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Adam Davidson Gets Stimulus Wrong in the NYT Print
Friday, 04 November 2011 05:41

Adam Davidson, the co-founder of NPR's Planet Money, has a new column in the NYT magazine, "that tries to demystify complicated economic issues — like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs." He is not off to a good start.

He tells readers that:

"One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it."

I seem to recall a lot of debates about employment and output back when I was in grad school a quarter century ago. There were plenty of papers that we read from the 60s that talked about whether we could have macroeconomic policies that could increase employment. Several Nobel winning economists from that period, with names like Paul Samuelson and Robert Solow would probably be surprised to hear that they were not worried about job creation. (It is true that these economists did not expect prolonged periods of stagnation, but they certainly did think about ways to increase employment and reduce the severity of downturns.)

Davidson then goes on to misrepresent the idea of stimulus:

"The stimulus, however, has to be borrowed, and it has to be really, truly huge — probably something like $1.5 or $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels. The goal is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them."

While his numbers are in the ballpark if he is referring to a 2-year package (something that should have been specified), the notion that we need consumers to spend more is his invention. Spending as a share of disposable income is still higher than normal, not lower than normal. In the short-run the government must fill the demand gap that is created by the collapse of construction following the overbuilding of the housing bubble years. It also must replace the demand that had been generated by consumption that was driven by housing bubble wealth that has now vanished.

There is no reason to expect consumption to return to its bubble levels. It would also be undesirable if it did because it would mean that workers are continuing to put aside inadequate savings for retirement. This is especially problematic in a context where politicians in Washington are determined to cut Social Security and Medicare.

Over the longer term, this demand will be filled by a pick-up in construction, as the excess supply of housing is eventually reduced by population growth and by increased net exports. The latter will happen if the dollar is allowed to fall. In a system of floating exchange rates, like the one we have, a drop in the value of the dollar is the mechanism for adjusting trade deficits. Remarkably, the value of the dollar is never mentioned in this piece.

David Brooks Comes Out for the Middle Position on Fracking: Drill, Baby, Drill Print
Friday, 04 November 2011 04:16

As a deep thinker, David Brooks always takes the middle positions between the extremes of the left and the right. We know it is the middle position because David Brooks holds it. Today, David Brooks discusses shale gas and essentially says "drill, baby, drill."

There have been many issues raises about the safety of drilling for shale gas since the companies that are engaged in this process, known as "fracking" don't have to disclose the chemicals they use. While companies in other industries would have to publicly report chemicals used in mining under the Safe Water Drinking Act, the gas companies doing fracking arranged to get a special exemption from Congress because, well, because they could. While a recent study by scientists at Duke found evidence of methane contamination of drinking water in areas near fracking sites, David Brooks assures us that there are no problems.

Brooks also is a bit off on the economics of the industry. He tells us:

"Already shale gas has produced more than half a million new jobs, not only in traditional areas like Texas but also in economically wounded places like western Pennsylvania and, soon, Ohio. If current trends continue, there are hundreds of thousands of new jobs to come."

Let's look at this one a bit. According to the Energy Information Agency (EIA) [Table A14], current production of shale oil is around 5 trillion cubic feet a year. At $4 per thousand cubic feet, this gets us $20 billion a year. For the economy as a whole we spend an average of more than $100,000 per job ($15 trillion GDP, 130 million jobs). If we use this number for the shale oil industry, then we get 200,000 direct jobs in the industry. It would take a multiplier of 2.5 to get us Brooks' number of more than 500,000. (Economists usually assume a multiplier close to 1.5.) 

In the longer term, economic models assume that the economy is at full employment, so the contribution of shale oil to employment would only be to the extent to which it reduces U.S. energy costs below what they would be otherwise. This is likely to be very limited. In the EIA analysis, even in the long-run shale oil is projected to supply around 70 percent of gas production, which is only one source of energy.

If it turns out that fracking results in polluted drinking water, the resulting increase in health care costs could quite possibly exceed any benefits from lower energy prices. Anyone committed to a free market (as opposed to government subsidies to the gas industry) would insist that the gas companies internalize the cost of whatever damage is caused by fracking. Then fracking would only take place if it were justified by market prices. 

Can WAMU Say "Cut Social Security?" Print
Thursday, 03 November 2011 04:54

We know that politicians don't like to talk about cutting Social Security or Medicare because both programs are hugely popular across the political spectrum. Even large majorities of Republicans are strongly opposed to cutting these programs. This is why politicians like to use the term "entitlements" when they talk about cutting these programs. Entitlements are much less popular than Social Security and Medicare.

