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Does Kent Conrad Know the Economy Is In a Downturn? Print
Wednesday, 16 March 2011 04:54
It seems from his comments on Marketplace Radio that Senator Conrad doesn't realize that the economy is in a serious downturn. If he did, his complaint that the government borrows 40 cents of every dollar it spends would make no sense. The reason that the economy has a large deficit at present is that the economy has an 8.9 percent unemployment rate and is operating well below its potential level of output. If the government were not borrowing 40 cents of every dollar it spends the economy would be weaker and the country would have a higher unemployment rate. Senator Conrad should have been asked about this issue during his interview.
 
It Was the Bubble, not Subprime, That Sank Fannie and Freddie Print
Wednesday, 16 March 2011 04:46
The NYT told readers that Fannie Mae and Freddie Mac collapsed due to their movement into the subprime and Alt-A market in 2005 to regain market share. While the move into lower quality mortgages worsened their situation, Fannie and Freddie would have suffered very large losses even if they had stuck to their traditional market. The collapse of the housing bubble led to record default rates on all mortgages. The majority of mortgages in default now are on prime loans.
 
Public Employees Living the Good Life Print
Wednesday, 16 March 2011 04:32
The NYT had a good piece describing the lives of some of the Ohio employees who its governor thinks are overpaid.
 
NPR Joins Drive to Cut Social Security Print
Tuesday, 15 March 2011 19:48

NPR ran a piece that largely accepted untrue or misleading Republican assertions about Social Security. The piece told readers that:

"Republicans also believe [emphasis added] the very best time to fix Social Security is now, during a time of divided government when both Democrats and Republicans can share ownership of any changes."

Actually, NPR's reporters/editors have no clue what Republicans "believe." They are just making this up. The Republicans in question (like Democrats) are politicians. They say things that advance their political agenda whether or not they actually believe them. Competent reporters know this and don't try to tell their audience that these politicians actually believe their assertions; competent reporters just report the assertions and let their audience make up their own mind as to whether the politicians believe what they are saying. 

It is also not a fact that Social Security needs to be fixed in any meaningful sense of the term. The Congressional Budget Office projects that the program can pay all benefits for the next 28 years with no changes whatsoever and can pay nearly 80 percent of projected benefits indefinitely into the future, even if nothing is ever done to change the program.

The article includes a statement from Alabama Senator Richard Shelby noting that Social Security paid out more in benefits than it took in taxes last year: "

"Social Security is now at the tipping point, the first step of a long, slow march to insolvency if we don't do something about it."

It would have been worth noting that this actually was part of the design of the program. The reason that payroll taxes were raised to a point where they exceeded benefits was to cover the cost of the baby boomers' retirement, which meant that there would be points like the present where benefits exceeded taxes. Otherwise, the increase in the payroll taxes in the 1980s made no sense. It would have been appropriate to point out to listeners that Mr. Shelby either does not understand the program or is deliberately trying to mislead the public.

Similarly, the segment included an assertion from Oklahoma Senator Tom Coburn that money was stolen from Social Security:

"The fact is ... $2.8 trillion was stolen from Social Security .., The money was spent. It's broke. And we're going to have to fund $2.8 trillion over the next 20 years just to make the payments that we've got. I would think most people would think we ought to fix that."

Actually, not a penny was stolen from Social Security. Social Security lent money to the federal government by buying bonds, just as individuals, private corporations and banks do all the time. When an individual or company buys a bond from the government, it doesn't matter to them at all (except as citizens) whether or how the government spends the money. The government owes the exact same money regardless.

When the government pays back the bonds held by the Social Security trust fund it will effectively be replacing the bonds held by the trust fund with other bonds. The borrowing took place when the government sold bonds to the Social Security trust fund in the first place. It is not new borrowing when the government repays the bonds held by the Social Security trust fund.

 
The Hill Has a Problem With Theory and Practice Print
Tuesday, 15 March 2011 07:28

The Hill told readers today that:

"The [Social Security] trust fund itself has a theoretical $2.6 trillion surplus, but that money has been spent by the federal government like general revenues."

