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Whatever Happened to Deflation? Print
Friday, 18 February 2011 05:53

The Bureau of Labor Statistics reported that consumer prices rose 0.4 percent in January. On closer inspection this should not be any big deal. Core inflation rose by just 0.2 percent in the month. The main driver of the higher inflation was a big jump in energy prices. However even with this jump the overall CPI is only up by 1.6 percent over the last year, a level that all but the most loony inflation hawks would consider acceptable.

Still, it is worth noting that the possibility of deflation seems to have disappeared from the scene. Since this possibility featured prominently in many discussions of the economy in the period immediately following the financial crisis, it probably would be worth some brief mention of its passing.

The issue of deflation has consistently been misrepresented in economic reporting. The economy is suffering from a lower than desired inflation rate, which limits the effectiveness of monetary policy. Given the severity of the downturn we would like a large negative real interest rate (e.g. -6.0 percent). However, nominal interest rates cannot go below zero.

This means that the real interest rate can't fall below the negative of the inflation rate (e.g., with a zero nominal interest rate, the real interest rate would be -1.0 percent with a 1.0 percent inflation rate and -2.0 percent with a 2.0 percent inflation rate). If the inflation rate falls below zero (i.e. we get deflation), this problem gets worse, but the drop in the inflation rate from 0.5 percent to -0.5 percent is no worse than the drop from 1.5 percent to 0.5 percent.

It was also predictable that there would not be persistent deflation in the United States. Wages are sticky downward, which made it unlikely that core prices would actually start falling. Also, the current rise in commodity prices was to be expected as the dollar would drift lower as a result of the U.S. trade deficit and also demand in China and other fast growing developing countries created scarcity for many products.

Anyhow, given how fears of deflation had once featured so prominently in discussions of economic policy it is worth some noting of their passing.

 
Why Does it Take a Jump in Unemployment Claims the Following Week for Reporters to Recognize the Impact of Weather the Prior Week? Print
Friday, 18 February 2011 05:39

Initial filings for unemployment claims were reported as rising to 415,000 last week. This was an increase from 385,000 the previous week (originally reported as 383,000).

The reports on the filings noted the impact of weather in reducing the number of claims the prior week. Because of bad weather the previous week, many unemployed workers did not get to unemployment offices to file claims, which in many cases were closed anyhow.

The result was that the number of claims were lower than otherwise would have been the case due to the weather. However, those unable to file the previous week would file in the next week, raising the number of filings for the most recent week. The reports were able to recognize this weather driven pattern this week when claims jumped, but did not note the impact of weather when claims fell the previous week.

 
The Post Is Confused About Interest on the Debt Print
Thursday, 17 February 2011 06:12

The Washington Post had a front page article highlighted the rising interest payments made by the federal government as a result of its rising debt. It would have been useful to point out that the decision to pay interest to wealthy bondholders is a policy choice, not a fact of nature.

It is possible for the Federal Reserve Board to buy and hold government bonds. In this situation interest on the government debt is paid to the Fed, which then refunds the money to the Treasury, creating no net interest burden for the government. Last year, the Fed refunded nearly $80 billion to the Treasury based on the large amount of mortgage backed securities and Treasury bonds it now holds.

While the Congressional Budget Office projects that the Fed will sell off these assets over the next few years it could opt to buy and hold a large amount of debt (e.g. $3-4 trillion). To prevent inflation when the economy recovers it could raise reserve requirements, the same route that China's central bank is now pursuing to head off inflation in China.

The decision to not have the Fed hold bonds is a policy decision. This policy choice should have been discussed in the article. Having the Fed buy and hold bonds would be one way to avoid imposing a large tax burden on the general public as a result of the countercyclical measures necessary to lift the economy out of this downturn. Readers should be informed about it.

This piece is really an editorial intended to scare readers into supporting harsh measures to reduce the deficit. It makes not effort to place the budget deficits in any sort of historical context and includes scary sounding assertions with no real meaning, such as:

"The borrowing the United States did over the past decade - to pay for the 2001 tax cut, the wars in Iraq and Afghanistan, and propping up the economy during the steep 2009 downturn - is coming due this decade."

There is no way in which this statement makes any sense. Bonds are coming due every month of every year. There is nothing "coming due" this decade that does not come due every decade.

It also would be useful if the Post did not rely exclusively on economists who failed to see the $8 trillion housing bubble as its sources in its economic reporting. 

 

Addendum: It is also worth noting that the ratio of interest payments to GDP is not projected to rise back to its early 90s level until well into the next decade. So the idea that we will be facing an unprecedented interest burden is not accurate. Thanks to Gary Burtless for reminding me of this point.

 
Warren Buffet Is Wrong Print
Thursday, 17 February 2011 06:00

The NYT ran an article discussing disagreements between Republicans and Democrats over the merits of the Financial Crisis Inquiry Commission's report. At one point it quoted Bill Thomas, the Republican vice-chair of the commission, citing Warren Buffet as saying that no one saw the housing bubble.

Mr. Buffet was clearly wrong in this assertion. Some economists very clearly saw the housing bubble. Given the extraordinary departure of house prices from their long-term trend, with no basis in the fundamentals of the market, it is amazing that all economists did not see the bubble. It is even more amazing that no economists seem to have suffered any consequences to their careers from the incredible failure.

The article should have pointed out that Mr. Buffet was wrong and therefore Thomas should not have relied on his statement in making his assessment of the report.

