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Why Doesn't Biden Tell China That U.S. Bonds Are a Bad Investment? Print
Monday, 22 August 2011 06:58
It happens to be true, since the dollar will almost certainly fall if they ever choose to unload their bonds. However more importantly, buying up government bonds is the way that China props up the value of the dollar against the yuan. Ostensibly the Obama administration's policy is that it wants the dollar to fall against the yuan. So why isn't Biden encouraging China not to buy up so many government bonds, and why isn't the Post asking this question?
Fun With Eric Cantor Print
Monday, 22 August 2011 04:55

The Post gave Eric Cantor the opportunity to lay out his economic vision today. Let's have a little fun seeing how many things he got wrong.

Cantor begins by telling us:

"Our country is facing two related but separate crises. The first is the federal government’s debt crisis, the result of decades of fiscal mismanagement by both political parties as well as unsustainable entitlement commitments."

Debt crisis? Does Cantor mean the fact that we have to pay just over 2.0 percent interest on 10-year Treasury bonds, a post-depression low? Of course, there was a near debt crisis when the Republicans refused to raise the debt ceiling. If they had held to this position, then legally prohibiting payment of the debt can be viewed as a debt crisis, but this has nothing to do with the level of the debt or its sustainability.

As a practical matter, the debt-to-GDP ratio was actually relatively low prior to the downturn. It had been falling in the Clinton years, so the 90s should not be included in his list of "decades of fiscal mismanagement." Even with the Bush tax cuts, the cost of the wars, and the Medicare drug benefit, the deficit was projected to be just 1.4 percent of GDP in 2009, until the collapse of the housing bubble brought down the economy.

Cantor then tells us:

"the Obama administration’s anti-business, hyper-regulatory, pro-tax agenda has fueled economic uncertainty and sent the message from the administration that 'we want to make it harder to create jobs.'"

He then tells us about, "...the “Transport Rule,” which could eliminate thousands of jobs." Hmmm, thousands of jobs. That's not millions, hundreds of thousands or even tens of thousands. Back in the late 90s the economy was generating 3 million jobs a year or 250,000 a month. Cantor's "thousands of jobs," if accurate, would translate into one day's job growth back then. 

But Cantor then comes back with the "ozone regulation" which he tells us "would cost upward of $1 trillion and millions of jobs in the construction industry over the next decade." It would be interesting to know where these numbers came from, perhaps they are somewhere near the story of creation in the bible.

Then we get:

"There is the president’s silence as the National Labor Relations Board seeks to prevent Boeing from opening a plant in South Carolina that would create thousands of jobs."

No, this was about shifting jobs from plants that are unionized to plants that are not unionized. There was not an issue of net job creation, unless Cantor thinks that non-union workers are less efficient so that it takes more of them to build a plane.

Cantor next jumps back to taxes, complaining that these regulations:

"coupled with the president’s insistence on raising the top tax rate paid by individuals and small businesses, has resulted in a lag in growth that has added to the debt crisis, contributing to our nation’s credit downgrade."

Yep, President Obama wants to raise the tax rate paid by the wealthy, a group which excludes the vast majority of small business owners, back to the level it was at when we were creating 3 million jobs a year. Clearly this is a job killer.

Oh yes, and the debt crisis has reappeared. It is featured again in the next paragraph:

"The debt crisis threatens our long-term future: the ability of our children and their children to have the same opportunities to succeed that this and previous generations have enjoyed. Republicans passed a budget this spring, written by Rep. Paul Ryan, that would address our challenges head-on by putting in place common-sense reforms to manage our debt over the short and long term."

According to the Congressional Budget Office, the Ryan plan would increase the cost of buying Medicare equivalent insurance policies by $34 trillion over the program's 75-year planning horizon. Note that this $34 trillion figure is the higher cost to the country. The total cost shift to future seniors (our children and their children) is $38 trillion.

Then we get another shot at Social Security, Medicare, and Medicaid:

"The president has acknowledged that without reform, spending on entitlement programs is unsustainable. But he has also made clear that he would never support the type of structural changes to Medicaid, Medicare and Social Security needed to make these programs solvent as envisioned in our budget."

Mr. Cantor probably missed it, but Congress passed health care reform last year. According to the Medicare trustees, the bill eliminated more than 75 percent of Medicare's long-term shortfall. That's not 100 percent, but Cantor seems more than a bit off the mark when he complains that Obama "would never support the structural changes ... needed to make these programs solvent," at least in reference to Medicare.

Cantor probably also failed to notice that the Republican budget did not include any thing to improve Social Security's long-term budget situation. This was no doubt an oversight.

