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Robert Samuelson Never Heard of the European Central Bank Print
Wednesday, 16 November 2011 07:53

Who can blame him, after all it is hard to get news when you're buried away in the middle of Washington, DC. Samuelson claims that Europe can't bail itself out. He calls on the IMF to come to the rescue -- at the cost of dismantling Europe's welfare state.

Of course there is nothing wrong with Europe's welfare state, as everyone who bothers to look at the data knows. In fact the troubled countries have the weakest welfare states in Europe. The ones with the strongest welfare states, Denmark, Sweden, the Netherlands, and Germany, are doing relatively well.

It is also the case that Europe has plenty of money to bail itself out, it just needs the European Central Bank (ECB) to backstop the debt of the troubled economies. But the folks at Fox on 15th Street, where the guiding philosophy is that a dollar in a worker's pocket is a dollar that could be in a rich person's pocket, are so committed to destroying the welfare state that they are prepared to pretend that the ECB does not exist.

The point here is that the problems facing the euro zone today are primarily demand side. If someone from Mars landed in the euro zone with 600 billion euros (roughly 6 percent of GDP) and started spending them all over the place, the main effect would be to increase demand and employment. This would raise tax revenue and reduce transfer payments, alleviating the budget problems facing euro zone countries. 

By contrast, the burden of an excessive welfare state is a supply side story. The generosity of benefits discourages people from working, reducing the supply of labor. In addition, the money dished out by governments in benefits creates excess demand, leading to inflation. This story does not at all describe the euro zone countries at present.

Germany's "Success" and Southern Europe's Failure Print
Wednesday, 16 November 2011 05:48

The NYT had a misleading piece contrasting the success of Germany with the difficulties facing the countries of southern Europe. The problem is not just a question of southern European countries emulating Germany, as the article implies. The problem is that Germany has acted to shut off the adjustment mechanisms that would allow southern Europe to accomplish this task

At the moment, southern Europe is not competitive with Germany, which is the cause of its large trade deficits. If these countries were not in the euro, they would simply devalue their currency. However, the euro rules out this option to restoring competitiveness.

The alternative would be to have a lower inflation rate than Germany. However, because the European Central Bank (ECB) has committed to sustaining an inflation rate of just 2.0 percent in the euro zone as a whole, there is very little that the southern countries can gain by having a lower positive inflation rate. Their only route within the euro to regaining competitiveness is to have a period of deflation. This is incredibly costly in terms of high unemployment and lost output. (Latvia is going this route now and has an unemployment rate in the high teens, after earlier hitting 20 percent.)

The German position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts. This is not just a question of southern Europeans being resentful or jealous, Germany is asking for something that is impossible.

The article also likely misled many readers on Germany's growth, telling readers that it grew 0.5 percent in the third quarter. This number is a quarterly growth rate. It is standard in the United States to express growth as an annual rate. Germany's growth in the third quarter was approximately 2.0 percent at an annual rate. 

Keynes, Hayek, and Rand: NPR's False Symmetry Print
Wednesday, 16 November 2011 05:29

Morning Edition did a three part series featuring segments on Ayn Rand, Friedrich Hayek, and John Maynard Keynes. In addition to the fact that two of these three are extreme conservatives, the pieces create a false symmetry on the influence of these three thinkers.

Keynes' work provides the basis for modern macroeconomics. The vast majority of the economics profession works within a framework that was established by Keynes, regardless of their political leanings. The influence of Rand and Hayek is nowhere near comparable.

Hot Air and the Fracking Jobs Boom Print
Wednesday, 16 November 2011 05:02

Most major news outlets have done pieces touting the jobs boom associated with fracking. The story goes that allowing this relatively new form of drilling will both lower energy prices in the United States and also lead to an employment boom in the regions where the drilling takes place. And, how do we know there will be a boom? Well, the industry said so.

It turns out that the employment boom ain't all it is cracked up to be. The environmental group, Food and Water Watch, released a report yesterday that examined job projections for New York, which is considering ending a ban on fracking. The industry had projected that fracking in western New York would create more than 60,000 new jobs. Food and Water watch looked at the experience in the adjacent Pennsylvania counties, which allow fracking, and concluded that the potential job gains for New York are one-tenth as large, or about 6,000. And, this is before taking account of any jobs that may be lost due to environmental damage (e.g. in tourism associated with fishing, hunting, and camping).

In short, for these counties there is not much of an issue of jobs versus the environment. The number of potential jobs at stake are relatively few and most are likely to go to people living outside the region in any case.

[Disclosure: The researcher for this report was my wife, Helene Jorgensen.]

Do Social Security Costs Have to Be "Soaring" in Washington Post News Stories? Print
Tuesday, 15 November 2011 05:42

That's the question millions are asking. In an article on the supercommittee this morning we find a sentence like:

"Republicans indicated a willingness to do so [raise more revenue], aides said, but only in exchange for additional reductions to soaring Social Security and Medicare costs (emphasis added)."

