the dollar in 2016 if the interest rate has risen to 6.0 percent. This would mean that if we bought back 30-year bonds with a face value of $2 trillion, it would only cost us $1.2 trillion. This would instantly eliminate $800 billion in debt, lowering our debt to GDP ratio by roughly 5 percentage points.)

This move would be completely pointless since it would not change our interest burden at all. But since Washington budget wonks seem to think the debt to GDP ratio is hugely important, it would be a very simple and costless way to make them all very happy. It would have been useful for the Post to note this so that its readers would realize that the budget debate in Washington is pretty much complete nonsense from an economic standpoint.

Currency Values Are Not Determined by the Market When Central Banks Buy Currencies Print
Tuesday, 12 February 2013 06:06

A NYT piece reported on concerns by the French government and others over the rising value of the euro. They were concerned that a higher valued euro would make French and other euro zone goods less competitive in world markets. In response the piece included two statements that are at best misleading. 

It presented the views of Jens Weidmann, the head of Germany's central bank, who said,  "warned that an exchange rate policy aimed at weakening the euro would 'in the end result in higher inflation.'"

The inflation rate in the euro zone has been below even its 2.0 percent target. While anything that increases in demand will lead to somewhat higher inflation, other things equal, it is implausible that modest declines in the euro will lead to serious problems of inflation in the euro zone economies. 

After telling readers that "a number of ministers agreed Monday that intervention would be wrongheaded," the piece then presented the view of Maria Fekter, the Austrian finance minister:

“'This is mainly decided by the market, ...I find an artificial weakening unnecessary.'”

In fact exchange rates are not currently being decided by the market. Many countries, most notably China, are buying up large amounts of foreign currency. This has the effect of keeping down the value of their currencies against the dollar and the euro.

In a normal market situation we would expect that the wealthy countries would have trade surpluses with the developing world, which means that they are lending them capital. However due to the malfunctioning of the international financial system, the capital flows have gone sharply in the opposite direction over the last 15 years.

David Brooks Is Lost in Time Print
Tuesday, 12 February 2013 05:34

David Brooks told us again today that he doesn't like Social Security and Medicare. He does this frequently in his columns although usually while he ostensible makes some other point.

Today's other point is that the country is less forward thinking in the past. A main piece of evidence in this regard is the money that we are spending on Medicare and Social Security.

"The federal government is a machine that takes money from future earners and spends it on health care for retirees. Entitlement spending hurts the young in two ways. It squeezes government investment programs that boost future growth. Second, the young will have to pay the money back."

Both parts of this are of course wrong. Brooks assumes that the federal government would be able to collect the same tax revenue if it didn't have Medicare as if it did. That is implausible. Medicare is an enormously popular program for which people are willing to tax themselves. It is not likely that if we nixed Medicare that we could raise the same tax revenue and simply use the money for something else. (We would at least have to change the name for the designated Medicare tax.)

It is also important to note that the excessive spending for Medicare is not due to the fact that seniors in the United States are getting such good care, but rather that we pay more than twice as much per person as people in other wealthy countries. If we paid the same as people in other wealthy countries then we would be looking at long-term budget surpluses, not deficits. In this sense it is not a question of transferring money from future earners to give to retirees, it is a question of taking money from future retirees to pay drug companies, doctors, and others in the health care industry.

It is also inaccurate to say "the young will have to pay the money back." Of course the debt never literally has to be paid back, the government debt has grown in nominal terms almost every year in the last century. Even the interest will be paid from some future earners to other future earners so government debt ends up being a transfer within generations, not between generations.

The piece also includes a couple of other items about a lack of future orientation that are between bizarre and wrong. Brooks tells readers:

"Banks can lend money in two ways. They can lend to fund investments or they can lend to fund real estate purchases and other consumption. In 1982, banks were lending out 80 cents for investments for every $1 they were lending for consumption. By 2011, they lent only 30 cents to fund investments for every $1 of consumption."

No data source is cited for this statistic, however if Brooks is just referring to bank lending (as opposed to all credit) then the obvious explanation would be the development of the junk bond market. Many mid-sized and even large firms that would have been dependent on bank loans for investment in 1982 (the middle of the recession -- a year when housing was hugely depressed) can now borrow directly in capital markets without going to banks. It is not clear what this tells us about the country's future orientation.

He then adds:

"Increasingly, companies have to spend their money on retirees, not future growth. Last week, for example, Ford announced that it was spending $5 billion to shore up its pension program. That’s an amount nearly equal to Ford’s investments in factories, equipment and innovation."

