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Debt Forgiveness in Greece: It's Easier Than the NYT Leads Readers to Believe Print
Thursday, 05 February 2015 07:53

The NYT led readers to believe that meeting Greece's demand for changing the terms of its debt is far more difficult than is actually the case. It told readers:

"Writing down government debts, or stretching out when they need to repaid, causes losses for the institutions and individuals that hold the securities. Banks hold billions of euros in government bonds and, to make sure the banks remain stable, money would need to be found to replenish the big losses that the banks would suffer. Richer countries would have to agree to provide such funds. Taxpayers there may object, adding support to political parties that oppose much of what the European Union stands for and wants to achieve."

In fact, well over 80 percent of Greece's debt is held by the I.M.F., European Central Bank, and other official institutions. Concessions made by these entities could hugely reduce Greece's debt burden while leaving private debt holders unaffected. These concessions need not cost taxpayers a euro, since the European Central Bank knows how to print euros, which it can and is doing.

If taxpayers are upset it is because they have not learned basic economics which speaks to the quality of the European educational system, not Greece's debts. It is also worth pointing out that in lending Greece money, the official institutions effectively bailed out incompetent bankers who made bad loans to Greece.

The Franken Amendment to Eliminate Rating Agencies' Conflict of Interest, Passed the Senate with 65 Votes Print
Wednesday, 04 February 2015 05:03

The Washington Post might have misled readers with its discussion of efforts to end the conflict of interest inherent in the current system where banks issuing mortgage backed securities hire the agencies that rate their debt. It told readers:

"Congress debated that idea when it put together the sweeping financial overhaul law in response to the 2008 crisis. But lawmakers pushing the idea were unable to include it into the final legislation."

The Senate actually overwhelmingly approved (65 votes) an amendment from Senator Al Franken that would have had the Securities and Exchange Commission pick the rating agency assigned to assess newly issued debt. The provision was stripped out in the conference committee, apparently with the support of then Secretary of the Treasury, Timothy Geithner.

The main substantive argument against the Franken amendment was that the SEC may send over an auditor who was not qualified to rate a new issue. This raises the obvious question of why an investment bank would be trying to market a bond issue that a professional auditor at a major credit rating agency could not understand.

Republicans Vote to Repeal Affordable Care Act Because the Earth is Flat Print
Wednesday, 04 February 2015 04:45

When politicians make assertions that are clearly not true, it would be useful if reporters pointed this fact out to readers. Reporters have time to verify claims by politicians, their readers do not.

For this reason, the NYT failed its readers when it reported on the Republican House vote to repeal the Affordable Care Act (ACA) because:

"Republicans said the law was driving up insurance premiums, burdening consumers with high out-of-pocket costs and leading some employers to cut back workers’ hours so that employers would not have to pay for their coverage."

All the evidence in fact points in the opposite direction. Insurance premiums have been rising less rapidly, the rate of growth of out-of-pocket costs has also slowed, and there is no evidence that employers are cutting back workers hours because of the ACA, although there is evidence that workers are voluntarily choosing to work less because they no longer need to work full-time to get insurance through an employer.

Many readers may not realize that the Republicans' claims were not true. The NYT should have made this fact clear.

How Many Germans Are Over One Hundred Years Old? Print
Tuesday, 03 February 2015 18:18

That's one question that readers of Eduardo Porter's insightful column on the prospects of the euro must be asking. Porter commented on the concerns expressed by Germany about inflation in a context where the inflation rate has been drifting lower for years and is now near zero. He argued that:

"conditioned by memories of hyperinflation after World War I, they still fear higher inflation."

Hmmm, "memories of hyperinflation?" Let's see, we're talking about a burst of hyper-inflation that took place in the early 1920s. If we say that someone had to be roughly 10 or so at the time to have a clear memory, then those with memories of this hyper-inflation would have to be over 100 years old today.

This point is worth noting, because hyperinflation is not something that any sizable number of Germans alive today actually experienced. For the most part, even their parents didn't experience it. The Germans' concern about hyperinflation is based on national myth, not their own experience. They are making the rest of the eurozone pay an enormous price for this myth.

It Ain't a Boom: Taking Matt O'Brien to the Woodshed Print
Tuesday, 03 February 2015 08:45

Matt O'Brien usually has interesting stuff on the economy is his Wonkblog pieces, but his post on the "economic boom" is not up to the usual standards. First, and most importantly, the idea of grading on a curve -- because things are better here than elsewhere we have a boom -- is rather dubious. Some countries were hit less hard by the depression than others. Would we want to say that they were experiencing a "boom?" 

Even if we accept grading on a curve it's not clear we have much of a story. The widely touted "recession" in Japan is seriously misleading. The Japanese proponents of austerity wanted to show that they could do as much damage as their counterparts in the U.K., euro zone, and U.S.. They insisted on a 5 percentage point increase in the sales tax in April. This led to a sharp drop in output in the second quarter. Output also fell in the third quarter, but this was entirely due to inventory fluctuations, final demand grew.

