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Tell NPR, the Fed Has Many More Bullets Print
Wednesday, 22 June 2011 04:55

In its top of the hour news segment NPR told listeners that there is little else that the Fed can do to boost the economy. This is very seriously wrong.

The Fed could do more quantitative easing, it could target a long-term interest rate, for example targeting a 2.5 percent 10-year government bond rate, or it could target a higher inflation rate (e.g. 3-4 percent). All of these measures would some impact in boosting the economy.

The Fed is choosing not to go this route because its open market committee apparently feels the potential benefits do not outweigh the risks, however it is simply wrong to say that additional options to boost the economy do not exist. The Fed has simply opted not to take them.

NPR's mis-reporting on this point is important because the decisions of the open market committee are in part political ones. They respond to the larger debate within the country. If people do not even know that the Fed has options that could spur growth and reduce unemployment then they will be less likely to try to pressure the Fed to pursue such options.

The Problem of Deflation at the NYT Print
Wednesday, 22 June 2011 04:34

In discussing the Fed's QE2 program, the NYT tells us that things are much different today than they were a year ago.

"Last year prices were falling; this year, prices are increasing."

Well, sort of. Here's the overall CPI where there is in fact a small drop between April and June, although it is completely reversed by the July increase.


Source: Bureau of Labor Statistics.

Of course, if we look at the core CPI which the Fed targets, there is no decline in prices at all in the summer of 2010. In fact, inflation looks pretty much exactly the same in the summer of 2011 as it did in the summer of 2010.


Source: Bureau of Labor Statistics.

In other words, what explains the difference in the Fed's behavior is not any obvious difference in inflation or even the growth outlook. (Growth projections were if anything stronger in the summer of 2010 than at present.)

Rather, the most obvious explanation is a difference in politics. There is a growing push against any effort to stimulate the economy, which is noted in the article. It is this change in politics that seems to explain the end of quantitative easing, not any change in the economy.

This article includes a peculiar statement by Mark Zandi, of Moody's Analytics, which attributes the economy's weakness to a loss of confidence. It would have been useful to ask how he thought low confidence was hurting the economy. Consumer spending continues to be very high relative to income and investment in equipment and software is quite strong given the low capacity utilization rates, so it is not obvious what sector of the economy is being constrained by a lack of confidence.

Blognote in Honor of Thomas Friedman: Spending on the Commerce Department Is Going to Bankrupt the Country Print
Wednesday, 22 June 2011 03:59

The United States has to cut back spending on the Commerce Department or it will bankrupt the country. Okay, I have no evidence for this and it really doesn't make any sense. The Commerce Department's budget is about $10 billion a year, less than 0.3 percent of total spending, but this note is written in the spirit of Thomas Friedman.

Just as Thomas Friedman can tell readers that Social Security and Medicare are bankrupting the country with no evidence, in my blognote I get to blame the Commerce Department. The reality of course is that Social Security is fully funded by its own dedicated tax revenue through the year 2036, meaning the program on net imposes no burden on the government.

Under the law, if nothing is done to increase revenues SS will only pay about 80 percent of scheduled benefits in years after 2036. It is prohibited from spending any money beyond what it collects in taxes. The projected shortfall over the program's 75-year planning period is equal to 0.6 percent of GDP, about one-third of the increase in annual defense spending between 2000 and 2011. It is difficult to see how a program that can only spend what it takes in from taxes could bankrupt the country, but this is Thomas Friedmanland.

There is more of an issue with run-away Medicare costs, but everyone outside of Thomas Friedmanland knows that this is an issue of run-away health care costs. If the United States paid the same amount per person for our health care as people in Canada, Germany, or any other wealthy country we would be looking at huge budget surpluses, not deficits.

This means that if we fix the U.S. health care system, then there will be no Medicare or budget problem. On the other hand, if we fail to fix the system, health care costs will bankrupt the U.S. economy even if we eliminate Medicare and other public health care programs altogether. People know this outside of Thomas Friedmanland, but in Thomas Friedmanland, you get to just make things up.

WSJ Gets Caught Up In the Chicken and Egg of Housing Finance Print
Tuesday, 21 June 2011 05:24

The WSJ told readers:

"because the banking sector isn't large enough to hold more mortgages without expanding its deposit base, securitization markets are an integral part of any lending expansion."

