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The NYT Touts the Fact That GDP Data Show the World Did Not End Print
Thursday, 27 October 2011 22:07

There was no reason why people who know economics would have expected a double dip recession, absent a meltdown in the euro zone. Unfortunately, policy debate tends to be dominated by people who don't fall into this category, hence the discussion of a double dip.

The unfortunate result of a debate dominated by ignorance is that a terrible 3rd quarter GDP growth number is touted as better than expected. As the NYT tells us in its headline:

"U.S. Economy Picks Up Pace, Averting a Stall."

At the economy's 3rd quarter growth rate it will take us an infinite number of years to get back to normal levels of unemployment. There was no reason to expect the economy to stall, just like there is no reason to expect heavily armed Martians to take over earth tomorrow. There is no reason that anyone should be happy about the 3rd quarter growth data, it is awful. The fact that some economic "experts" expected worse just speaks to the state of economics.

E.J. Dionne Understands Zero Economics Print
Thursday, 27 October 2011 05:21

There is a caricature of political debate that the right has invented whereby conservatives claim to be supporters of free markets whereas progressives want government regulation. This was always utter nonsense, but it should be especially apparent that it is utter nonsense today.

Few mainstream conservatives supported letting the market put Wall Street out of business when the collapse of the speculative bubble in the housing market made most major banks insolvent in the fall of 2008. At the moment, Europe's leaders are meeting nearly around the clock to devise a plan that will have the effect of saving the big European banks from their bad investments in sovereign debt.

There are almost no major figures in politics who are actually opposed to government regulation. In fact, it is not even clear what that means. Do they want to get rid of deposit insurance for banks, or patent and copyright protection? The real issue is whether the government is going to structure markets in ways that have the effect of pushing income upwards, which has been the situation for most of the last three decades or whether it will design policies that benefit the vast majority of the population. This is the 1 percent versus the 99 percent question.

It is hugely advantageous to conservatives, who want the government to advance the interests of the 1 percent, to have their position framed as a pro-market position. It is far more politically palatable to be seen supporting a free market than to be supporting policies that are intended to aid a small elite at the expense of the bulk of the population.

It is therefore understandable that conservatives would embrace the market versus intervention framing of the debate between conservatives and progressives. It is much harder to understand why someone who is left of center, like WAPO columnist E.J. Dionne would embrace the same framing.

[Dionne's framing is a textbook example of loser liberalism.]

The Post Uses the Double Dip Story to Diminish Expectations Print
Thursday, 27 October 2011 05:04

The headline of a Washington Post article used the term "optimism" in reference to a prediction of 2.5 percent growth for the third quarter. It is very difficult to view 2.5 percent growth as much less than disastrous. At this rate the economy is growing just fast enough to keep pace with the growth of labor force.

That means we are making zero progress in reducing the unemployment rate. If the economy continues to grow at a 2.5 percent pace, the unemployment rate will remain around 9 percent indefinitely with tens of millions of people unemployed, underemployed or out of the labor force altogether. These people are seeing their lives needlessly ruined because the well-paid people who manage the economy are not competent at their jobs.

The only context in which this growth can be seen as positive is compared with the alternative of a double-dip recession. The Post and other media outlets unfortunately helped promote the view that the economy was at a serious risk of a double dip based on the misreading of a limited number of economic reports over the summer.

While a collapse of the euro or some other crisis could certainly throw the economy into a second recession, it is not a plausible scenario on the economy's current path. Recessions require a major sector of the economy to actually shrink. In the past, this has always been the housing and car sectors. Since both are already very depressed, it is implausible that they could turn sharply negative. While the government sector is shrinking, its rate of decline is in the neighborhood of 1 percent annually. This is a drag on growth, but nearly enough to push the economy into a recession.

The Washington Post Imposes Its Own Agenda on the Supercommittee Print
Thursday, 27 October 2011 04:45
The Washington Post told readers that the supercommittee had an "original goal of at least $1.2 trillion in savings through 2021." Actually, its goal was specified in terms of deficit reduction which can come in the form of either higher revenue or reduced spending. The term "savings" implies spending cuts. That may be the Post's agenda, but it is not the one that Congress gave to the supercommittee.
Robert Samuelson Complains About the Paint Job on the Titanic: Yet Another Deficit Whine Print
Wednesday, 26 October 2011 19:48

It is really incredible how much ink that Robert Samuelson and his colleagues on the Post's opinion and news pages can devote to the budget deficit at a time when 26 million people are unemployed, underemployed or out of work altogether. In a column on Monday Samuelson told us of his "fantasy":

"Retired presidents Bill Clinton and George W. Bush would tour the country together and apologize. They would apologize for not tackling Social Security and Medicare when they had the chance."

What a fantasy! Here we are sitting in the middle of the wreckage of the housing bubble and we are supposed to be upset at Presidents Clinton and Bush for not cutting Social Security and Medicare.

The bubble economy of course had its origins in the Clinton years. His team applauded the rise of stock prices to ever more irrational levels, somehow thinking that ever greater distortions in the stock market were evidence of a successful economy. In addition, Clinton's Treasury Secretary Robert Rubin was the main promoter of the high dollar policy. This was the origins of the country's huge trade deficit, which is the largest remaining imbalance in the U.S. economy. Clinton also pushed the financial deregulation that helped open the door for the financial crisis of 2008.

President Bush certainly has no better record. The housing bubble grew to ever more dangerous levels right in front of his face. All he could do was celebrate the rise in homeownership as a success in his quest for an "ownership society."