For those keeping score, a tax increase that is equal to 5 percent of the wage growth projected over the next thirty years would be sufficient to keep the program fully solvent over its 75-year planning horizon. That doesn't sound like an insoluble problem.

Cantor then concludes with a paean to growth. Yes, more growth would be better, but it's not clear why anyone would think that Cantor's path of tax cuts and lax regulation, which we just tried (remember George W. Bush?) would be the route to fast growth.

Okay, enough fun for now, I have work to do.

The Post Goes Into Overdrive In Its Social Security Scare Campaign Print
Monday, 22 August 2011 04:27

Showing once again why it is known as "Fox on 15th Street," the Washington Post headlined an article "Social Security crisis is worsening." The subhead told readers, "rise in disability applications driving it to the verge of insolvency."

Those who read the article carefully will discover that the "it" being driven to insolvency is the Social Security disability program, which is a bit more than one-tenth of the combined retirement, survivors and disability program that people usually think of as "Social Security." The latest projections from the Congressional Budget Office show that the combined program will be fully solvent until 2038.

Even after this date, the program will still be able to pay 81 percent of scheduled benefits. Alternatively, if taxes were raised enough to make the program fully solvent, the necessary tax increase is equal to about 5 percent of projected wage growth over the next three decades. The Post doesn't like to make these points because it doesn't advance its agenda for cutting Social Security. 

Quick Quiz: How Large is $900 Million? Print
Monday, 22 August 2011 04:14
It is likely that almost no readers of the Post have much clue as to how large the $900 million appropriated for the country's satellite program is relative to the budget or their tax bill. It comes to 0.025 percent of projected spending in 2012 or about $3 per person.
Amazing NYT Story on Obama Administration Pressure on NY AG Print
Monday, 22 August 2011 03:58

The NYT reported that the Obama administration is pressuring Eric Schneiderman, New York's attorney general, to agree to a settlement with the major banks over improper handling of foreclosures and mortgage servicing. The piece has this stunning statement:

"Mr. Donovan [housing secretary Shaun Donovan] defended his discussions with the attorney general, saying they were motivated by a desire to speed up help for troubled homeowners."

The NYT Gets It Seriously Wrong on Housing Print
Monday, 22 August 2011 03:37

The NYT's lead editorial told readers that:

"Congress and the White House have yet to figure out that the economy will not recover until housing recovers."

It's not clear what the paper means by this. The piece complains that "sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier."

If it means that prices must recover then it is looking in the wrong direction. House prices are still about 10 percent above their long-term trend level. In other words, the bubble has not yet fully deflated. If it has any reason for believing that the fundamentals of the housing market justify this sort of divergence from trend it is not clear what this could be. Certainly the near record vacancy rates (down somewhat from the 2009-2010 peaks) do not support the notion that prices are too low.

Also, even with the decline in existing home sales, the recent sales rate is still more than 1 million higher (@30 percent) than the mid-90s pre-bubble rate. So it is not clear what aspects of the housing market the NYT expects to see fixed.

In its list of remedies for underwater homeowners facing foreclosure the editorial missed the simplest one, giving foreclosed homeowners the right to stay in their house as renters paying the market rent. This could be passed into law at the state or federal level or implemented uniltaerally by Fannie and Freddie which are now seeing half of all foreclosed properties. 

The right to rent plan involves no complex bureaucratic calculations, nor taxpayer dollars. There is no major moral hazard problem and no serious windfalls. In other words, it's the sort of policy that has no chance in Washington.

NPR Tells Us That There Is Nothing that Congress and the Fed Can Do About the Weak Economy Print
Sunday, 21 August 2011 20:09

Okay, that is just not true. Congress can do another big round of stimulus. It could mandate a reduction in the value of the dollar in order to boost net exports. Or it could push an aggressive work sharing program like the one that has led the unemployment rate to fall below pre-recession levels in Germany.

The Fed could target a long-term interest rate. For example it can set a 1.0 percent target for the 5-year Treasury rate. Or it could target a higher rate of inflation, committing itself to throw out enough reserves as necessary to raise the inflation rate to 4.0 percent, a policy that Bernanke advocated for Japan back when he was still a professor at Princeton.

It is simply wrong to claim, as NPR did in this piece, that there is nothing more than Congress and the Fed can do to boost the economy. If it wants to say that none of these measures are politically viable, that may well be a true statement. But then the problem is with the people who dominate politics in the country. It is a political problem, not an economic one and NPR should clearly identify it as such.

[Thanks to Jonathan Lundell.]

