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The Fed Tries to Confuse the Record in Battle with Bloomberg Print
Wednesday, 07 December 2011 05:47

Bloomberg has done some outstanding reporting over the last few years on the Federal Reserve Board's bailout of the financial sector. Much more money went through the Fed's special lending facilities than went through the TARP program that was approved by Congress.

Bloomberg's reporters have taken the lead both in pressing the Fed to release data on its bailout programs and also in publicizing the numbers when they were released. They even sued the Fed (successfully) to force it to release data on the beneficiaries of lending through the discount window. The Fed has resisted the release of information about its programs, claiming that it would make it more difficult for it carry through bailout programs and monetary policy.

Yesterday Fed chairman Ben Bernanke attacked Bloomberg claiming that its reporting was misleading. It looks like the Fed missed the mark on just about every issue.

Perhaps the most important issue is the Fed's claim that it did not lend at a below-market rate to banks, thereby effectively giving them a subsidy. In fact, it is almost definitional that the rate did provide a subsidy.

No one forced the banks to borrow from the Fed. If they had better options, they would have borrowed elsewhere. Instead the Fed made large amounts of money available to banks at a time when liquidity carried an enormous premium. This meant that the banks could relend the government's money to others and earn a substantial profit.

This lending may have been justified to stem the financial crisis, but in principle the government could have imposed conditions (e.g. real caps on executive pay, downsizing the too-big-to-fail banks, modifying mortgages) on the banks as the price of getting access to credit at below-market rates. Bernanke and Congress did not seek to impose such conditions.

Given Bernanke's strenuous opposition to the release of data on the bailout programs it would be interesting to know if he now feels that it is more difficult for the Fed to conduct monetary policy.

 
Things Are So Bad in Japan That it Suffers from Both Too Many and Too Few People Print
Wednesday, 07 December 2011 05:16

The media regularly gives us stories about the impending demographic disaster in Japan because of its low birth rate and declining population. Today, in the context of an article about the clean-up from the accidents at its nuclear reactors last spring, the NYT told us Japan's problems are even worse than we thought:

"The Soviet Union did not attempt such a cleanup after the Chernobyl accident of 1986, the only nuclear disaster larger than that at Fukushima Daiichi. The government instead relocated about 300,000 people, abandoning vast tracts of farmland.

Many Japanese officials believe that they do not have that luxury; the evacuation zone covers more than 3 percent of the landmass of this densely populated nation."

So we now learn that Japan is not only suffering because it has a declining population, but also because it is a densely populated country. Can things get much worse?

In reality, the demographic story is silly. The alleged problem is a decline in the ratio of workers to retirees. (The correct measure is the ratio of workers to non-workers, the latter would include children.) In a healthy economy, the rise in productivity growth swamps the impact of even very negative demographic trends.

For example, going from 3 workers to retiree to 2 workers per retiree over a 20 year period (an extremely fast rate of decline) would imply that the share of workers' wages going to support retirees would have to increase by 0.6 percentage points annually, assuming a 70 percent replacement rate for retirees. This is 40 percent of the 1.5 percent annual productivity growth in the years of the productivity slowdown (1973-1995) and 24 percent of the 2.5 percent annual productivity growth in the years since 1995.

This means that in a healthy economy workers can continue to enjoy substantial increases in living standards even during years in which the demographic trend leads to a sharp increase in dependency ratios. Insofar as this is associated with a declining population, there are many gains associated with less crowding and less pollution that will not show up in GDP statistics.

 
Another Front Page Washington Post Editorial Against the Welfare State Print
Tuesday, 06 December 2011 08:14

The boys and girls at Fox on 15th Street are really getting excited over their hopes that the European welfare state might be dismantled. The third paragraph of the lead front page article told readers:

"If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world."

Of course the most generous welfare states who have the most "cozy" social protection systems are not facing fiscal crises. These are countries like Sweden and Denmark and even Germany, all of whom have relatively solid finances. Paul Krugman put up a nice graph on his blog yesterday showing the non-relationship between the share of government spending in GDP and the current interest rates paid by government.

Also, as people familiar with current events know, this crisis did not stem from "three decades of overspending," it came about because of a collapse of housing bubbles in the United States and across Europe. This is the opposite of a problem of an excessive welfare state. It was a problem of a private financial sector gone wild making the reckless loans that fueled the bubble. Apparently the Post has not heard about this.