 
There Is a Way to Measure the Money Available for Private Sector Investment Print
Thursday, 17 February 2011 05:46

It's called the "interest rate." The NYT should have made a reference to interest rates in an article that reported House Speaker John Boehner's claim that government borrowing is pulling away money from the private sector, thereby curtailing investment.

The data do not support Mr. Boehner's claim. Interest rates are at historically low levels. For example, the interest rate on Baa bonds, which would be paid by large reasonably creditworthy companies, is lower in both nominal and real terms than it was in the late 90s when the government was running a budget surplus.

If the article had discussed the interest rate, readers would have the ability to assess whether Mr. Boehner's claim is accurate. Instead, the article is essentially just a he said/she said piece.

 
Senator Mark Warner Does Not Know that the Normal Retirement Age for Social Security Has Been Raised Print
Thursday, 17 February 2011 05:21

Either Senator Warner doesn't know one of the most basic facts about Social Security or he is deliberately saying things that are not true to advance his agenda of cutting Social Security. In an interview on Morning Edition he commented that Franklin Roosevelt set the retirement age at 65 when the program was initially established and that we have still not raised it, even though we have had substantial increases in life expectancy.

In fact, the age for receiving full benefits has already been raised to 66 and will rise further to age 67 for people born after 1962. It would be incredible if Senator Warner was unaware of this fact. It is also remarkable that the moderator did not correct Mr. Warner's misstatement and inform listeners that the normal retirement age has in fact been raised. This is not the first time that Morning Edition has been used to pass along a false information to disparage Social Security.

 
Why Should Taxpayer Dollars Go to National Public Radio? Print
Thursday, 17 February 2011 05:08

The introduction to Morning Edition promised us a discussion with a Republican who is open to tax increases and a Democrat who is open spending cuts. The top of the hour news segment then included a sound bite from a Republican member of Congress who said that she didn't see why the American people should be financing news that is biased.

Although this member was complaining that the news was biased from the left, she has a very good point. After all, this segment was outrageously biased since it implied that there was no question that there was a serious budget problem.

All budget experts know that the current deficits are overwhelmingly attributable to the economic downturn caused by the collapse of the housing bubble. The longer term shortfall is entirely attributable to the broken health care system. If the United States paid the same amount per person for its health care as any other wealthy country we would be looking at large budget surpluses, not deficits. 

These basic facts were never mentioned in the discussion with the two senators. It was an entirely one-sided push for deficit reduction without any discussion of the real issues at stake. It is hard not to agree with the Republican member of Congress. Why should taxpayers be paying for such biased reporting, isn't this what Peter Peterson is paying for with his foundation?

 
The Washington Post Tells Readers that Workers Will be Much Less Prepared for Retirement in the Future Print
Wednesday, 16 February 2011 06:03

The Post probably did not realize that this is what it was telling readers, otherwise it should have been the headline of the article, but this is the logical implication of the assertion in the middle of the article that:

"analysts who study personal finances say that savings rates and debt ratios are not going to return to their 1980s levels."

This statement means that the savings rate will remain near 5 percent instead of rising back to its historic rate from the 80s and prior decades, which was over 8.0 percent.

If these analysts are right, this means that workers will accumulate less money for their retirement, relative to their income in their working years, than their parents and grandparents. With Social Security providing a lower replacement rate and Medicare premiums and other health care costs rising relative to income, this means that retirees will be relatively poorer in the future than at present. This will be even more true if Social Security benefits are reduced further.

It is also worth noting that a lower private sector saving rate has the same impact on the economy as a higher government budget deficit. Given that the Washington Post has been virtually obsessed with the budget deficit on both its news and editorial pages, it is striking that it appears so little concerned about the prospect of lower private sector savings.

Remarkably this article also never mentions the housing bubble. The run-up in house prices was the cause of heavy consumer borrowing in the years prior to the downturn. Conventional estimates put the housing wealth effect at 5-7 percent, meaning that consumers will increase annual spending by between 5-7 cents for each additional dollar of housing wealth. When the bubble burst, destroying $6 trillion in housing equity, it was entirely predictable that consumption would plummet.

 
The Republican Leadership Commits Huge Gaffe and NPR Doesn't Notice Print
Wednesday, 16 February 2011 05:21

Before the Pennsylvania primary in the 2008 presidential election, then Senator Barack Obama made a speech at a fundraiser in which he referred to working class whites as being "bitter." This was referred to as a "gaffe" and became a central theme in news reporting over the next two weeks.

On Morning Edition, NPR included comments from the Republican congressional leadership that the United States is "broke" and therefore has no choice but to make very large cuts in the budget. Of course this is not true. Investors are willing to lend the United States trillions of dollars at historically low interest rates. This means that the government is not broke. There is no evidence that it is coming up against any serious spending or borrowing limitation.

This inaccurate representation of a basic issue about the financial health of the U.S. government would have been worth pointing out to listeners. It almost certainly matters more to most of the public than President Obama's comment about working class whites being bitter.

 
President Obama Proposes a Bank Fee Equal to 20 Percent of Goldman's Annual Bonus Pool Print
Tuesday, 15 February 2011 06:14

The Washington Post noted that President Obama's budget called for a $30 billion bank fee to recoup losses from the TARP. It would have been helpful to give readers some context for this number.

It would raise approximately $3 billion a year, this is less than one-fifth the size of the $17.5 billion bonus pool at Goldman Sachs in 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.

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