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NYT Runs Confused Editorial on China and U.S. Debt in Its News Section Print
Monday, 18 July 2011 19:27

The NYT decided that it did not like the efforts of the government to sustain demand and used a news story to describe this policy as "America’s own fiscally dubious habits." While one can argue with the NYT's view that it would be better for the United States to have slower growth and higher unemployment than run a deficit, the more fundamental issue is that such comments are usually reserved for editorial pages.

This is not the only peculiar item in this piece. The article tells readers that China is concerned about losing money on its dollar holdings. This is difficult to believe since it is almost inconceivable that China's government did not expect to lose money on these holdings. There are no other buyers who will be willing to hold dollars at the price that China paid and in fact the dollar already has declined substantially since its peak at the start of the last decade.

Presumably China's government did not mind losing money on its dollar holdings, seeing this loss as the necessary price of maintaining its export market in the United States. In effect, China's government was paying people in the United States to buy its stuff.

The article also includes this bizarre paragraph:

"Most of those reserves are held in dollars, and recycled back to the United States through investments in Treasury bonds and other dollar-denominated securities — even stocks. And while some of China’s foreign exchange reserves are plowed into European and Japanese debt, those bond markets are not big or liquid enough to absorb the bulk of China’s ever-larger foreign holdings."

China is under no obligation to accumulate foreign exchange holdings. It can allow Chinese corporations and citizens to simply sell their foreign exchange holdings on international currency markets. China has accumulated foreign exchange holdings only because it made a conscious decision to accumulate these holdings. This is part of its effort to keep down the value of its currency to sustain its exports. 

Robert Samuelson Wants Us to Follow the Example of a Country With 7 Years of Double-Digit Unemployment Print
Monday, 18 July 2011 05:23
Yes, I am serious. In his column today Samuelson holds up Latvia as the model for the United States to follow. The unemployment rate in Latvia is currently close to 20 percent. According to the latest projections from the IMF, it is still projected to be double-digits by 2016, the end of its projection period. Its 2016 GDP is projected to be 1.5 percent below its 2007 level. If this is a model for success, it's interesting to think of what Samuelson would view as a failure.
Tell Larry Summers, We Can Keep Banks Alive With Conditions Print
Monday, 18 July 2011 05:08

Larry Summers wants Post readers to believe that the policy choices are either letting banks fail like Lehman, and setting off a financial earthquake, or keeping them alive through government bailouts. Actually, there is a third option. Governments can keep the banks alive but tell them that their world will end.

The principle here is so simple that even one of the world's top economists should be able to understand it. Insolvent banks are kept alive by government welfare. Just as the government sets all sorts of conditions for getting monthly welfare checks (which average around $500), it can impose conditions on the banks that are on life support. This can mean giving large capital stakes to the government, voluntary haircuts for creditors (voluntary in the sense that they will get next to nothing if it goes bankrupt), and really really big paycuts for bank executives. This means no more multi-million dollar paychecks.

Congress pretended to impose some of these restrictions with the TARP, but everyone except Washington Post reporters knew at the time that the restrictions were a joke. The story as Summers and the Wall Street boys tell it is that we have no choice but to give the financial industry all of our money. This is not true.

Budget Reporting at the Post: Trees Die for Nothing Print
Monday, 18 July 2011 04:49

Pointless death is always tragic. The Post's budget reporting is a great tragedy for trees everywhere. Today it tells readers about plans to consider a balanced budget amendment to the constitution in Congress. It would have been useful to tell readers something about this amendment, which does not just require a balanced budget. It also restricts spending to 18 percent of GDP, requiring a super-majority of both houses of Congress to exceed this level of spending. This implies a reduction in spending of more than 10 percent going forward (compared with its average over the last decade), even as health care costs and the aging of the population are pushing up spending on programs like Medicare, Medicaid, and Social Security. It would have been useful if the Post had pointed this fact out to readers.