 
Net Exports Create Growth and Jobs, Not Exports Print
Tuesday, 06 December 2011 06:06

The NYT had a good piece on Ireland's effort to get back on a solid growth path. At one point it refers to a 5.4 percent rise in exports as an encouraging sign:

"driven by gains from Pfizer, Intel, SAP and other multinational companies that were drawn to Ireland in the 1990s and 2000s by its low taxes, well-educated English-speaking work force and access to the European market."

Actually, this picture is less clear. Many of the exports associated with these companies are likely to be associated with increased imports as well. For example, if Intel is exporting more microprocessors assembled in Ireland it is also importing more components. The net gain to Ireland's economy might be very small since most of the value added may take place elsewhere.

 
David Brooks Teaches People How Not to Talk About Regulation Print
Tuesday, 06 December 2011 05:18

Some people try to teach by providing step by step instructions. This can be very tedious. David Brooks instead teaches by example. In his column today, David Brooks commits two of the great sins that would not appear in any serious discussion of regulation. 

First he discusses the cost of the regulations put in place by different presidents:

"George W. Bush issued regulations over eight years that cost about $60 billion. During its first two years, the Obama regulations cost between $8 billion and $16.5 billion, according to estimates by the administration itself, and $40 billion, according to data collected, more broadly, by the Heritage Foundation."

So regulation under the last president Bush cost $60 billion. Is this $60 billion a year (@0.4 percent of GDP)? Is it the accumulated cost over ten years (@0.04 percent of GDP)? Or, is it over a one-time cost of $60 billion? David Brooks doesn't tell us. The differences are of course enormous, but we have not a clue based on the information given in the article.

The second major sin is that we have no idea how Brooks is measuring costs. Suppose that my neighbor has the disturbing habit of dumping his sewage on my lawn. If this is a common problem, then I and others similarly afflicted may unite to put a socialist in the White House who will prohibit people from dumping sewage on their neighbors' lawn.

Most regulation does in fact have this character. It prohibits businesses from doing harm to the life and property of others. The question is, does Brooks' measure of the cost of regulation simply count the cost to my neighbor of dealing with his own sewage, or is it supposed to be some net measure that subtracts the savings that accrue to me and other current recipients of our neighbors' sewage?

Brooks doesn't tell us, but since analyses of most regulations show the benefits far exceed the cost (in the case of the Clean Air Act, the net benefits were estimated as $2 trillion over the next few decades), it is likely that Brooks is simply counting the cost to my neighbor of cleaning up his own sewage. It's not clear what this tells us exactly about the burden of regulation, but hey, this is David Brooks, what did you expect?

 
Robert Samuelson Misuses the Euro Crisis to Advance His War on the Welfare State Print
Monday, 05 December 2011 05:45

A newspaper that doesn't fact check its news articles can hardly be expected to fact check its opinion pieces. This mean that Robert Samuelson can get away with just about anything he wants in his column.

Today it is a diatribe against the welfare state. He tells readers that the euro crisis is the grand reckoning of the welfare state. Now that the euro zone economies are growing slowly and have aging population, the welfare state is no longer sustainable.

If the Post had fact checkers, they would ask Samuelson why, if the problem is an excessive welfare state, the countries with the most generous welfare states appear to be doing just fine. If we just take the measure of spending relative to GDP, the leaders would be countries like Sweden, France and Denmark, all of which are surviving the crisis reasonably well. None of the crisis countries rate near the top of the list and Spain is an outlier in Europe for having a much lower than average share of government spending in GDP.

A fact checker would have reminded Samuelson that the crisis came about because out of control lending by bankers who somehow could not recognize the huge housing bubbles in the United States and much of Europe that created the largest asset bubble in the history of the world. This is a story of a broken private sector and/or too little government regulation.

The immediate problem facing the euro zone countries is too little demand, the exact opposite of the problem that Samuelson is blaming, which is too much demand and too few resources. (Lesson for reporters: the bloated welfare state story is too much demand chasing too few resources. The problem today is too little demand chasing too many resources, hence the mass unemployment. Remember this one and you are head of 99 percent of your peers.)

 

 

 
At University of Pennsylvania, How Did Presidential Pay Compare to Pay of Other Employees? Print
Monday, 05 December 2011 05:34
In an article on the pay of presidents at private colleges and university, the NYT implied that an Occupy group was wrong to complain about the $1.3 million annual pay for Amy Gutmann, president of the University of Pennsylvania, because her salary "is less than 1 percent of the institutional budget." It would have been helpful to give a comparison to the salaries of professors and other university employees and also to report how it increased in the last decade. This is done for other institutions mentioned in the piece.
 
Roger Cohen Wonders If a Financial Transactions Tax Is Feasible, Someone Has to Tell Him About the UK Print
Sunday, 04 December 2011 22:09

NYT columnist Roger Cohen told readers that ideas like a:

"tax on global financial transactions, have been around for years but they’re almost impossible to apply."

