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The Chicago White Sox Sunday Defeat Sent Stock Market Tumbling: It Wasn't the Debt Downgrade Print
Thursday, 11 August 2011 04:07

Time to beat up on really really bad news reporting. The stock market doesn't tell people why it does what it does. We have commentators who bloviate on what they think caused the market to rise or fall, but they don't really know and they could be completely wrong.

That is why it was incredibly irresponsible for NPR to tell listeners in its top of the hour news segment that the market plunged because Standard and Poor's downgrade of U.S. debt. NPR does not know this to be true and it certainly is not obviously the case.

The market that should have been most immediately affected by the S&P downgrade was the U.S. bond market. However bond prices soared in the trading immediately following the downgrade and continued to rise through Wednesday. If there was greater fear that the U.S. would default because of the downgrade, then bond prices should have plunged as investors demanded a higher risk premium. This did not happen.

The most obvious alternative explanation for the plunge in the market is the risk that the euro could break up as the debt crisis spread from relatively small countries like Greece and Ireland, to the euro zone giants, Spain and Italy. The prospect of a euro zone break-up raises a real risk of a Lehman-type freeze up of the world financial system. It is far more plausible that this prospect led to the plunge in the stock market than the downgrade by one of three major credit rating agencies.

This point is important because many political actors, including National Public Radio, are trying to use the debt downgrade as an argument for cutting Social Security and Medicare. Their argument will be furthered if they can claim that the downgrade had enormous consequences for the stock market, since so many people involved in political debates (i.e. columnists, policy wonks, reporters, congressional staffers) have substantial amounts of money invested in the stock market.

 
The Difference Between China and Germany Print
Thursday, 11 August 2011 03:58

The NYT has a good editorial outlining the weak U.S. growth prospects, although the double-dip discussion is silly – we're looking at too slow growth, not a double-dip. The piece makes another serious error at the end when it argues that Germany, like China, should reduce its trade surplus.

China and Germany are in fundamentally different positions in the world economy. China is an extremely fast growing developing country. It would be expected that China would have a large trade deficit. By contrast, Germany is a very slow growing wealth country with a stagnant or declining labor force. It should be expected that Germany would have a large trade surplus as it sends capital to countries where it can be better used.

 
The Financial Crisis Was Housing, not Subprime, and There Is Much More That the Fed Can Do Print
Thursday, 11 August 2011 03:44

A front page piece in the NYT compared the current turmoil in financial markets with the situation in the fall of 2008. It referred to the 2008 crisis as being a subprime crisis. While subprime mortgages took the biggest hit, prime mortgages also defaulted at rates that were many times higher than expected.

The piece also said that the Federal Reserve Board is largely out of ammunition in terms of its ability to counter a crisis. This is not true. The Fed could take far more aggressive measures to counter the downturn. For example, it could target a longer-term interest, committing itself to keep the 5-year Treasury bond rate to 1.0 percent for the next year.

Also, it could target a higher rate of inflation (3-4 percent), a policy that Bernanke himself had advocated for Japan when he was still a professor at Princeton. This would reduce the real interest rate, giving firms more incentive to borrow and also reduce the indebtedness of homeowners as house prices would presumably rise in step with inflation.

It is irresponsible for the NYT to make unsupported assertions about the lack of Fed power. The Fed is one of the main tools for affecting the economy and it is wrong to tell readers that it cannot do anything.

 
Why Would Liberals Be Happy About a Senator Who Wants to Cut Social Security and Medicare? Print
Wednesday, 10 August 2011 04:55

The Washington Post told readers that Senator John Kerry's appointment to the Supercommittee that is supposed to come up with $2.5 trillion in deficit reduction "could help appease liberals." Senator Kerry has repeatedly expressed his willingness to cut Social Security and Medicare, despite the fact that retirees and near-retirees saw much of their wealth destroyed with the collapse of the housing bubble.

It is difficult to see why liberals would be appeased this selection, especially since the Republicans selected are likely to be adamantly opposed to any tax increases.

 
The New York Times Announces Thomas Friedman's Dismissal Print
Wednesday, 10 August 2011 10:26

In the spirit of Thomas Friedman's column today, we should not have confidence in the quality of the news and opinion writing we see in the NYT until we see the following press release from the New York Times.

 

"As of this date we have notified Thomas Friedman that the New York Times no longer has a place for his column. While we recognize that Mr. Friedman had a substantial following, his column had simply become too much of an embarrassment for the newspaper and its staff. Column after column would make broad assertions that were almost completely impervious to the facts.

"For example, he recently wrote a piece telling readers that everyone will have to join together to help solve the country's economic and fiscal problems. This piece completely ignored the massive redistribution from wages to profits over the last three decades and from low wage workers to high workers. This call for togetherness must have been deeply offensive to the hundreds of millions who are suffering because of this upward redistribution of income.

"The prior week he told readers that Social Security, Medicare, and Medicaid were unaffordable 'entitlements' ignoring the fact that Social Security is actually fully funded for the next quarter century and according to the Congressional Budget Office, more than 80 percent funded for the rest of the century. The projections that show Medicare and Medicaid becoming unaffordable are based on projections of exploding private sector health care costs. A competent columnist would have focused on the need for fixing the U.S. health care system.

"In another column he explained that the Germans were going to bail out the Greeks, but that they would insist that the Greeks work German hours and take German vacations. Apparently Mr. Friedman did not realize that German workers on average work fewer hours than Greek workers and get longer vacations.

