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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.  

 

 
Steven Beard at Market Place Flunks Euro Crisis 101 Print
Friday, 02 December 2011 05:52

Steven Beard apparently does not have access to data on budget deficits. He wrongly told Market Place listeners that the euro zone crisis is due to the fact that euro zone countries spent more money than they took in. This is wrong, wrong, and wrong!

The euro zone crisis is due to the fact the European Central Bank was managed by incompetent people who either did not see the housing bubbles across the continent and the world or did not understand their implications for the euro zone economies. It was the collapse of these bubbles that threw the euro zone countries into a severe downturn.

With the exception of Greece, it is this downturn that is the origin of chronic deficit problems. The other heavily indebted countries had sustainable deficits or even surpluses prior to the collapse.

 
The Myth of Profligate Euro Zone Countries Print
Thursday, 01 December 2011 05:33

Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse.

Perhaps repeating this line three times will help the type of people who have columns in the Washington Post on the euro zone crisis get some understanding of the issue. Today we get a lecture on southern country profligacy from Daniel M. Price. Yesterday, Post columnist Matt Miller told us how he misleads his daughter about the nature of the euro zone crisis and suggested that the rest of us be equally misleading with our own children.

The reality is that most of the countries currently facing debt troubles were not profligate prior to the crisis. While it may be reasonable to describe Greece as being profligate, the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years leading up to the crisis.

Italy, the closest Greece competitor among euro zone crisis countries, had relatively small budget deficits in the years before the crisis. Its debt to GDP ratio fell from 93.7 percent of GDP in 2001 to 87.3 percent of GDP in 2007. In other words, the deficits of these years were completely sustainable.

Spain ran budget surpluses in the years from 2005-2007. Its debt to GDP ratio fell from 50.3 percent in 2000 to 26.5 percent of GDP in 2007. There is no remotely plausibly story of government profligacy here.

In short, people who describe the euro zone crisis as a story of excessive government deficits are pushing an ideological agenda that has nothing to do with reality. The story of the current deficits of the non-Greece countries is the story of the collapse of housing bubbles that threw the euro zone economies into a severe downturn. The European Central Bank (ECB) has magnified the problem by maintaining relatively tight monetary policy in order to maintain very low inflation and also explicitly asserting that it would not act as a lender of last resort to the heavily indebted countries.

Blaming government profligacy may be useful to those who want to see cuts in social spending, but it is not a story that is based in reality. It conceals the incompetence/greed of the private sector bankers who fueled the bubble. It also ignores the recklessness of the ECB of clinging to its inflation obsession even in the midst of a crisis that threatens the survival of the euro and could cause millions of additional workers to lose their job.

 
Inflation Will Matter for the Future of the Euro Print
Thursday, 01 December 2011 05:14

The NYT Magazine had a useful piece outlining some of the key issues on the future of the euro. It would been helpful to mention the issue of euro zone inflation as one of the key factors affecting the ability of euro zone countries to get through the crisis. The southern euro zone economies are currently uncompetitive with Germany and other northern euro zone economies. They can regain competitiveness either by having their nominal wages fall (the path suggested in the piece) or by having their wages and prices rise less rapidly than in the northern European economies.

The former path is extremely painful. It would require many years of high unemployment. Even then, success is far from assured. One effect of falling prices is that the debt burdens of these countries would increase in real terms. (If wages and prices fall by 10 percent, then Italy's 2 trillion euro debt is 10 percent larger relative to the size of its economy.) Falling wages and prices are also likely to discourage investment, since businesses will know that the products that they will be selling in 5 or 10 years will get lower prices than they would today.

The alternative route to regaining competitiveness would have a somewhat higher euro zone rate of inflation, which would allow the southern euro zone countries to regain competitiveness by having a lower, but still positive rate of inflation. However, going this route would require the European Central Bank to loosen its commitment to maintaining a 2 percent rate of inflation.

 
The U.K Has Its Own Central Bank Print
Wednesday, 30 November 2011 05:27
This important fact should have been noted in an article on a public sector strike in the U.K. against plans to cut workers' wages and benefits. The article includes some discussion of the effectiveness of the U.K. austerity plan and notes that interest rates on U.K. debt are now lower in Germany. An important difference between the U.K. and Germany is that the U.K. has a bank that can buy its debt in a crisis. The European Central Bank insists that it will not play this role for Germany and other euro zone countries.
 
House Prices Are Not Depressed Print
Tuesday, 29 November 2011 21:28

A NYT article on President Obama's latest program to help underwater homeowners included the assertion:

"an increasing number of economists worry that depressed housing prices and underwater borrowers are holding back a broader recovery."

Actually, the United States does not have depressed housing prices. According to the Case Schiller national house price index, inflation adjusted house prices are still more than 9 percent above their 1996 level. The problem was that the country had a housing bubble that is now mostly deflated. The problem in the economy is not a depressed housing market.

 
Post Gets Loans and Gifts Confused with Big Banks Print
Tuesday, 29 November 2011 08:06
The Post ran an article [sorry, it won't allow linking] with the headline: "big banks got $13 billion in undisclosed Fed loans." Actually, the article refers to a Bloomberg investigative piece by Bob Ivry and colleagues that found that Fed loans at below market interest rates amounted to a subsidy of $13 billion to the country's largest banks. This $13 billion was effectively a gift from the taxpayers to J.P. Morgan, Goldman Sachs, and other large banks. It was not a loan as the Post headline implies.
 
Senator Kyl Claims that Businesses Don't Hire When Demand Increases Print
Monday, 28 November 2011 06:10

Economists and people who believe in gravity think that firms hire when they see an increase in demand. The alternative is to turn away customers because a business does not have the necessary staff. Companies trying to make profits generally do not like to turn away customers.

Nonetheless, Republican Senator Jon Kyl said that the payroll tax cut did not lead businesses to hire workers. It is clear that workers did spend much of this tax cut. The savings rate in the last quarter was under 4.0 percent. If workers did not spend much of the tax cut, the implication is that the saving rate would have been under 3.0 percent in the absence of the tax cut. While this is higher than the near zero rate when the housing equity created by the bubble was driving consumption, it is far below the 8.0 percent pre-bubble average. 

The NYT should have pointed out that Kyl was wrong; that he either doesn't understand basic economics or was deliberately making assertions that he knew not to be true. Instead it just presented Kyl's statements and responses by Democrats in he said/she said context. NYT reporters have the time to find the truth of such statements, most NYT 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.

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