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More Scare Stories on the Deficit to Get Folks to Give Up Their Social Security and Medicare Print
Sunday, 24 April 2011 11:28

Steven Pearlstein did his part for the Wall Street crusade to get people to surrender their Social Security and Medicare. He warned readers that if we don't follow the Wall Street deficit reduction agenda, the dollar could enter a free fall. I would say that this is one of the silliest things the paper has ever published, but this is the Washington Post that we are talking about.

Anyhow, let's put on our thinking caps and try to envision what Pearlstein's scare story would look like. Currently, the euro is equal to around 1.45 dollars, there are approximately 6.5 yuan to a dollar and around 80 yen. Suppose we don't follow the Wall Streeters' wishes. Will the dollar fall to 3 to a euro, will it only be worth 3.5 yuan and 40 yen?

Does anyone think this story is plausible? We supposedly have been begging China to raise the value of its currency by 20 percent. Is China's leadership suddenly going to sit back and let the yuan rise by 100 percent? What happens to China's export market in this story? The same is the case for our other trading partners. Europe will lose its export market in the U.S. and suddenly U.S. made goods would be hyper-competitive in Europe's domestic market. Japan, Canada and everyone else would face the same situation.

These countries will not allow their economies to be destroyed by the loss of the U.S. export market and a surge of imports from the United States. They will undoubtedly take steps to stop and reverse any free fall of the dollar, if we did begin to see one.

In other words Pearlstein and the others are peddling total nonsense when they try to push this scare story. The bottom line is that they want to cut benefits to the middle class. They don't have a good story to sell a policy that will be harmful to large segments of the population, especially when the Peter Petersons of the world are making out like bandits. So they make stuff up.

As every economist knows the story of our deficit in the short-term is the downturn created by the collapse of the housing bubble. The deficit is propping up the economy following the loss of $1.2 trillion in annual demand from private sector.

The deficit story in the long-term is health care. Our health care system is out of control. Fixing health care would end the deficit problem, but this would reduce the income of the insurance industry, the pharmaceutical industry and other powerful interest groups. So, the Washington Post would rather just see people go with out health care. Hey, someone's got to pay.

 
The New York Times Has not Heard About the Budget Deficit Print
Sunday, 24 April 2011 05:18

This is one of the things that readers of an article discussing the impact of the Fed's quantitative easing policy might conclude. The article indicates that the second round of quantitative easing (QE2) has had little effect in boosting economic growth.

While this is likely true -- it had a limited effect in keeping interest rates at already low levels -- the policy of quantitative easing has had a substantial impact on the deficit. As a result of the fact that the Fed holds a large amount of assets, interest that otherwise would have been paid out to the general public is instead paid to the Fed. This money is then refunded to the Treasury.

Last year the Treasury refunded almost $80 billion to the Treasury, an amount that is approximately twice the size of the deficit reduction in the agreement reached earlier this month between President Obama and Congress on a continuing resolution. If the Fed were to continue to hold around $3 trillion in assets it would reduce the deficit by close to $1.5 trillion over the course of the next decade. (It can offset the inflationary impact of the increased reserves in the financial system by raising reserve requirements.) Given the obsession of the media with the budget deficit, it is remarkable that the NYT did not mention this implication of quantitative easing.

This article also wrongly referred to the downturn as a financial crisis. The main reason why the economy is suffering from high unemployment and weak growth is the collapse of the housing bubble. Large firms can now borrow money in financial markets at historically low real interest rates. Few small firms cite credit availability as a major problem in their business. It is difficult to see how the economy would be any different right now if the financial crisis had not occurred.

 
LA Times Makes It Up on Chairman Ryan Print
Saturday, 23 April 2011 22:56

The LA Times told readers that:

"Congress is on its first recess since Republican leaders unveiled a plan to end the federal deficit by dramatically changing Medicare, cutting other government programs and reducing taxes."

Actually the Republicans never produced a plan to "end the federal deficit."

They produced a plan that promised large tax cuts but did not identify any of the taxes that would have to be raised to offset the lost revenue. This is like saying they had a plan to fly to moon because they said they would build a rocket. The whole point is the specifics. How would they build a rocket? How would they raise taxes to meet their revenue targets?

