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The Post Takes a Strong Stand on the Budget in Front Page Editorial Print
Saturday, 23 July 2011 07:13

In a front page editorial, the Washington Post warned about the "nation's runaway debt," which is projected to rise to near its 1946 level by 2021. At that point the debt will still be less than half as large relative to GDP as Japan's is today. Japan can still sell long-term debt in private financial markets at interest rates of less than 1.5 percent, but the Post obviously feels strongly about this point.

The editorial also insisted the issues that separate President Obama and the Republicans are philosophical in nature telling readers that:

"the speaker concluded that the philosophical gulf between Republicans and the White House could not be bridged."

The view that the differences are philosophical in nature is rather peculiar since none of the main actors in this dispute -- President Obama, Speaker Boehner, Senate Majority Leader Harry Reid or House Minority Leader Nancy Pelosi -- are known for their philosophical writing. All of them got into their positions as a result of being effective politicians. They managed to gain the support of powerful interest groups and used this to achieve high political positions. It is not clear why the Post thinks that they are philosophers.

The Post also referred to "significant changes" to Medicare and Social Security, when it meant cuts. "Changes" is a euphemism that politicians like to use to hide the fact that they want to cut these popular programs. Serious newspapers try to convey information to readers, not assist politicians in concealing their agenda.

The editorial also inaccurately referred to Social Security as one of the "biggest drivers of future borrowing." This is not true. Under the law, Social Security can only spend the money that is in its trust fund and not a penny more. This means that the government can never borrow to pay Social Security benefits, all of the benefits must be paid from revenue raised through designated Social Security taxes or the interest and principle on past tax revenue.

 
Bad Economics at Economix Print
Friday, 22 July 2011 08:13

Princeton economist Uwe Reinhardt gets his economics mixed up in his piece today. He follows Michael Spence and Sandile Hlatshwayo in touting the virtues of the non-tradable sector of the economy at the expense of the tradable sector. However, there is nothing that is inherently non-tradable, it depends on the institutional structure we put in place.

We can make it easy for people in the United States to get our health care from more efficient providers overseas. The same applies to legal work and accounting and all the other areas that supposedly have high value-added and high paying jobs. This is important because Reinhadt is 180 degrees wrong when he describes it as "a problem for the United States" that middle income countries like China, Brazil, and India appear posed to move up the value chain and provide competition for many of these high-paying jobs.

In fact, economists would recognize that the United States can have enormous gains from having these services provided by much lower-paid workers in developing countries, just as the United States as a whole gained by having manufactured goods supplied by lower paid manufacturing workers in the developing world. It is the exact same argument; the only difference is that the beneficiaries of the new path for globalization will be those at the middle and bottom of the wage distribution, not those at the top.

 
Raising the Medicare Eligibility Age to 67 and Cutting Social Security Benefits by 3 Percent Is Not a Big Deal Print
Friday, 22 July 2011 05:21

That is what the Post effectively told readers in a front page article. It told readers:

"If both sides agree, that measure [a short-term agreement on the debt ceiling] could also include some tax and entitlement changes, such as ending breaks for corporate jets, raising the Medicare eligibility age or changing the measure of inflation used to adjust Social Security benefits. However, the largest tax and entitlement changes are likely to be left until next year."

"Entitlement changes" mean cuts to Social Security and Medicare.

The piece also refers to the "soaring" national debt. Serious newspapers reserve such terms for the opinion pages.

 
Global Warming? Print
Friday, 22 July 2011 05:04

Maybe I've missed it, but I haven't seen any discussions in the context of the current heat wave. Of course there is no direct connection between global warming and any specific weather event, but given that there is a well-documented trend of warming over recent decades, the heat wave might be a good time to have a piece or two on the topic.

Put another way, suppose that there was a terrorist attack against U.S. citizens after a Democratic president had decided to close Guantanamo and end practices that raised civil liberties issues. Does anyone doubt that there would major news articles asking whether the president's actions had opened the door for the attack?

 
The NYT is Wrong: Officials Do Not Say That Medicare Is Not Sustainable In Its Current Form Print
Friday, 22 July 2011 04:49

That is what Republicans say. Officials, like the Medicare Trustees, say that the program faces a modest shortfall over its 75-year planning horizon. The projected shortfall is around 0.3 percent of GDP or less than one-fifth of the amount that we increased annual military spending by since September 11th. The projected Medicare shortfall is down by more than 75 percent from when President Obama took office due to the cost controls put in place in the health care reform bill.

In fact, the Congressional Budget Office (CBO) calculates that the Medicare system in its current form is far more efficient than the privatized system advocated by Republicans. CBO's projections imply that switching to a privatized system would add $34 trillion to the cost of buying Medicare equivalent policies over the program's 75-year planning period.

