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China Could Reduce Inflation and Boost the World Economy at the Same Time Print
Saturday, 24 September 2011 04:32

The NYT reports on evidence that China's economy is slowing, which it suggests is bad news for the world economy, since China has been a main engine of world growth in the last 2 years. The slowdown that China is experiencing is being deliberately engineered by its central bank as a way to combat inflation.

While the article implies that the slowdown makes it less likely that China would raise the value of its currency, which would increase its imports from the rest of the world and reduce its exports, a rise in the value of the yuan would be an obvious way to achieve the desired slowdown. In other words, as an alternative to the measures taken by China's central bank to reduce lending, the bank could simply raise the value of its currency against the dollar and other major currencies. This route would also have the advantage of directly reducing the inflation rate by making the goods China imports from the rest of the world cheaper.

There are reasons that may opt not to go this route, most obviously that the export-oriented industries may have more political power than the industries that will suffer as a result of the central bank's measures to reduce lending, however it is worth pointing out that these are alternative mechanisms for slowing the economy. If China does not raise the value of the yuan, it is not because its economy is slowing, it is because it has opted to take an alternative route for slowing its economy.

Krauthammer in Full Rant Mode Print
Friday, 23 September 2011 05:42

President Obama wants to raise the tax rate on the wealthy back to the levels of the Clinton years, still leaving them 10 percentage points lower than the rates set in President Reagan's tax cuts. Charles Krauthammer confronts the threat.

Krauthammer warns of "a $1.5 trillion tsunami of tax hikes." (The tsunami is equal to approximately 0.7 percent of projected GDP or less than half of the Iraq-Afghan war induced increase in military spending.)

He then tells us that Obama's tax plans make him "today’s soak-the-rich, veto-threatening, self-proclaimed class warrior." Krauthammer goes on to call President Obama "a leveler, a committed social democrat, a staunch believer in the redistributionist state."

Along the way he also calls President Obama's adoption of the 1990s Heritage Foundation health care plan "the quasi-nationalization of one-sixth of the economy that is health care" and also denounces a stimulus package that was roughly the same size as the Bush tax cuts as "the largest Keynesian stimulus in recorded history." (I guess Bush didn't think of his tax cuts as "Keynesian.")

Pretty strong stuff here, imagine what Krauthammer would be calling Obama if he proposed to return to Reagan's 50 percent top marginal tax rate.

Oil Is Priced In Dollars and It Doesn't Make an Iota of Difference Print
Friday, 23 September 2011 05:30

The Post discussed the turmoil in financial markets yesterday. It told readers that

"Crude oil fell more than 7 percent, to about $80 a barrel, its lowest price in four weeks."

It then went on to say:

"Market observers attributed part of the fall in raw-material prices to investors rushing into dollars. The dollar index moved to a seven-month high after the Federal Reserve announced its decision to buy up $400 billion in long-term debt. Commodities such as crude oil are priced in dollars, so as the currency rises, oil becomes more expensive for holders of other currencies."

This makes no sense. It doesn't matter at all to other countries what currency oil is priced in. As it just reported, oil prices measured in dollar terms fell. This was due to the fact that the value of the dollar rose against other currencies. This means that higher dollar was offset by lower oil prices, meaning that the price of oil would be little changed for most other countries.

The fact that oil is priced in dollars is irrelevant. The situation would be the same for both the United States and other countries if oil were priced in corn. (There is an issue of oil that is purchased under long-term contract. The cost of this oil, if it is denominated in dollars [it may not be, people write any contract they want] would rise to third countries when the dollar rises in value.)

President Clinton, Who Set the Bubble Economy In Motion, Is Giving Economic Advice Print
Friday, 23 September 2011 05:08

The NYT told readers that former President Bill Clinton is planning to write a book giving the country advice on how to improve the economy. At one point the article cites the material from the publisher:

"In the book, according to a statement from Knopf, Mr. Clinton says that the United States has lost its commitment to fiscal responsibility, shared prosperity and balanced growth."

Remarkably, the article does not point out that President Clinton endorsed the high dollar policy that led to the large trade deficits of the last decade. This trade deficit created the gap in demand that was filled by the demand generated by the housing bubble.

This is like the captain of the Titanic giving lectures on safe ocean travel. [Here is a brief discussion of national income accounting for those who need to be reminded why Clinton's high dollar policy set the economy on a course for disaster.]