This one is a real head-scratcher. Has Brooks missed the plunge in defined benefit pensions over the last three decades? How about the rapid disappearance of employee health care coverage? The trend here seems to be going rapidly in the other direction. Pensions are of course are part of workers' compensation, just like pay. Companies are supposed to put aside money at the time pension liabilities are accrued, so a properly managed pension fund does not imply a drain on the future.

Of course the country does seem to have shortage of people with proper skills in finance, so many companies do have underfunded pensions. However this has little to do with preferring the present over the future, as opposed to a simple lack of skills in an important sector of the economy.


Robert Samuelson Is Worried the Justice Department is Persecuting S&P Print
Monday, 11 February 2013 05:53

Robert Samuelson is worried that S&P is being persecuted by the Justice Department which is suing the company for mis-rating tens of billions of dollars of mortgage backed securites. He argues that S&P was suckered by the housing bubble just like everyone else.

While the claim that they believed that house prices could only rise is probably true (most economists and policy types believed this in the years 2002-2006 -- you don't get fired in economic policy work for making huge mistakes) that has little to do with the charges leveled by Justice Department. These charges claim that S&P changed its rating model in order to get more business. If S&P did not alter ratings to get business then the Justice Department will probably not get far with its case.

There is no inconsistency between the claim that actors in the financial industry both believed in the bubble and committed fraud, as Samuelson seems to think. In a rising housing market every mortgage is a good mortgage. Even if the borrower never makes a single payment, the lender ends up in possession of a home that has risen in value and can likely be resold to cover the cost of the mortgage. This could mean that lenders issue mortgages without proper underwriting (e.g. they make up information) because they know that there will be plenty of potential buyers for the mortgage. The investment banks go along with the hoax because everyone is making money. So do the rating agencies and the captive regulators. The fact that all of these people might be clueless about markets and the economy hardly precludes the possibility that they committed massive fraud.



How Does Greg Mankiw Know that Wage Inequality Is Due to Technology? Print
Sunday, 10 February 2013 06:30

As opposed to alternatives like macroeconomists who lack skills in running the economy? Mankiw asserts as a fact that technology is responsible for the upward redistribution of income over the last three decades, but it is not clear that the evidence supports his story. After all technology had a much larger impact in increasing productivity in the decades from 1947 to 1973 yet workers shared in these gains more or less equally.

If technology explains the shift those who try to explain the timing of the process, like M.I.T. professor David Autor, have had a difficult time making their case. The villains that some of us would point to are anti-union measures by government and businesses that have weakened workers' bargaining power, trade policy that was designed to put less-educated workers in competition with people in the developing world while largely protecting the most highly educated workers, patent and copyright policy that increased the rents pulled out of the economy for these monopolies, and macroeconomic policy that has led to more unemployment in the last three decades than in the early post-war period. High unemployment tends to disproportionately hit less educated workers, both by having more impact on their probability of being unemployed and reducing their wages.   

It is easy for Harvard economic professors to assert that technology is the cause of inequality. It is much more difficult for them to produce the data to prove their case. 

The Housing Bubble Should Not Have Been Hard to See Print
Saturday, 09 February 2013 20:34

Economists and other policy types are working hard to maintain the absurdity that the housing bubble was hard to see. Hence we have Federal Reserve Board Governor Jeremy Stein pontificating on how the Fed should deal with bubbles and the Post playing along with the gag.

Let's just run through the basic facts. Nationwide house prices had sharply departed from a 100 year long trend in which they had just kept pace with the overall rate of inflation. At the peak of the bubble in 2006 they were more than 70 percent above their trend level. Housing construction rose from its average of 3-4 percent of GDP to over 6.0 percent of GDP. This was at a point when the demographics would have led observers to expect a drop in construction since the baby boom cohort was seeing their kids move away from home and would have been looking to downsize. On top of this, the vacancy rate was already at record levels as early as 2002. It kept rising to new record highs year by year after that.

The savings rate had dropped from a pre-stock bubble average of more than 8.0 percent to near zero at the peak of the bubble. Again, the demographics with the baby boom cohort in its peak saving years would have led one to expect a rise in the savings rate.

Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. And this is before we even talk about the explosion of the subprime market, the Alt-A market, and the huge number of homeowners buying houses with no money down.

Folks this was really really easy. The economists and other policy types who are trying to say it was difficult to see are just covering their rears.

