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Outstanding Piece on German Labor Markets In Washington Times Print
Monday, 14 May 2012 10:04
The Washington Times showed that it can do serious reporting. This piece on the German labor market is solidly researched and carefully written. At last, the nation's capital has a real newspaper.
The Washington Post Has Not Heard of the Federal Reserve Board Print
Monday, 14 May 2012 06:48

That is what readers of a front page article on the impact of austerity in Spain must have concluded when the Post told readers:

"The tensions between tackling runaway deficits and stimulating the economy are in many ways akin to those facing the United States, where political leaders are struggling to agree on the right balance."

Actually, the problems facing Spain and the U.S. are not comparable, most importantly because the United States issues its own currency and Spain does not. This is the main reason that the interest rate on 10-Treasury bonds in the United States is less than 1.8 percent, while it's close to 6.0 percent in Spain.

Spain's problems can be viewed as being more in line with the fiscal problems that a particular state, like California or Ohio, might face. The existance of single currency under the control of the European Central Bank, means that individual countries cannot count on the central bank to support their debt, which makes it far more risky than the debt of countries like the U.S., U.K., or Japan, even if the latter might carry much heavier debt burdens.

The term "runaway" was strange editorializing that does not belong in a news story. It is strange because Spain's deficit is entirely due to the economic crisis created by the collapse of its housing bubble.

How Did AP Determine that the Scheduled Cuts to the Military Budget Would be "Crippling?" Print
Monday, 14 May 2012 04:57

That is what readers of an AP article on the impact of budget cuts stemming from last year's agreement must be wondering. The first sentence of the piece told readers that:

"Moving to protect the military from a crippling wave of budget cuts next year, a key House committee voted Monday to cut instead food aid, health care and social services like Meals on Wheels."

The piece would have been more informative if it had avoided editorializing by including the word "crippling." That assessment is obviously a judgement call on which there is considerable disagreement. Even with the cuts put in place, the government would still be spending well above 4.0 percent of GDP on the military. By contrast, it was spending just 3.0 percent of GDP in 2000, so current spending is more than one-third higher relative to the size of our economy.

It also would be useful if the budget numbers in this piece were expressed as a share of GDP and/or the total budget over the relevant horizon. The vast majority of readers have no ability to assess the importance of items like $80 billion in savings on federal employee pensions over the course of a decade. (This is approximately 0.2 percent of projected spending.)

[Thanks to Randy Schutt for passing this one along.]

Spanish Debt, the European Central Bank, and the Maginot Line Print
Thursday, 10 May 2012 04:54

The NYT had an article that reports on the high level of corporate debt and indebtedness in general in Spain. The article gives a measure of the total debt to GDP in Spain and then compares it to the ratios in other countries.

This is a confused way to assess the issue. Debt by itself will reveal nothing about the state of an economy. Debt is also an asset.

Suppose every household in the United States lent $300,000 to the household on its left. (We are going to make the United States a circle for purposes of this analysis.) With roughly 130 million households, the United States now has $39 trillion (@ 2.6 times GDP) more debt than it did previously.

However, as a country it is no poorer than it had been previously. In fact, every household is just as well off as it had been previously. It owes $300,000 more than it had previously, but it has $300,000 more in assets than it had previously.

Problems arise due to the distribution of the debt. If every third household borrowed $600,000, which was lent by the other two households, then this third household is getting deep in debt, with the other two are appearing to build up large amounts of assets.

This is what happened to Spain, the United States and other countries with serious housing bubbles. The other two households were willing to lend money to the third household because they thought it held an asset (a house) of great value. When this turned out not to be true, the third household found itself with an unsustainable debt burden and the other two households found themselves with assets of questionable value. If the third household can't repay its debt, then the loans are no longer worth their face value.

Central banks should be paying attention to the buildup of such unsustainable debt burdens. Unfortunately, the European Central Bank (ECB) was focused on building up its Maginot Line, being vigilant in its fight against inflation.

The problem now is to try to correct the imbalances created by growth of the housing bubble. Spain and the rest of Europe is getting little help from ECB which is still focused on reinforcing the Maginot Line rather than promoting growth in the euro zone.

France's 35-Hour Workweek is "Much Criticized" In the Washington Post Print
Wednesday, 09 May 2012 05:00

A Washington Post article on the likely composition of France's new socialist government mentioned Martine Aubrey, a former minister, who it identified as the main proponent of "the much-criticized 35-hour workweek in the 1990s." There is probably no major policy change that could not be described as "much criticized," however they generally do not appear with this characterization in the Washington Post and other major news outlets.

In fact, the 35-hour workweek has proven to be hugely popular in France. Nicolas Sarkozy, the current president, had attempted to roll back the law, but he was forced to back down in the face of overwhelming public opposition. The result was that he only made relatively minor changes in the law.

Germans Hold Incoherent Views On Greece and Southern Europe Print
Wednesday, 09 May 2012 04:43

It would have been useful to include this fact in an article on how Germans are losing patience with Greece. Germany has been anxious to build up and preserve its export market in southern Europe. However if Germany wants to have an export surplus with these countries, as it does, then it must lend them money. There is no logical way around this.

For this reason, it is absurd that Germans are both upset about the borrowing by Greece and other peripheral countries, but yet refuse to take the steps (most importantly higher domestic inflation) that would allow these countries to regain competitiveness. The Germans are acting like little children who both want to have their cake and eat it too, and then get mad at everyone else because they won't make it possible. 

If Germany wants to keep the euro zone intact, with its current low inflation obsession, then Germans will have to give money to the peripheral countries to buy their stuff. There is no way around this. The Germans' complaints are against logic, not their southern neighbors. 

