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News Flash for NYT Dealbook: Financial Firms Are Not Always Honest Print
Wednesday, 01 February 2012 05:53

Steven M. Davidoff had a Dealbook column complaining about a Dodd-Frank regulation that he argues is slowing the supply of capital to finance corporate takeovers. The issue in question is a requirement that the creator of a collaterized loan obligation (CLO) keep a 5 percent stake in the issue. Davidoff argues that many issuers of CLO's are relatively small businesses and don't have the capital to allow them to hold a 5 percent stake.

He then asks:

"So why add a new regulatory burden? It’s unclear what benefit a “skin in the game” rule would provide, given that C.L.O.’s are more akin to commercial loans, for which Dodd-Frank deems risk-retention rules unnecessary."

The answer is that financial firms can make money by misrepresenting the products they sell. Those who are good at misrepresentation can get very rich. While some misrepresentations may be in violation of the law, it is often difficult to prove that misrepresentations were made to sell a product. This makes even civil litigation difficult, criminal prosecution is rare.

Forcing the creators of CLO's to keep a stake is a way to help ensure that they consider the asset they have created to be good. In principle, the sophisticated institutional investors who buy stakes in CLO's should be able to assess their quality themselves, however one lesson from the housing bubble is that they seem to lack this ability. 

NPR Editorializes Against Growth In Europe Print
Wednesday, 01 February 2012 04:55

A Morning Edition segment on the recent European Union summit was headlined, "Most EU Nations to Sign Pact to Stop Overspending." This is both flat-out wrong and misleading.

It is flat-out wrong because the pact restricts deficits, not spending. It is misleading because it implies that the current crisis was caused by overspending. It wasn't. Most of the crisis countries had declining debt to GDP ratios before the downturn and two, Spain and Ireland, were actually running budget surpluses. The problem was caused by housing bubbles and the inept management of the economy by the European Central Bank.

Rick Scott Promises to Make Florida Do Worse Than the Nation In Job Growth Print
Tuesday, 31 January 2012 16:14

That should have been the headline to the NYT story on Florida governor Rick Scott, if they got their facts right. While it is common for politicians to make big promises and not come through, the NYT reports that Rick Scott is not expecting to even get Florida back to its pre-recession level of employment after 7 years in office.

According to the according to the article, Scott promised to create 700,000 jobs after 7 years in office. If Florida follows this path, it will have 7,862,000 jobs in January of 2018, more than 200,000 less than its pre-recession peak of 8,071,000 jobs in March of 2007. If Florida actually has 2.5 percent fewer jobs in 2018 than it did in 2007, then it is likely to rank near or at the bottom among states in job creation.


Source: Bureau of Labor Statistics.

Instead of calling readers to attention to the meekness of the governor's promise, it effectively did a PR pitch for his performance, telling readers:

"And he has started to deliver. In the past year, more than 100,000 private-sector jobs have been created, and the state ranks third in job growth behind California and Texas, according to the latest Labor Department data."

Of course it should not be terribly surprising that Florida ranks third in job growth, since it is the fourth largest state in population, less than 3 percent behind third place New York.

Bloomberg, on Losing End of Austerity Debate, Continues Fight Print
Tuesday, 31 January 2012 10:54

Imagine George Foreman got up off the floor after being counted out in his fight with Muhammad Ali and started taking wild swings at the champ. This is what Mark Whitehouse, a member of Bloomberg View editorial board, effectively did in a column yesterday.

In response to a Paul Krugman column pointing out that the UK's austerity package has led to a virtual recession, making the current downturn worse for the UK than the Great Depression, Whitehouse calls attention to the decline in the price of credit default swaps on UK debt relative to euro zone countries. He touts the fact that lower interest rate on UK debt will make it easier for the country to get its deficits down to a manageable level.

The missing elephant from Whitehouse's story is that the price of credit default swaps on everyone's debt has fallen relative to the euro zone countries. The relative decline in interest rates on UK debt doesn't speak to the wise policies of the UK government, but rather the foolishness of the European Central Bank, which has done its best to convince markets that it will not act as a lender of last resort and will actually let euro zone countries default on their debt. 

The key issue here is having a central bank that will act as a lender of last resort. This is the reason that not only the United States, but Canada, Sweden, Denmark and even fiscally prudent Japan all enjoy lower interest rates than the UK.

[Thanks to Jim Naureckas for calling this one to my attention.]

Washington Post Gets Behind Republican Economic Agenda Print
Tuesday, 31 January 2012 07:58

In a major business section article on President Obama's plans to address inequality, the Washington Post (a.k.a. Fox on 15th Street) came down squarely on the side of the Republicans. The Republican slant starts with the headline, "Obama's push to revive middle class will clash with long-term trends." This one undoubtedly had people all over the metro area saying, "duh."

