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Ireland's Economy Is Slumping BECAUSE It Is Following the ECB-IMF Bailout Program Print
Saturday, 03 March 2012 08:42

A Washington Post article on the weak state of Ireland's economy began by telling readers:

"Of all Europe’s crisis countries, Ireland has been perhaps the most adamant about pushing ahead with the budgetary, banking and other steps urged by its international lenders.

"Yet more than a year into its bailout, economic growth is lagging, high unemployment seems entrenched, and households and banks remain weighed down by the debts accumulated during a heady real estate boom."

The second sentence would have been more accurate if it said:

"As a result, more than a year into its bailout, economic growth is lagging, high unemployment seems entrenched, and households and banks remain weighed down by the debts accumulated during a heady real estate boom."

The poor performance of Ireland's economy is not a surprise to people who know economics. Sharp cutbacks in government spending in the middle of an economic downturn are expected to lead to weaker growth. Ireland's economy is doing badly precisely because it has been following the ECB-IMF program so closely.

Job Training That's Cheap, but Not Necessarily Useful Print
Friday, 02 March 2012 12:52

There's an old story about a drunk who is looking by the curb for his car keys in the middle of the night. A bystander offers to help and asks the drunk where he lost his keys. The drunk tells him that he dropped them in the bushes. The bystander asks the drunk why he is looking by the curb if he dropped his keys in the bushes, to which the drunk replies, "the light is better here."

That seems to be the logic that the NYT discovered in a piece that looked at job training programs. It notes several instances in which governments have cut back funding for training for positions where there is a recognizable shortage of workers. Instead they are funding training for jobs where there is already a glut of applicants. It seems that the reason is that the latter type of training is cheaper.

That's not good policy.

The Washington Post Runs a Column Complaining That No One Hears About the Liabilities of Medicare and Social Security Print
Friday, 02 March 2012 06:55
Seriously, they really did. If I was Peter Peterson, I would sue if I saw this column. After all, he has spent a billion dollars hyping the liabilities of Social Security and Medicare and now the Washington Post is telling us that no one has heard about them. Someone must have run off to Mexico with his money.
The Washington Post Still Misses the Housing Bubble (European Edition) Print
Friday, 02 March 2012 08:56

The Washington Post told readers that the euro zone crisis stemmed from governments living beyond their means in an article on an EU summit to deal with the region's economic crisis. The lead sentence is:

"The leaders of 25 European countries on Friday signed a new treaty designed to prevent the 17 members of the eurozone from living beyond their means and avoid a repeat of the region’s crippling debt crisis."

Of course the crisis was not caused by governments spending beyond their means (the purpose of the treaty). The crisis was caused by speculative housing bubbles that drove much of Europe's economy until 2008. There is nothing in this treaty that will prevent the sort of housing bubble that led to enormous distortions in the economies of the United Kingdom, Ireland, and Spain and elsewhere across Europe.

The crisis has been worsened by the refusal of the European Central Bank to act as a lender of last resort for the eurozone countries. This has driven up interest rates, creating fiscal crises in several countries. This treaty also does nothing to address that problem.

Oil Prices Are Determined in the World Market: It's Not Just Something That President Obama Says Print
Friday, 02 March 2012 06:42

The Washington Post had an article celebrating the fact that the public is confused about the causes of higher oil prices. This is sort of like a fourth grade teacher being delighted that his students don't know arithmetic. 

Undoubtedly much of the public is confused about the cause of higher oil prices because of articles like this one. It treats the issue as a he said/she said dispute, at one point quoting President Obama:

"the amount of oil we drill at home doesn’t set the price of gas on its own. That’s because oil is bought and sold in a world market. And just like last year, the biggest thing that’s causing the price of oil to rise right now is instability in the Middle East — this time in Iran."

This is not just something that President Obama says, this is true. The price of oil is determined in the world market. If the price of oil plummeted in the U.S. because we drilled everywhere, all the time, then we would lose supply from the rest of the world, because no one will sell us oil at below the world market price.