A real newspaper would have just said that the Republicans were demanding "additional reductions in Social Security and Medicare costs." That would provide the same information as the Post's sentence in less space and without the editorializing.

Why Does NPR Rely On Economic Experts Who Only See Things In Hindsight? Print
Tuesday, 15 November 2011 05:19

Morning Edition included a discussion this morning (no link yet) with WSJ economics editor David Wessel and the Economist's economics editor Zanny Mintos Beddes. When the discussion turned to housing, David Wessel said that in retrospect we underestimated the extent to which housing would be a drag on the economy.

Actually, those who understood the housing market were saying at the beginning of the downturn and before that the collapse of the housing bubble would be a serious and longterm drag on the economy. It was easy to see that the loss of $8 trillion in housing wealth would substantially reduce consumption and that the enormous overbuilding during the boom was going to lead to a prolonged period of depressed construction. Wessel simply failed to study the factors driving the economy. There was no need for hindsight on this one.

At one point Zanny Mintos Beddes held out the possibility that resurgent residential construction might provide a boost to the economy in the near future. That seem unlikely since the vacancy rate is still near record highs.

[I just stumbled onto this one by chance. People who did their homework did not need hindsight.]

Post Goes After the Job Killing Regulation Myth Print
Monday, 14 November 2011 10:29

Two years ago the Republican party adopted a requirement that every time a party member used the word "regulation" it had to be preceded by the phrase "job-killing." Those who failed to comply were thrown out of the party.

The Post has a nice front page piece looking at the evidence that regulations are in fact serious job killers. The piece reports what almost all economists would acknowledge: regulations both eliminate and create jobs. Their net effect tends to be small.

Tell that to your favorite job creator.

Robert Samuelson Misses the Fix to the Housing Market Print
Monday, 14 November 2011 06:17

Some folks are still missing the $8 trillion housing bubble and Robert Samuelson seems to be one of them. In reviewing the housing market it is important to notice that there is a very different story by regions. In many areas (e.g. Las Vegas and Phoenix), bubbles have fully deflated and we should look for house prices to stabilize and even rise some in the years ahead. In other areas, like Los Angeles and Boston, there is likely still some air in the bubble. In these markets, prices are likely to fall in the years ahead. This can be seen as a good thing, since it will make homes more affordable for new buyers.

It would be foolish to envision a single national housing market since different regions have very different dynamics. As a result, it would be very wrong-headed to try to design a single policy -- for example promoting higher prices -- for the nation as a whole.

Do the Washington Post's Analysts Have Names? Print
Monday, 14 November 2011 06:01

A front page Washington Post article told readers:

"Analysts, however, said the United States could risk another downgrade of its credit rating and do further damage to business and consumer confidence if the supercommittee process implodes in a chaotic display of partisan rancor — for example, if a deal is approved by the supercommittee but is killed on the House floor. And analysts are deeply concerned that lawmakers could 'de-trigger' the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt."

It would be interesting to know who these analysts are so that readers could know if these are the same people who could not see the $8 trillion housing bubble that collapsed and wrecked the economy. It would be also worth knowing if these analysts were among the group who claimed two years ago that large deficits would send interest rates on Treasury bonds soaring. Readers should be told if the experts whom the Post relies upon for its stories are primarily known for their misunderstanding of the economy.

The piece also includes the unsupported assertion that:

"the numbers obscure a larger ideological divide. Democrats are willing to trim spending on health and retirement programs in exchange for an overhaul of the tax code that would generate significantly more revenue, with most of the burden borne by the nation’s wealthiest households.

"Republicans want to overhaul the tax code but lower the top rate from 35 percent to 28 percent and leave preferential rates untouched for capital gains and dividends. Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, said that approach would almost certainly guarantee lower taxes for the wealthy."

There is no evidence whatsoever in this statement or elsewhere in the article of any ideological divide. The evidence is that the Republicans are more directly responsive to the demands of the wealthy whereas Democrats feel the need to also be responsive the interests of other segments of the population. If there are ideological issues here, the piece offers no insight as to what they might be.

Ayn Rand Is Not a Supporter of Free Markets Print
Monday, 14 November 2011 05:43

It is misleading to imply, as Morning Edition did, that Ayn Rand's philosophy was about free markets. The idea of promoting oneself at the expense of others, advocated by Rand, is consistent with taking advantage of whatever support one is able to get from the government in this process.

For example, the top executives of Wall Street banks are happy to take advantage of the implicit government guarantee given to too-big-to-fail banks as well as the explicit guarantee that is given through deposit insurance in addition to the support given by the Federal Reserve Board through access to its discount window and other facilities. It is politically advantageous for people who benefit from these and other types of government support to claim that they are advocates of free markets even if it is not true.  

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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.