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The NYT Completely Misinforms its Readers on Fed Policy Print
Friday, 26 August 2011 09:58

The NYT made a remarkable assertion in its discussion of Federal Reserve Board Chair Ben Bernanke's speech at Jackson Hole today. It told readers:

"The most dramatic option available to the central bank would be an announcement that it intends to increase the total size of the portfolio. This is what markets refer to as “QE3,” meaning that it would represent a third round of the strategy known as quantitative easing."

Let's try about 2000 "NO"s for that one. The Fed could target a long-term interest rate. For example, it could announce that it was going to push the interest rate on 5-year Treasury bonds to 1.0 percent. It could target a higher inflation rate, for example 3-4 percent as has been advocated by people like Ben Bernanke before he was Fed chair. And it could buy assets other than government bonds, like the bonds of private corporations.

All of these steps would have a much more dramatic impact than "an announcement that it intends to increase the total size of the portfolio." It is incredible that the NYT reporters/editors on the Fed beat are apparently unfamilair with such proposals since they have been mentioned frequently by economists involved in monetary policy debates for years.

 

 
What Does It Mean to Say the Economy Will Not Recover Until the Housing Market Recovers? Print
Friday, 26 August 2011 05:51

Morgan Stanley director Laura Tyson included this line in a piece that argued for the need for government stimulus. It is common for people to make this assertion, but it is not clear what they mean by "recovers."

The economy was driven by a housing bubble in the last upturn. It lead to both a building boom and a consumption boom. Is the implication that we need another housing bubble to drive the economy?

There is a simple issue of accounting identities. Currently the country has a large trade deficit. To make up the shortfall in demand created by this deficit, we either need negative private savings or negative public savings (e.g. budget deficits) or some combination. It seems that Tyson is arguing for negative private savings as a long-run solution, as opposed to pushing the dollar down to eliminate the trade deficit.

 
Maybe Republicans Talk to Business People Because They Give Campaign Contributions Print
Friday, 26 August 2011 05:26

The Washington Post featured an extraordinary exercise in mind reading on page 3 today. The article, which carries the subhead, "candidates gravitate to potential job creators rather than unemployed," told readers:

"the contenders in the GOP field appear to be spending most of their time with those they think could be the solution to the country’s economic hardship (business owners) rather than those who are most directly experiencing the hardship (people out of work)."

Of course the Post has no idea what the Republican presidential candidates think. A serious newspaper would restrict itself to telling readers what the candidates do and say.

 
Corporations Do Not Exist to Create Jobs Print
Friday, 26 August 2011 05:08

In an article discussing three trade agreements being debated by Congress, the NYT told readers:

"under the agreements, American service providers would be able to compete in the three countries, ostensibly adding new jobs to the American economy. Because of this, they are widely supported by the U.S. Chamber of Commerce and other business trade groups."

This is wrong, wrong, and wrong. Corporations do not exist to create jobs, nor do they claim this as a goal. Invariably, corporate CEOs will say that their responsibility is to produce returns for shareholders, as they announce large layoffs. If the Chamber of Commerce is supporting these deals it is because it believes that they will increase profits, end of story.

The piece also bizarrely tells readers that the deals are projected to expand exports by $12 billion without mentioning how much it is expected to increase imports. This is like reporting a baseball score by telling us how many runs the Yankees got and not mentioning how many runs their opponents got.

It is net exports, the difference between exports and imports, that creates jobs. If the GM relocates an assembly plant from Texas to Mexico, the export of car parts from the United States is not adding jobs. Any reporter should know this and never print an export projection without including the corresponding import projection.

The piece also wrongly refers to the deals as "free-trade agreements." This is just a term that proponents use to make them sound more appealing. In fact, the deals will increase many forms of protectionism, most notably by imposing stronger patent and copyright protections on the three countries in these deals. A neutral report would just use refer to the deals as "trade agreements."

 
NYT Is Confused About the Payroll Tax Cut Print
Friday, 26 August 2011 04:41
The NYT told readers that the temporary cut in the payroll tax, "resulted in $67.2 billion of lost revenue for Social Security in 2011 and a total cost of $111.7 billion spread over 10 years." Actually, the cut did not cost the program anything since the lost tax revenue was replaced by general revenue.
 
We Run the Risk of Political Interference Undermining Good Fed Policy Print
Friday, 26 August 2011 04:21

Morning Edition had a piece on the Federal Reserve Board's annual meeting at Jackson Hole. The segment included a comment from an analyst (link not available yet) saying that we are seeing the risk of political interference undermining good Fed policy.