Later the article refers to a proposal by Oklahoma Senator Tom Coburn to cut $9 trillion from the deficit over the next decade. It would have been useful to tell readers that this is approximately equal to 20 percent of projected spending or 4.4 percent of projected GDP over the decade. Few readers are able to assess the meaning of $9 trillion over a decade without some context.

Should We Raise Taxes or Cut Spending: It's All So Complicated Print
Monday, 18 July 2011 04:15
That was the NYT's line in a piece on how best to deal with the deficit. While the piece briefly refers to some of the key research papers on the issue, it would have been worth noting that the U.S. already ranks at the bottom among wealthy countries in the tax share of GDP. Since other countries do manage to sustain healthy economies, with several enjoying comparable or better levels of productivity, it might suggest that raising taxes would not derail the U.S. economy. This fact would have been a useful point to include in this "it's so complicated" piece.
Krugman Also Thinks That an Increase in the Supply of Housing Lowers Its Price Print
Sunday, 17 July 2011 21:57

I was glad to see Paul Krugman's piece this morning in which he reminded readers of the basics of supply and demand. If we slow the foreclosure process, we reduce the supply of housing, thereby raising the price of housing. This is important because there are a lot of people running around this town, with pretensions of being serious, who have been saying that slowing the foreclosure process would lower house prices and hurt the market. 

Maybe I'm idealizing the past, but I would like to think that in the old days, not knowing the basics of supply and demand would have been a fatal blow to a business reporter or a Treasury Secretary. These days, ignorance on this level seems to be a job requirement.

Senate Budget Committee Chair Kent Conrad Only Pays Attention to Economists Who Could Not See an $8 Trillion Housing Bubble Print
Sunday, 17 July 2011 07:31

That's what the Washington Post told readers today in a front page article. It quotes Senator Conrad as saying:

“We cannot as a country fail to deal with the debt threat. .... Every serious economic analysis tells us we’ve reached the danger zone. And just kicking the can down the road? That can’t be. We’re better than that. We’ve got to be better than that.”

This is not true. Many economists, for example Nobel Laureate Paul Krugman, have argued that the country is nowhere near its debt limit. They point to the fact that both the United States and other countries have sustained much higher rates of debt to GDP than the United States does now or is projected to in the near future. For much of the 19th century the UK had a debt to GDP ratio of more than 100 percent. Japan currently has a debt to GDP ratio of more than 200 percent yet can still borrow long-term in financial markets at interest rates of less than 1.5 percent.

They also point to the fact that the markets do not seem concerned about the debt situation of the United States. If the financial markets were concerned about the ability of the U.S. government to pay off its debt then they would not be lending the country money for ten years at interest rates close to 3.0 percent. 

It seems that Mr. Conrad relies exclusively on economists who could not see the $8 trillion housing bubble, the collapse of which devastated the economy. This was obviously true before the collapse of the bubble. The fact that it is still true even after the collapse of the bubble should have been highlighted by the Post. This demonstrates a serious failure of judgment by a person in an important position of power.

It is also worth noting that the Post article bizarrely confuses financial markets with credit rating agencies, telling readers that

"the markets are demanding it [large-scale debt reduction]. The credit rating agency Standard & Poor’s says Washington must agree to reduce the debt by $4 trillion over 10 years to avert a downgrade."

Of course the credit rating agencies often have little to do with the market. They rated hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. The value of these bonds subsequently collapsed, leading to the financial collapse in the fall of 2008. They were paid tens of millions of dollars for these investment-grade ratings. Financial markets have also often ignored the credit rating agencies. For example, Japan can still borrow at extremely low interest rates despite the fact that both Standard and Poor and Moody's downgraded its debt.

The Post should know the difference between the judgment of financial markets and credit rating agencies.

What's New About Politicians Saying They Care More About Principle Than Getting Re-elected? Print
Sunday, 17 July 2011 07:30

In a discussion of Republican opposition to raising the debt ceiling the NYT tells readers:

"This time is different .... some freshmen in both chambers say they worry more about changing the ways of Washington than about getting re-elected."