Of course it will clash with long-term trends, that would be the point. No one thinks that the 1 percent just got all of our money yesterday. The process of upward redistribution has been going on for more than three decades.

After outlining the basic issues, the Post tells readers:

"Republicans, both in Congress and on the campaign trail, favor a far different approach than Obama has embraced. They generally regard government efforts to promote equality and strengthen the middle class as counterproductive. By this thinking, reducing taxes and shrinking the government’s role in the economy will free up capital that entrepreneurs can invest, creating good new jobs."

Actually, the Post has no idea how Republicans "regard" government efforts to promote equality. Nor does it know whether in their "thinking" lower taxes for the wealthy actually translates into "good new jobs."

What the Post knows is what Republican politicians and spokespeople say. A serious newspaper sticks to what is visible and knowable, it does not do mind reading for the benefit of its readers.

The piece also includes a number of assertions that are unsupported by anything. For example, it tells readers:

"But it is not clear that the measures [those proposed by President Obama]— or any others — could compensate for the factors behind the decline of the middle class, including the rise of nations with abundant cheap labor and the development of new technologies that allow companies to operate with far fewer workers."

Actually, the abundant supply of cheap labor could do much to make middle class workers wealthier if it were allowed to compete freely with the most highly educated workers in the United States. There is no shortage of smart people in China, India, and other developing countries who could train to be doctors in the United States. If we eliminated the barriers that make it difficult for foreign doctors who meet U.S. standards from practicing in the United States, it would would substantially reduce the pay of physicians.

If the salaries of doctors fell to European levels it would mean a dividend for the middle class (in the form of lower health care bills) of close to $100 billion a year, almost twice the amount at stake in extending President Bush's tax cuts to the wealthy. There would be comparable gains from opening up law and other high-paying professions to people from the developing world.

The reason that globalization has put downward pressure on the living standards of the middle class is that it has been deliberate policy under both Republican and Democratic administrations to force middle class workers to compete with their low-paid counterparts in the developing world, while protecting the most highly educated workers from the same competition. The predicted and actual result of this policy has been an enormous upward redistribution of income.

A serious piece on inequality would have made this point. It also would have discussed other ways in which conscious policy decisions (e.g. greater legal hostility to unions) have resulted in upward redistribution, instead of telling readers it was all just the natural workings of the economy.

David Brooks Doesn't Want People to Focus on the 1 Percent Print
Tuesday, 31 January 2012 05:46

Even though the data on income show the top 1 percent of the population pulling away from everyone else, New York Times columnist David Brooks tells us that focusing on the 1 percent is a "distraction." He bases this assertion on, well absolutely nothing.

Brooks goes to tell readers that:

"the truth is, members of the upper tribe have made themselves phenomenally productive."

This is striking for two reasons. Since his upper tribe is the whole top 20 percent, much of this group that has become phenomenally productive has seen little benefit from their productivity. Wages for the second decile have risen over the last three decades, but not by very much.

The other part of the story is that this group has made itself phenomenally productive largely through its control of the political process. For example, it has used the political process to get an implicit government guarantee for too big to fail banks that can pay its top executives phenomenal amounts of money. It maintains protectionist barriers for doctors, lawyers and other highly educated professionals that allow their pay to soar relative to workers who must compete in the international economy. And it has garnered ever stronger patent protection that has shifted income from ordinary workers to those able to earn patent rents.

It was control over the political process that has allowed the 1 percent to profit at everyone else's expense. Their productivity, whether phenomenal or not, was secondary.

ABC and the Independent Are Terrified by the Prospect of Japan Getting Less Crowded Print
Tuesday, 31 January 2012 05:23

Japan is a densely populated country. As a result, housing is extremely expensive in its major cities. Its subway system is so crowded that Tokyo has people who push people into the subway cars to ensure that no space is wasted.

Given this situation, it was striking to see that the Independent report on Japan's "demographic crisis" and ABC News tell us about Japan's "dire picture." Their concern is that Japan's population is projected to shrink by about a third over the next 50 years.

While these news outlets might be terrified by the prospect that the Japanese will pay less for housing, it is not clear why the Japanese should have such concerns. The implication is that the increase in the ratio of retirees to workers will impose a devastating burden on the working population.

Those who know arithmetic don't share such concerns. Productivity growth in Japan has averaged almost 2.0 percent annually over the last two decades. At this rate, output per worker hour will be nearly 170 percent higher in 50 years.