This piece also reports that Senator Coburn of Oklahoma wants to reduce the annual cost of living adjustment (COLA) to Social Security to make it more accurate. It is worth mentioning that Senator Coburn is not interested in having the Bureau of Labor Statistics construct an index that actually measures the cost of living of the elderly so that it could in fact be made more accurate. He is instead insisting that Social Security COLAs be based on an index that is known to show a lower rate of inflation.

 
David Brooks is Worried that the United States Will Lose Its Control Over Jupiter Print
Friday, 22 July 2011 04:16

I didn't see Jupiter mentioned in the piece, but loopy is loopy, so talking about controlling Jupiter or "the end of American economic supremacy" make just about as much sense.

The immediate reference is "doing nothing could lead to default." If the question is default, that would end the supremacy of the U.S. financial industry. The downturn from a default would be very bad news for all of us, but the end of the supremacy of the U.S. financial industry would likely be good news for the rest of us. This would radically reduce the political power of this sector and their ability to steer the government to serve Wall Street's agenda. We could instead pursue economic policies that serve the rest of the economy with the resources consumed by the financial sector redeployed to more productive uses. It wouldn't be surprising that Brooks would confuse the status of the U.S. financial industry with the status of the U.S. economy, but it is an incredibly embarrassing mistake.

If Brooks meant literally that the supremacy of the U.S. economy is at risk, then he is ignorant of data on international comparisons. In absolute numbers, China is virtually certain to soar past the United States long before the end of the decade. It already is ahead of the U.S. in a wide range of measures (including college graduates with science and engineering degrees), and will soon surpass us in most all measures.

Of course China has four times the population as the U.S., so surpassing the United States is inevitable as the country moves higher into the ranks of middle income countries. We can instead ask about per capita measures, but here supremacy has long been in question. The U.S. does enjoy a higher per capita income than most other wealthy countries, but most of this gap is due to working longer hours, not higher productivity. Furthermore, since we have much greater inequality than anywhere in Europe, typical workers do much better in most European countries than the United States. So here also, the "economic supremacy" in the article seems to largely live in Brooks' head.

In short, Brooks thinks it is important that we cut Social Security and Medicare so that he can maintain his illusions of economic supremacy. I suppose that is kind of cute, but it's not very serious policy.  But no one ever said that Brooks was into serious policy.

 
NPR Warns that Not Raising the Debt Ceiling Will Increase Net Exports and Create Jobs Print
Friday, 22 July 2011 04:07

That was the local news spot at the top of the hour on Morning Edition (WAMU). The anchor said ominously that a failure to raise the debt ceiling would lower the value of the dollar. Of course those who know economics all gave a big cheer at that one and immediately sent a note to their representative in Congress urging default (okay, not those of us who live in DC).

Anyhow, the extent of confusion on the dollar in the media is truly incredible. Do you want our goods to be less competitive in international markets? Then you want a higher valued dollar. It's pretty much that simple. Alright, it's not quite that simple. If you have enough political power so that the government largely protects you from foreign competition (e.g. doctors, lawyers, economists) then you might want a high dollar because this will depress the wages of people who work for you. I suppose the concern for the fall in the dollar tells us about NPR's audience here. 

 
The Cost of the Bailout As Calculated by Allan Sloan Print
Thursday, 21 July 2011 05:49

Allan Sloan had a lengthy piece in the Post business section last week examining the cost of the bailout. He showed that the vast majority of the money was repaid with interest, with Fannie and Freddie being the big exceptions. He followed this up with an explanatory piece today. This analysis is worth a bit of additional explanation.

Sloan did exactly what he said, he did a straight cash-out, cash-in analysis. How much money the government lent to financial institutions and how much it got back. By this measure he is absolutely right, the government made money on the vast majority of its loans.

However, this is a very incomplete analysis. Suppose the government announced a new mortgage program in which it would give every homeowner who meets a minimal standard a mortgage at 1.0 percent interest. Presumably the vast majority of homeowners would repay the loan. In the methodology used by Sloan, the government would make money on this deal.

If the government can make money by making low cost mortgages available, why shouldn't it do this? Well, this move would actually carry an enormous cost to the government and the economy. The government typically borrows at interest rates well above 1.0 percent. The gap between the interest rate that the government pays on its borrowing and the 1.0 percent it gets back on the mortgage loans is a direct cost to the Treasury.

Even more important are the costs to the economy. By making a vast amount of capital available to homeowners at very low cost, the government is diverting capital from other uses. (This is less of an issue in a period in which we have 9.2 percent unemployment and vast amounts of excess capacity.) This means that money that might have been used developing new software, better medical technology, or cleaner forms of energy production will instead go into home construction because the government is allowing people to borrow money so cheaply. 

In fact, the government can cause this diversion of money without even lending at a below-market rate. Suppose it just guaranteed all mortgages at 100 percent value. This would have the same effect on the economy as lending to homeowners at below-market rates since it would divert capital from other uses into housing.

