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WSJ Lets Bernanke Play Fast and Loose in Lecturing About the Fed and the Economy Print
Saturday, 24 March 2012 13:59

The Wall Street Journal let Federal Reserve Board Chairman Ben Bernanke get away with a bit of Three-card Monte in a lecture he gave to George Washington University about the Fed's role in the housing bubble. According to the WSJ Bernanke absolved the Fed of blame for the housing bubble because of its low interest rate policy. He noted that other countries, like the UK, had housing bubbles even though they had more restrictive monetary policy.

This international comparison is very neat in the context of another issue that Bernanke raised in this lecture. The WSJ reported that Bernanke also made a pitch for the importance of central bank independence in reference to Paul Volcker's tenure as Fed chair:

"Volcker’s tough policies successfully drove down inflation, but caused a recession that stirred the ire of construction workers who would mail two-by-four planks of wood with a nail driven in them to the Fed as a symbol of their protest, Bernanke noted. If Volcker had to face re-election, he might not have been able to sustain his policies."

Actually, inflation rates fell sharply everywhere in the world in the early 80s. Not all central banks pursued as restrictive a monetary policy as the Fed. This suggests that the high unemployment caused by Volcker's policies were not necessary for bringing down inflation.

In fact, this is a good argument for a central bank that is more democratically accountable. If Volcker felt as much obligation to protect against excessive unemployment -- which negatively affects large segments of the non-rich population -- as he did to combat inflation, perhaps he would have managed to contain inflation while inflicting less pain.

On the earlier point about the Fed's responsibility for allowing the housing bubble to grow to such dangerous levels, some of us who complained about the policy at the time were not advocating higher interest rates. We advocated first and foremost that the Fed use its enormous bully pulpit to call attention to the bubble and to the fact that people buying homes at bubble-inflated prices stood to lose their lives savings.

These warnings could have been backed up by research by the Fed's huge staff of economists which would have showed that there was an unprecedented run up in house prices with no basis in the fundamentals of the housing market. The Fed could have used the public appearances and congressional testimonies of Greenspan and other Fed officials to bring this evidence to the public's attention. (Instead, Greenspan argued the opposite, claiming that there was no bubble.)

The Fed also has substantial regulatory powers over the financial industry. They could have used this power to crack down on the widespread issuance and securitization of fraudulent mortgages which was evident to anyone paying attention at the time. 

Good and Bad Reasons for Slower Economic Growth Print
Friday, 23 March 2012 07:42

An NYT Economix blognote discussed a new paper by two economists (James Stock and Mark Watson) that purports to give us the bad news that we are likely to see a permanent slowdown in growth. Stock and Watson attribute this slowdown to a slower rate of growth of the labor force.

Before anyone gets too upset about the prospect of slower growth, it is worth reflecting for a moment on the different possible causes of slower growth. There are essentially four:

1) slower productivity growth;

2) higher unemployment or underemployment (involuntary);

3) slower population growth;

4) reduced labor force participation or hours worked.

The first two of these causes of slower growth are unambiguously bad. If productivity growth slows, then we are seeing less improvement in living standard for each hour we work. That is definitely bad news. However, nothing in the Stock and Watson paper suggests that productivity growth has slowed or will anytime soon.

I'll come back to reason 2, but let's look at reason 3 and 4 for a moment. Reason 3 is clearly true. Our population growth is slowing, as people are having fewer kids than they did in the 40s, 50s, and 60s. This means that we will have slower overall growth. However this could be associated with faster per capita growth. Each worker will now have more capital to work with, which could mean that they are more productive. Fewer people also means that there will be less strain on the infrastructure and the environment. In other words, if this is the reason why growth is slowing, there is no obvious cause for concern.

Reason 4 is a similar story but from a slightly different angle. Suppose people choose to retire early, take longer vacations, or have shorter workweeks. All of these practices would lead to slower growth, but it is hard to see anything negative in this picture. If people decide that they would rather work 10 percent less and have 10 percent less income, there is no reason that economists or anyone else should be upset. This also has the same benefits for the infrastructure and environment as the slower population growth noted above.

In short, if growth is expected to slow for reasons 3 and 4, as Stock and Watson argue in their paper, there is no obvious reason for anyone to be concerned. This is certainly not bad news. In fact it is arguable it is good news given the problem of global warming and other environmental concerns.