This means that if retirees consume 80 percent as much as active workers, and the ratio of workers to retirees fall from 2.5 today to 1.8 in 50 years, then consumption per worker and per retiree can increase by 120 percent over this period, assuming no reduction in hours worked.

In fact, this would understate the actual gain in living standards since there will be fewer children to support and there will also be gains in living standards associated with less crowding. (Tokyo won't need to pay workers to push people into subway cars.)

In short, worrying about demographics might be a good way to create jobs in the current economic environment, it need not be a concern for serious people.


[Thanks to Keane Bhatt and Victor Silberman.]

Brazil’s Per Capita Income Did Not Grow by 200 Percent Over the Past Decade Print
Tuesday, 31 January 2012 05:05

By Mark Weisbrot

An article in Saturday’s New York Timesclaimed that Brazil had “tripled its per capita income over the past decade.”  In fact, Brazil’s real per capita income (per capita GDP) has grown by about 30 percent from 2001-2011.  

The article notes that “some of that increase has to do with its [Brazil’s ] overvalued currency”, but (1) even this cannot account for the vast difference between 200 percent and 30 percent, and (2) even if it all of this “growth” were due to currency appreciation, the measure used would still be wrong.  Brazilians earn and spend about 90 percent of their income in domestic currency;  the correct measure of their income growth is therefore in their own currency, adjusted for inflation. That has grown about 30 percent per capita over the decade.

Brazil would look like quite a different country today if it had really tripled its per capita income over the past ten years.

The article also presents a somewhat misleading impression of Brazil as compared with Argentina, which is common in the media, where Brazil “now flexes its economic muscle,” and “Argentina is the dean of the club of nations utterly obsessed with their decline” (an Argentine scholar quoted in the article).  Although the article notes that Argentina had a “robust recovery after defaulting on its debts,” the reader is left with the impression that Brazil has been an economic success story as compared with Argentina.

The chart below shows real per capita income in Argentina compared with Brazil (on a purchasing power parity basis).  It can be seen that, even though Brazil has greatly increased its growth rate since 2004, Argentina has pulled ahead so rapidly since in recent years that the gap has widened enormously.  Income per person is now about 40 percent higher in Argentina than in Brazil. Since income is much more unequally distributed in Brazil than Argentina, this income gap means an even wider gap for the poor and the majority of the population.

Per Capita Income: Argentina and Brazil


Source: World Bank.

Arithmetic Lesson for Robert Samuelson Print
Monday, 30 January 2012 05:29

In a piece that supported imposing a Buffet-rule type tax on the wealthy, Robert Samuelson explained the growing income share of the 1 percent in part on the booming stock market. He told readers:

"From 1980 to 2000, stocks rose almost tenfold; from 2000 to 2007, the gain was about 40 percent."

While the first part is roughly correct, the S&P 500 rose by just 3.5 percent from 2000 to 2007. According to his source, it averaged 1427.22 in 2000. Its average close in 2007 was 1477.19.

It's good to see Samuelson get the story straight that a higher capital gains tax will not hurt growth. (The Buffet rule would effectively raise the capital gains tax rate.) But he could make his arguments better if he got his numbers right.

The House is on Fire and Fred Hiatt Is Worried About What Color to Paint the Kitchen Print
Monday, 30 January 2012 05:05

You have to love Fred Hiatt and the Washington Post's oped page. The country is suffering through the worst downturn in 80 years. Tens of millions of people are unemployed or underemployed. Millions are facing the prospect of losing their homes. And tens of millions of baby boomers are looking at a retirement where they will be entirely dependent on their Social Security and Medicare.

With this state of affairs, they naturally rise to the occasion by denouncing politicians for being insufficiently attentive to "needed Medicare and Social Security reform." Of course, people familiar with the Congressional Budget Office's projections for Social Security know that there is no need for Social Security reform. The projections show the program will be fully solvent for the next quarter century even if no changes are made. Even after it is first projected to face a shortfall in 2038 it would still be able to pay more than 80 percent of projected benefits. It is difficult to see why dealing with a projected distant and modest shortfall should be a priority given the economy's current situation.

As all policy wonks know, the problem with Medicare is the problem of U.S. health care costs which are more than twice as high per person as the average for other wealthy countries. Therefore the issue should be fixing the health care system. If the United States faced the same per person health care costs as other wealthy countries we would be looking at huge budget surpluses in the long-term, not deficits.

Towards the end of the piece we are told:

"If America doesn’t tackle its debt problem, everything else is at risk: economic growth, the safety net for the poor, investment in research and roads."

Yeah, things might get bad if we don't start taking the Post's concerns about Social Security and Medicare seriously. It would be great if the Post's oped staff could get access to government data on unemployment, housing equity and family wealth.  

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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.