It is not clear what information the paper thinks is added by the word "theoretical." It is possible to add the word to almost any sentence (e.g. "Washington has a theoretical basketball team"). When something actually exists in the world, calling it "theoretical" is presumably intended to impugn it in some way.

Of course the trust fund does exist in the world, it is held in the form of U.S. government bonds. These bonds are referred to as "IOUs" in the Hill piece. It is highly unusual to refer to bonds of private corporations or government bonds as IOUs.

The article also makes the bizarre assertion that: "the payback [use of interest on the bonds held in the trust fund to pay Social Security benefits] has arrived at a very difficult time, when Washington is running a $1.6 trillion budget deficit." Actually, the interest rate on government debt is very low right now. This means that it is in fact a very good time for the government to be replacing the bonds held by Social Security with other bonds.

Readers can assume, based on these comments, that the Hill does not like Social Security and wants to see benefits cut. Usually this sort of editorializing is left to the opinion pages but apparently the Hill could not contain its animosity towards the program.

 
Fox on 15th (a.k.a. the Washington Post) Pushes Its Trade Agenda Print
Tuesday, 15 March 2011 04:49

The Washington Post is going into high gear pushing its trade agenda. It ran an editorial that included the term "free trade" in both the headline and the first sentence. While proponents of these deals like to call them "free" trade pacts, this is not accurate. They do little or nothing to reduce the barriers to trade in highly paid professional services, like those provided by physicians and lawyers, and they increase many forms of protectionism, most notably patent and copyright protection.

But the Post wants these deals to pass, so if calling them "free trade" pacts advances the cause, this is a small matter. After all, this is a newspaper that told readers that Mexico's GDP quadrupled between 1988 and 2007 to make its case that NAFTA was a huge success. The actual growth was 81 percent. Given the paper's willingness to ignore truth in the pursuit of its trade agenda, calling the pacts "free trade" deals is a relatively minor matter.

 
The Mysteries of Labor Composition Print
Monday, 14 March 2011 11:10

David Leonhardt had a blogpost last week that left some of us here at CEPR stumped. It had two graphs, one on top of the other, showing patterns in wages since the start of the recession. The top graph showed wage gains by educational attainment. This showed that college grads had an increase of about 1.5 percent in their real weekly earnings, while everyone else saw modest declines. The second graph showed real wage growth by income cutoffs. Those at the 90th percentile saw real wage gains of 8.0 percent, but everyone else also saw modest wage gains as well.

At first glance, these seemed inconsistent and we thought that Leonhardt had made a mistake. After checking his data, we saw that he was exactly right. The explanation was a change in the composition of the employed workforce. There was a sharp drop in employment among workers without high school degrees and those with just a high school degree between 2007 and 2010. On the other hand, the number of people employed who had advanced degrees actually increased slightly.

 

educational_mix2_31489_image001

Source: Bureau of Labor Statistics.

 

What happened here is that the change in composition means that much of the bottom portion of the workforce is no longer employed. Therefore the 90th percentile worker in 2010, might have been the 92nd percentile worker in 2007. And, in 2007 the 92nd percentile worker earned 6.3 percent more than the 90th percentile worker.

So, what looks like a big rise in wages for higher-end workers is in fact the result of comparing different workers. This is worth keeping in mind. The wage growth at the middle and lower-end of the income distribution in the late 90s looks even better when we consider that many less educated workers found jobs in this period. 

 
Washington Post Decides That the Markets Are Wrong About Japan Print
Monday, 14 March 2011 08:59

The financial markets seem relatively unconcerned about Japan's fiscal situation as evidenced by the fact that investors are willing to buy 10-year Treasury bonds from the Japanese government at an interest rate around 1.4 percent. Nonetheless, the Washington Post told readers that:

"Japan is already groaning under government debt equal to twice its yearly economic output."

As a result of the low interest rate on its debt, Japan's interest burden is actually smaller measured as a share of GDP than the interest burden in the United States. Also, close to half of Japan's debt is held by its central bank. The interest paid on debt held by the central bank is refunded to the government and therefore imposes no burden on Japan's budget.

Also, Japan has no fears whatsoever of inflation. As the article notes toward the end, many forecasters project that the economy will weaken further as a result of the earthquake/tsunami and cause another burst of deflation.