This would have been a great comedic comment, if it were not said in complete earnestness. This is sort of like worrying that the performance of the Federal Emergency Management Agency would deteriorate after the departure of Michale Brown, except the damage caused by Brown's incompetence was trivial compared to the enormous suffering that has resulted from the Fed's incompetence.

The Fed (i.e. Alan Greenspan and his then sidekick Ben Bernanke) sat back and let the housing bubble grow to ever more dangerous levels. It possessed all the tools necessary to rein it in but chose to do nothing. This is like a school bus driver drunkenly swerving into oncoming traffic and killing all aboard. Incredibly, in Federal Reserve Board land, the driver comes to work the next day and no one says anything.

Yeah, we should worry that it gets worse than this! 

 
Another Problem of Drug Patents Print
Friday, 26 August 2011 04:04

The NYT has been reporting on the occasional shortages of important generic drugs that arise. It discusses possible answers today, but doesn't discuss the extent to which drug patents are a part of the problem. Because patents allow pharmaceutical companies to sell drugs at prices that are far above their competitive market price, there is relatively little interest among manufacturers in producing drugs that have come off patents. In many cases, the barriers created by the patent holders (e.g. the potential of legal harassment) means that they maintain an effective monopoly long after their patents have expired.

As a practical matter, it would be almost costless for the government to establish a stockpile of key off patent drugs. (They could contract it with a private firm.) If they bought up a million doses of each of 200 drugs, this would cost around $800 million. The drugs could be sold at prices that cover the cost of the purchase, storage, and wastage. It is difficult to see a good argument for not taking a costless measure that could ensure people's health while saving money.

 
Housing and Arithmetic: Why Do They Never Appear Together Print
Thursday, 25 August 2011 09:32
If I was still getting my paper copy of the NYT this article on the Obama administration's plan to allow more refinancing of Fannie and Freddie backed mortgages would have had me tearing it to shreds. The article refers to plans to allow easier refinancing for people who are now underwater or have bad credit. The piece tells us that refinancing could save homeowners lots of money:

"by one estimate, $85 billion a year."

It sure would be nice to see the name of the person who could be hanged with this estimate. According to the piece, Fannie and Freddie back $2.4 trillion in mortgages that have interest rates over 4.5 percent. If all of these mortgages were refinanced and the average saving was 1.5 percent, this would save homeowners $36 billion. This is just over 40 percent of our $85 billion estimate.

In fact, most of these mortgages could already be refinanced today, if the homeowners wanted to do so. Removing the obstacles for underwater homeowners or homeowners with bad credit would be unlikely to allow even one quarter of these mortgages be refinanced, providing a net savings of less than $9 billion.

If we look at the economic impact, we have to also remember that the interest payments were income for some people. The investors on average are certainly much richer than homeowners, but they would still spend some portion of their interest earnings. If we assume a 40 basis points gap in marginal propensities to consume (e.g. homeowners consume 90 percent of their additional income, investors consumer 50 percent) then the net boost to consumption from this measure would be less than $4 billion a year or 0.03 percent of GDP. 

The article discusses concerns that house prices are continuing to fall. Actually we should expect house prices to continue to fall, they are still close to 10 percent above their long-term trend. If there is a reason that we should expect house prices to stay above this trend, the NYT has never bothered to run a piece on it.

Finally, the piece includes comments from Frank E. Nothaft, the chief economist at Freddie Mac. Mr Nothaft made himself famous for repeatedly asserting during the bubble years that nationwide house prices never fall. If he has ever been right about anything connected with the housing market there is no record of it.

 
The Morality of the Other Side in the Class War Print
Thursday, 25 August 2011 07:55

The Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board. The word from these folks is "No Inflation!" If that means millions more people will suffer unemployment for a few more years, that's a price that the Post and Samuelson are willing to pay.

Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don't need the Post and Samuelson to put them into print. So, this really is a public service.

What's neat about this picture is that there is little dispute about the basic facts surrounding inflation. Inflation is a problem that stems from an overheated economy. Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar type hyper-inflation. This means that if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment. It will not just creep on us overnight when we are sleeping. (There can be supply induced inflation. Suppose Saudi Arabia's oil fields are blown up and the price of oil goes to $400 a barrel. This would cause inflation, but the Fed's actions are not going to affect this outcome.) 

The other basic fact is that moderate rates of inflation do very little harm. The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation. This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation (e.g. here and here).

Yet, both the Post edit board and Samuelson argue strongly that Bernanke should not risk higher inflation to try to reduce the unemployment rate. The edit told readers:

"the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed’s 2 percent target. Printing more money might push it above that, unleashing dangerous inflationary expectations."

 

Ooooooh, dangerous inflationary expectations. That's really scary. Since the core inflation rate has been above 2.0 percent for most of the last 50 years, it's hard to see what anyone would be worried about.