While it is understandable that politicians would like to conceal their efforts to do actions that are opposed by most of their constituents, it is not obvious why the media would feel obligated to assist them in this effort. In a top of the hour news segment, WAMU (one of DC's local NPR affiliates) told listeners about plans to "tweak" or "change" entitlements. In fact, they meant plans to cut Social Security and Medicare.

It is striking that such terms are never used on the tax side. For example, reporters never refer to plans to "change" taxes in reference to plans to end the Bush tax cuts to the wealthy. Nor do they ever refer to this as a "tweak" to the tax code, even though it would have less impact on the after-tax income of the affected population that the cut to Social Security that is being considered (a 0.3 percentage point reduction in the annual cost of living adjustment).

Planet Money Is Off the Planet on Demographics and Retirement Print
Thursday, 03 November 2011 04:26

Most people who report on economics have heard of productivity growth. Virtually all economists see it as the main determinant of living standards. However, NPR's Planet Money seems unfamiliar with the concept.

It had a piece on demographics and the problems of supporting retirees in the context of stagnant, or even declining, populations. Incredibly the piece did not even once mention productivity growth.

Economists would consider productivity central to this issue, since it would determine the ability of workers to support a growing population of non-workers. (The burden imposed by supporting a larger number of retirees is at least partly offset by a reduced burden from supporting children.)

Productivity growth is the reason that the country has enjoyed a large increase in per capita income over the last four decades, even as the ratio of workers to retirees fell from 5 to 1 to just 3 to 1. With productivity growth of 2 percent a year (roughly the average over the last 4 decades), the output of an average worker would rise by more than 80 percent over a 30 year period. (Many workers have not benefited from this rise in productivity because of the upward redistribution of income during this period, however this is an issue of distribution, not demographics.)

If an average retiree has 75 percent of the income of an average worker, and the ratio of workers to retirees were to fall from 3 to 1 to 2 to 1 over a 30-year period, it would be possible for both workers and retirees to enjoy a 65 percent increase in living standards. The impact of productivity growth swamps the impact of the change of the dependency ratio in this story, which is why economists focus much more on productivity growth.

It is also worth noting that population growth can have a negative impact on productivity growth. Slower growth in the labor force can raise the capital to output labor, thereby raising the rate of productivity growth. Slower population growth is also likely to lead to less strains on the physical and natural infrastructure which could lead to large gains in living standards that are not measured in GDP. For example, people will spend less time commuting in cities with less dense populations. People will also have more access to natural resources like beaches and national parks if the population were smaller.

Any serious story on demographics and a rising ratio of workers to retirees would discuss these issues.


$800 Billion in Tax Increases Are Equal to 0.4 Percent of GDP Print
Wednesday, 02 November 2011 07:53

It would have been helpful if the Washington Post gave readers some context in an article that discussed Morgan Stanley Director Erskine Bowles' appearance before the supercommittee. Mr Bowles suggested that the committee agree to $800 billion in additional taxes over the next decade.

This amount is a bit less than 0.4 percent of projected income over this period. It is also less than one fourth of the increase in annual military spending (measured as a share of GDP) in the years since September 11th.

Europe Asks China for Help Because of 2.0 Percent Inflation Superstition Print
Wednesday, 02 November 2011 05:17

The Washington Post reported on the bizarre situation in which the relatively rich European Union is asking China, a relatively poor country, with assistance in its bailout package. It would have been appropriate to remind readers that the only reason that Europe needs help from anyone is that the people running the European Central Bank (ECB) are part of a bizarre cult that worships a 2.0 percent inflation target.

If the ECB was managed in the same way as central banks have been managed through time, it would simply step in as the lender of last resort and guarantee the sovereign debt of the euro zone countries and immediately put an end to the crisis. However, adherence to the 2.0 percent inflation cult prevents the ECB from functioning as a modern central banks.

The 2.0 percent inflation cult is proving to be one of the most destructive faiths in human history. The adherence to this cult prevented the ECB from taking an steps to stem the growth of housing bubbles across the continent. (This was also the case in the United States where the cult is not as widely practiced at the Fed.) Now that these bubbles have collapsed and left the economy in ruins, adherence to the cult is preventing the ECB from responding adequately.