It is a safe bet that GDP will grow in the fourth quarter and will continue growing at a moderate pace in 2015. In terms of how life is on the ground, unemployment fell from 3.5 percent to 3.4 percent in December, with 1.15 jobs for every applicant, the highest ratio since 1992. It's true that Japan is likely to experience slower growth than the U.S., but this is largely due to it having a slowly shrinking population rather than a population growing at a rate of 0.7 percent. There is likely to be little difference in the rate of per capita GDP growth, which is economists' standard measure of income.

Much is often made of slower or negative population growth. There is no reason that anyone except the "it's hard to find good help" crowd should be concerned about such things. If an economy is experiencing healthy rates of per capita GDP growth, then the slower population growth simply means less strain on infrastructure and the environment.



Washington Post Tells Readers That Interest Payments on the Debt Will be Almost as High in 2025 as They Were Under President Reagan and Bush! Print
Tuesday, 03 February 2015 08:03

Actually the Post's budget piece didn't tell readers that. Instead it said:

"All told, Obama’s policies would add about $5.7 trillion to the debt over the next decade (compared with nearly $8 trillion under current law). Meanwhile, interest payments on the debt would climb to nearly $800 billion a year by 2025 — more than Obama proposes to spend on any program in that year other than Social Security and Medicare."

Pretty damn scary, huh? Just think of that -- adding $5.7 trillion to the debt, and interest payments that will be larger than spending on any program other than Social Security and Medicare! Sounds like we're going to hell in a handbasket.

If the point of the story was to convey information rather than advancing its deficit cutting agenda (which seems aimed largely at Social Security and Medicare), the paper would have told readers that the interest tab projected for 2025 is 3.0 percent of GDP. Before you scream about what we are doing to our children, consider that interest payments were 3.0 percent of GDP or more every year from 1985 to 1997, except 1994 when they were 2.9 percent. (These numbers are in the same document, Table E-6). These payments were larger than spending on any program except the military and Social Security.

Unlike the NYT, the Post makes almost no effort to put the budget numbers in any context, expressing terms almost exclusively in billions and trillions which they know are meaningless to almost all their readers. It's just another way of saying that the government spends and borrows lots of money, the sort of claim that papers are supposed to leave to the opinion pages.

Context on the Obama Budget Print
Tuesday, 03 February 2015 05:49

Give the NYT credit, it is trying to write about the budget in a way that doesn't just bury people in really big numbers. Its main article on President Obama's budget included several references that indicated how large various items were relative to the size of the economy and used other comparisons to place them in a context that could make them understandable to readers. This is a good start, but it could be better.

One item that readers would miss in this piece is any sort of historical comparison. This is important because the piece notes Obama's proposed increases in spending, but readers may not realize this is against a baseline of large cuts. The key area for increases is discretionary spending, both domestic and military. Obama proposes to increase spending in each area by less than 0.3 percentage points of GDP. This implies that spending in both areas will fall to close to 2.5 percent of GDP by the end of the 10-year horizon.

By comparison, spending in both areas had always been far higher as a share of GDP. Military spending had averaged well over 5.0 percent of GDP in the 1970s and 1980s during the cold war years, but declined to 3.0 percent by 2000 before again being ramped up as a result of the wars in Afghanistan and Iraq. Domestic discretionary spending averaged 3.9 percent of GDP in the 1980s and 3.4 percent in the 1990s and well over 4.0 percent in the 1970s. Before the downturn the Congressional Budget Office (CBO) was projecting that domestic discretionary spending would be close to 2.8 percent of GDP by the end of this decade. This means that even with the increases proposed by President Obama he would still be spending less than the baseline path that CBO envisioned when President Bush was in the White House.



The Enron Felons Believed in Enron: Corrective to Samuelson on the Housing Bubble Print
Monday, 02 February 2015 05:44

Robert Samuelson used his column today to tout a new study that analyzes home purchases by the income level of the buyer in contrast to previous work that analyzed data by average income in a zip code. The conclusion of the study is that increased aggregate debt to income levels was the result of more people buying homes, not higher ratios of debt to income among purchasers. This means that the problem was not a deterioration in lending standards. It also finds that the growth of debt was proportionate to income in each quintile, meaning that low-income households were not singled out for bad loans.

This is an interesting analysis that seems to contradict much other evidence. For example, while it shows no correlation between income levels and delinquency, we know that African Americans were far more likely to lose their home in the crash than the population as a whole. It would be striking if this is exclusively a question of race and not income.

We also know that both subprime and Alt-A mortgages skyrocketed as a share of total mortgage issuance during the downturn, with the former going from around 8-9 percent in 2000 to 25 percent in 2005. The latter went from 2-3 percent to 15 percent in 2005. It is difficult to believe that the growth of these riskier mortgage types wasn't not associated with a rise in the debt to income ratios of borrowers.

And, we have a survey done by the National Association of Realtors at the time. This survey found that 43 percent of first-time homebuyers in 2005 put zero down or less (many people borrowed more than the value of their home). This certainly would not have been the case ten years earlier. Part of the problem could be that the first year in the analysis is 2002, a point at which the bubble was already well underway. The deterioration from 2002 to 2006 would have been far less than if the analysis had begun in a year before the bubble began. The other possibility is that the analysis is not picking up second loans that raised debt-to-income as well as debt to value ratios.