There is no remotely plausible story where the U.S. could become energy independent (even if we drilled everywhere), but even if we no longer needed imports oil prices would still be determined on the world market. Oil companies would export their oil if they could a higher price in Europe or Asia then they were getting in the United States.

When the media report the truth as a debatable point, it is not surprising that the public is confused about the cause of the rise in the price of oil.

If the Post felt a need to be bipartisan it could have told readers that President Obama's plan to end subsidies to the oil industry would have almost no impact on the industry. The $4 billion in subsidies that President Obama claims is at stake comes to about 4 cents per gallon of gas. It might make sense to end these subsidies, but it will have relatively little consequence for either consumers or the oil industry. 

Secret Commerce Department Report Shows the Economy May be Faltering Print
Thursday, 01 March 2012 07:44

Actually, it wasn't secret, it's right here on the Census Bureau's website, but for some reason no one in the media thought it was worth reporting a drop in durable goods orders of 4.0 percent in January. I am always the first to say that we should not make too much of any single report. Monthly data are often erratic and if one report seems out of line with most other data, odds are that the report was driven by some flukish factor or just sampling error.

Nonetheless, this is a big drop that can't be explained by the usual suspects. New orders excluding transportation (airplane orders are especially erratic) fell by 3.2 percent. Excluding military goods, new orders fell by 4.5 percent, so this is not a result of the peace dividend. The weather goes the wrong here since January was unusually warm this year meaning that businesses were not shut by snow storms. New orders for non-defense capital goods (i.e. investment) fell by 6.3 percent, or 4.5 percent if we exclude aircraft.

In short, this is an unambiguously bad report. My view is that it is probably an anomaly. We will perhaps see upward revisions in the second report for January or a big bounceback in the February numbers. But, this report definitely deserved some attention. It might seem rude to spoil the celebrations over our 3.0 percent growth rate last quarter, but that is what reporters are supposed to do.

China's Premature Aging Process: Another Arithmetic Failure at the Washington Post Print
Thursday, 01 March 2012 05:19

The Washington Post is absolutely obsessed with the costs of an aging population and it refuses to let arithmetic stand in the way. Today it ran an editorial complaining about China's "premature social aging process, saddling China with a large dependent elderly population before it’s truly rich enough to support it."

As the piece correctly notes, China has had very slow population growth over the last three decades by deliberate design, primarily its one child policy. While some results of this policy have been horrible (e.g. infanticide of girls by parents who wanted a boy), the slower population growth has been a huge plus helping China to sustain rapid economic growth with less damage to the environment than would otherwise have been the case.

China's economic growth has been so rapid that it can easily support an aging population. Those familiar with arithmetic can see this by comparing the experience of China with Mexico, our NAFTA partner whose economic policies have frequently been touted by the Post.

If we look at the IMF's data, we see that per capita GDP has risen by 740 percent over the last 25 years while Mexico's per capita GDP has risen by just over 26 percent [warning: more arithmetic ahead]. Now let's assume that China's per capita income doesn't rise at all over the next decade (absolutely no one expects this), while Mexico's continues to grow at the same pace as it has over the last quarter century. This means that in 2020, per capita GDP in China will still be 740 percent higher than it was in 1985, while in Mexico per capita GDP will be 38.6 percent higher.

Let's suppose that China's ratio of workers to retirees fell from 5 to 1 to just 2 to 1 over this time horizon (a more rapid decline than actually is taking place). Let's assume that in Mexico the ratio remains unchanged at 4 to 1. Then let's assume that retirees consume 80 percent as much as workers. We will ignore children to make the calculation more favorable to the Washington Post's beloved country.

In this story, China's workers will be able to enjoy living standards in 2020 that are almost 7 times as high as they were 35 years earlier, even though they will be supporting a much larger population of retirees. This will be the case even though the implicit tax on their wages will have risen from 13.8 percent to 28.6 percent. China's retirees will also be enjoying a standard of living at age 70 that is more than 5.5 times as it high as it was when they were 35.