But then the Post gets to the substance of the matter:

"The Fed recently promised to continue making funds available to the financial system at nearly zero percent interest. While perhaps necessary in the short run, this policy amounts to a penalty on prudent savers and a reward to over-leveraged debtors."

Yep, we should really be worried about rewarding those over-leveraged debtors -- lazy bums, many of them are not even working. And the "prudent savers?" Yes, that woud include all those wealthy people with large amounts of money to invest. But hey, no class issues here.

Robert Samuelson also notes how more expansionary policy has the effect of transfering wealth from creditors to debtors in the context of discussing a proposal by Harvard economist to deliberately target 6 percent inflation for a couple of years:

"To be sure, higher inflation represents a wealth transfer to debtors (who repay in cheaper dollars) from creditors (who receive cheaper dollars). That’s unfair, Rogoff says, but it may be less unfair and disruptive than outright defaults by overborrowed debtors."

Samuelson concludes that the risks of inflation are just too great and then wrong tells readers:

"Remember: The economy’s basic problem is poor confidence spawned by pervasive uncertainties."

As noted in today's lesson on accounting identities, the share of GDP devoted to investment in equipment and software is almost back to its pre-crisis level. And, the saving rate is still below its post-war average, meaning that consumption is high, not low. The economy's basic problem is that the dollar is too high, which is causing a large trade deficit.

When we think about the trade-offs between inflation and unemployment it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong. It was people like Alan Greenspan and Ben Bernanke who messed up. And of course other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble did not help either.

 
National Income Accounting for the Washington Post and Robert Samuelson Print
Thursday, 25 August 2011 07:06

National income accounting is really basic stuff. It is taught in every intro economics class. It would be a really great thing if only the people who wrote about and implemented economic policy understand it.

Today Beat the Press features a quick lesson in national income accounting for folks who clearly do not know it: the Washington Post editorial board and its columnist Robert Samuelson.

Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that:

1) C+I+G+(X-M) = Y

where Y stands for income. This identity must always hold, it is true by definition.

We can then divide Y into disposable income, which is total income, minus taxes. This gives us:

2) Y = YD + T

We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us:

3) YD = C+S

since we now know that  Y = C+S+T, we can rewrite equation 1 as,

4) C+I+G+ (X-M) = C+S+T

we then eliminate consumption from both sides and we get:

5) I+G+(X-M) = S+T, rearranging terms gives:

6) (X-M) = (S-I)+(T-G)

This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.

Now, let's bring this back to the concerns that the Post and Samuelson raise today. Both are very concerned about inflation (I'll beat up on them for this is another post), but they also hold out the hope that the economy will get back to full employment once consumers and firms are more confident about the economy.

But consider the accounting identity. The country has a large trade deficit, which means that X-M is a large negative number. It's currently around 4 percent of GDP (just under $600 billion), but would certainly be much larger if the economy were near full employment. Imports rise with income, so that with a higher level of GDP the trade deficit would expand.

If X-M is negative, then either or both (S-I) or (T-G) MUST be negative. This means either or both that we have negative private savings or we have a budget deficit.

We can have the former with a very low private saving rate, as we did during the stock and housing bubble. In both periods there was aa consumption boom driven by transitory wealth created by the bubbles. It is difficult to understand why anyone would want a low private saving rate.

It means that people reach retirement with very little to support them other than their Social Security or Medicare, which both the Post and Samuelson want to cut. So no one can consistently want both low private saving and cuts to Social Security and Medicare, unless they want the elderly to be very poor. (It is in principle possible to raise investment, but in practice very difficult. The equipment and software investment share of GDP is already almost back to its pre-crash levels, so the prospects of further increases are very limited.)  

The other possibility is that we can have a large budget deficit, making T-G a big negative number. But, we know the Post and Samuelson hate budget deficits, they complain about them all the time.

For those who believe in accounting identities and evolution there is only one other place to go, we must get our trade deficit down. We need X-M to be a much smaller negative number. The best mechanism for getting the trade deficit down is reducing the value of the dollar.

A lower dollar would make imports more expensive for people in the United States, leading them to buy fewer imports. It would also make our exports cheaper for people living in other countries, leading them to buy more of our exports. Fewer imports and more exports translates into a smaller trade deficit.

So we should want a lower dollar, right? Not so fast, Samuelson explicitly warns that a falling dollar could be a bad consequence of higher inflation. The Post editorial never mentions a lower dollar as a possible benefit of more expansionary monetary policy.

What can we conclude from this? We can conclude that Samuelson and the Post do not know national income accounting.

 

 
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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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