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Is Associated Press Working for the Fracking Industry? Print
Sunday, 11 December 2011 12:40

That's what millions of readers are asking after seeing a piece that asserted:

"The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region."

Actually, the industry has created relatively few jobs in Pennsylvania and many of the jobs that it has created have gone to out-of-staters, providing little benefit to the people in the regions where fracking is taking place. News stories should not include unsourced assertions like this one in the AP piece. The article should have sourced the claim and made an effort to evaluate its accuracy if it came from someone with ties to the industry.

Maybe Merkel and the ECB Want to Weaken Labor Print
Sunday, 11 December 2011 08:49

If someone has a gun and is shooting it repeatedly at another person, we might infer that the shooter wants to kill this person. In this vein, how could it never occur to analysts that the purpose of Chancellor Merkel and the ECB's policy of austerity across Europe is to permanently weaken the power of labor across the continent?

It is hardly a secret that workers can be forced to make concessions on wages and benefits in periods of high unemployment. The power of workers will be further undermined if government supports like pensions and employment protection legislation are also removed. All of this is well-known and widely understood.

Therefore it is remarkable that the class implications of the Merkel-ECB policies never get mentioned in a NYT piece examining the contrasting approaches of Merkel and President Obama to the euro zone crisis. In fact the piece explicitly sends readers in the opposite direction, saying it is "a battle of ideas" in a quote from Almut Möller, a European Union expert at the German Council on Foreign Relations.

In fact the most obvious basis for the difference in the views between President Obama and the Merkel-ECB view is standard Keynesian story that it is in the interest of any individual business owner to have other businesses pay their workers more money. This creates more demand for her products.

In this context, President Obama would be very happy to see a prosperous Europe which would provide a stronger market for U.S. exports right now. However, Chancellor Merkel and the ECB seem more focused on keeping down their own labor costs.

Thomas Friedman Is Flat: More Nonsense on Economics In the NYT Print
Saturday, 10 December 2011 23:57

The NYT continues its policy of affirmative action for people ignorant of the world by allowing Thomas Friedman to write two columns a week on whatever he chooses. Today he talks about the job crisis.

He does get some things right in pointing out that we have a huge shortage of jobs. He also notes the growing crisis posed by long-term unemployment in which millions of people are losing their connections to the labor market and risk being permanently unemployed.

However he strikes out in his dismissal of manufacturing as a source of jobs and calling for more high tech centers like Austin, Silicon Valley and Raleigh-Durham. When the dollar falls to a sustainable level it will have an enormous impact in improving the competitiveness of U.S. manufacturing. We stand to gain more than 4 million manufacturing jobs once we get the dollar down to a sustainable level.

To take this a step further, if we followed the German model (of which Friedman often speaks fondly) we would create another 3 million jobs in manufacturing by shortening the average length of the work year. The seven million new manufacturing jobs that would be added due to a more competitive dollar and shorter workyear is only a bit over 4 percent of the work force, but it is still a far larger number than those employed in Austin, Silicon Valley and Raleigh-Durham.

In addition, those seeing Austin, Silicon Valley and Raleigh-Durham as the future of the United States have not kept up with the present. Just as China and other low-wage countries can undercut the United States in manufacturing goods with their lower wages, so can developing undercut the United States in high tech production with their lower wages. India already has a large and growing trade surplus in software with the United States.

It is difficult to see how this trend will be reversed in the decades ahead, no matter how much we tax ordinary workers to subsidize the centers that Friedman advocates. The arithmetic is straightforward, high tech workers in the United States will not be able to compete with comparable skilled workers in the developing world making one-fifth as much. Furthermore, it is much cheaper to send software programs half way across the world than it is to send cars.

Friedman also wants to cut Social Security and Medicare for retirees as advocated by the co-chairs of President Obama's deficit commission, former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. This policy will make Wall Street deficit hawks happy, but it is difficult to see how it will help the future strength of the economy.
The Washington Post Just Can't Resist Editorializing About Fiscal Policy in Its News Section Print
Saturday, 10 December 2011 08:56

Fox on 15th yet again did some heavy editorializing in a front page story on the euro zone crisis. It referred to the plan to constrain debt as an effort to create an institutional structure that will "slap automatic penalties on governments that recklessly spend and borrow."

How did the word "recklessly" get into this article and why did it make it past the Post's editors? The point is that if the penalties are automatic, then they will not distinguish between countries that borrow "recklessly" and countries that might end up borrowing for reasons that are not reckless.