"The NYT is a great newspaper. It should not be associated with this sort of sloppiness week after week. For this reason we will be looking for a new columnist to replace Mr. Friedman. In the mean time we will run Tom Toles cartoons in his space."

 
The New York Times Tells President Obama That He Has to Cut Social Security and Medicare Print
Wednesday, 10 August 2011 04:36

The NYT ran a piece that told readers that it was necessary for President Obama to cut Social Security and Medicare for the good of the economy. This is not obviously true. There is no shortage of economists who would say that the economy's main problem is a lack of demand. This can be met by more stimulus, more aggressive action from the Fed, or a decline in the value of the dollar.

Remarkably, the NYT did not include the views of any economist who made these points. The only views presented in these articles were of those who wanted to cut Social Security and Medicare. The former is especially peculiar since the latest projections from the Congressional Budget Office projects that the program will be fully solvent until 2038 even with no changes and it could always pay more than 80 percent of scheduled benefits. Also, under the law the program cannot contribute to the deficit since it can only spend money raised through its designated tax.

One of the two experts cited in the piece suggested the need to means-test Social Security. Analysts familiar with the program generally do not support means-testing since it is likely to raise little money unless it is applied to people with very modest incomes.

 
National Public Radio Redoubles the Effort to Cut Your Social Security and Medicare Print
Wednesday, 10 August 2011 03:35

Wall Street investment banker Peter Peterson has pledged $1 billion to the effort to cut Social Security, Medicare, and Medicaid. Other Wall Street types are doing their part, as is National Public Radio.

They are doing a full court press now -- things are really terrible, if you don't give up your Social Security and Medicare, then the economy might collapse. (Oh yeah, the economy already did collapse because none of these people were troubled by the $8 trillion housing bubble, but don't think about that.) Standard and Poor's might have to downgrade the U.S. again, even if they can't get their arithmetic straight. (Math is hard.)

NPR did its part yesterday with a piece that told us that the debt is not just that scary $14 trillion number that we all hear, it's actually -- stand back boys and girls -- $211 trillion!!!!!!

Are you impressed? You should be. This is an extraordinary example of cesspool journalism that would even embarrass Fox News.

The piece gets from the debt number normally reported to $211 trillion by doing some unusual accounting (following a methodology developed by Boston University economist Lawrence Kotlikoff) and also hiding assumptions about exploding private sector health care costs. First, the calculation adds up all the Social Security and Medicare benefits that current workers are projected to receive and then assumes that no new workers pay taxes into the system.

This methodology would imply enormous deficits in these programs even if they were projected to be fully solvent forever, in the sense that current tax payments would always pay current benefits. The reason is that today's workers will provide a smaller share of the tax revenue as more of them retire. It is unlikely that any of NPR's listeners would be very scared if it told listeners that Social Security and Medicare would be fully solvent indefinitely, but applying the methodology from this segment it could tell listeners about tens of trillions of dollars in uncounted debt.

The other part of the story is that much of this $211 debt figure is driven by projections of exploding private sector health care costs. Per person Medicare costs are projected to rise far more rapidly than the rate of economic growth in the projections used in this segment (albeit not in the Congressional Budget Office's baseline or the Medicare Trustees projections) because private sector health care costs are projected to rise far more rapidly than the rate of economic growth. The projections in this segment imply that the cost of providing a Medicare equivalent policy for an 85-year old in 2030 will be $40,000 a year (in 2011 dollars) in 2030. The cost would exceed $100,000 a year (also in 2011 dollars) by 2080.

If private sector health care costs actually follow the path assumed in this segment's debt calculations it would devastate the economy even if we eliminated public sector health care programs like Medicare and Medicaid. On the other hand, if U.S. health care costs were contained, like those in every other wealthy country, then there would be no long-term deficit problem.

An honest news report would have discussed the projections of explosive private sector health care costs and what they mean for the economy if they prove true. It would not hide these projections in a huge debt figure and tell its listeners that the debt is much bigger than they realize.

The only possible point of a piece like this is to scare people. It provided no information whatsoever about the country's fiscal situation to NPR's listeners.

 
Chilean Students are Protesting Cuts to Education, Quick What Do the Bankers Think? Print
Tuesday, 09 August 2011 19:46
That must have been what the editors at Reuters asked their reporter in Chile. How else could one explain the quote from the head of research at a Santiago brokerage house at the end of a short story on student protests. I guess no story is complete without presenting the view of the financial sector on the topic.
 
Productivity, Profits, and Job Growth Print
Tuesday, 09 August 2011 14:07

An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.

Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can't get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.

Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.

It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.

It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.

 

Productivity Growth, 1995-2011

prod

Source: Bureau of Labor Statistics.

 
The Post Is Learning a Bit More About Trade and the Economy Print
Tuesday, 09 August 2011 04:56

In an article on the value of the dollar the Washington Post noted that a high dollar makes U.S. goods less competitive in international markets. While this is an improvement over pieces that warn the dollar could plummet if the U.S. doesn't get its budget deficit down, the article still remains confused on the issue. It later told readers:

"For the better part of the past decade, the dollar has steadily lost value against other international currencies, reflecting both the rapid economic growth of many developing countries and a persistent U.S. pattern of spending more than it takes in."

Of course the U.S. pattern of spending more than it takes in is due to the fact that the dollar is too high. In a system of floating exchange rates, like the one we have, the price of currencies is supposed to fluctuate to bring trade into balance. This means that the trade deficit is caused by the over-valued dollar and a decline in the dollar is the predictable result.

 
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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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