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Doesn't Anyone Have Anything Bad to Say About Jacob Lew? Print
Saturday, 26 February 2011 08:46

Not in the Washington Post they don't. The paper ran a lengthy fluff piece that did not present a single critical comment about Mr. Lew.

One item that the Post could have mentioned is that Lew and his colleagues in the Clinton administration, who it notes are all back in top positions in the Obama administration, ignored the growth of the stock bubble and stood by as the over-valued dollar led to an enormous trade deficit. The collapse of the bubble in 2000-2002 gave the country what was at the time the longest period without job growth since the Great Depression. The economy only recovered from that slump as a result of the growth generated by the housing bubble. 

 
The Washington Post STILL Has Not Heard About the Housing Bubble Print
Saturday, 26 February 2011 08:27

The Washington Post had a front page article on the downward revision to 4th quarter GDP reported by the Commerce Department yesterday. The article cited higher oil prices and state and local budget cuts as the two major threats to growth in the immediate future.

Remarkably, the article did not mention falling house prices. Since their peak last summer when the first time buyers tax credit expired, house prices have fallen by more than 4.0 percent. They are currently falling at the rate of 1.0 percent a month. This would imply a drop of more than 15 percent by the end of 2011, which would correspond to a loss $2.4 trillion in housing wealth. A loss of wealth of this magnitude would reduce annual consumption by $120-$140 billion.

This loss of consumption due to a drop in housing prices would be a considerably larger blow to the economy than either the budget cuts and tax increases attributable to the state budget shortfalls or a rise in the price of oil that is twice as large as what we have seen to date. It is amazing that the Post is oblivious to the situation in the housing market even after the collapse of the bubble threw the economy into the worst downturn in 70 years.  

 
The Post Wants YOU to Lose Your Job to Ease Its Concern About Inflation Print
Friday, 25 February 2011 08:04

It seems as though the Washington Post's editorial board is losing sleep over inflation. Its lead editorial notes the recent rise in commodity prices and then warns that:

"Core inflation does indeed remain well within the Fed's safety range, but it has nevertheless begun trending upward, and one leading forecaster, Deutsche Bank Economic Research, says it could hit 2.1 percent, the upper limit of the Fed's usual target range, by the end of 2011. That could force the Fed to raise interest rates, slowing growth before unemployment has returned to pre-recession levels, in order to preserve its inflation-fighting credibility."

Actually, 2.1 percent inflation is not "the upper limit of the Fed's usual target range." The Fed never explicitly set a target range and there are a range of views among the Fed's open market committee (the body that sets interest rates) as to how high inflation can go before it poses any problem to the economy. For example, back in 1999 Chairman Ben Bernanke argued that in comparable circumstances Japan's central bank should deliberately target a higher rate of inflation in the range of 3-4 percent to lower real interest rates.

As a practical matter, the inflation rate has rarely been below 2.1 percent. As can be seen, there was only one year in the decades of both the 80s and the 90s when the inflation rate was below the level that the Post wants the Fed to have as the top end of its target range.

annual_inflation_5504_image001
Source: Bureau of Labor Statistics.

 

There is no obvious reason that the Fed should feel "forced" to raise interest rates if the core inflation rate happens to edge above 2.0 percent to preserve its credibility. Such an increase in interest rates would mean throwing more people out of work.

There are already tens of millions of people who have lost their jobs and/or their homes because of the Fed's mismanagement of the economy. There is no reason that the Fed should deliberately put more people out of work just because the Post editors and their friends have irrational fears about inflation.

 
Overplaying the Impact of Oil Prices Print
Friday, 25 February 2011 06:50

The NYT had a front page article warning that the rise in oil prices could slow economic growth. The article hugely overstates the potential impact of the price rises that we have seen to date as indicated by an estimate that appears in the article.

At one point it tells readers that:

"Mr. Lafakas [an economist at Moody's Analytics] estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year."

It is worth remembering that the payroll tax cut was only a portion of the stimulus package that included the extension of the Bush tax cuts, the extension of emergency unemployment benefits, and 100 percent expensing for business investment. It is unlikely that anyone would have paid too much attention if the tax cut had been 2.5 or 1.5 percent instead of 2.0 percent. In other words, the impact on economic growth of this rise in oil prices is not likely to be very noticeable.

At one point the article also includes the comment:

"After a few false starts, housing prices have slid further."

Actually, the decline in house prices following the "false starts" was entirely predictable. The first-time buyer tax credits that Congress put in place supported the market by pulling purchases forward. It was inevitable that demand and prices would fall after these credits expired.

 
David Brooks Sings the Praises for Mitch Daniels Print
Friday, 25 February 2011 06:22

David Brooks thinks that Mitch Daniels would be a great president, or at least this is what he said in his column today. Brooks' case centers on the outstanding job that Daniels has done as governor of Indiana. Brooks is especially impressed with the extent to which Daniels has improved the state's fiscal situation.

While that may be interesting to some, most people are probably most concerned about jobs. (Remember the recession?) If we compare job growth in Indiana with job growth (or more accurately loss) with its mostly Democratically governed neighbors, it doesn't look especially good.

