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German Exports Are Slowing Print
Friday, 05 August 2011 05:34

This one is almost too painful to write about. The Post tells us that:

"Even some of the recent bright spots in the global economy are starting to dull. German economic growth, for example, appears to be slowing. Germany exports heavily to the European nations that are experiencing a debt crisis."

Is there anything in the world that was more predictable? Why on earth didn't the people making policy at the ECB see this?

 
David Wessell Is Seriously Wrong, There Is Much More That the Fed Could Do Print
Friday, 05 August 2011 05:18

David Wessel, the Wall Street Journal's economics editor, badly misled NPR listeners this morning when he told them that there is little that the Fed could do to boost the economy. This is not true.

The Fed could do another round of quantitative easing, although this is likely to have a limited impact. It could also target a long-term interest rate, for example putting a 1.0 percent interest rate target on 5-year Treasury bonds.

Alternatively, the Fed could pursue a path that Bernanke himself had advocated for Japan when he was still a Princeton professor. It could target a higher rate of inflation, for example 4 percent. This would have the effect of reducing real interest rates. It would also lower the debt burden of homeowners, which could allow them to spend more money.

This policy has also been advocated by Paul Krugman and Olivier Blanchard, the chief economist at the IMF. It would be amazing if Wessel was unaware of this policy proposal.

 
Arghhhhhh! China's Desire to Slow Growth is Good News for the U.S., Not Bad Print
Friday, 05 August 2011 05:02

Ezra Klein is one of the more knowledgeable columnists writing on economic policy today. He puts the rest of the Washington Post team to shame. But he gets it wrong in a really huge way in his front page column today.

He says that China's desire to slow its economy means that there will be no engine for economic growth in the world. This is 180 degrees wrong. If China wants to slow its economy because it is worried about inflation, then the simple textbook method would be to raise the value of its currency against the dollar.

This has two effects. First, it makes imported goods cheaper for people living in China. That will slow inflation. Second, a higher valued yuan will lead China to import more from countries like the United States and to export less. This will reduce demand in its economy and slow growth.

And the flip side of this story is -- that's right, the U.S. exports more to China and reduces its imports, leading to an improvement in our trade balance and a boost to growth. In other words, the fact China wants to slow growth means that they should be very happy to increase imports from the United States. We should be worried if the opposite were true; if China, like the U.S., Japan, and Europe desperately needed to increase demand, then we would face more of a problem.

(I am going to ignore the fact that Ezra called me "no one.")

 
NPR Still Doesn't Know About the Housing Bubble Print
Friday, 05 August 2011 04:42

Morning Edition had a segment on the current turmoil in financial markets in which it asserted that the United States still has not recovered from the effects of the financial crisis. This is not true.

The economy is not in any obvious way suffering from the effects of the financial crisis. Potential homebuyers have little difficulty getting mortgages. We know this because the Mortgage Banker Association's mortgage application index has not been rising. This index measures applications, not mortgages. If otherwise qualified buyers were being turned down by banks, they would have to put in multiple applications to get a single mortgage. This is not happening.

The real and nominal interest rates on corporate bonds are at extraordinarily low levels indicating that larger firms have no difficulty getting capital. The National Association of Independent Businesses, which consists of smaller businesses, has fielding a monthly survey for more than a quarter century that asks its members what are its biggest problems. Very few cite the availability or cost of finance, indicating that small business does not finance as a problem either.

The economy's weakness is easily explained by the collapse of the housing bubble. The overbuilding of the bubble years led to enormous oversupply of housing and most type of non-residential structures. Therefore construction is hugely depressed. Similarly, the loss of close to $8 trillion in housing wealth is leading to predictable drop in consumption. The bubble wealth pushed the saving rate close to zero. It is now rising back to its normal level of close to 8 percent.

In short, the fallout from the collapse of the bubble easily explains the economy's weakness. It is not clear why NPR is telling its listeners that the problem is the financial crisis.

 
National Public Radio Insults the Washington Policy Community Print
Friday, 05 August 2011 03:03

National Public Radio showed either its ignorance of the policy community in Washington or its bias in supporting Peter Peterson's efforts to cut Social Security and Medicare in a news story on the deficit and taxes. It described Maya MacGuineas, the head of the Committee for a Responsible Federal Budget, as:

"about as close to an independent voice on tax policy as you'll find in the nation's capital."

While Ms. MacGuineas has been critical of both political parties, this is true of many of the people working on budget policy in Washington. It is remarkable if NPR is somehow unaware of this fact. 

Ms. MacGuineas has consistently taken positions that are consistent with those supported by Peter Peterson (whose foundation supports her work). Her organization has not shown in interest in proposals that focus on reducing the deficit by taxes on Wall Street speculation or reforming the U.S. health care system, the primary driver of the long-term deficit.

NPR's comment is inaccurate and misleading to listeners, as well as insult to dozens of people doing policy work on budget issues in Washington. 

 
The Military Is Projected to Spend $7.8 Trillion Over the Next Decade Print
Thursday, 04 August 2011 04:56

The Washington Post is trying to win yet another Pulitzer for bad reporting. Today's entry is a page 4 story discussing the impact of potential cuts to the military budget. The Post told readers that the Pentagon could face $600 billion in cuts over the next decade.

That is supposed to sound really really big. But is it? It would have been helpful if the Post had bothered to tell readers the baseline level of spending. The Congressional Budget Office baseline is $7.8 trillion over the decade, putting the proposed cuts at a bit under 8 percent of projected spending.