The collapse of these bubbles is projected to cost the country $8.3 trillion. This is more than $27,000 for every man, woman, and child in the country. It might be reasonable to think that our former presidents owed us some sort of apology for leading us into this disaster. But not in Robert Samuelson's world.

In Samuelson's world they should be apologizing that the retirees, who saw their housing wealth decimated by the collapse of the bubble, are living on $1,200 monthly Social Security checks instead of $1,100 monthly checks. And, they should be apologizing that these retirees don't have to pay more money for their health care.

That's really some fantasy that Robert Samuelson has there.

A Bit of Confusion on Consumption Print
Wednesday, 26 October 2011 07:17

I'm not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.

While part of the story sounds very good -- reverse the upward redistribution from wages to profits -- some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.

In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn't change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.

Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S.-owned companies. I understand how this helps the shareholders in these companies, but I can't see what this does for the rest of us.

The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.

Contrary to What the Post Says It's Not Hard to Project the Lost Revenue from Governor Perry's Tax Plan Print
Wednesday, 26 October 2011 05:11

The Washington Post left readers with the impression that Governor Perry's flat tax proposal would give people the option of staying under the current tax code. It favorably cited a Heritage Foundation analyst comment that:

"it will be difficult for analysts to accurately predict what its economic and fiscal impact would be."

Actually, it should not be very difficult to project the economic and fiscal impact of the plan.

If people are given the option of paying $2 for a gallon of gas or $4 we would usually assume that they would opt to pay $2. Undoubtedly there will be some people who would make mistakes under Governor Perry's plan and end up paying more in taxes than necessary, but presumably most people will get it right and the ones who get it wrong are not likely to be off by much.

As the NYT showed, an analyst of the plan by the Tax Policy Center of the Urban Institute and the Brooking Institution showed that the flat tax would imply a substantial tax increase for most low and middle-income households. These people would presumably keep paying tax at their current rate. However, the Perry plan would provide large reductions in taxes for the highest income taxpayers. Undoubtedly these people, all of whom have professional tax preparers, would take advantage of the large tax cut offered under the Perry plan.

It is a very simple exercise to project the revenue from a tax plan that is likely to leave the tax bill of the bottom 80 percent little changed and provide large tax cuts to top 20 percent and especially the top 1 percent. The result is a large fall in revenue and a big increase in the deficit. The Post misled its readers by implying otherwise.

Does the NYT Invest in Pets.com? Print
Tuesday, 25 October 2011 04:50

For those young uns out there, Pets.com was the poster child of the craziness of the 90s stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.

While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of "restoring home equity," which in turn it tells readers "is also crucial to getting consumers to spend again."

Umm, no it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.

In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.

Brooks Is Wrong: The OWS Crew Is Against Redistribution Print
Tuesday, 25 October 2011 04:26

David Brooks told readers that the Occupy Wall Street movement it out of step with the country because it favors redistribution while most of the country opposes it. It is not clear what Brooks thinks he means by this.

The country has been seeing enormous redistribution over the last three decades, but it has all been in an upward direction. For example, the government gave trillions of dollars of below market interest rate loans to the largest banks to save them from collapse. The big banks continue to benefit from a too big to fail subsidy.

It has strengthened patent monopolies and sought to impose them on foreign countries through trade agreements. These monopolies provide the basis for huge drug companies like Pfizer and Merck.

The government has also pursued a policy of one-sided enforcement of labor law. The firing of union organizers and other law-breaking measures directed against workers are given a slap on the wrist, whereas unsanctioned strikes are confronted with the full power of the law, with unions seeing assets seized and officers put in jail.

It would not be surprising if most of the country is against this sort of redistribution since 99 percent (or thereabout) are losers from these government interventions. But this is consistent with a populist stance against the wealthy and their abuse of governmental powers to advance their interests.

The Washington Post STILL Has Not Heard About the Housing Bubble Print
Monday, 24 October 2011 04:44

During the run-up of the housing bubble the Washington Post's main and often exclusive source in stories on the housing market was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 bestseller, Why The Real Estate Boom Will Not Bust and How You Can Profit From It. A front page article in today's newspaper indicates that its understanding of the housing market has not improved much.

Many of the basic facts in the article are wrong. For example, it tells readers that, "a quarter of all homeowners are 'underwater,'" owing more than their homes are worth. In fact, the correct statement is that a quarter (actually 22.5 percent in the Core Logic piece that is linked to in the piece) of mortgage holders are underwater. Since roughly one-third of all homes do not carry a mortgage, this translates into about 16 percent of all homeowners.

The piece also tells readers that:

"Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth."

Actually, rather than being near a crisis low, house prices can be better described as still being about 10 percent above their trend level. If the Post has some reason to believe that the fundamentals in the housing market justify this divergence from a 100-year long trend in nationwide house prices it should have discussed it in this article.

Also, consumption continues to be higher than normal relative to disposable income, not lower, as this quote asserts. The saving rate is currently hovering near 5 percent, compared to a post-war pre-bubble average of more than 8 percent. Consumption is down relative to its bubble peaks, but this is easily explained by the loss of close to $7 trillion in housing bubble wealth and $6 trillion in stock market wealth, not being too scared to spend.


Source: Bureau of Economic Analysis.

The article also includes the bizarre and unsourced assertion that:

"Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system."

It is certainly possible that Geithner claims that allowing bankruptcy judges to alter mortgages would reduce lending, but the Post has no way of knowing that he actually believed this. As a practical matter, it is difficult to see why it would have much impact on lending, although it would undoubtedly reduce bank profits.

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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.