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Is It a Fact That the U.S. Deficit Is "Ballooning?" Print
Thursday, 26 May 2011 04:26

The Congressional Budget Office actually projects that the deficit is on a downward path, but the NYT still felt the need to tell readers that the deficit is "ballooning" in an article on the agenda for an upcoming meeting of G-8 leaders. The article also felt the need to describe the deficit as "giant."

These comments reflect the reporters or editors political views. They do not inform readers about facts in the world.

Bill Clinton, Who's Known for His Plan to Cut Social Security Print
Thursday, 26 May 2011 03:56

In an article reporting on how the Republicans are backing away from the Ryan plan for privatizing Medicare. the NYT quoted former President Bill Clinton on the need to cut Medicare spending. Mr. Clinton was speaking a daylong conference of the deficit sponsored by Wall Street investment banker Peter Peterson.

It would have been worth reminding readers that Clinton is a big proponent of cuts to Social Security. At the deficit conference that Peterson sponsored last year, Clinton boasted that he had wanted to cut Social Security but congressional leaders from both parties blocked him. The cuts that he wanted would have reduced benefits by approximately 1 percent a year. This means that retirees in their 70s, 80s, or 90s, would be getting almost 15 percent less in Social Security benefits today, if President Clinton had gotten his way.

His desire to cut Social Security puts Clinton far outside the mainstream in the Democratic Party. In fact, it puts him far to the right of the majority of the Republican Party. It would have been appropriate to remind readers of this fact so they could put Mr. Clinton's interest in cutting Medicare in context.

The Wall Street Journal Tells Us It's All About Philosophy Print
Wednesday, 25 May 2011 22:03

The news media keeps trying to tell us not to worry about who gets the money, the issue is one of philosophy. The WSJ picks up the task today telling readers that the difference between conservative and liberal budget plans:

"The big takeaway is this: The debate over how to reduce the deficit is truly a philosophical one about the size of government."

Is that so? The Congressional Budget Office tells us that it will cost $34 trillion (5 times the size of the projected Social Security shortfall) more to provide Medicare equivalent policies through private insurers than through the traditional government Medicare program. This would be additional money paid by taxpayers and beneficiaries to insurers and providers. Is the desire to hand this money over to these groups a question of philosophy?

Near Record Vacancy Rates Weigh on Home Prices Print
Wednesday, 25 May 2011 21:22

Nearly all economics reporters missed the housing bubble on the way up. They still seem determined to ignore it even after its collapse wrecked the economy.

The Wall Street Journal has a piece that emphasizes the effect that foreclosures are having on house prices. While foreclosures are lowering house prices, the more fundamental issue is that we have enormous excess supply. The country still has near record housing vacancy rates, although the level is down slightly from the peaks hit in 2009-2010.

This extraordinary vacancy rate puts downward pressure on house prices, since it means that there is excess supply of housing. (Those who took intro econ might recall the concepts of "supply" and "demand.") One of the predictable results of excess supply and falling prices is a rise in foreclosures, since falling house prices will put many people underwater in their mortgage. As a result of having zero equity, it is harder for people to pay their mortgage (they can't borrow against equity) and they have less reason to do so.

Anyhow, the key part of this story is the excess supply which was the result of the massive overbuilding of the last decade. It is reasonable to expect that prices will have to fall at least back to their pre-bubble level (@10 percent more) in order to bring the market back into balance.

If Senator Simpson Started Muttering Incoherently, Would the Media Sill Cover Up for Him? Print
Wednesday, 25 May 2011 20:44

At Peter Peterson's daylong conference on the deficit, former Senator Alan Simpson, who was also the co-chair of President Obama's deficit commission, once again insisted that Social Security was not intended as a retirement program. He also insisted that the arithmetic for the program doesn't add up and that therefore there have to be major cuts.

Of course everyone involved with the establishment of Social Security understood it to be a retirement program. It's not clear what Senator Simpson has been reading that led him to think otherwise.

In terms of the arithmetic underlying the program's finances, this is performed regularly by the actuaries at Social Security. With the trustees current assumptions, the program can pay all benefits through the year 2036 and almost 80 percent of scheduled benefits for the rest of Social Security's 75-year planning period. The projected shortfall could be almost completely eliminated with the cap on the payroll tax was removed.

Put another way, if there had not been a massive upward redistribution of wage income over the last three decades, most of the current projected shortfall would not be there. This is the simple arithmetic that apparently Senator Simpson does not understand.

It is incredible that no media outlet other than Huffington Post thinks it is newsworthy that the co-chair of President Obama's deficit commission is completely uninformed about the country's most important social program. While these news outlets have been anxious to tout comments by minor administration officials that had little to with their jobs (e.g. Van Jones' pejorative reference to Republicans), they have consistently covered up Mr. Simpson's repeated demonstrations of ignorance on the finances of Social Security.

The Public Fears the Consequences of Going Long Periods of Time Without Eating More Than it Fears Starvation Print
Wednesday, 25 May 2011 06:50

That is what the Washington Post told readers this morning in an article headlined:

"in poll, debt is scarier than default."

