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The Post Couldn't Find CBO's Projection that Higher Interest Rates from the Fed Will be the Major Driver of Deficits Print
Wednesday, 06 February 2013 05:43

Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.

This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed's decision to raise interest rates over the next decade will be the main factor pushing deficits higher.

The Post somehow missed this one.

Thomas Friedman Doesn't Read His Columns, Why Should You? Print
Wednesday, 06 February 2013 05:08

On Sunday Thomas Friedman told us that one in three people in China is a blogger, today he tells us that the country has a:

"gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated."

This would be news to China. The country adopted its one child policy back in the 1970s leading to  sharp drop in birth rates. Since that was more than 30 years ago, it means that China actually has a relatively small share of its population under the age of 30. Friedman seems to show some recognition of this fact later in this column when he notes:

"'India today has 560 million young people under the age of 25 and 225 million between the ages of 10 and 19,' explained Shashi Tharoor, India’s minister of state for human resource development.  'So for the next 40 years we should have a youthful working-age population' at a time when China and the broad industrialized world is aging. According to Tharoor, the average age in China today is around 38, whereas in India it’s around 28. In 20 years, that gap will be much larger."

Of course if Friedman had thought about the implication of Tharoor's comment he would realize that it means that China doesn't have a youth bulge. But that would mean reading through his column and thinking about it for a few minutes. (Friedman's claim that India somehow benefits from its huge population growth is whacky -- at least if you care about the living standards of people in India.)


The NYT Has Determined that the United States Has a Spending Problem Print
Tuesday, 05 February 2013 21:28

Okay all of you liberals who thought that the deficits were due to too little tax revenue and all you economists who pointed out that the large deficits were due to a collapsed economy, you're wrong. The United States has a spending problem the NYT said so.

A NYT article on President Obama's speech on the budget told readers:

"New deficit projections will define the scope of the nation’s spending problem."

See, it's a spending problem!



I see from readers' comments that the NYT has apparently fixed the spending problem in subsequent edits. It still tells readers:

"the budget office once again emphasized that the deficit will rise later in the decade, beginning in 2016, and continue do to so as the population ages and health care prices rise."

While Social Security is projected to rise modestly as a share of GDP and health care costs a bit more so, the largest reason for the projected rise in deficits from 2013 to 2023 is higher interest payments from the government. Net interest is projected to rise from 1.4 percent of GDP this year to 3.3 percent of GDP in 2023. This projected 1.9 percentage point increase in interest payments is by far the largest component driving the projected increase in the deficit over the decade.

In fact, the actual increase is somewhat larger since the amount of money that the Federal Reserve Board refunds from its holdings of government bonds is projected to drop from 0.5 percent of GDP at present to 0.2 percent of GDP in 2023. This drop of 0.3 percentage points of GDP, added to the 1.9 percentage point rise in net interest implies that higher interest costs will add 2.2 percentage points to the deficit in 2023.

This would have been worth mentioning both because it tells readers why deficits are rising and also because the rise in interest rates is a matter of policy. The CBO projections assume that the Fed will decide to raise interest rates. It is not something that just happens by itself.

(Morning Edition committed the same sin.)


NYT and WAPO Can't Find Out About Franken Amendment on Bond Rating Agencies Print
Tuesday, 05 February 2013 05:39

It's so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post's coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.

Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.

The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment. 

It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer). 

The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.  

It’s Monday and Robert Samuelson Is Confused Print
Monday, 04 February 2013 14:43

The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.

Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:

“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”

Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.

As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.

In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.

Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.

This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.

(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)

It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.       

Tyler Cowan's Keynes Versus the One We All Know and Love Print
Sunday, 03 February 2013 08:42

Tyler Cowan argues in his column today that we should let the sequester cuts go into effect but his argument is a bit hard to follow. He tells readers:

"One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy."

He then goes on to point out that we can have cuts in military spending, farm subsidies and other areas that could benefit the economy.

This is where the story gets confusing. If we are looking to Keynes then the argument is straightforward, if we make cuts to the budget in a period of high unemployment like the present, then we are throwing more people out of work. These people will not be re-employed elsewhere, or if they are, they will be displacing other workers. (Btw, it's not clear why the word "recession" appears in the paragraph. The point is simply that we would have slower growth and fewer jobs, there is no magic recession threshold in any Keynesian text I have seen.)