It would have also been worth mentioning that the Congressional Budget Office projections for the Ryan plan imply that it would increase the cost of buying Medicare equivalent insurance policies by $30 trillion over the program's 75-year planning period. This is approximately 6 times the size of the projected Social Security shortfall and comes to almost $100,000 in additional costs for every man, woman, and child in the country. This money would be a transfer from retirees to the insurance and health care industries under the Ryan plan.

 
Will the Protectionists Wipe Out Solo Practitioners in Medicine? Print
Saturday, 23 April 2011 07:30
That is the implication of an NYT article on the decline in the number of physicians in independent family practices. The article argues that long hours and uncertain pay make it unattractive for physicians in the United States. This may be true given the extent to which the doctors' lobbies have been able to limit the number of people licensed to practice medicine in the United States. However, there is a huge supply of people in the developing world who would be willing and able to train to U.S. standards and work under the conditions described in the article. If the Obama administration and Congress were not so completely dominated by protectionists, they would be working to eliminate the barriers that are making it more expensive for people in the United States to get health care.
 
Looniness on Domestic Oil Production, Will the Post Print Anything? Print
Friday, 22 April 2011 05:55

The Washington Post printed an oped column from Alaska Senator Lisa Murkowski arguing for increased domestic oil production. The column directly confuses short-term economic weakness with the impact of long-term oil prices.

It cites Harvard professor and former AIG director Martin Feldstein as supporting the claim that "that if prices remain high, economic growth will languish." In fact, the quote from Feldstein explicitly refers to economic growth this year. There is nothing that the government can do that will in any significant way affect the amount of oil that the U.S. produces this year. Therefore, Feldstein's statement is irrelevant to the issue at hand.

As far as the longer term question, higher oil prices would have a modest impact in slowing growth in most economic forecasting models. However even large increases in domestic production would have little impact on world oil prices (the relevant variable) and therefore have little effect on economic growth. A serious newspaper would not have allowed a columnist to make such misleading assertions.

 
Workers Are Never Required to Join Unions Print
Friday, 22 April 2011 05:18

The NYT wrongly told readers that a bill approved by the New Hampshire legislature would, "disallow collective bargaining agreements that require employees to join a labor union." It is already the case that collective bargaining agreements cannot require employees to join a labor union.

Under current New Hampshire law, collective bargaining agreements can require workers to pay representation fees to a union. National labor law requires that a union represent all workers who are in a bargaining unit regardless of whether or not they opt to join the union.

This means that non-members not only get the same wages and benefits as union members, but the union is also required to represent non-members in any conflict with the employer covered by the contract. For example, if a non-member is faced with an improper dismissal the union is obligated to provide them with the same representation as a union member.

The new bill passed by the New Hampshire legislature effectively guarantees non-union members the right to get union representation without paying for it (representation without taxation). It denies workers the freedom of contract that they currently enjoy, which would allow them to require that everyone who benefits from union representation has to share in the cost of union representation.

 
The Post Is Confused About Government Debt and Foreign Debt Print
Friday, 22 April 2011 05:02

Readers of the front page Washington Post article headlined, "the dollar, no longer almighty," no doubt walked away very confused. The article never distinguishes between the government deficit/debt and the trade deficit/foreign debt.

The dollar will likely fall because of the ongoing trade deficit. This is the adjustment mechanism for a trade deficit in the system of floating exchange rates like the one we have in the United States. This has no direct relationship to the budget deficit. If the United States were running its current deficit of around $600 billion a year (@ 4 percent of GDP), it would be expected that the dollar would fall regardless of whether or not the country is running a budget deficit.

The decline in the dollar will benefit workers who are subjected to international competition, most importantly manufacturing workers. The decline in the dollar will reduce U.S. imports by making them more expensive and increase exports by making them cheaper to foreigners. This will increase the demand for manufacturing workers, driving up their wages.

By contrast, workers who are largely protected by regulations against foreign competition, like doctors, lawyers, and other highly educated professionals, will likely lose when the dollar falls. They will have to pay more for manufactured goods and will probably not be able to raise their fees proportionately.

