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The Moment of Truth: Post Tell Readers We Should Only Care About Business Concerns Print
Thursday, 12 April 2012 05:06

There have been many people who have suggested that the Washington Post has a pro-business bias. The Post seemed to confirm that view in a piece on Mitt Romney's agenda for his first day as president.

It noted that Romney said he would demand that China raise the value of its currency as one of his day one items. It then told readers:

"But some China experts say Romney would nevertheless be risking a backlash from the Chinese — over an issue that is not a top priority.

"In a recent survey of the concerns of American businesses working in China, currency ma­nipu­la­tion was only the 26th-biggest worry.

"'You can’t go to the Chinese and say, "I demand eight fundamental changes!"' said Derek Scissors, a China expert at the conservative Heritage Foundation. 'You’ve got to pick your thing.'"

Of course Scissors' assessment is exactly right. The United States cannot simply make a set of demands on China and expect the Chinese government to accept them. It must prioritize its demands and be prepared to make concessions on issues of concern to China.

The Post implied that because the over-valuation of the dollar against the Chinese currency is not a major concern of business it should not be a concern to the United States. This only makes sense to someone who believes that the concerns of business should be given a priority over the concerns of the rest of the country. In fact, there is a clear opposition between the interests of many, if not most, businesses and the rest of the country on dealings with China.

According to mainstream economics, the main mechanism for adjusting a trade deficit is reducing the value of a currency. In other words, anyone who wants to see the United States move towards more balanced trade should want the dollar to fall.

(The Post should be in this camp, since it has endless tirades about the budget deficit. By definition, a trade deficit means that a country has negative national savings. Negative national savings means that either the public sector has a deficit or the private sector does, as we did in the housing-bubble years because of huge over-building and a bubble-driven consumption boom. Anyone who views those options as unattractive would want to see the trade deficit come down, if they understood economics.)



Tax Fraud Is Not A Healthy Basis for Growth Print
Thursday, 12 April 2012 04:38

The NYT wants readers to be sympathetic to countries that set themselves up as tax havens for corporations who would rather not pay their taxes. In a piece on the problems facing the Cypriot banking system the NYT told readers that the Cyprus does not want to turn to the European Union for a bailout of its banking system because:

"In return, the Union might demand that Cyprus raise its 10 percent tax on corporate profits, a crucial selling point and key to an economy based on financial and business services like accounting."

This is a strange assertion. A bloated state bureaucracy can be called a key to an economy that is based on a bloated state bureaucracy. This is not a basis for healthy growth, just as being a tax haven is not in general a basis for healthy growth.

There is no obvious reason to be more sympathetic to a government that wants to maintain a country as a tax haven than there is to be sympathetic to a government that wants to maintain a bloated bureaucracy as a patronage system. Neither provide a platform for healthy sustainable growth.

Can Someone Tell the NYT About the Chinese New Year? Print
Wednesday, 11 April 2012 05:37

After last month touting the fact that China's trade surplus had plunged, the NYT  reports that in March:

"Exports surged last month, helping to produce an unexpected trade surplus of $5.35 billion in March, according to government data released Tuesday."

This one is getting really painful. If we do some deep investigative reporting and look at a chart accompanying the article we notice a sharp dip in exports every February which is followed by a big jump in March. Now we might think that China's exports lose competitiveness in February and then regain them in March or alternatively we might think this has to do with the vacations around the Chinese New Year that cause most factories across the country to be closed for several days. I vote for the latter explanation, but hey, I'm no China expert.

It's also worth taking issue with another assertion in the piece. At one points it cites Eswar Prasad, a former IMF official, telling readers:

"The I.M.F., the United States and other Western nations in recent years have periodically accused China of deliberately keeping its currency, the renminbi, weak as a way to stimulate exports.

"But shrinkage in China’s current-account surplus, notwithstanding the modest trade surplus in March, is making it harder for the I.M.F. and others to press for China to allow further appreciation of the renminbi."

Actually, in standard trade theory, fast-growing developing countries are expected to run current account deficits. The logic is that capital can be better used in developing countries where it is relatively scarce than in comparatively slow-growing wealthy countries. This means that as long as China has any surplus on its current account there is a strong argument in standard economic theory that its currency is under-valued.

Also, this piece badly misrepresents the problem of inflation with China. Insofar as inflation is a growing problem for the government, as the article claims, this would be an argument for re-valuing the renminbi. A higher-valued renminbi would directly reduce inflation by making the goods that China imports less costly. So this would fit well with the logic that for both its own good and the good of its trading partners, China should increase the value of its currency.