The NYT Is Wrong, China Can Save the World Print
Friday, 23 September 2011 04:49

The NYT ran a Reuters column in its business section that told readers that China lacked the ability to support the world economy. The piece essentially argued that China will act in its own interest, not the interest of floundering economies in the United States and Europe.

This piece ignores the actions that China is already taking. China's government has bought more than $1 trillion in U.S. government debt to keep up the value of the dollar, in order to sustain its export markets in the United States.It is virtually certain to lose money on these bonds because the dollar will inevitably fall when China stops buying up vast amounts of dollar assets.

This means that China already spends huge amounts of money to sustain its export markets. Switching to purchases of euro zone debt or guarantees of this debt would simply mean redistributing some of the money that China spends to support its export markets, it would not be a change of policy.

On a per dollar basis, China's purchases and guarantees of euro zone debt would almost certainly have far more impact on sustaining its exports than the marginal purchase of U.S. government debt. A collapse of the euro would almost certainly lead to a double-dip recession not only in Europe, but also the United States. This means that if China were to continue its policy of using its currency purchases to support its exports, it should be shifting from supporting dollar to supporting the euro.

They Are Trade Pacts, not "Free-Trade" Pacts Print
Friday, 23 September 2011 04:43

The NYT referred to the trade agreements negotiated with South Korea, Panama, and Colombia as "free-trade" agreements. This is inaccurate. They increase many forms of protectionism, most importantly by increasing the extent of patent and copyright protection in U.S. trading partners.

The Obama administration and Congress are strongly opposed to free trade in intellectual output. The NYT should not misrepresent their views on such an important economic issue.

Can't the NYT Find Someone With a Name to Talk About the World Economy? Print
Friday, 23 September 2011 04:10

In an article on the recent instability in financial markets and the weak world economy, the NYT turned to "a senior World Bank official" for extensive comments about the world economy. The official's comments included no inside information, nor were they qualitatively different from the views expressed by many other economists who would have no problem being on the record.

Many economists have extremely bad track records in assessing the state of the economy, including many officials at the World Bank. For this reason it would be helpful for readers to know the names of the economists whose views are being presented so they know the credibility that should be attached to them.

Disaster Relief Accounts for 0.1 Percent of the Budget Print
Thursday, 22 September 2011 04:57
The Post reported that most House Democrats opposed a continuing resolution to keep the government running because it included cuts of $1.5 billion to partially offset an appropriation of $3.65 billion for disaster relief. It would have been worth telling readers that $3.65 billion is approximately 0.1 percent of the budget, whereas the $1.5 billion in cuts is equal to 0.04 percent of spending. Many readers would not know how large these sums are in total federal spending or relative to the deficit.
The NYT Has Not Heard About Work Sharing in Germany Print
Thursday, 22 September 2011 04:47

The NYT noted that Germany's unemployment rate is just 6.2 percent and told readers:

"One reason is a series of policies that loosened job protections and put more pressure on unemployed people to find work."

That might be one reason, although most research shows that these measures have a limited impact on unemployment. The more obvious explanation for Germany's low unemployment rate is its policy of work sharing. This policy encourages firms to reduce work hours rather than lay off workers. The result has been that Germany has met its reduced demand for labor primarily by shortening work hours.

The context for this comment was an assertion that Greece will have to take comparable measures to force people to find work. The prospect of work sharing in Greece and other countries facing demands for austerity might look like an attractive alternative to maintain employment during the downturn.

It Was Not Just Random Fed Members Who Opposed Boosting the Economy Print
Thursday, 22 September 2011 04:19

A segment on Morning Edition noted that 3 members of the Fed's Open Market Committee (FOMC) opposed the plan to shift from shorter term debt to holding longer term bonds in an effort to drive down interest rates. It would have been worth mentioning that all 3 of the no votes came from the district bank presidents. The bank presidents are essentially appointed by the banks in the district.

The 5 bank presidents who are voting members of the FOMC split 3-2 against this measure. By contrast, the 5 Fed governors who were appointed through the political process (by both Presidents Bush and Obama) voted 5-0 in support further action.

This is a striking split between the FOMC members who essentially represent banks and the members who were appointed by democratically elected officials. It would have been worth mentioning this fact in this story. (The NYT and the Post committed the same sin.)

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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.