How is this "different"? Politicians always claim that they care more about their principles than getting re-elected. How many politicians proclaim that they will abandon every principle to get re-elected (even if it is true)? There is little in the description of the freshman Republicans discussed in the article that could not have been applied to hundreds of politicians over the last three decades. If these politicians are really different, the article does not explain how.
Baby Boomers Behaving Badly: Treating Thomas Friedman as a Serious Person Print
Sunday, 17 July 2011 00:23

Okay, I stole the line from Thomas Friedman, but if there is truth to baby boomers behaving badly it is that we treat people like Thomas Friedman as serious intellects who have real insights to give us about politics and society. In fact, Friedman is someone who has made a splendid career for himself opining on issues of which he knows nothing. In addition to being a New York Times columnist, he is the author of numerous best-sellers and a frequent guest on the Sunday morning talk shows.

The problem for which baby boomers share blame is that we allow people like Friedman to distract us from real concerns. For example, Friedman gives us a lecture today about living within in our means. In fact, the reason that so many people find themselves in bad financial shape today is that people like Friedman crowded out voices who saw real economic problems like the stock bubble, the housing bubble and the over-valued dollar.

The consumption of the 90s and 00s would have been entirely sustainable if the stock bubble and the housing bubble did not burst. And the country would not be borrowing from China or anyone else if the dollar fell to a level that was consistent with balanced trade. But the people who were warning of the collapse of the bubbles and who understand international trade did not have the same megaphone as Thomas Friedman. 

Of course the baby boomers didn't give Friedman his columns, nor did they promote his books, but many did get suckered. If they continue to take Friedman and his ilk seriously, then they will have badly failed future generations.

Economists and Economics Reporters Continue to Be Surprised by the Economy Print
Sunday, 17 July 2011 00:07

[see note at bottom.]

David Leonhardt tells us that consumer demand is still surprisingly weak. This should have drawn a big "huh?"

The savings rate through most of the post-war period was around 8.0 percent. This began to fall at the end of the 80s and more rapidly in the 90s as the stock bubble generated trillions of dollars of bubble wealth. The wealth effect, which economists have known about for a century, predicts that consumers would spend 3-4 cents more for additional dollar of stock wealth. By the peak of the bubble in 2000, we had close to $10 trillion in stock bubble wealth, which implies $300-$400 billion in additional consumption. This would correspond to a drop in the savings rate of 4-5 percentage points, which is what we in fact saw.

In the last decade, the housing wealth effect became more important. At the peak of the bubble in 2006, there was close to $8 trillion in housing wealth. The housing wealth effect is usually estimated at 5-7 cents on the dollar. This implies an increase in annual consumption of between $400-$560 billion a year.

Now that these bubbles have largely deflated, how could anyone who knows any economics be surprised by the weakness of consumption? This is 100 percent predictable based on the knowledge that most students should get from an intro econ class. In fact, if anything consumption is surprisingly high. The savings rate is still close to 5 percent, somewhat below the pre-bubble average. With most of the huge baby boom cohort still in their peak saving years, we should expect to see somewhat higher than normal savings, even if we were not recovering from the collapse of the housing bubble.

It would have been helpful if this piece relied more on economists familiar with basic economic relationships.



On a second read this headline should have really been "economists continue to be surprised by the economy." Leonhardt gets it largely right, although the article would have benefited from an explicit reference to the wealth effect. If the bubble wealth was real, then there was no sense in which people were over-spending in the 90s and 00s. Perhaps they should have known better to listen to Alan Greenspan and other leading economists, but the problem was in the assessment of the economy that they were getting from on high, not their personal savings habits based on this assessment being true.

Also, the article is wrong in implying that the United States need fear a rush of foreign investors to the door. The result of such a rush would be a sharp decline in the value of the dollar. This would make imports to the United States far more expensive and make our exports much cheaper for people living in other countries. That would lead to a surge in exports and reduction in imports, which is exactly the rebalancing the U.S. economy desperately needs. In fact, because other countries do not want to see their trade balance with the United States deteriorate, their governments would almost certainly intervene to prevent their currencies from rising too much against the dollar.

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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.