Since When Did Unionized Autoworkers Become Republican and Family Farmers and Doctors Become Democrats? Print
Tuesday, 10 April 2012 05:31

When David Brooks is not busy trying to destroy Social Security, he is often making grand pronouncements that make no obvious sense. Today he tells readers that the economy is being divided into an efficient globally competitive sector that has lots of productivity gains but few jobs and a moribund sector that is uncompetitive but has lots of jobs. The distinction is not especially new (or accurate), but Brooks adds the twist:

"Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I. Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle."

Most unionized manufacturing workers fit squarely in the efficient globalized economy. So do the unionized workers in the telecom sector. These workers are overwhelmingly Democrats.

On the other, hand family farmers, who benefit from massive farm subsidies, live in the second sector. So do doctors and other highly paid professionals who depend on the government to protect them from foreign and domestic competition. The streamlining and huge profits that the Republicans admire, according to Brooks, often are attributable to massive public subsidies, such as the deduction for interest payments by private equity companies or patent monopolies granted drug companies.

Of course one of the most protected sectors of the economy is the financial industry where the traders and top executives of the large banks can earn tens of millions or even hundreds of millions of dollars a year thanks to "too big to fail" insurance provided by the government at no charge. This group had been more or less evenly split between Republicans and Democrats in 2008, but according to many accounts in the media now strongly favors the Republicans.

The only obvious logic to Brooks' division is that supporters of the Democrats are more likely associated with government policies that benefit broad segments of the population. By contrast, supporters of the Republicans tend to favor policies that just benefit the wealthy.

Robert Samuelson Shows that the Post Has no Fact Checkers on Its Opinion Pages Print
Sunday, 08 April 2012 21:28

Social Security and Medicare are hugely important for the security of the non-rich population of the United States. For this reason, Robert Samuelson and the Washington Post hate them.

As we know, this is a question of basic political philosophy. In the view of Samuelson and the Post, a dollar that it is in the pocket of low or middle class people is a dollar that could be in the pocket of the rich. And Medicare and Social Security are keeping many dollars in the pockets of low and middle class people. 

Today's column by Robert Samuelson tries to tell us that Franklin Roosevelt would be appalled by the current state of the Social Security program. Of course, he produces not a single iota of evidence to support this position, although it is very clear that Samuelson doesn't like Social Security.

Samuelson begins by telling us that:

"It [Social Security] has become what was then called 'the dole' and is now known as 'welfare.' This forgotten history clarifies why America’s budget problems are so intractable."

He later adds:

"Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they 'earned' these benefits. To reduce them would be to take something that is rightfully theirs."

Of course Samuelson is 100 percent wrong here. Payroll taxes have been segregated. That is the point of the Social Security trust fund and the Social Security trustees report. These institutions would make no sense if the funds were not segregated.

Samuelson is welcome to not like the way in which the funds were segregated, in the same way that I don't like the Yankees, but that doesn't change the fact that the Yankees have a very good baseball team. Since its beginnings, the government has maintained a separate Social Security account. Under the law, no money can be paid out in Social Security benefits unless the Trust Fund has the money to pay for them.

In this sense, the funds are absolutely segregated. Samuelson doesn't like this, but why should any of the rest of us care? The rest of the piece shows the same dishonesty and lack of respect for facts.

Samuelson later tells readers:

"But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt’s fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits."

Okay, let's think about this for a minute. We went from five workers per retiree in the 1960s to roughly three workers for each retiree in the 90s. This ratio is projected to fall to roughly two workers per retiree by 2030 (not 2025, as readers of the Trustees report know).

On average we were much richer in the 90s than in the sixties, in spite of the fall in the ratio of workers to retirees. The same will be true in 2030, even assuming that we see the projected decline in the ratio of workers to retirees.

A small fact that Samuelson never mentions in this piece is that the Congressional Budget Office projects the program to be fully funded through 2038, with no changes whatsoever (i.e. no new taxes, contra Samuelson). If we want to make the program fully solvent for the rest of the century, a tax increase that is equal to 5 percent of projected wage growth over the next three decades should be roughly sufficient to do the trick. Are you scared yet?

There is an issue that most workers have not shared in the economy's growth over the last three decades. This is indeed a problem. If recent trends in inequality persist then any increase in Social Security taxes will be a burden, but the problem here are the policies that have brought about this upward redistribution of income, not Social Security.

Then Samuelson gives us his coup de grace:

"Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Steuerle and Rennane."

Okay, this is a really nice trick. Remember we were talking about Social Security? Note that Samuelson refers to "lifetime Social Security and Medicare benefits." It wasn't an accident that he brought Medicare into this discussion. That is because Steuerle and Rennane's calculations show that this average earning couple would get back less in Social Security benefits than what they paid in taxes. That would not fit well with Samuelson's story, so he brings in Medicare (remember this is the Washington Post).

