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It's Supposed to be Funny, but Do We Really Need to Bring China Into the Debt Ceiling Clown Show? Print
Wednesday, 13 July 2011 16:25

That's what folks should be asking Jon Stewart. The United States as a country owes China money because it has a trade deficit. The trade deficit means that United States would be borrowing from China even if it had a balanced budget, as for example was the case in 1999 and 2000. The fact that China happens to hold a lot of Treasury bonds simply is the result of what U.S. assets they choose to hold. They could, and do, also buy private bonds, stock and other assets.

Of course the trade deficit is high due to the over-valued dollar. This in turn is partly the result of the fact that China and other countries have a policy of keeping the dollar high by buying up assets like U.S. Treasury bonds.

All of this may be way too much depth for a comedy show, but how about leaving China out of the story? We have a lot of China bashers in this country. There are reasons to object to many of China's policies (I certainly do), but do we need to throw China into the picture gratuitously? After all, John Boehner, Eric Cantor, and Barack Obama would seem to provide plenty of comedic material.

The All-Knowing Washington Post Tells Readers What the Budget Deal Will Include Print
Wednesday, 13 July 2011 15:46

We no longer have to wait to see how the battle over the debt ceiling will turn out, the Washington Post already told us:

"No matter what the outlines are for a final agreement to lift the debt ceiling, the deal will include cuts to some of the nation’s major entitlement programs: Medicare, Medicaid and Social Security."

There you have it, right there in the first sentence of a Washington Post article.

This piece also told readers in the context of a discussion of lowering the Social Security cost of living adjustment:

"experts have long argued that the formula [the current consumer price index] overstates inflation because it does not take into account changes in consumer behavior in response to rising prices."

While some experts have argued this point, other experts have noted that research from the Bureau of Labor Statistics (BLS) showing that consumption patterns among the elderly are substantially different from the consumption patterns of the rest of the population. These experts have suggested that if the concern is making the cost of living adjustment more accurate (as opposed to just cutting it), Congress could just instruct BLS to construct a cost of living index that was based on the consumption patterns of Social Security beneficiaries.

Such an index may show a rate of inflation that is higher or lower than the current index. It would be impossible to know for sure without first doing the research. However, there is no doubt that such an index would be more accurate than the current one for measuring changes in the cost of living of the elderly.

The Trade Deficit Jumps While the Politicians Play Debt Ceiling Poker Print
Wednesday, 13 July 2011 15:15

The Commerce Department reported that the trade deficit jumped in May to $50.2 billion from $43.6 billion in April. The monthly data are erratic, but this is definitely bad news. This means that growth in the U.S. economy is likely to be very weak in the second quarter. (Measured in constant dollars, the deficit increased by $3.9 billion.) It does not look like trade is about to become a major driver of growth and jobs.

This is also bad news for fans of income accounting. If we have a trade deficit, then national savings must be negative. That means either or both negative private savings or negative public savings (e.g. budget deficits). That's the rules -- there is no way around this one.

But this one didn't get much attention in the media. I couldn't find the NYT piece on the deficit. The Post had a piece on the May trade numbers, but it worked hard to get us the good news:

"But rising imports aren’t necessarily bad, because they can indicate the overall direction of demand for goods and services. Some analysts see crude oil, which accounted for more than two-thirds of May’s increase in imports, as a positive read for the economy.

'It indicates demand is stronger,' said Linda Duessel, equity market strategist at Federated Investors in Pittsburgh. 'That’s a good thing here in the U.S.'"

Actually, most of the increase in oil imports came about as the result of higher oil prices, not the need for more oil to fuel the economy. While the volume of oil imports in May was down from its April level, it is more than 9 percent below the average for the first quarter of the year.

Italy's Crisis: The ECB Could Just Print the Money Print
Wednesday, 13 July 2011 05:21

It would have been worth reminding readers that the debt crisis in Italy and other euro zone countries is first and foremost a political crisis. The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.

If there is a risk of default it is because the ECB has decided to make an obsession out of its 2 percent inflation target. This shows that numerology can be a very dangerous religion when it is held by central bankers.

Let's See, If President Obama Commits To Making Large Cuts in Future Budgets Then He Will Have Lots of Money to Spend in the Future Print
Wednesday, 13 July 2011 05:11
That seems to be Ruth Marcus's argument in her column today. The point is that he needs money for his education and infrastructure agenda, but he will only get this money if he commits to make large cuts, including in areas like education and infrastructure. Okay, no one expects the Washington Post to make much sense, but does anyone have any idea what she is talking about?
Republicans Claim That They View Restrictions on Light Bulbs as an Excess of Big Government, NPR Doesn't Have a Clue What They Believe Print
Wednesday, 13 July 2011 04:54

Politicians sometimes say things that they don't believe. Reporters really should know this. That is why NPR seriously misinformed listeners when it told them that Republicans oppose regulations on incandescent light bulbs intended to reduce energy use because they believe it is an excess of big government.

This is their claimed motivation. They may be opposing this regulation for entirely different reasons. For example, they may not care at all about the future of the planet, they may have gotten campaign contributions from companies who will see their profits reduced by these regulations or they may just want to oppose anything that President Obama supports. However the main point is that NPR does not know the motives of these politicians and it should not imply that it does.

Morning Edition Spreads Nonsense on Investment and Innovation Print
Wednesday, 13 July 2011 04:15

Morning Edition spread a bit of nonsense this morning in a segment on innovation. It told listeners that firms are not investing much right now, which it attributed to uncertainty. It's not clear what metric it is using, but investment in equipment and software as a share of GDP is almost back to its pre-recession peak. Given that many sectors on the economy are still operating far below full capacity, this is a fairly high level of investment.