The European Central Bank Is Accountable to Governments Print
Wednesday, 09 May 2012 04:31

That fact should have been mentioned in a NYT article that told readers, "few options if Europe turns from austerity." If there were a political consensus within Europe to reject austerity, the euro zone countries could call Mario Draghi, the European Central Bank (ECB) president, and tell him that he must guarantee debt and run expansionary policy or look for a new job and surrender his pension. (Which is far more generous than the ones that were cut in Greece.)

This piece might wrongly lead readers to believe that the ECB could pursue policies that all the governments in the euro oppose. That is not true. If the governments all agreed that they wanted to reject austerity then they could require that the ECB support this position.

That would mean abandoning its obsession with defending its Maginot line (its 2.0 percent inflation target), but such is life.

Can Anyone Say "Patent?" Print
Tuesday, 08 May 2012 09:48

Washington Post readers must be wondering after reading an article on a settlement by Abbott labs in a case brought by the Justice Department over promoting its drugs for off-label uses, in which Abbott agreed to pay $1.6 billion. The issue is that the Food and Drug Administration determines the acceptable uses for a drug. While doctors are allowed to prescribe drugs for other uses, the manufacturers are not allowed to promote their own drugs for "off-label" uses.

The Justice Department apparently had compelling evidence that Abbott had promoted off-label uses of its drug Depakote, a drug that was being improperly promoted as a sedative for elderly patients in nursing homes, according to the article. Such off-label promotions are a common, even if illegal, practice as the article notes.

The reason that drug companies violate the law and promote their drugs for unapproved uses is the huge patent rents that they are able to earn as a result of the patent monopolies granted by the government. Generic drug companies do not engage in the same sort of practices because they don't have the incentive.

It would have been worth mentioning patent monopolies since they are central to the story. This sort of abuse is one reason that people are interested in promoting more efficient alternatives to patents for financing drug development.

How Can an Election Result be "Shrill?" Print
Tuesday, 08 May 2012 09:22

If the Washington Post doesn't like it. That would explain the lead sentence of its lead front page story on the elections in France and Greece on Sunday:

"The shrill anti-incumbent message that has emerged from a pair of European elections carries a threat to the U.S. economic recovery and a political warning for President Obama, whose reelection prospects could hinge on whether the economy can improve."

Other newspapers might leave such editorializing for the opinion pages, but not Fox on 15th Street.

The substance in this statement is also not especially accurate. U.S. exports to Europe are only about 2 percent of U.S. GDP. This means that even a sharp drop in exports (e.g. 10 percent) would only imply a reduction in growth of around 0.2 percentage points. That is unlikely to make much of a difference in U.S. growth.

If Europe's turmoil leads to more uncertainty in financial markets (short of a full-fledged meltdown), it could actually benefit the United States. Interest rates in the United States plummeted following the spike in interest rates on Spanish and Italian debt last summer. The same would likely happen again. This would make it cheaper for people to refinance mortgages and engage in other types of borrowing.

The piece also includes the bizarre assertion:

"A new round of political paralysis that delays Europe’s recovery or calls into question the austerity agreement reached this year to help bail out Greece would probably lead to an immediate slowdown of U.S. economic growth and job creation while confusing bond and equity markets."

Actually, Europe is not on a path to recovery. It is on a path to recession because of the austerity being imposed by the European Central Bank and the IMF. If this austerity is reversed and Europe starts growing again that would help the U.S. economy.

David Brooks' Parallel Universe Print
Tuesday, 08 May 2012 04:07

Just in case you thought that the failure of austerity in the United Kingdom and across the euro zone, and its rejection by voters in France and Greece, might be cause for changing course, David Brooks has a column to tell us otherwise. He says that there are two different arguments going on over economic policy which unfortunately don't intersect.

First, we have the cyclicalists who worry about silly things like 25 million people who are unemployed, underemployed or out of the workforce altogether. These people are also likely to worry about the millions of people who are losing their homes and probably also the children of the unemployed, underemployed and displaced homeowners.

Then we have the far-sighted structuralists like Brooks who worry about the long-term. They worry about fixing government deficits and getting us the labor force that we will need in the future.

This is a great division that has considerably less to do with reality than Middle Earth and the Munchkins. What could Brooks possibly be drinking when he thinks that he has identified a group of economists/policy wonks who are only concerned about the cyclical problem of high unemployment and not the structural problems that created them?

For my part, I have been yelling about the structural problems for more than a decade. I have written books on the structural problems of the economy, like Plunder and Blunder: The Rise and Fall of the Bubble Economy and The End of Loser Liberalism: Making Markets Progressive (free download available). I made the argument (unlike Brooks and his structuralists) that the underlying structural problems in the economy would create the sort of cyclical problems that we are now seeing as a result of the collapse of the housing bubble.

I don't know anyone who looks like cyclicalists that Brooks writes about. It would be good if he could toss out a few names for readers so that we know such people actually exist in the world and are not just Brooks' hallucinations.Since the views Brooks attributes to the cyclicalists are sufficiently bizarre, it is hard to believe that such people exist.

For example, he tells us that the cyclicalists believe:

"the level of government spending is the main factor in determining how fast an economy grows."

I have never come across anyone who had a view anything like this. I do know many economists who argue that in a downturn more stimulus will lead to more economic growth, but this is nothing like the view that Brooks attributes to the cyclicalists. Does Brooks really think it is the same thing to say that more stimulus leads to more growth in a downturn and saying that government spending is the main factor determining growth in general? This is scary.



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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.