And, the high cost of Medicare benefits is not due to their great generosity. The high cost is due to the fact that we pay our doctors, our drug companies, and our medical equipment suppliers way more than do people in any other country, and we have no better outcomes. If our per person costs for health care were comparable to costs in Germany, Canada, the UK or any other wealthy country, then workers would be paying far more for their Medicare benefits than the cost of what they are getting in care.

The story here is that Samuelson wants to punish ordinary workers for the fact that we pay doctors and the other big winners in this story too much. That may not make sense, but they don't call this paper "Fox on 15th Street" for nothing.

The Secret Source of Economic Weakness: The Trade Deficit Print
Sunday, 08 April 2012 20:23

I know, it isn't really secret. The Commerce Department publishes data on the trade deficit every month, but given the extent to which it is ignored in economic policy discussions, as for example in this otherwise thoughtful NYT column, it might just as well be secret. 

The basic story is incredibly simple. If we are buying more from abroad than we are selling, this means that we have negative national saving. If we have negative national saving, then either the public sector must have negative savings (i.e. a budget deficit) or the private sector must have negative saving (we are investing on net more than we households and corporations save) or both must have negative saving.

Currently the trade deficit is close to 4 percent of GDP at $580 billion. If we were near full employment, it would likely be close to 5 percent of GDP or $750 billion a year. (At higher levels of GDP the trade deficit increases, other things equal, because we would buy more imports.)

To offset this gap we must have a large budget deficit. Alternatively, we can have the situation like what we had in the housing bubble years of the last decade or the stock bubble years of the late 90s when private investment exceeded private saving.

In the last decade this was accomplished through the bubble-spurred housing boom and the near zero savings rate as people consumed based on their bubble-generated housing wealth. In the 90s we got negative private savings as gullible investors threw hundreds of billions of dollars into dot.garbage. Savings also fell to near zero in that period as households spent based on their ephemeral stock-bubble-generated wealth.

Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years. They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it.

The key to reducing the trade deficit is of course getting the dollar down. That will make our goods more competitive internationally.

This all is really simple, but it does require thinking for a moment or two. Repeating the Washington conventional wisdom gets one nowhere. (Okay, I don't mean that literally -- it can get you a high paying important job.) People actually have to think about how the economy works in order to understand it.

(btw, one painful item in the NYT piece was the discussion of housing equity. It is not coming back and there is zero, nada, no reason for thinking it will. There is no story that passes the laugh test in which house prices will have any substantial appreciation from current levels. They are now near trend levels; why would they rise back to their bubble levels?)

James B. Stewart Declares Himself Clueless About the Ryan Budget Print
Sunday, 08 April 2012 16:20

I met Paul Ryan when I debated him over President Bush's Social Security privatization plan back in 2005. He seemed like a nice, reasonably intelligent guy.

However this has nothing to do with the time of day when we are talking about his budget, the budget that NYT columnist James B. Stewart assured us is a good starting point in his column on Saturday. What Stewart tells us is reasonable is that the budget calls for cuts in entitlements and tax reform. He then asks who could disagree with this.

One has to wonder whether Stewart has looked at the Ryan budget. First, on taxes the only specifics are cuts in the tax rates paid by rich people and corporations. None of the offsetting tax increases are specified.

If this sounds like a sensible opening gambit, let's imagine the equivalent on the opposite side. Suppose that we proposed to increase Social Security benefits for the bottom two income quintiles of retirees. Suppose that we also proposed increased spending on infrastructure, research and development, and education.

Suppose the left-wing Ryan budget wrote down that these spending increases would be offset by unspecified reductions in government waste. We then told CBO to score it accordingly. Is this a good starting point for further discussion?

In terms of the other parts, if Stewart read the CBO analysis of Ryan's proposal from last year he would find that his "reform" hugely increases the cost of providing health care to seniors. The point of Medicare was to make health care affordable to workers in their old age. Of course we can save money by reducing what the government pays, but the point is to do so in a way that still leaves retirees able to pay for care. Ryan's plan is a huge step in the opposite direction according to the Congressional Budget Office.

The Ryan plan also hugely cuts non-entitlement spending. By 2050 it essentially eliminates all spending on items other than Social Security, health care and defense. By the end of the 10-year budget horizon most of the areas that we think of as the domain of the federal government (e.g. federal highways and airports, federal courts and law enforcement, drug research and safety, the State Department and Justice Department) will be cut by around 50 percent under the Ryan plan. How could Stewart have missed this?

Stewart has one other egregious error in this column. He refers to the Bowles-Simpson Commission report. Sorry folks, there was no commission report. According to the commission's by-laws a report required the support of 14 of the 18 commission members. The report being touted as a report of the commission only had the support of 11 commissioners. Arithmetic lesson for policy pundits number 28,742: 11 is less than 14.