Finally, we have reason number 2, where growth slows because workers can't get work. This is undeniably bad news, especially in a country like the United States where the support system for the unemployed is minimal. In fact, contrary to Stock and Watson, this is the main reason that growth has slowed since the downturn in 2007. There have been sharp declines in the overall employment to population ratio, but this drop has been concentrated among younger workers. These are not people who we could plausibly believe had opted to drop out of the workforce voluntarily.

The good part of the story is that we know how to restore growth to its former trend in this case: spend more money to create demand. Unfortunately, the politics are such that we are not likely to see this happen anytime soon.

February Existing Home Sales Should Not Have Disappointed Print
Friday, 23 March 2012 07:02

The Post headlined an article on the release of existing homes sales data for February, "housing report disappoints as existing home sales dip in February." It's not clear why anyone would have been disappointed. The 4.59 million annual sales rate reported for February was below the 4.63 million rate now reported for January, but above the 4.57 million rate that had been reported before the revision.

Also, these monthly numbers are highly erratic. The difference between January and February numbers are well within any reasonable margin of error. The same is the case with the monthly price data. The fact that median price for February 2012 was 0.3 percent higher than the median price for February 2011 is virtually meaningless as this can easily be reversed with next month's numbers, and in fact will be unless prices jump by 2 percent.

China Policy: The 99 Percent Versus the 1 Percent Print
Friday, 23 March 2012 05:10

The NYT did a piece on Governor Mitt Romney's pledge to impose tariffs on China to pressure it to lower the value of the dollar relative to the yuan. At one point it noted that many business people are opposed to this position:

"business leaders, while pressing for China to open its markets and protect intellectual property, caution that labeling China a currency manipulator could backfire, harming those efforts."

It would have been worth a paragraph or two expanding on this point. There is a direct conflict in the interests of most workers and many businesses in U.S. policy toward China.

Financial firms like Goldman Sachs and Citigroup have a major interest in getting more access to China's market. Firms with claims to intellectual property like Microsoft and Pfizer have a major interest in getting China to offer increased protection for their copyrights and patents.

By contrast, workers in the United States have a major interest in lowering the value of the dollar against the yuan. Since other countries would likely follow China in allowing their currencies to rise relative to the dollar (this is exactly what happened in 2005, the last time China had a large re-valuation of its currency), the result could be millions of new jobs in manufacturing. This would offer a large number of relatively good-paying jobs for less educated workers, putting upward pressure on the wages of these workers. 

The Obama or Romney administration must decide which goals it will prioritize in its negotiations with China. If it makes more progress in getting access to China's financial markets for Goldman Sachs and Citigroup or increased protection of Microsoft's copyrights then it will make less progress in persuading China to raise the value of its currency.

Whoever is in the White House will have to decide which group's interests are pursued and which group's interests are downplayed. It would have been worth making this conflict more clear to readers.

Housing Starts Fall in February, WAPO Talks About Permits Print
Wednesday, 21 March 2012 07:20

Okay, we should all be happy that the economy seems to be growing more rapidly that it was at this time last year, but can we try to be a little serious about this. The Census Bureau reported that housing starts fell by 1.1 percent in February. That's not a big deal, starts had been trending upward and the monthly numbers are always erratic, but nonetheless a fall in starts is a negative sign.

Apparently, the Post did not want to utter a discouraging word. Its business digest section only discussed the 5.1 percent rise in permits for the month, never mentioning the decline in starts. It also featured a graph showing the rise in permits which was mislabeled as a rise in starts (print edition only).

The Post Asks If the Fed Could Do More on Jobs Print
Wednesday, 21 March 2012 07:15
The piece discusses more aggressive actions that Bernanke could take, such as targeting a higher rate of inflation, a policy he advocated when he was still a professor at Princeton. This is a good article.
The Post Forgot to Mention that the Ryan Plan Would Eliminate the Government Print
Wednesday, 21 March 2012 07:01

The Post probably didn't have room in the piece for such small points, but when it told readers that the Ryan plan:

"calls for spending cuts and tax changes that would put the nation on course to wipe out deficits and balance the budget by 2040."

It would have been reasonable to point out that it gets to this balance by virtually eliminating the non-defense, non-Social Security, and non-health care portions of the budget. According to the Congressional Budget Office's analysis of the Ryan plan (Table 2), all spending on items other than health care and Social Security would be reduced to 4.75 percent of GDP by 2040 and to 3.75 percent of GDP in 2050.

