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Mortgage Debt Is NOT the Main Factor Holding Back U.S. Growth Back Print
Friday, 30 September 2011 05:15

The NYT had an article about the prospects of persistently slower growth in Europe and the U.S. as a result of the current downturn. It told readers that:

"Now, just as the United States economy is held back by households whose mortgages are still underwater and who won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means."

Actually, the United States economy is not being held back by a lack of consumer spending. The ratio of spending to income is still considerably higher than the pre-bubble average as reflected by the lower than normal saving rate. The problem is that the bubble had generated excessive consumption demand, which is not being replaced by any other source of demand.

Book2_20820_image001 Source: Bureau of Economic Analysis.

The piece also inaccurately asserts that:

"in Europe it was mainly governments that piled on the debt, facilitated by banks that lent them money by buying up sovereign bonds."

Actually, Ireland and Spain, two of the most troubled countries, ran budget surpluses in the years preceding the downturn. They ran into trouble because they both had large housing bubbles which burst and left their economies in crisis.

It would also have been useful if the chart showing debt to GDP ratios included Japan. The IMF shows Japan's debt to GDP ratio at the end of this year as being 229 percent. Excluding Greece, this is almost twice as large as any debt burden shown in the chart. Japan can currently pay just over 1.0 percent interest on its long-term debt. If Japan had been included, it would have suggested that the debt levels may not be as troubling as the piece implies.

George Will Is Upset Because Barney Frank Wants to End the Banks' Control Monetary Policy Print
Thursday, 29 September 2011 07:06

That's right, Representative Barney Frank, the ranking Democrat on the House Financial Services Committee, proposed legislation that would take away the votes that the banking industry has on the Federal Reserve Board's Open Market Committee (FOMC). As the FOMC is currently structured, 12 of the 19 members are essentially appointed by the banks, with 5 of the 12 voting at any one time.

George Will is outraged that Frank would take away the banks' direct control over the country's monetary policy. After all, if we followed Frank's logic, drug companies wouldn't be able to appoint commissioners to the Food and Drug Administration, phone companies wouldn't be able to appoint commissioners to the Federal Communications Commission, and airline companies would not be able to appoint commissioners to the Federal Aviation Authority.

Bloomberg Doesn't Like Financial Speculation Taxes and Is Prepared To Make Stuff Up to Make Its Case Print
Thursday, 29 September 2011 13:36

Bloomberg News Service really doesn't like financial speculation taxes (FST). In fact it dislikes them so much that it is prepared to make things up to try to get people to oppose an FST. It told readers that the very low financial speculation taxes (0.05 percent on each side of a stock trade 0.005 percent on each side of a derivative trade) being considered by the European Union would shave 0.5 percentage points off of Europe's growth rate.

Let's think about this one for a moment. In the last three decades, the cost of trading shares of stock and derivatives has almost certainly fallen by at least twice this much. If the increase in the cost of trading from this tax would slow growth by 0.5 percentage points, then we should expect that a decline in costs of more than twice this size would raise annual growth by perhaps as much a 1.0 percentage point.

Since growth has been very weak in this last decade of low trading costs, does Bloomberg really want to tell its readers that it would have been 1.0 percentage point lower if there had not been a decline in transactions costs?

What about the UK which already has a tax on stock trades that is 5 times the size of the tax being considered by the EU. (This tax somehow appears as a "small duty" in the Bloomberg piece.) Since the UK tax is 5 times as large as the one that Bloomberg tells us would slow growth by 0.5 percentage points, does Bloomberg want us to believe that the UK's growth rate might increase by 2.5 percentage points (5*0.5 percentage points), if the UK eliminated its stock transfer tax?

Of course these claims are absurd on their face as is the claim that the tax could possibly have an impact on growth of the order of magnitude claimed by Bloomberg. This is clearly a case of Bloomberg making stuff up to put down a measure it doesn't like.

And we know that people resort to making phony arguments when they know they don't have real arguments. So, we should all extend a big thank you to Bloomberg News Service.


[Non-correction: I did find the EU study to which the Bloomberg editorial referred. It does refer to a reduction in GDP growth of 0.5 percent. However, this section is awkwardly worded and it is very clear that it is actually referring to GDP levels, not growth rates. In response to the comment by editorial board member Paula Dwyer (below), I suggest that it is Bloomberg that needs to make a correction.]

The Post Does Mind Reading at the European Central Bank Print
Thursday, 29 September 2011 06:28

The Washington Post explained the reluctance of European Central Bank president Jean-Claude Trichet to support a large write down of Greek debt that would force creditors to take large losses by saying:

"Trichet and others worry that a default or even a steep devaluation of Greek bonds would wreck the euro zone’s credibility and make it harder for countries, banks and companies to raise money."