It would have also been useful to remind readers of the basic accounting identity that net foreign borrowing is equal to net national investment. An identity is something that is true by definition -- there is no possible way around it.

This identity means that if the United States has a large trade deficit, as it does now, then it must have either a large budget deficit or very low private savings, or some combination. (In principle, investment can rise, but as practical matter it is very hard to make non-residential investment rise by much as a share of GDP. Residential investment did rise substantially during the housing bubble, but it would be difficult to view this experience as health.)

This identity means that anyone who wants the budget deficit to fall without wanting the dollar to fall, want to see very low private sector savings. This would be a very perverse goal, although many policymakers seem to advocate this position without realizing it.

 
New Unemployment Insurance Claims: Which Way Is Up? Print
Thursday, 21 April 2011 09:18

The headline of the WSJ article on weekly unemployment insurance filings told readers, "jobs data signal progress." The article then went on to tell readers that:

"Initial jobless claims decreased by 13,000 to a seasonally adjusted 403,000 in the week ended April 16."

It's always good to hear that unemployment claims are down from the prior week, except the prior week's number was a jump of 31,000 from the level reported two weeks earlier. This means that the number reported for last week was still 18,000 higher than the the number of claims reported two weeks earlier. In fact, this is the first time that we have seen two consecutive weeks in which claims have exceeded 400,000 since January.

We always need the caveat that weekly jobless claim numbers are erratic, and two weeks does not establish much of a pattern. But it is clear that the news in this report suggests that the economy is going in the wrong direction, except to the WSJ.

 
The Washington Post's Economic Experts Expect House Price Decline to Stop Quickly Print
Thursday, 21 April 2011 05:08

House prices have been declining at the rate of 1 percent a month for the last four months. This is why it was somewhat surprising to see Paul Dales, a senior economist at Capital Economics, quoted in the Post as saying that house prices would decline by about 5 percent this year. That would imply a sharp slowing in the rate of price decline in the months ahead.

The Post gained notoriety during the run-up of the housing bubble for relying on David Lereah, the chief economist for the National Association of Realtors, as its main and often exclusive source on the housing market. Mr. Lereah was also the author of the book, Why the Real Estate Boom Will Not Bust and How You Can Profit from It.

 
The NYT Reports on Paul Ryan's Presidential Ambitions and Flat Earthers' Plan for Astronomy Department Print
Thursday, 21 April 2011 04:33

The NYT somehow thinks that it's good journalism not to point out that people who say that the earth is flat are wrong. How else can one explain the fact that it reports on Representative Paul Ryan's presidential ambitions (or lack thereof) and notes in passing that he has different views on how to constrain health care costs and promote growth than President Obama.

Representative Ryan's views on both topics have been tested and shown to be wrong. The government run Medicare program is far more effective in constraining costs than the private sector. This is why the Congressional Budget Office (CBO) projects that adopting Representative Ryan's plan would add $30 trillion to the cost of buying Medicare equivalent plans over Medicare's 75-year planning horizon.

This is not the sum transferred from the government to beneficiaries. It is the increase in total costs -- waste to the government, income to insurers and health care providers. This $30 trillion figure is approximately 6 times the size of the projected Social Security shortfall. It comes to almost $100,000 for every man, woman, and child in the country.

We also have had ample opportunity to test Representative Ryan's other main theme, that lower taxes are necessary to boost growth. President Reagan had large tax cuts in the 80s. This was the worst decade for growth in the post-war period until the last decade when President Bush had another big round of tax cuts. This is why CBO projects that tax cuts do not pay for themselves and will lead to deficits that will be a drag on growth.

Given the overwhelming weight of the evidence, the NYT is misleading readers when it reports that:

"And Mr. Ryan is making a counter case — tax cuts are needed to stir economic growth, and Medicare is on an unsustainable path — as he travels through towns like North Prairie, Delavan and Clinton, population 2,162."

The reporter should know that Mr. Ryan's case does not make sense and should not imply to readers that it does.

 

 
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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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