The Ryan budget is proving to be a wonderful Rorschach test. We have people who want to be part of the inside Washington conversation who praise the budget's courage and integrity. Then we have people who believe in arithmetic who call it what it is: a piece of trash.

By the way, Paul Ryan is a very nice guy.

Falling Coverage Rates: One Reason Government Surveys May Not Show a Rise in Poverty Print
Saturday, 07 April 2012 22:46

In a NYT Economix blogpost Jason DeParle ponders the fact that government surveys are not showing much increase in poverty, even though we know there are many people experiencing long periods of unemployment and many forms of government assistance have been cut back. One possible explanation is that people in poverty and extreme poverty are less likely to be covered by the survey.

My colleague, John Schmitt, found clear evidence of a coverage problem in comparing employment rates as shown in the 2000 Census and the overlapping months of the Current Population Survey (CPS). This is a useful check on the accuracy of the CPS, the main survey for measuring both unemployment and poverty, since the Census has near universal reach with a response rate of close to 99 percent. By comparison, the coverage rate for the CPS is close to 88 percent.

Even after applying a Census adjustment formula, Schmitt still found a substantial difference in employment rates, with the CPS showing an overall employment rate that was more than a full percentage point higher than the Census. The difference was largest for groups with the lowest coverage rates. In the case of young African American men, who have a coverage rate of close to two-thirds, the CPS showed an employment rate that was 8 percentage points higher than the Census for the same months of 2000.

These results are consistent with a story where the CPS is missing more people through time and the people who it misses are disproportionately at the bottom of the income ladder. If this is true, then there could be a rise in poverty that is largely missed in the standard surveys.

Economics Reporters Over-Discover the Weather Print
Saturday, 07 April 2012 09:41

Back in February and March when we got reasonably strong employment numbers, some of us noted how unusually good weather likely inflated job growth (see last paragraphs). That is why we were not especially surprised that the March job numbers came in below the average for the prior three months and many economists' expectations.

However, the news stories today were filled with accounts from surprised economists who discovered the influence of the weather on economic data. This stuff really is not rocket science.

In the winter months we usually get some serious snowstorms in the Northeast and Midwest. This means construction sights get shutdown and project starts are delayed. People will be less likely to go out to restaurants when the streets are covered with snow or it's below zero. The same applies to shopping at the mall or buying a new car. If the weather is really bad, factories will shut down because they can't get necessary supplies.

None of this happened this winter which meant that job growth was better in the winter months than would ordinarily be the case. But if we didn't get the winter weakness that we expect, then we won't see the same spring bounce that we usually get.

People were hired in January or February who would not ordinarily be hired until March or April. Similarly, people who bought their car in the winter months will not be buying another one in the spring.

None of this means that the economy is about to sink into recession. It just means that some of the growth from the spring months was pulled forward to the winter months. It's no big deal and there is no excuse for anyone who does this stuff for a living to be surprised.

WAPO Runs Editorial on the Budget in News Section Print
Friday, 06 April 2012 05:45

It is well-known that the Washington Post is obsessed with the budget deficit and that it feels little need to restrict this obsession to the opinion pages (hence its nickname, "Fox on 15th Street"). It once again ran an editorial in its news section as it told readers about the country's "rocketing debt."

The editorial then asked:

"Why can’t America’s leaders, at the helm of such a wealthy country, find a solution that both puts the nation on a long-term path to financial security and preserves the vast array of vital services government provides?"

Of course the obvious answer is that there is no obvious reason that the country should be worried right now about writing down numbers on paper that show the nation will be on a "long-term path to financial security and preserves the vast array of vital services government provides."

The immediate problem facing the country are the tens of millions of workers who are unemployed or underemployed due to economic mismanagement by people like Alan Greenspan and Ben Bernanke. The question that all reasonable people should be asking is why America's leaders can't find a solution that will put these people back to work? After all, Keynes showed us how to restore an economy to full employment more than 70 years ago. The only reason that the country currently faces a large budget deficit and rising debt to GDP ratio is the economic downturn caused by the collapse of the housing bubble.

It is also worth reminding readers that the horror stories of exploding health care costs are entirely the result of the broken health care system in the United States. We spend more than twice as much per person on health care in the United States than in other wealthy countries. If we had the same per person health care costs as in other countries then we would be looking at enormous budget surpluses, not deficits. That is why serious people focus on the problem of health care costs, not budget deficits.

The piece also includes the assertion that:

"Economists say high debt levels can increase the risk of financial crises."

To make this more accurate the statement should say that:

"Economists who failed to see the last economic crisis say high debt levels can increase the risk of financial crises."

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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.