[Addendum: Those interested in hearing more about the situation in Greece may want to tune into a conference on Thursday and Friday at the University of Texas organized by my friend Jamie Galbraith.]

It Doesn't Make Sense to Say GDP Growth Doubled in the Third Quarter Print
Wednesday, 02 November 2011 05:03

A top of the hour Morning Edition news segment told listeners that GDP growth nearly doubled from the second quarter to the third quarter, going from 1.3 percent to 2.5 percent. This is not a useful comparison.

The relevant comparison would be the percentage point change in the growth rate. For example, an increase in growth from 3.0 percent to 5.0 percent is far more meaningful than the rise from the first quarter to the second quarter, even though it is a near-doubling of the growth rate. When growth is slow, an increase that is large measured as a percent of the prior quarter's growth is not a big deal.

The IMF Will Wing it for Greece, Just Like They Did for Citigroup Print
Wednesday, 02 November 2011 04:42

The Washington Post is concerned that the referendum in Greece on the austerity plans will make it difficult for the IMF to approve the next tranche of a loan that will be needed for Greece to make a set of debt payments in December. It told readers:

"Papandreou’s announcement could put the IMF in a difficult position. The agency is due to approve the latest disbursement of money to Greece under an earlier loan agreement. But IMF rules allow such disbursements only under programs that are on track."

This certainly will not be a problem for the IMF. Since the beginning of the financial crisis all sorts of rules have been suspended in all sorts of different contexts. For example, when the crisis was at its peak in September of 2008 the FDIC suspended mark to market accounting, allowing banks to keep mortgages on their books at full value even when it was almost certain that they would take large losses on them. Citigroup was given guarantees on $300 billion in assets by the Fed and Treasury at a point where it was not even clear what assets were being guaranteed (i.e. they could after the fact put bad assets into the pool).

If the IMF wants to support Greek debt, which it probably will since a default would likely lead to major bank defaults, then it will have no problem getting around its rules. There is no legal body to which such a move can be contested.

This piece also neglected an important aspect to the decision to hold a referendum. The referendum will likely lead the troika dictating bailout terms (the IMF, the European Central Bank, and the European Union) to make further concessions. Their current plan implies more than a decade of austerity where Greece will not return to its pre-crisis level of per capita income until after 2020, even if the economy grows in line with projections.

(Since Greece's pension system has been one point of contention in the austerity plans designed by the troika, it is worth noting that IMF economists are often able to retire in their early fifties with six-figure pensions.)

Is Politico Giving Out Stock Tips? It Knows What Markets Want Print
Tuesday, 01 November 2011 07:18

People who have the ability to anticipate market movements can make enormous amounts of money running hedge funds and other investment vehicles. Apparently Politico is among the small group of analysts who know what will move markets.

It told readers that:

"If the committee were to take up changes to Social Security, it could show that Congress is looking for systemic changes to the nation’s finances — something markets and credit rating agencies want to see."

While the credit agencies, who are known for rating subprime mortgage backed securities Aaa, have been explicit in their instructions to Congress, it is not clear how Politico could determine the market's sentiments. In recent months bonds prices have soared and interest rate on 10-year Treasury bonds fell as low as 1.7 percent. Is Politico telling us that the bond markets are unhappy about the current budget situation and that interest rates will fall even lower if Congress cuts Social Security?

If that is the claim, it would be interesting to see Politico provide the evidence that is the basis for this assertion. Alternatively, if this is just intuition on the part of the reporters/editors at Politico, it would be important to disclose this fact as well.

NYT Wins Award for Misleading Headline for Article on G.A.O. Report on A.I.G. Bailout Print
Tuesday, 01 November 2011 05:13

The NYT headline told readers:

"G.A.O. Says New York Fed Didn't Cut Deals on A.I.G."

That should have us all reassured. After all, we don't want our government cutting deals when they bail out huge financial institutions.

Actually, the story says pretty much the opposite. The story tells how the Government Accountability Office (G.A.O.) found that the New York Fed made little effort to try to force banks to make concessions after it took control of A.I.G.

The point is that A.I.G. was effectively bankrupt and unable to pay all of its debts. In such circumstances it would have been reasonable for the New York Fed to insist that the creditors, in this case large banks like Goldman Sachs, accept some losses. These banks should understand that they take risks when dealing with financial institutions that are in questionable financial shape and should suffer some loss when they make a bad bet. However the government bailout of A.I.G. ensured that they suffered no consequences from their mistake. 

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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.