This Keynesian argument that cuts leads to unemployment in a depressed economy applies regardless of whether the spending is for good or bad purposes. In other words, even if we cut $100 billion from the government Department of Waste, Fraud, and Abuse, which does nothing but write reports and throw them in the garbage, it would still slow growth and raise unemployment. The problem facing the economy right now is demand, demand, and demand. If you reduce demand, you hurt the economy.

In the longer term, when the economy does get back to something resembling full employment, it will be helpful if we can eliminate wasteful areas of government spending. Of course it would also help the economy if we can expand useful areas of government spending. But that is not particularly a Keynesian story. I assume that almost anyone would agree with these propositions even if they might draw the lines differently between wasteful and useful.

Anyhow, the reference to Keynes is a bit peculiar here. If Cowan thinks he has argued for cuts that are consistent with the Keynesian view, he is mistaken. The idea that cuts in areas of relatively strong demand like health care will have less effect on employment is at best true in only a trivial sense. Wages are not rising especially rapidly in this sector, it is not as though we have any reason to believe that there would be large numbers of additional hires to replace workers who lose their jobs due to government cutbacks, even if the impact might be marginally less than cutbacks in other sectors.

Of course Cowan also brings in the reference to investor sentiment and refers to the bond-rating agencies. This is a strange argument for a strong believer in markets. The markets are yelling at us as loudly as they can that they have no fears about the health of the U.S. government and its ability to pay its debts, hence the 2.0 percent nominal interest rates on 10-year Treasury bonds. Why would Cowan take the word of bond-rating agencies who thought subpime mortgage backed securities were Aaa over the view of financial markets?

Anyhow, it is hard to know from this column whether Cowan thinks his preferred list of cuts won't slow growth and add to unemployment or whether the additional unemployment is a price worth paying to make the bond-rating agencies happy.

Does One of Every Three People In China Have a Blog? Print
Saturday, 02 February 2013 23:16

Just wondering, since Thomas Friedman says there are 400 million bloggers in China.

Ezra Klein Strikes Out Big on Immigration and Demographics (link fixed) Print
Saturday, 02 February 2013 08:17

Ezra Klein usually can be counted on for good insights on politics and the economy, however today's piece on immigration is the sort of thing that could have been on a press release from Fix the Debt. The basic point is to tout the virtues of immigration. While there are benefits of immigration that Klein rightly highlights, much of the piece veers off into the sort of pablum readers expect from the non-Klein portions of the Post.

This is especially the case where Klein dives off into demographics.

"The economic case for immigration is best made by way of analogy. Everyone agrees that aging economies with low birth rates are in trouble; this, for example, is a thoroughly conventional view of Japan. It’s even conventional wisdom about the U.S. The retirement of the baby boomers is correctly understood as an economic challenge. The ratio of working Americans to retirees will fall from 5 to 1 today to  3 to 1 in 2050. Fewer workers and more retirees is tough on any economy."

Klein then adds, "there’s nothing controversial about that analysis."

Actually everything about that analysis is controversial, including the basic facts. (Actually, these are just wrong.) The current ratio of workers to retirees is 2.8 to 1, it hasn't been 5 to 1 since the early 1960s. It is projected to fall to 2.0 to 1 by the mid 2030s.



The End of Fox on 15th Street? Print
Saturday, 02 February 2013 08:12

It looks like relocation is a possibility.

Fiscal Cliff Concerns Did Not Restrain Hiring Print
Saturday, 02 February 2013 06:29

The NYT is still pushing the line that, "uncertainty over fiscal policy and the fragility of the economy still seem to be holding back employers." There is no evidence in this or prior job reports to support this contention. If employers are seeing a level of demand that would otherwise justify hiring, but are reluctant to do so because of uncertainty, they would look to fill this demand through alternative channels.

The two obvious alternatives are increasing the length of the average workweek and hiring temporary employees. The average workweek has been stable or even gotten slightly shorter in recent months. Temp hiring has been extremely weak. These facts suggest that the reason for lack of hiring is simply that employers are not seeing adequate demand, not uncertainty. 

The piece also told readers:

"Economists are forecasting job growth of around 170,000 a month for the rest of 2013, comparable to job growth over the last year."

That would probably be the view of economists who could not see an $8 trillion housing bubble. Economists with a better understanding of the economy would probably project a slower rate of job growth. The economy had been growing at just a 1.5 percent annual rate in the second half of 2012. There will be downward pressure on growth from the ending of the tax cuts and the sequester or other budget cuts. In this context it is more likely that growth will be around 120,000 a month, a pace closer to the underlying rate of growth of the labor force.

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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.