Young People Today Can't Even Conceive of Wage Growth Print
Saturday, 09 February 2013 18:39

That is undoubtedly what readers of Matt Yglesias' blogpost on immigration and retirement income are saying. Matt correctly notes that an economy cannot collectively save for a generation's retirement in the sense of putting aside the goods and services that the generation will consume in retirement. His conclusion is that we need large numbers of new workers to support our current or soon to be retired population. This leads him to call for a much larger number of immigrants.

While we may want more immigrants, the need to support a larger retired population should not rank high on the list of reasons. According to the Social Security trustees projections, a more rapid pace of immigration will make little difference to the program's finances. This is due to the fact that immigrants will also get benefits. Since they tend to work for lower pay during their working lifetime, and the program's payout structure is highly progressive, the net gain from more immigrants is limited. Increasing the projected immigration level by 30 percent reduces the projected long-term shortfall by less than 10 percent.

On the other hand, suppose that real wages grow roughly in step with productivity. If we saw real wage growth of 1.5 percent annually, then the tax increase needed to meet the projected 75-year shortfall would be equal to 4.6 percent of projected wage growth over the next 30 years. Suppose we got real kinky and imagined we saw some of that 2.0 percent annual wage growth that we had in the golden age (1947-1973). Then the tax increase need to main the program's solvency would be equal to just 3.2 percent of projected wage growth over the next 30 years.

The story here is straightforward. We expect retirees' income to be related to their living standards in their working lifetime. If wages grow rapidly then it is easy for a smaller number of workers to support a growing population of retirees while still ejoying a rise in living standards. This is the way the world used to work. It might not be easy for political reasons to get back to that world, but we should at least know that such a world did once exist and is still possible. 

Post Misses Opportunity to Ridicule Obama Administration on Trade Data Print
Saturday, 09 February 2013 09:29

The trade deficit has been rising throughout the recovery. For arithmetic fans this is bad news. It means that the United States has net negative savings. That in turn means that either the government must run deficits or the private sector must have negative savings. There is no way around that fact, which means that people unhappy with the budget deficit should be unhappy about the direction of trade.

The December data showed a sharp drop in the trade deficit for the month. This was hailed by the Obama administration as good news, showing the success of its trade policy. It also touted the fact that exports hit a record level in 2012, as did the export share of GDP. The Post dutifully reported these Obama administration boasts. 

It would have been helpful to provide readers with a bit of background. The $10.1 billion drop in the trade deficit reported for December followed a $6.5 billion rise in November. Trade data are highly erratic, with large changes in one month often followed by sharp changes in the opposite direction the next month. For example, the deficit reportedly fell by $7.7 billion last February but then rose by $7.2 billion in March. The average trade deficit for the last three months is actually $1.5 billion higher than for the prior three months, indicating that the deficit has been moving in the wrong direction.

While it is true that we set a record for exports last year, we set records for exports most years. The economy generally grows and the trade share generally grows as well. We also set a record for imports in 2012. Boasting about record exports is not very different than boasting about the sun rising. As far as the export share, the "record" of 13.90 percent compares to 13.89 percent in 2011.

This piece refers to the "free trade" agreement with South Korea. While it was called this by the administration, since many aspects of the deal had nothing to do with free trade and some actually involved increased protection (i.e. patents and copyrights), it would more accurately be described as simply a "trade" agreement. This step towards increased accuracy also saves space. 

The United States Hugely Lags in Leisure Time Print
Friday, 08 February 2013 06:27

The Post has an article implying that many more people are opting for leisure in the United States than in the past and that this fact could even explain income inequallity. Neither of these assertions is very plausible. The United States has seen a much smaller reduction in work time over the last three decades than any other wealthy countries. Furthermore, countries that have seen steeper reductions in work time have seen much smaller increases in inequality. 

Neil Irwin Has a Faulty Econ Textbook Print
Friday, 08 February 2013 05:51

He presented a quote from Mario Draghi, the President of the European Central Bank:

"'The exchange rate is not a policy target, but it is important for growth and price stability. We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.'"

He then added:

"And with that, the euro fell more than half a percent against the dollar—even though Draghi was really more stating a fact from Economics 101 than signaling some major new policy plans by the central bank."

Actually the exchange certainly can and often is a policy target. There are many central banks, most notably China's, that quite explicitly target their exchange rate. Other central banks have often taken steps that clearly seem to have the purpose of raising or lowering the exchange rate, as was the case with this statement.

While a central bank can opt to ignore the exchange rate, that would be a specific policy decision. It is not a basic principle from economics textbooks.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.