For example, a country like Ireland may end up borrowing because it had private banks that engaged in reckless lending and faced collapse. The country then had the choice of seeing its banking system go under or borrowing to rescue its banks. (It is possible that Ireland could have kept its banks operating at lower cost by giving creditors haircuts, but that is a debatable point.)

Alternatively, a country like Spain may end up borrowing because incompetent central bankers allow an enormous housing bubble to grow unchecked. When the bubble bursts it creates a severe recession leading to a huge loss of tax revenue and a massive increase in spending on unemployment benefits and other transfers.

An automatic enforcement mechanism does not distinguish between this sort of borrowing and borrowing that is done for reasons that may be viewed as reckless. That is precisely the point with an automatic mechanism, it is automatic. The Washington Post should be able to hire people who understand this.

Why Is Anyone Asking Why We Don't Have Enough Jobs? Print
Friday, 09 December 2011 17:52

If we see a car that runs into a brick wall at 80 miles an hour, we don't ask why its front end is messed up. In this same vein, why on earth would be looking for a reason for a lack of jobs in an economy that has a gap of close to $1 trillion a year in annual demand?

This is what Robert Atkinson does in a column in the Huffington Post. If we take him at face value, Atkinson is actually confused about the reason that the economy is lacking jobs. He must have missed the housing bubble and its collapse.

See, the housing bubble was directly creating hundreds of billions of dollars of annual demand by spurring record levels of construction. The housing bubble also generated close to $500 billion in annual consumption through the housing wealth effect. The bubble generated more than $8 trillion in additional equity, almost all of which has now disappeared.

After the bubble collapsed, housing fell from more than 6 percent of GDP to less than 2 percent of GDP, a loss in annual demand of more than $600 billion. The loss of housing wealth, coupled with the loss of close to $5 trillion in stock wealth, led to a falloff in annual consumption of close to $500 billion. Lost tax revenue also led to cutbacks in annual government spending at the state and local level of close to $100 billion.

In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.

The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets.

I suppose, in this weak economy, that it is good that people can get jobs looking for solutions to mysteries that do not exist. (Make work jobs can make sense if there is no productive employment available.) But there is no reason that the rest of us should be bothered by solutions for non-existent problems.

[Btw, the fact that the stimulus was too small is not 20/20 hindsight, it is what those of us who know economics said at the time.]

Larry Summers' Poor Memory on the IMF Print
Friday, 09 December 2011 06:35

Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF's role in the world economy. In an oped column he told readers that:

"From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations."

This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.

It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin's strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.

This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers' assertion that the IMF puts countries on a sustainable course.

In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post's opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers. 

Where are the Millionaire Job Creators? NPR Does the Big Hunt Print
Friday, 09 December 2011 06:22

The Republicans have substituted "job creator" for the word "rich" in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.

Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.

NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.

Post Covers Up for Draghi Print
Friday, 09 December 2011 06:09

Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)

The Washington Post decided to cover up the nature of the ECB's strategy when it told readers that:

"By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency."

The Post effectively defined the measures demanded by the ECB as being necessary to "stabilize the euro currency." That would perhaps be an appropriate stance for the ECB's public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.

Debt Targets Would be Much Easier to Hit if the ECB Had Expansionary Policy Print
Friday, 09 December 2011 05:53

The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.

The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.

If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.

It's Not the Market Sinking Euro Zone Countries Print
Friday, 09 December 2011 05:20

Suppose you go out to sea in your beautiful new sailboat. (Don't worry folks, I don't have a boat and I don't think I even know anyone who has a boat.) A couple hundred miles offshore, your boat gets attacked by a gang of pirates. They tear up your sails, smash your engine, and run off with your lifeboat. When your body is found 2 weeks later, NPR surveys the damage and says "that's the power of the sea." 

That was the tone of a Morning Edition story (sorry, no link yet) which discussed the new euro zone agreement and whether the markets would be satisfied. This is not a question of governments being forced by the market to make changes any more than the victim of the pirate attack can be said to have been killed by the sea.

The European Central Bank (ECB) created the conditions in which countries are facing bankruptcy, first by failing to notice the largest asset bubbles in the history of the world. Its inadequate response to the downturn and continued obsession with inflation has deepened the downturn. And, its repeated assertions that it will not act as a lender of last resort and stand behind euro zone sovereign debt, has ensured that member nations would be vulnerable to speculative attacks that could make otherwise solvent governments face bankruptcy. 

It is wrong to confuse the deliberate policy of the ECB with random outcomes of the market. Reporters should be highlighting the distinction, not concealing it.

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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.