Source: Bureau of Economic Analysis.

The segment also included the unsupported assertion that Americans used to be the most innovative people in the world, but this is no longer true. It does not give its measure of innovation. The United States trailed most other wealthy countries in productivity growth in the years prior to 1995. Since then, productivity growth has been somewhat more rapid in the U.S. than in other countries, but this reverses the pattern identified in the story. Other countries have more small businesses and self-employed people relative to the size of their workforce, at least in part because they have national health insurance. (Entrepreneurs know that they will still have health care even if their business fails.) It is not clear what measure produces the pattern of innovation described in the segment.

Is Peter Peterson a Major Driver of the Country's Debt? Print
Tuesday, 12 July 2011 07:17

Let's imagine that Wall Street investment banker and long-time Social Security foe Peter Peterson had $1 billion in government bonds (also known as "IOUs"). Suppose that he decided to sell them. According to Glenn Kessler, the Washington Post's fact checker, this would create a burden for the U.S. government.

This sale of bonds would displace other bonds that the United States might want to sell in the financial market. This would lead to higher interest rates on U.S. debt. Therefore Mr. Peterson is contributing to our deficit problem.

That may seem more than a little silly to readers, which it is. Yet, this is the same way in which Kessler says that Social Security will be creating a fiscal burden. The program has bought $2.6 trillion in government bonds which are part of the $14.3 trillion debt subject to the debt ceiling. It will be relying on the interest from these bonds to pay for some benefits for the next decade, just as Mr. Peterson may use interest from government bonds that he holds to pay for his living expenses or funding his anti-Social Security agenda.

After 2022 the program will begin selling off its bonds. This will have the same effect on the market as if Mr. Peterson were selling his bonds. In Peterson's case he will directly sell his bond into the market, in the case of the Social Security program it will sell a bond to the government which will have to get the money by selling a new bond in the market (unless it raised taxes or cut spending to cover the price of the bonds).

Kessler also gets wrong the baseline for the projected longer-term shortfall for Social Security. After 2036 the program is projected to only have enough money to pay a bit less than 80 percent of scheduled benefits. However, if the law is never changed, then the program would only pay the benefits that could be financed through incoming Social Security tax revenue. The general fund would not be tapped to cover the shortfall.

Of course Congress could change the law, but budget debates usually start from the law as written, not as some individual might imagine it will be changed in the future. In this sense, it is 100 percent accurate to say that Social Security does not now nor will it in the future contribute to the deficit. Congress could change the law so at some point it does contribute to the deficit, but that is just a guessing game, not the current reality.

David Brooks Says All We Can Do Is Sit Back and Throw People Off Medicare Print
Tuesday, 12 July 2011 04:10

David Brooks is such a moderate guy. He doesn't have the hubris of people who think that we can control risk, boost growth and employment, or never raise taxes. He just thinks that we have to reduce Social Security and Medicare.

And Speaker Boehner and President Obama apparently agree with him. They were reportedly prepared to raise the age of eligibility for Medicare from age 65 to age 67. Unfortunately, the people who think that we can never raise taxes and the people who support Medicare and Social Security obstructed this deal. David Brooks thinks this is a real tragedy.

Of course people who have the hubris to know arithmetic were probably less upset about not seeing this deal go through. It is extremely expensive for people in their 60s to get health care insurance.

Many struggle through their early and mid-60s, just hanging on until they reach age 65 and have the government pick up most of their health care costs through Medicare. Insurance for someone in their 60s with any moderately serious medical condition can easily be $20,000 or $30,000 a year.

People who have the hubris to know arithmetic also know that the real problem is the broken health care system in the United States. If the United States had the same per person health care costs as any other wealthy country, then we would be facing huge budget surpluses, not deficits.

If policy was not controlled by protectionists like David Brooks, then we would just allow seniors to buy into other countries' health care systems and allow them to split the savings with the government. This would be a huge win-win for all involved except the U.S. health care industry. Because of its power, this sort of trade is never debated publicly and people like Brooks are scared to even mention it.

People who have the hubris to know arithmetic would also point out to Brooks that the "huge" stimulus did not fail because they knew from the onset that it was nowhere near large enough. The annual stimulus was around $300 billion in each of 2009 and 2010. The loss in annual demand from the collapse of the housing bubble was around $1.4 trillion. Followers of arithmetic know that $1.4 trillion is considerably larger than $300 billion, therefore they did not expect the stimulus to be anywhere near sufficient to boost the economy back to full employment.

Douthat Is Hiding the Military Budget Print
Monday, 11 July 2011 07:19

Ross Douthat did a little pundit sleight of hand when he told readers that:

"For decades, the tug-of-war between left and right has kept government’s share of the economy nearly constant, around 19 percent of G.D.P. But in what you might call the revenge of Lyndon Johnson, the ballooning cost of Medicare is poised to tilt the debate decisively toward liberalism."

Douthat has to assign a very loose meaning to "around." In fact, the Reagan military build-up caused spending to hit 23 percent in the mid 80s. It then fell back to 18 percent under President Clinton due to the peace dividend and cutbacks in various categories of domestic spending, including public investment.


The run up in the last four years is of course response to the downturn created by the collapse of the housing bubble.

The chart points out that swings in military spending have been a big factor raising spending. If spending fell from its current level (@4.6 percent of GDP) to the 3.0 percent level at the end of the Clinton years, this would free up considerable money for other purposes or lower spending.

It is also worth noting that the major factor driving up Medicare costs is the broken health care system. If people in the United States paid the same amount per person for health care as people living in other wealthy countries we would have surpluses, not deficits in the long-term. It's not clear that giving huge excess payments to health care providers is an especially liberal position.

[Thanks to Adam Jones for catching this one.]

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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.