AP Gets It Right! The Recession Caused the Deficit Print
Saturday, 20 August 2011 08:51
AP did what news organizations are supposed to do; it checked the numbers and showed that politicians yelling about "out of control spending" don't know what they are talking about or are making things up. Its FACT CHECK, printed in the NYT, showed that the deficit exploded because of the recession. There was no issue of out of control spending prior to the increases for programs like unemployment insurance and other spending needed to counteract the effect of the downturn. AP gets an "A" for this one.
The Washington Post Wants You to Accept High Unemployment (and Social Security Cuts) Print
Saturday, 20 August 2011 07:53

The Washington Post ran a major article today telling readers that they should just get used to high unemployment. The article presented the view of some economists, that the economy can only recover from a financial crisis after a prolonged period of economic weakness, as somehow reflecting a consensus opinion within the economics profession.

For example, the subhead told readers that while presidential candidates promise a quick recovery, "analysts say this post-recession comeback may take longer." Since this pessimistic view is far from the consensus within the profession, a real newspaper would have said "some analysts." Similarly the sentence, "but because of the severity of this recession, and the accompanying crises hitting banks and other lenders, economists believe that recovering from it will be more difficult," would have the phrase "some economists" in a serious newspaper. (The article does include some dissenters, but it implies that their views are an exception.)

The article then includes a set of charts that show a number of countries in which it took more than a decade for the unemployment rate to return to its pre-crisis level following a financial crisis. It is possible to tell a very different story using a different set of countries as is shown below.

crisis-unemployment_23169_image001                             Source: International Monetary Fund.

As can be seen, the unemployment record of these five recent victims of financial crises is mixed. Four years after the crisis (which would be 2012 in the U.S. case) South Korea and Malaysia had unemployment rates that were above the pre-crisis level, although in both cases they were at or below 4.0 percent. Most people in the United States could probably live with this outcome. In the case of both Russia and Mexico the unemployment was below the pre-crisis level four years after the crisis. In Argentina the unemployment rate was 8 full percentage points below the pre-crisis level, although the country had already been in a severe recession prior to the onset of the financial crisis.

The point of this exercise is that it is easy to find countries that were able to recover from the effects of a financial crisis relatively quickly. It is not a pre-ordained fact given to us by God that workers must suffer for years afterward simply because the people who managed the economy were too incompetent to prevent a financial crisis. This is simply an effort by the same group of incompetent economists to excuse their ongoing failure to fix the economy after they wrecked it.

It is also worth noting that this article gets an important fact about the economy and the recovery fundamentally wrong. It told readers that:

"The economy cannot fully heal until consumers and other debtors shed their financial burdens and are able to spend more freely again."

Actually, the failure of consumers to spend freely is not the economy's problem, which can be easily seen by looking at the savings rate. Currently the savings rate is near 5 percent of disposable income. Its average over the years prior to the take-off of the stock bubble in 90s was over 8 percent. In other words, consumers are spending freely. The reason why demand remains weak is that over-building of the bubble years has left construction badly depressed. Also, a trade deficit that is close to 4 percent of GDP is effectively draining $600 billion a year out of the economy.

These simple facts would be evident to anyone who has knows the basic national income accounting that is taught in an intro economics class. The Post should be aware of them.

New Unemployment Claims Data Are Not a Sign of a Recession Print
Friday, 19 August 2011 05:12

The business media have become obsessed with the notion of a double dip recession in a context where the economic data we are now seeing is not very different from the data that we have been seeing for months. These data point to a picture of an economy that is growing weakly, however it is still growing. However reporters who are now obsessed with the "double dip" are reading numbers consistent with weak growth as implying a recession. 

For example, a Washington Post article that raised the prospect of a second recession in the 5th paragraph told readers:

"The latest figures on unemployment, considered another key piece in any recovery, also proved disconcerting. The Labor Department said Thursday that weekly unemployment benefits again rose above the 400,000 level last week, a benchmark figure that many economists take as a sign of a declining economic trajectory."

Actually, economists who are familiar with unemployment data would not consider 400,000 new unemployment claims "a benchmark figure that many economists take as a sign of a declining economic trajectory." The reason is that unemployment claims have been above 400,000 in every week since the beginning of April, except for two weeks ago when there were 399,000 claims. Weekly unemployment claims were also above 400,000 in every week of 2010, a year in which the economy grew 3.1 percent.

The misplaced obsession with a double-dip has consequences because it creates a situation in which the slow growth that the economy is now experiencing appears to be good. For example, the July jobs report, which showed 117,000 new jobs, was widely seen as good news. However, this pace of job growth is only slightly faster than the 90,000 rate needed just to keep pace with the growth of the labor force. At the July rate of job growth it would take close to 30 years to replace the jobs lost in the downturn.

It would be helpful if reporters would try to discuss what the data show and not frame their story on misplaced optimism or pessimism from ill-informed commentators.

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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.