Another useful benchmark is the pre-2001 level of spending. If spending were the same as a share of GDP as the pre 9-11 level, we would spend approximately $5.4 trillion on the military over the next decade.

 
The European Central Bank: The Main Cause of the Debt Crisis Print
Thursday, 04 August 2011 04:43

The Post forgot to mention the role of the European Central Bank (ECB) in worsening the European debt crisis. The original crisis stemmed from the failure of the ECB to notice and respond to the huge housing bubbles that were driving the economies of countries like Spain and Ireland.Instead, it allowed these bubbles to grow to sizes where their collapse would inevitably sink the economy.

However, the ECB has compounded this damage by its limited response the downturn. It never pushed its overnight money rate below 1.0 percent, in contrast to the zero rate at the Fed. It also was more cautious in it quantitative easing policy and now is actually raising rates, ostensibly because it fears inflation.

Higher interest rates will worsen the debt situation for two reasons. First, it will tend to put upward pressure on the interest rates that countries must pay on their debt. Second, it will slow growth. Slower growth will mean reduced tax revenues for debt burdened countries and higher payments for unemployment insurance and other benefits.

Anyone reporting on the course of the debt crisis of the Euro zone countries has to give the ECB a starring role.

 
Erskine Bowles Gets $350,000 a Year from Morgan Stanley Print
Thursday, 04 August 2011 04:26

For some reason the media never find room to mention the fact that Erskine Bowles is a director of Wall Street investment bank Morgan Stanley (an otherwise bankrupt beneficiary of the bailout). Bowles was a co-chair of President Obama's deficit commission and is now apparently one of the people whose name is being mentioned as a possible successor to Timothy Geithner if he were to resign as Treasury Secretary.

If Bowles was getting $350,000 a year from the United Auto Workers it seems likely that it would be mentioned in news reports. It's not clear why the media do not think his ties to a major Wall Street bank are relevant.

 
How Supply Affects Employment in a Downturn: Another Exchange With Casey Mulligan Print
Wednesday, 03 August 2011 09:04

Casey Mulligan seems to believe that because some groups (i.e. older workers) can increase their employment in a downturn, that the problem is one of supply and not demand. As I noted in my past exchange, a recession does not mean that some demographic groups will not be preferred to others. In the downturn there has been an increase in employment for college grads also.

There is nothing inconsistent with the idea that demand is a constraint on employment yet some individuals may be able to beat out others for the jobs that are available, either because they have more experience in the case of older workers or they have better skills in the case of college educated workers. This is very different from saying that if only all our workers had these advantages (being more experienced or college educated) that we would not have a problem of unemployment.

In fact, even among these groups unemployment has risen substantially in the downturn. If we snapped our fingers and suddenly our whole workforce had the experience of the over 55 population or the skills of a college graduate then we would see many more experienced and college educated workers unemployed. I don't see anything in Mulligan's story suggesting otherwise.

(As another example, Mulligan shows us that employment has increased in Texas. Is this a surprise? There has been a huge increase in oil and gas prices that has both increased demand in these industries and led to a substantial increase in the money flowing into the state for royalties. Also, Texas did not have as large a housing bubble as states like Nevada and California. Therefore, it suffered much less damage when the bubble burst.)

Finally, Mulligan insists that us Keynesian types have no evidence that lack of demand explains the downturn. Actually, there are a number of macroeconomic models that have been built up over the years based on evidence of firm and individual behavior. These do support the view that the downturn is attributable to a lack of demand. Also, there was a study (Feyrer and Sacerdote, 2011 and my comment) of the state by state effects of the stimulus that found multipliers that were very much consistent with the ones predicted by these macroeconomic models. So, we have the standard Keynesian theory, which is largely embedded in macroeconomic models based on years of data collection, that is now supported by a careful analysis of the impact of the stimulus.

That seems pretty good in the evidence department, what does Professor Mulligan have?

 

 
News For the NYT: You Don't Know Anyone's Reason for Acting Print
Wednesday, 03 August 2011 08:29

Politicians don't always tell the truth. Most school kids know this, but apparently the NYT believes otherwise. That explains why it tells us that:

"the reason that many conservative Republicans refused to vote for the [debt] agreement" was that the debt to GDP ratio would still rise even with the proposed cuts. Actually, this is what many conservative Republicans said. That is how it should be reported, as in "many conservative Republicans said ......"

The NYT also said that this is the reason the bond rating agencies are considering a downgrade of U.S. debt. Again, a newspaper reports this as "this is the reason that the bond rating agencies have given ..."

The bond rating agencies do not have a great deal of credibility at the moment, having rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade, and getting paid tens of millions of dollars in the process. No one can accept their claims at face value, especially since it is not even clear how they think the U.S. could ever default on its debt. (The debt is owed in dollars. The U.S. prints dollars. How could we be unable to pay our debt, apart from deliberate non-payment through failing to raise the debt ceiling?)

The piece also wrongly asserts that Social Security contributes to the debt. This is not true. Under the law, Social Security can only spend the money in its trust fund and not a penny more. If it runs short of money then payments would not be made. This is a very serious error that the NYT should not make. (It is clear that the article is referring to the on-budget budget, since it reports that CBO projects that the debt to GDP ratio will exceed 100 percent of GDP in 2021. This is only true if we look at the on-budget budget and add in the debt held by the Social Security trust fund.)

It would also have been useful if the article found at least one source who was not a deficit hawk. There are no shortages of economists, policy analysts and elected officials who fall into this category.

 

 
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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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