By comparison, Mexico's workers will have seen their after-tax pay increase by just 38.6 percent over this period. The income for a 70 year-old retiree will be just 10.9 percent higher than it was when they were a 35-year old worker. 

If there is a problem in this story for China, it is difficult to see what it is. China's extraordinary growth over the last three decades is sufficient to ensure large increases in living standards for its whole population, if it is evenly distributed. If the Post meant that China can't support its retirees at U.S. living standards, it's absolutely right. However, it's not clear why on earth they would be thinking about this comparison.

Local Governments Argue That Financial Markets are Highly Monopolistic Print
Wednesday, 29 February 2012 05:43

The Washington Post told readers that local government officials complained about the monopolistic nature of U.S. financial markets in an article on the Volcker Rule. The article reported that a number of local government officials complained that the Volcker Rule would force them to pay higher interest rates on their bond issues.

While the article never discussed the issue of monopolistic markets, this is what the complaints by these officials imply. If the markets were highly competitive, then it would make very little difference whether or not banks opted to buy the debt they issued. Even a small increase in interest rates would cause other investors to swoop in and grab up their debt.

Also, if the financial system were reasonably competitive, we would expect that independent investment banks -- which are not subject to the Volcker Rule -- would be created to take advantage of these high yielding bonds, bringing up their price and pulling interest rates down.

The article should have asked the question of why, if these local government officials are correct in what they claim, financial markets are not working as they are supposed to. 

The World Bank's Advice to China on Growth Print
Tuesday, 28 February 2012 05:51

It is striking that the reporters can write about recommendations from the World Bank or International Monetary Fund to China about sustaining its growth, without any comment on the irony. These institutions have been making policy recommendations for six decades that have often not resulted in much growth at all. In some cases, most notably the situation of Argentina following its default in 2001, they have been astoundingly wrong. Therefore it is impressive that Washington Post can report on a set of recommendations from the World Bank to China, whose growth has averaged more than 8 percent annually over the last three decades, without ever noting this irony.

It is also worth noting that the graphs accompanying this article show that China's productivity growth is projected to average close to 6 percent annually over the next two decades. Many news outlets (including the Post) have argued that China will face a problem supporting a larger population of retirees as its work force ages. If this productivity growth projection proves accurate, both China's workers and retirees will be able to see their standard of living double on the next two decades, even as the ratio of workers to retirees falls sharply.

Joe Nocera Claims Fracking Raises U.S. Greenhouse Gas Emissions by Almost 20 Percent Print
Tuesday, 28 February 2012 05:15

In his column today, which argues for responsible fracking, telling readers that there can be enormous gains from using cleaner techniques in fracking. In discussing the importance of reducing fracking related methane emissions Nocera comments:

"How big a difference will it make to the environment if industry can minimize methane leaks? A lot. ... Suppose, for instance, the current leak rate turns out to be 4 percent. Suppose we then reduce it in half. That would mean an immediate reduction in overall U.S. greenhouse gases by — are you sitting down for this? — 9 percent. If the leaks are reduced to 1 percent, the decrease in greenhouse gases jumps to 14 percent."

While Nocera does not make this point, but if cutting the methane emissions from fracking in half would reduce greenhouse gas emissions by 9 percent, then the methane emissions must come to close to 18 percent of total greenhouse gas emissions. If methane emissions are actually 6 percent, as indicated by a study Nocera cites, then fracking would account for more than one quarter of all U.S. greenhouse gas emissions.

Nocera may have his numbers completely wrong, but the implication of the evidence presented in his piece is that fracking is an incredibly dirty process from the standpoint of greenhouse gas emissions. If his numbers are right, he makes a compelling case for banning fracking unless it can be done far more cleanly than is currently the case.

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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.