He wouldn't say this if he was familiar with the United Kingdom. The United Kingdom has been taxing trades of stock for centuries. It raises between 0.2-0.3 percent annually ($30-$40 billion in the United States). There are many other financial transactions taxes in place in other financial markets.

It is not clear what makes Mr. Cohen think that a tax that raises tens of billions of dollars each year is "almost impossible to apply."

 
The Washington Post Can't Get Data on European Debt Print
Friday, 02 December 2011 06:43

That must be the case, since if the Post actually knew the history of European debt it would not begin its lead front page story with a sentence like:

"The head of the European Central Bank signaled Thursday that the institution might be willing to take more-aggressive steps to stem the region’s debt crisis, but only if the 17 nations that share the euro unite behind a plan that could tame years of runaway spending."

Those who have access to data on government debt know that the debt-burdened countries (except Greece) actually had modest budget deficits or even surpluses prior to the collapse of housing bubbles across Europe and in the United States. So there was no pattern of runaway spending that needs to be tamed. There is a severe recession from which Europe needs to recover. If the European Central Bank was more aggressive in promoting growth, with lower interest rates and quantitative easing, it would go far toward addressing the real cause of the deficits in Europe.

 
Bailout Economics for David Brooks Print
Friday, 02 December 2011 06:01

David Brooks tells us that he is very concerned about the demands that value-less technocrats are imposing on the people of Germany to bail out the heavily indebted countries of southern Europe. He is worried that the bailout will be very costly and also that it will remove the link between effort and reward.

Both sides of this picture need a little further examination. First, let's take a look at that big cost story. What is needed first and foremost in this bailout is a guarantee of debt from a deep-pocketed entity that can make this guarantee credible. That would be the European Central Bank (ECB).

Guarantees can in principle be costless to the guarantor. Our political establishment and their followers in the media have been anxious to tell us how the government and the Fed made money on the TARP and related Fed bank bailouts. This is true. Of course we still gave enormously valuable subsidies to the beneficiaries of the bailouts.

The way this works is that the money lent to the banks had very little cost to the government. The guarantees have no cost to the government, if they are not actually drawn upon. This means that if we get even nominal interest payments, the government comes out ahead.

This is largely the case with the ECB right now. If it guarantees the debt of the troubled countries then the runs on these countries' bonds will stop and their debt burdens will be sustainable. This means that the net cost to the ECB is likely to be close to zero and it could even led to a profit. Furthermore, the ECB can print as many euros as it wants, just as the Fed can print as many dollars as it wants.

All of this means that the tax burden on those hard-working Germans should at the end of the day be a mind blowing -- hold your horses -- ZERO!

Okay, there is a small issue here. The ECB will have to abandon its worship of the number 2, as in 2 percent inflation. If the ECB is prepared to provide the support necessary to get southern Europe back on a healthy growth path then it will be necessary to have a somewhat higher inflation rate in Germany, perhaps 3-4 percent. Is that too troubling for the German people? Maybe we can have inflation adjustment therapy sessions to allow Brooks' hard-working Germans to cope with this situation. (We should send the bill to the profligate southern Europeans.)

Now that we have explained to Brooks that there will be no crushing tax burden on the Germans let's turn to the "effort-reward" story. There is a logical counterpart to every reckless borrower known as a reckless lender. Lenders are supposed to know the creditworthiness of their borrowers. That is what is supposed to distinguish a successful bank from an unsuccessful bank.

To some extent the lenders can perhaps be excused in the case of Greece, since the country did outright lie about its budget situation. (Some people more familiar with the world of high finance than me insist that the lenders knew that Greece was lying.) However, the trillions of dollars of loans that fueled housing bubbles in Spain, Ireland, and elsewhere were freely made by very well compensated bankers who were supposed to have some clue as to what they were doing.

In the world where effort is linked to reward, all of these reckless lenders should be out on the street, sent to the bottom rungs of society for their incredibly destructive greed and incompetence. That has not happened, nor is Brooks calling for it to happen.

Instead, Brooks wants to see the people of Spain, Portugal, Italy and elsewhere suffer, because their leaders were no more competent than the people at the ECB or the banks making loans in Germany, France and elsewhere. He thinks that they should endure long periods of high unemployment, see big cuts in the pensions for which they worked decades, and have education spending for their children reduced.  

I'm looking really hard, but I don't see any connection  between effort and reward in Brooks' vision. Maybe he can clarify the link in a future column.  

 

 
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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.

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