Book1_15615_image001
Source: Bureau of Labor Statistics.

 

Indiana lost 6.5 percent of its jobs between December of 2004 (the month before Daniels took office) and December of 2010. This beats Michigan's 13.0 percent and Ohio's 7.7 percent, but is worse than Illinois' loss of 5.2 percent of its jobs. It's also worse than the loss of 3.3 percent of jobs in Wisconsin and 0.2 percent of jobs in Iowa.

I suppose that Daniels campaign slogan can be "better than Michigan."

 
Does a 13 Percent Drop in Homes Prices Since June "Reflect an Improved Economy"? Print
Thursday, 24 February 2011 06:09

According to the Washington Post it does. The Post reported on the modest rise in existing home sales in January reported by the National Association of Realtors. The increase in sales was accompanied by a sharp plunge in prices with the median sale price now 13.1 percent below the recent high set in June.

As the article suggests, it appears that many investors were buying up foreclosed properties at low prices. This is a necessary part of the return to normal in the housing market, but it is a bit misleading to describe this story as reflecting an improved economy.

 
Chris Farrell Nails It on Marketplace Radio Print
Thursday, 24 February 2011 05:58
He told listeners this morning that the government deficit problem is a health care problem. It's too bad that people in Washington can't hear this.
 
The Impact of Oil Prices on Economic Growth Print
Thursday, 24 February 2011 05:26

An NYT article discussing the impact of higher oil prices on the economy told readers that:

"As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years."

There is no source cited for this rule of thumb, which implies an extraordinarily large impact of oil prices on GDP. For example, the fall of oil prices from an average of $91 a barrel in 2008 to $53 a barrel in 2009 should have added almost two percentage points to GDP growth in the last two years.

The article later gives a more conventional rule of thumb, that each 1 cent increase in gas prices takes $1 billion out of consumers' pockets. These two rules of thumb appear inconsistent. A $10 increase in the price of a barrel of oil would imply an increase in gas prices of about 25 cents. This would reduce the money available for other consumption by about $25 billion a year. If the impact is doubled to account for other uses of oil (e.g. home heating, electricity, etc.) this would reduce the money available for spending by $50 billion, approximately 0.3 percent off GDP.

Of course the reduction in spending will not be 100 percent of the higher price of oil, many consumers will dip into their savings, just as they would in response to a temporary tax increase. In addition, some of the gain from higher oil prices goes to U.S. producers of oil, either as domestic production or importers with higher profits. While higher earnings for producers will have less impact on increasing spending than higher oil prices will have on reducing spending, the impact will not be zero.

On net, it is unlikely that the actual impact of a $10 increase in the price of a barrel of oil would be even half as large as the rule of thumb described in this article. A substantial rise in the price of oil would still have a substantial impact on the economy, but not nearly as much as this article claims.

 
Washington Post Runs Another Deficit Hawk Editorial In Its News Section Print
Wednesday, 23 February 2011 06:18

The Washington Post (a.ka. "Fox on 15th Street") long ago gave up any pretense of objectivity in its budget coverage. Today it ran a news article which can best be described as a tirade against budget deficits and debt, since it contained no real news. The article relies exclusively on deficit hawks as sources. It presents no one who could put current deficits/debt in context.

Had it gotten a broader range of opinions readers would have known that the claim that growth slows when a country's debt to GDP crosses 90 percent is dubious, since most of the countries in this group are like Japan, in the sense that their debt to GDP ratio rose because they were growing slowly. Japan's government actually had a very small debt before its stock and housing bubbles burst in 1990.

A wider range of sources would have pointed out that it is the combination of public and private sector debt together that pose a burden on an economy. Right now the U.S. is seeing its private sector debt diminish. They might have also pointed out that the Federal Reserve Board can and does hold large amounts of government debt, so that it poses no interest burden for taxpayers.

And, they would have also pointed out that productivity growth ultimately determines a country's standard of living in the long-run. Current and projected future levels of productivity are far higher than the deficit hawks ever dreamed possible in the mid-90s, so what are they whining about?

 
How Did the Washington Post Determine that Congress Has an "Addiction to Spending?" Print
Wednesday, 23 February 2011 06:01

That's what readers of a front page Washington Post article are undoubtedly asking after reading the first sentence:

"Is Rep. Harold Rogers the right man to break Congress's addiction to spending?"

There is nothing in the article that explains an "addiction to spending." It does describe efforts by members of Congress to get projects for their districts for which they can take credit, but it does not provide any evidence that this has been a major problem for either the federal budget or the economy. Virtually all budget experts agree that narrowly defined pork barrel spending, of the sort described in this article, is a small share of the total spending. Many projects are actually useful -- members of Congress just want to circumvent the normal appropriation process so that they can take credit for it.

It would have been more reasonable to begin a piece with a phrase like "fear of deficits" as the disease that Congress needs to overcome, since tens of millions of people are now unemployed or underemployed because Congress has a seemingly irrational fear of running larger budget deficits.

 
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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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