However the deeper point in this discussion is that the question of banker fraud versus a mistaken belief that the bubble will last forever is not an either/or proposition. It is entirely possible that most of the bankers issuing mortgages that they knew borrowers could not pay, or that were based on mis-stated information that they had entered, believed that rising house prices would ensure the quality of the mortgages. The investment bankers who packaged them into mortgage backed securities may have also believed in the bubble.

However this does not change the fact that falsifying mortgage information is fraud and that knowingly packaging fraudulent mortgages into mortgage backed securities is also fraud. The people convicted of fraud charges in the Enron scandal all had large amounts of Enron stock. This indicated that they believed the company was a good buy and presumably had a good business model. They still committed fraud. That is likely true of the folks at places like Countrywide, Goldman Sachs, and Citigroup.

4th Quarter GDP: Happy Days Are Here Again (not) Print
Saturday, 31 January 2015 09:19

The Commerce Department reported that GDP grew at a 2.6 percent annual rate in the fourth quarter, roughly a half point below most forecasts. This brought growth for the year (fourth quarter to fourth quarter) to 2.5 percent, a modest slowing from the 3.1 percent rate in 2013. Since GDP is the broadest measure of overall economic activity, the weak quarter and weak year-round performance might seem to fly in the face of all the upbeat news we've been hearing on the economy recently. But, most news coverage seemed determined not to let the data spoil the story.

For example, the Post told readers:

"For all of 2014, the U.S. economy grew at a 2.4 percent pace — a relatively dreary number much in line with the previous years of a long recovery. But that number is somewhat misleading: A brutal winter in the northeast led to a sharp contraction in the first quarter. Since then, the nation has seen its best nine-month stretch of growth since 2003 and 2004."

Actually, instead of the 2.4 percent (I get 2.5 percent) pace being misleading, the comment about the next 9 months is misleading. The economy shrank a 2.1 percent annual rate in the first quarter, a drop that was clearly in large part due to the weather. However the strong growth reported for the next two quarters was in large part due to the first quarter shrinkage.

To see this point, assume that the actual rate of growth in the economy is 2.8 percent annually, or 0.7 percentage points a quarter. Now suppose that the economy goes into reverse in a quarter due to weather so that we show that it shrank 0.5 percentage points (2.0 percent annual rate). If the economy returns to its trend path in the following quarter, then it will grow by 1.9 percentage points (0.7 percentage points for the quarter's trend growth, 0.7 percentage points for the first quarter, and 0.5 percentage points to make up for the drop). This 1.9 percentage point quarterly growth translates into roughly a 7.6 percent annual rate. 

This exercise is overly simplistic, but that is basically the story of the rapid growth in the second and third quarters. This growth cannot be understood without reference to the decline in GDP in the first quarter.

The NYT seemed to largely ignore the data altogether, with a lead paragraph telling readers:

"Powered by healthy spending from increasingly optimistic consumers, the American economy is emerging as an island of relative strength in the face of renewed torpor and turmoil elsewhere in much of the world."

Wow, 2.5 annual growth! That should embarrass China with its 7.4 percent growth. Those interested in comparisons with our own past recoveries should know that growth averaged 5.2 percent over the three years 1976-1978 and 5.4 percent over the years 1983-1985. Still feel like celebrating?



The BS Storm is Coming on Trade Deals Print
Friday, 30 January 2015 08:12

Okay folks, get out those umbrellas, we are about to showered with all sorts of garbage as the corporate interests pushing for the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Pact ((TTIP) go into overdrive to get Congress to approve their deals. We are entering the logic-free zone where ostensibly serious people say any sort of nonsense imaginable to advance these trade deals (not free-trade deals).

Today's entry is a piece by David Ignatius in the Washington Post pushing the merits of the Trans-Pacific Partnership (TPP). Ignatius' big punch line is:

"The Peterson Institute for International Economics estimates that the market-opening features of the TPP will boost U.S. exports by about $123 billion annually by 2025 and add 600,000 jobs."

Hey, 600,000 jobs sounds pretty good. What sort of troglodyte could be opposed to that?

There are a few points that are worth noting on this. First, the comment on exports is a big giveaway. No serious person would talk about exports. Exports do not create jobs in an underemployed economy, net exports create jobs. To see the distinction, suppose that GM shuts a car assembly plant in Ohio and instead ships the parts to Mexico to be assembled. The finished cars are then imported back into the United States.

Exports have risen in this story by the value of the car parts. If you think GM's move of the assembly plant to Mexico was a job creator in the United States, then think more carefully. Anyone who understands basic economics knows that exports by themselves don't create jobs, you have to look at net exports (exports minus imports). Someone who just discusses exports is either ignorant of economics or not being honest.

The next point is that standard trade models are full employment models. This means that everyone who wants a job at the prevailing wage has a job. (Ignatius does not provide a link so it's not clear where he got his numbers.) This means that they create jobs through increasing efficiency. The job creation effect will almost invariably be small and it results from an increased supply of labor. Greater efficiency means higher wages (in these models) and therefore more people want to work.



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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.