Of course fearing debt more than default makes no sense just like fearing the consequences of not eating more than starvation makes no sense. The government will always have the option to default on its debt. The consequences would of course be enormous, but there is no reason to think that the consequences of default would be greater 10 or 20 years from now. If the public is prepared to default on its debt, it is difficult to see why it would not want to in effect borrow for free for another 10-20 years and then default to its creditors.

As a practical matter, it is obvious that almost no one has any understanding of what default means nor do they have any idea of the size of the debt and its consequences. One of the main reasons for this confusion is that politicians have sought to build up fears about the debt and they have been allowed to do so with the assistance of major news outlets like the Washington Post and National Public Radio.

When politicians (including political figures like Peter Peterson and his employees) make obviously false statements about the deficit and debt these outlets have routinely passed them on to their audience as plausible arguments. They have rarely treated them as gaffes, like for example then Senator Obama's comments about guns and religion during the Pennsylvania primaries.

There has been a serious effort (strongly supported by the Washington Post) to hold teachers accountable for what their students learn. Teachers whose students do not learn are supposed to be fired. By this standard, a high percentage of the reporters and editors who deal with budget issues would be out looking for work today.

Answering Steven Pearlstein's Questions on Social Security Print
Wednesday, 25 May 2011 05:25

Steven Pearlstein wants to know:

"how much more of the nation’s wealth will have to be transferred to senior citizens with six-figure incomes before it will be politically acceptable to hold their future Social Security benefit increases to the rate of inflation?"


The answer is very little, at least if he means through Social Security benefits. Of course, a very large portion of the nation's wealth is transferred to rich people through financial policy, trade policy, and Federal Reserve Board policy.

Congress Considers Giving FEMA an Extra 0.03 Percent of the Budget Print
Wednesday, 25 May 2011 05:08

In a major page 3 news story the Post told readers that Congress is considering an additional $1 billion appropriation for the Federal Emergency Management Agency in order to allow it to better deal with the range of natural disasters hitting the country. Since almost no one knows the size of the federal budget, and $1 billion is a huge number to most people, it is likely that many people will hugely exaggerate the importance of this spending to the deficit or their tax bill.

Polls regularly show that the public is grossly uninformed about the federal budget. This sort of reporting is the reason. It is very simple to report items as a share of total spending. Since this is the only way that the number is meaningful to readers ($1 billion is not meaningful to 99 percent of Post readers), there is no excuse not to present the information this way.

Social Security Will be There for You, David Lazurus May Not Be Print
Wednesday, 25 May 2011 04:56

There are no, as in none, zero, projections that show that Social Security will not always be able to pay retirees a higher benefit (adjusted for inflation) than what retirees get today. This means that when LA Times, consumer columnist David Lazarus told listeners on Marketplace radio this morning that Social Security may not be there for them, he was speaking utter nonsense.

Responsible radio stations do not present people as experts who either do not know what they are talking about or deliberately say things they know not to be true.

Why Does the NYT Want the Government to Make Housing Unaffordable? Print
Wednesday, 25 May 2011 04:12

The lead NYT editorial tells readers that it is surprised and upset by the deflating of the housing bubble. It tells us:

"At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths."

Actually no; it never looked like "things were improving" to people who follow the housing market. It looked like the tax credits were temporarily delaying the deflation of the housing bubble. This delay allowed banks and investors to have hundreds of billions of dollars in mortgages, which would be underwater today, taken off their books and replaced by Fannie and Freddie guaranteed loans, through sales or refinancing. 

Prices are still close to 10 percent above their trend level, based on either the 100-year long-term trend in house prices or the current price to rent ratio. Neither the NYT, nor anyone else, has provided an explanation as to why we should expect prices to settle above trend.

It is not clear why the NYT would view any delay in the bubble's deflation as a positive development. People who buy houses at prices that are still inflated by the bubble can anticipate losing money on their house. Does the NYT have some reason for thinking it is good policy to get new homeowners into homes where they can anticipate capital losses.

More generally, high house prices amount to a transfer of societal wealth from people who don't own homes to those who do. Since the latter group is much wealthier on average than the former group, why should it be public policy to promote this sort of upward redistribution of wealth? 

The NYT's failure to seriously think about the housing market demonstrates an extraordinary laziness that prevents them from clearly understanding the policy implications. The economy will have adjust to a situation where prices return to trend levels. This will mean lower consumption. (Isn't this what everyone wants -- higher savings?) The lost consumption must be replaced in the short-term by government spending, in the longer term by more net exports. The latter will require a lower dollar. This is all accounting identities from Econ 101.

As far as the housing market, a little clearer thought would get policy to distinguish between markets where the bubble is still deflating (e.g. Seattle, Los Angeles, Boston) and markets where prices are likely overshooting on the low side (e.g. Los Vegas and Phoenix). It might make sense to have policies to boost prices in the latter set of cities. It makes no sense to have policies to boost prices in the former.

Finally, the simplest and cheapest way to help homeowners facing the loss of their home is to give them the right to stay in their house as renters paying the market rent. This requires no taxpayer dollars and no new bureaucracy and would immediately help all the homeowners affected. For these reasons, it is a non-starter in Washington.

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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.