The problem with this assertion is that one of the main reasons that the banking sector doesn't have a larger deposit base is that investors can buy government insured mortgage backed securities. If the government reduces or eliminates its role in this market, then investors will have to look for alternative places for their money, such as bank deposits. So, rather than filling an unavoidable gap in private financing in the mortgage market, the government is helping to create this gap.

The Washington Post Tells Readers that the Financial Markets Are Wrong Print
Tuesday, 21 June 2011 05:00

The people who are betting trillions of dollars in financial markets have considerable confidence in the ability of the U.S. government to pays its debts, as demonstrated by the fact that the interest rate on 10-year Treasury bonds remain extraordinarily low. However a front page Washington Post article told readers that these actors are mistaken, actually the United States is, "a nation already mired in red ink."

Most newspapers would restrict such sweeping and unsupported assertions to the editorial pages, however the Washington Post has made debt reduction a crusade. It has little concern for standard journalistic practices in pressing this agenda.

Did Dana Milbank's Mother Tell Him "There’s Not Much More That Government Can Do to Boost Jobs in the Short Term?" Print
Tuesday, 21 June 2011 04:22

That's what Washington Post readers must have been thinking when they saw Milbank's line:

"The truth is that there’s not much more that government can do to boost jobs in the short term."

Since this is so obviously counter-factual and there is nothing in the article to support the statement, one must assume that this is the sort of truth that gets passed on in the family that is never supposed to be subjected to critical evaluation. Of course as a practical matter, there is an enormous amount that the government can do to create jobs.

The government can spend money. People work for money, meaning that government spending will create jobs. The government can also have more tax cuts or credits. If these tax breaks go to low and moderate income people, then they will spend money. This will create jobs. The Federal Reserve Board can deliberately raise the rate of inflation, thereby lowering real interest rates and reducing debt burdens. This will also lead to more spending and more jobs. The government could also push down the value of the dollar which will increase net exports. This will also create more jobs.

And, the government could provide incentives to employers to shorten workweeks as an alternative to layoffs. The German government has used this practice so successfully that its unemployment rate is lower today than it was at the start of the downturn, even though its growth has been slower than in the U.S. Furthermore, this path can actually be done at the state level by the governors who are the focus on this article.

So, there is a great deal that the government can do to boost jobs in the short-term, contrary to what Mr. Milbank's parents apparently told him when he was growing up.

President Clinton, The Economy Started Losing Manufacturing Jobs While You Were in Office Print
Monday, 20 June 2011 09:52

If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation [thanks hapa]. His 13th item on job creation is "Enforce Trade Laws," where he tells readers:

"We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply. Contrary to popular belief, the World Trade Organization and our trade agreements do not require unilateral disarmament. They’re designed to increase the volume of two-way trade on terms that are mutually beneficial. My administration negotiated 300 trade agreements, but we enforced them, too. Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit. In the history of our republic, it’s the first time we ever cut taxes while going to war."

Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:

                               Change in Manufacturing Jobs

1998                         -140,000

1999                         -170,000

2000                         -99,000


It is true that the pace of job loss picked up after Clinton left office, but this was due first and foremost to the recession caused by the collapse of the stock bubble. Blaming President Bush for that downturn would be like blaming Obama for the Lehman crisis if it happened to occur in February of 2009 rather than September of 2008. The downturn caused by the collapse of the bubble was the result of President Clinton's team failure to try to rein in the bubble. As a result of the collapse of the stock bubble, the country had at the time the longest period without job growth since the Great Depression. It only began to create jobs again once the housing bubble began to fuel a construction and consumption boom.

Now for the other part of Clinton story:

"Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending."

Actually, if President Clinton paid attention to economic data he would have noticed that not only were we losing manufacturing jobs during his last three years in office, but the trade deficit was soaring. The trade deficit grew from just over 1 percent of GDP in 1996 to over 4.0 percent of GDP by the 4th quarter of 2000. President Clinton's team must have been doing one heckuva job enforcing trade laws.

More importantly, the rest of his story makes no sense either. The United States borrows from China, Japan and other countries because of our trade deficit, not our budget deficit. We were borrowing huge amounts from Japan and China at the end of the Clinton presidency, but most of their loans went to buy stocks, private bonds, and mortgage backed securities, not government bonds. In fact, by the end of the Clinton presidency, because of the large trade deficit, the country was accruing debt to foreigners at a then record pace.