 
What's Ideological About Wanting the Government to Give Money to Rich People? Print
Monday, 14 March 2011 04:46

E.J. Dionne had a good piece pointing out that the country is not "broke" as many of the deficit hawks have been claiming. Dionne rightly points out that per capita income is continuing to rise; the problem is that the bulk of income gains have been going to those at the top. Dionne rightly identifies the claim of national poverty as part of an "excuse" for "policies to lower taxes on well-off people and business while reducing government programs."

However, Dionne bizarrely describes this effort as "ideologically driven." It's not clear what ideology Dionne sees here and he certainly doesn't identify one. The more obvious story is that wealthy people pay for the political campaigns of politicians who will support give policies that will give them more money. Ideology plays no more obvious role in this scenario than it does in the operations of the Mexican drug cartels.

 
Those Damn Chinese Are Going to Buy Our Wheat Print
Sunday, 13 March 2011 08:29

The Post really outdid itself in running confused pieces when it ran a column by Lester Brown in its Outlook section warning us that China will start buying our grain in massive quantities. It's common for a column to get 2 or 3 things wrong, but just about every single assertion in this column is mistaken.

To start with, we are supposed to be concerned about China's ability to buy our food based on its holdings of $900 billion in Treasury bonds. Actually, as a country, China's ability to buy our wheat depends on its holding of any U.S. asset. It would have just as much ability to buy U.S. wheat if it did not have a single dollar in Treasury bonds, but instead held $900 billion worth of the stock and bonds of private corporations. (Most estimates put China's holdings of U.S. assets considerably higher than this.)

This distinction is important because U.S. indebtedness to China is a function of the trade deficit not the budget deficit. Many people deliberately promote this confusion in order to use xenophobic fears to promote their deficit reduction agendas. In reality, those who are concerned about indebtedness to China and other countries should want to see the value of the dollar decline. If we eliminated the budget deficit completely, and somehow maintained full employment, we would be borrowing just as much money from China and other countries each year, if we did not lower the value of the dollar. Conversely, if we lowered the value of the dollar to the point where our trade was balanced, the country would not be borrowing a penny from China or anyone else, on net, even if the federal government was still running large deficits.

This logic is also important in the threat that we would supposedly face if we tried to restrict grain sales to China. Brown tells us that China might then boycott our Treasury auctions.

Let's carry this one through for a moment. We have been pushing China to raise the value of its currency relative to the dollar. The way that they keep the value of their currency down is by using the dollars they earn from their trade surplus to buy Treasury bonds instead of just dumping them on international currency markets and allowing the dollar to fall. Of course if the dollar fell, then our trade deficit with China and other countries would shrink. 

So, China will threaten to do exactly what we have been asking them to do -- they will stop propping up the value of the dollar against the yuan. This is supposed to have us scared.

Finally, the real bad news in the picture -- China pushing up the price of wheat -- actually is not scary for people in the United States at all. The U.S. currently produces about 2 billion bushels of wheat a year, roughly half of which is exported. Prices have fluctuated a great deal in recent months, but let's start with a price of $10 a bushel, the higher end of the recent range.

At this price, we spend roughly $10 billion a year on the wheat we consume domestically and get $10 billion a year from the wheat we export. Suppose the buying by the Chinese doubled the price to $20 a bushel. This means that the wheat we consume would cost us another $10 billion a year. Meanwhile the wheat we sell overseas would allow us to buy twice as many imports as it had previously. The $10 billion rise in food prices would come to a bit more than $30 per person per year -- less than 10 cents a day. Are you scared yet?

Even if we said that the price of wheat tripled because of the Chinese and then doubled this impact because of China's buying up of corn, soy beans and other crops, we still only get 40 cents per person per day. In short, higher food prices are not going to be bad news for people in the United States.

Where this column misses the boat is that higher food prices will be a problem for the world's poor who must subsist on just 1-2 dollars a day. Hundreds of millions of people in Sub-Saharan Africa and other poor regions of the world will face serious consequences if world food prices rise substantially. Remarkably, these people did not find their way into this column.

 
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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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