The defense budget is currently over 4.0 percent of GDP and Representative Ryan has indicated that he wants to leave it at this level. That would leave little for the Justice Department, Education Department, Park Service, education, transportation and everything else government does in 2040 and nothing in 2050. That fact would have been worth pointing out in this article.

Representative Ryan Calls for Eliminating Park Service, FDA, Justice Department, and Just About Every Thing Else in Government and Media Don't Notice Print
Wednesday, 21 March 2012 05:00

House Budget Committee Chairman Paul Ryan is supposed to be a brave and serious thinker. That's how the Washington punditry treats him. Last year, the Peter Peterson gang gave Ryan a "Fiscy Award" for "leading the way in promoting fiscal responsibility and government accountability." Politico made Representative Ryan its "health care policymaker of the year." Ryan is a regular guest on the Sunday talk shows and he can always count on a warm reception from the very serious people.

For this reason when Representative Ryan again proposed a budget that would shrink non-defense spending outside of Social Security and health care programs to zero by 2050 the proposal deserves real attention. According to the projections of the Congressional Budget Office (Table 2), Representative Ryan's budget would shrink the category of defense and non-defense discretionary spending, plus non-health entitlements to 3.75 percent of GDP by 2050.

Since Representative Ryan has said that he wants to keep military spending near its current level of 4.0 percent of GDP, this would leave no money to pay for the Justice Department, the Food and Drug Administration, Education, the National Institutes of Health or anything else that the government does.

This shrinking of non-defense spending to zero was also in Representative Ryan's budget last year, however he could have been credited with an honest, if incredibly foolish, mistake. However he has now gone on record with the same proposal in 2012, presumably indicating that this budget does in fact reflect his views and the views of the Republicans in the House, if they again approve the budget, as they did last year. 

It is remarkable that this extraordinary proposal by Representative Ryan has not gotten more attention from the people who think so highly of him in official Washington. Apparently they consider the elimination of most of the government to be a very reasonable suggestion.


"Right to Work" Means the Government Redistributes from Union Supporters to Non-Supporters Print
Wednesday, 21 March 2012 04:40

The NYT began an article discussing a "right to work" measure in Minnesota by describing it as a "measure ... that would allow workers to avoid paying fees to unions they choose not to join." It would have been helpful to remind readers that under federal law a union is legally obligated to represent all the workers in a bargaining unit regardless of whether or not they choose to join the union.

This rule means that workers who do not join the union not only gain from whatever wage and benefit increases the union negotiates with the employer, they also are entitled to the union's representation in any disputes that are covered under the contract. For example, if the employer wants to discipline or fire a worker who is not a member of the union, the union is obligated to represent this worker in the same way as if they were a dues paying member of the union.

In this context, the Minnesota measure means that workers who support a union can effectively be required to pay for the representation of workers who do not support the union. This is not an obvious step toward promoting individual freedom.

Contrary to what the article asserts, every worker in Minnesota can already "avoid paying fees to unions they choose not to join." They have the option to not work at a company where there is a union contract that requires workers to pay for their union representation.

This measure is about taking away rights, not extending them. If it were approved, workers would no longer have the right to sign a contract that required that everyone who benefited from union representation paid for this representation. This is a case of the government interfering with freedom of contract.

It is a Fact that Charter Schools Don't on Average Improve Performance, Not Just Something that the Teachers' Union President Says Print
Tuesday, 20 March 2012 07:02

The NYT had a bad case of he said/she said reporting this morning in an article that reported on a panel's recommendations for improving the nation's education system. The article noted the panel's recommendation for increased the choice of schools available for parents to select among. It then cited comments from Randi Weingarten, the President of the American Federation of Teachers, saying:

"school choice options like vouchers and charters, which use public funds but are run by a third party, have not proved to be sustainable or to improve schools."

This is not just something that Ms. Weingarten says, it also happens to be true. Extensive research has found that the vast majority of charter schools do not result in better performance by standardized test measures than the public schools, and a substantial portion do markedly worse.

The NYT should have pointed out that Ms. Weingarten's assertion was true and not left it to readers to try to decide between competing claims. The NYT's reporters have the time to investigate these claims, its readers do not.

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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.