This is what happened with the bailouts. The government lent money at interest rates that were far below market levels and also provided guarantees so that private lenders would make loans at much lower rates than would otherwise have been the case. We don't know the exact financial situation of the banks in the immediate aftermath of the crisis, but there can be little doubt that Bank of America and Citigroup would have quickly gone under if left to the mercies of the market. The same is true of Goldman Sachs and Morgan Stanley who were the victims of a classic bank-run that was only stopped when the Fed let them become commercial banks, granting them its protection as well as that of the FDIC.

Left to the market, the shareholders of these companies would have been wiped out, their executives put out on the street and their creditors forced to take substantial haircuts. Instead, the bailouts kept them in business and allowed them to return to their pre-crash profitability.

While this was arguably a desirable policy for the economy as a whole, there is no reason that the Fed and Treasury could not have extracted a much larger price for rescuing these institutions. It could have put an end permanently to the multi-million dollar Wall Street compensation packages. It could have required that the too-big-to-fail banks commit themselves to breaking up once the markets stabilized. It could have wiped out shareholders.

Instead, the bailouts made a vast amount of capital available to Wall Street at a time when capital was scare and therefore valuable. In this sense the bailouts were a enormous gift from average people to some of the richest people in the country, even if the money did not flow directly through the Treasury.

 
Why Can't the Post Use Percentages in Discussing Proposed Cuts to the Military? Print
Thursday, 21 July 2011 05:34

In a relatively lengthy article discussing potential cuts to the military budget, the Post never once told readers what baseline projected spending is, nor what the cuts would be as a share of baseline spending. The Post told readers that the military had prepared for cuts of $400 billion over the next 12 years, but now it seems possible that the cuts could be as large as $800 billion.

Wow! Those are really big numbers. And no responsible newspaper would ever print them without giving its readers some context, since virtually none of them will have any ability to assign meaning to these numbers.

The baseline budget shows that the government will spend approximately $9.5 trillion on the military. (This does not count veterans benefits and some other costs associated with maintaining the Defense Department.) The $400 billion in cuts would imply a reduction in the budget of a bit more than 4 percent. If the cuts reach $800 billion then the cuts would be a bit over 8 percent of the budget.

By comparison, the Gang of Six have proposed a reduction in the cost of living adjustment for Social Security that will reduce average benefits by close to 6 percent. The largest cuts would hit the oldest beneficiaries with beneficiaries in their 90s seeing benefit reductions of close to 9.0 percent. 

 
NYT Warns That Debt Ceiling Crisis May Boost Net Exports and Increase Growth Print
Thursday, 21 July 2011 04:57

Of course they did not know that this was their warning. The NYT told readers that:

"Deterioration of investor confidence in the United States could also hurt the value of the dollar, according to William H. Gross, co-chief investment officer of Pimco, a bond fund based in California. Mr. Gross said he believed that the dollar would become weaker because of the country’s inability to deal with its rising deficit. Instead, he favors currencies in China, Canada, Brazil and Mexico."

While Mr. Gross, as a major actor in financial markets, may not want a lower dollar, the vast majority of people in the country should. A high dollar makes our exports more expensive to people in other countries, meaning that they will buy less of them. Raising the value of the dollar is like imposing a tariff on our exports.

A higher dollar also reduces the cost of imports relative to domestically produced goods. A higher dollar is comparable to subsidizing imports, leading consumers to buy imports instead of domestically produced goods.

This means that if Mr. Gross is correct, then most workers should be rooting for a continuation of the standoff on the debt ceiling. The drop in the value of the dollar would result in an increase in net exports, thereby providing a powerful boost to the economy and potentially creating millions of jobs.

While this is 100 percent standard economics that most students would be taught in an intro econ class, most economics reporting is so bad that very few people understand how much of a stake they have in a lower valued dollar. There are few policies that more directly transfer income from the middle and bottom of the income distribution to the top than an over-valued dollar, yet the implications of the value of the dollar is virtually never discussed in economics reporting.

This article also reports on the price of credit default swaps on U.S. Treasury bonds as a measure of the risk that investors assign to the risk that the U.S. government will default on its debt. This is not accurate. A credit default swap (CDS) effectively involves two bets. First the bet that the U.S. government will default on its debt. Second, it is also a bet that the financial institution issuing the CDS will survive after the U.S. government has defaulted on its debt.

Since the latter bet has a low probability, since U.S. debt is the basis for the world financial system, the price of CDS bears little relationship to the risk that investors assign to the U.S. actually defaulting. It is most likely a bet on the future direction of the price of CDS, sort of like the high price paid for a really awful painting by a great artist. No one really wants the painting, but it is still possible to make money off holding it, if one gets the timing right. 

 
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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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