Anyone who thinks that this didn't matter because the foreigners were holding private assets and not government debt should realize that if they desired for some reason to own government debt, any day of the week they could sell their stock, bonds, or mortgage backed securities and buy government debt. The issue is indebtedness to foreigners and the potential drain on future income. It matters not at all whether the debt is on the public or private side.

This raises the final point, why did the trade deficit soar in the last years of the Clinton administration (aside from the fact that President Clinton apparently was not paying attention)? The answer is simple. The value of the dollar soared.

This was the result of Treasury Secretary Robert Rubin's high dollar policy. This was a rhetorical point when he first took over as Treasury secretary in 1995. He put the muscle of the IMF behind it in the East Asian bailouts of 1997. These bailouts forced the East Asian countries to repay debts in full. This could only be done by allowing the value of their currencies to plunge against the dollar, making their exports hyper-competitive.

Also, the IMF bailouts were considered so onerous by the rest of the developing world that every country that could decided it had to accumulate massive amounts of reserves to avoid ever being forced to turn to the IMF. This meant pushing down the value of their currencies against the dollar as well. In the late 90s, the normal flow of capital from rich countries to poor countries was reversed in a major way, with developing countries becoming massive lenders to the United States.

This was definitely bad policy, but it was President Clinton's policy, not President Bush's. The dollar actually depreciated moderately under President Bush. He certainly should have done more to push down its value, which would have corrected the imbalances built up in the Clinton years, but President Clinton has events seriously backward in this piece.

Robert Samuelson Calls Attention to the Incompetent Management Problem Print
Monday, 20 June 2011 04:59

Robert Samuelson devoted his column today to the problem of structural unemployment. He tells us that many positions are going unfilled, in spite of the high rate of unemployment. In fact, according to the Bureau of Labor Statistics, the job opening rate is just 2.2 percent.


Source: Bureau of Labor Statistics.

Since there will always be some time involved in replacing new workers, this rate can never fall to zero. If the rate were to fall to 1.7 percent, its low for this downturn, this would imply that another 650,000 of the 14 million unemployed would have jobs. It is also worth noting that it would be reasonable to expect that employers would be more choosy about their hires, therefore taking longer, in a period in which they face weak demand (and therefore have little urgency for new workers) and have many good workers to choose from.

In a context where the economy is strong and relatively few people are looking for work, employers would be expected to try to hire quickly since there will be little benefit to waiting for a better job candidate. However, in the current labor market, there is a strong likelihood that an employer can find a better candidate if they wait longer to hire. This fact would be expected to raise the number of job openings even if there is no reduction in the quality of the workforce.

It is also important to note that if there really is a serious problem of structural unemployment (firms are unable to find qualified workers for vacant positions) then there should be substantial sectors of the economy where wages are rising rapidly. It is difficult to identify any major sector where this is the case. Wages for workers at all education levels are at best just keeping pace with the rate of inflation.

This implies that if employers are really having trouble finding qualified workers then it is likely because they are offering wages that are below the market rate. The problem then is a lack of qualified employers, not a lack of qualified workers.

The NYT Has Not Heard of the European Central Bank Print
Monday, 20 June 2011 04:04

That's what readers must be thinking of an NYT piece on the changes Greece needs to make in order to restore economic growth. The piece never mentions the European Central Bank (ECB). 

The ECB is an incredibly important force, either promoting or constraining growth. It is currently doing the latter. It set its overnight interest rate at 1.25 percent. This is higher than the 1.0 percent rate set by the Fed from 2002 to 2004 when the U.S. economy was trying to recover from the stock market crash. It is generally expected to raise its rate further over the course of the year.

By contrast, if the ECB was interested in promoting growth in Greece and elsewhere in the euro zone, it could push its short-term rate to zero, like the Fed. It could also target a 3-4 percent inflation rate to reduce real interest rates further and lesson the debt burden on governments and households across the euro zone.

This path has been advocated in various contexts by Olivier Blanchard, the IMF's chief economist, Federal Reserve Board Chairman Ben Bernanke, and Nobel prize winning economist and NYT columnist Paul Krugman. Reporters who write about what is necessary for Greece to grow should be familiar with this argument.

Why Is Third Way an Unlikely Ally for a Corporate Tax Break? Print
Sunday, 19 June 2011 22:12
That's what NYT readers must have been asking when they heard the Wall Street-backed group described by the NYT as a "unlikely ally" of business efforts to get a special tax concession that would allow them repatriate foreign profits at a near-zero tax rate. What is "unlikely" about a business-funded group supporting a tax break for business?
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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.