Actually, the Post doesn't know what Mr. Trichet and others are worried are actually about, it only knows what they claim to be worried about. It is possible that Mr. Trichet and the unnamed others are actually worried about the euro zone's credibility, but it also possible that their main concern is to protect European banks from large losses. The Post should just report what people say and do and not try to claim knowledge of their motives.

Germany Is a Slow Growing Rich Country, China Is a Fast Growing Developing Country Print
Thursday, 29 September 2011 02:38

In a useful anti-austerity editorial the NYT makes the mistake of equating the trade surpluses of China and Germany. There is a fundamental difference between these countries. China is a fast growing developing country. In standard economic theory we would expect that it would be a capital importer (meaning it has a trade deficit) since capital gets a much higher return in China than elsewhere. The fact that China and other developing countries are growing by running large trade surpluses and exporting capital reflects the enormous failure of the IMF in setting up a workable international financial system.

On the other hand, it would be expected that a relatively slow growing wealthy country like Germany would have a trade surplus, although not necessarily with other wealthy countries, as is now the case in the euro zone. The Germans apparently have not yet come to grips with the accounting identity that implies that if they run persistent trade surpluses with the other euro zone countries, then Germany will have to continually lend them more money. The only way to avoid this situation would be if the deficit countries within the euro zone had massive surpluses with non-euro zone countries.

AP Says a Financial Speculation Tax Could Lead to an Attack By Martians Print
Wednesday, 28 September 2011 20:34

Close, but not quite; citing no evidence whatsoever, an AP article on plans to impose a financial speculation tax told readers that:

"though the tax could dent growth and employment, it has won a fair degree of support across the 17-country eurozone, including France and Germany, the EU's two biggest economies."

This should have caused readers to scratch their heads and some people at AP to get fired.

Okay, we know that rich and powerful people don't like the idea of taxing financial speculation. A serious news article would just tell us that rich and powerful people don't like taxing financial speculation, it would not just make things up about the tax slowing growth and job creation as this piece does.

The reality is that the tax rates being discussed would just raise the cost of financial transactions back to where they were in the 80s or even the 90s. Perhaps AP's reporters/editors don't have any knowledge of these decades, but we had plenty of growth and job creation back then. If the lower transactions costs of the last 15-20 years have helped growth it would be hard to find evidence for this in the data.

Ruth Marcus Is Right: Don't Focus on Budget Trivia Print
Wednesday, 28 September 2011 05:03

It's nice to see Ruth Marcus use some simple common sense in her Post column today. She criticizes the flap over the $16 breakfast muffin (which turns out not to be true). She then points to other big flaps over very little money.

The points are well-taken. Many budget battles are over trivial portions of the budget. (John McCain made a $1 million appropriation [0.00003 percent of federal spending] a centerpiece of his 2008 presidential campaign.) It would be great if the Post would use its news pages to educate the public about where the real spending takes place, for example by routinely expressing spending and tax items as shares of the budget. It would also be useful if it started pointing out the fact that the long-term deficit problem is entirely the result of our broken health care system.

USA Today Says Republicans Want Joe the Plumber to Subsidize Corporate Jet Gang Print
Wednesday, 28 September 2011 04:48

Actually, USA Today didn't put it in quite these terms, and readers of its piece on raising airport fees probably missed it, but that is the clear implication of one of the statements in the piece. The piece told readers that:

"The security fees that passengers pay now cover about 43% of its costs of providing security in the air."

If this is accurate, then opponents of raising the fees believe that average taxpayers should subsidize the travel of frequent flyers and especially users of corporate jets, who pay very low fees.

A More Serious Way to Cover Street Protests Print
Wednesday, 28 September 2011 03:45
The NYT had a good piece on the wave of world-wide protests driven by economic policy today. This piece contrasts with a piece last weekend which clearly had the purpose of making the protests against Wall Street look foolish. Reporters would have little problem finding ill-informed inarticulate people at any of the protests mentioned in today's piece. However, these people would not be representative of the protest and their views would not explain the cause of the actions.
David Brooks on Stimulus: The Food is Poison and the Portions are So Small! Print
Tuesday, 27 September 2011 17:09

Jonah Gelbach takes me to task for not reading David Brooks column carefully enough. Had I done so, I would have noted this part about President Obama’s latest jobs plan:

“Look at the recent Obama stimulus proposal. You may like it or not, but it’s trivial. It’s simply not significant enough to make a difference, given the size of the global mess.”

After telling us that stimulus does not work, Brooks is now telling us that Obama’s plan is too small to make a difference. [The latest jobs bill actually would provide more stimulus in 2012 than the original stimulus did for either 2009 or 2010.]

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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.