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Why Does the Fed Have Credibility and What It Is Worth? Print
Sunday, 07 November 2010 22:39

The NYT repeatedly refers to the credibility of the Federal Reserve Board. This is an interesting assertion. The Fed failed about as completely as a central bank possibly could in allowing the growth of an $ 8 trillion housing bubble. According to the Fed's own projections, the collapse of this bubble is likely to lead to more than $4 trillion in lost economic output, more than $13,000 for every person in the United States.

By comparison, the costs of the inflation that it was battling in the 70s and 80s were trivial. It is difficult to see how anyone who understands economics would give the Fed any credibility whatsoever based on its track record.

 
Germany's Finance Minister Doesn't Understand Basic Economics Print
Sunday, 07 November 2010 22:30

This should have been the headline of an article in which Germany's finance minister both complained about the United States credit-led model of growth and the decline in the value of the dollar. A falling dollar is the mechanism through which the United States would get off its credit-led model of growth. It will make imports more expensive in the United States, leading us to buy fewer imports. It will also make our exports cheaper, leading us to increase exports. This will reduce the U.S. trade deficit and therefore its foreign borrowing.

Complaining about both the credit-led model of growth and then complaining about the decline in the currency is like complaining that the room is too hot and then complaining when someone turns on the air conditioner. Germany's finance minister apparently does not understand economics, which should have been the main point of this article.

 
It's the Economy Stupid Print
Sunday, 07 November 2010 08:04
The media are filled with discussions about how the Democrats lost the elections because they over-reached or according to a front page Post article because President Obama was disconnected to the American people. However, there are number of models from political scientists that largely predicted the outcome based on the Democrats' past success (meaning a large number of seats in marginal districts) and the bad economy. It would have been useful to call attention to these models even if it undermines the story the media want to tell.
 
The Washington Post Shields Greenspan and the Fed from Criticism on the Disaster They Created Print
Sunday, 07 November 2010 07:48

In a major page two article the Post concealed the true nature of the major criticisms of the Fed's actions on the crisis. The article presents a secondary issue as to whether Greenspan's support of financial markets, for example his actions following the 1987 crash, led investors to underestimate risk.

While this is a reasonable criticism, there is the more direct point that the Fed stood by while an $8 trillion housing bubble built up in the years from 1996 to 2006. This bubble was easy for any competent economist to recognize. There was an unprecedented divergence in house prices from their long-term trend with no remotely plausible explanation in the fundamentals of the housing market.

This bubble was driving the economy. The housing bubble, along with a later bubble in non-residential real estate, led to an enormous building boom. The housing wealth created by the bubble led to a huge increase in consumption as the saving rate fell to zero.

It was 100 percent predictable that the bubble would burst. It was also inevitable that this would lead to a large decline in demand as construction plummeted in response to enormous over-building and consumption plummets in response to lost housing wealth. The lost demand is equal to approximately $1.2 trillion annually, close to 9.0 percent of GDP. There is no easy way to replace this amount of lost demand, which is why the economy is currently experiencing 9.6 percent unemployment.

All of this was entirely foreseeable by any competent economist. Greenspan and the Fed either failed to see what was going on, or saw this and failed to act anyhow. That is the nature of the criticism that the Post would not print.

It is also striking that the Post reports a debate at the meeting over whether the Fed's quantitative easing policy runs the risk of raising inflation above the Fed's 2.0 percent target. The fact that such a debate took place should have been a scandal and the headline of this article.

The Fed has a legal obligation to target full employment and price stability. The 9.6 percent unemployment rate is hugely above anyone's measure of full employment. It is leading to trillions of dollars of lost output and ruining the lives of tens of millions of people. The consequence of inflation edging above 2.0 percent are incredibly trivial by comparison. This is like someone worrying about the greenhouse gas emissions from the firetruck rushing to put out a school fire. The fact that ostensibly serious people involved in setting U.S. monetary policy could debate this point should be a scandal.

 
The Post's Simplistic Editorial Criticizing "Simplistic" Thinking on Trade Print
Sunday, 07 November 2010 07:25

The Washington Post editorial board, which thinks that Mexico's GDP quadrupled between 1988 and 2007 (due to NAFTA), is again pushing its trade agenda. The Post plays the usual game of calling trade agreements that increase protectionism in many areas (e.g. patents and copyrights) "free-trade" agreements. (Anyone out there opposed to "freedom?")

The "simplistic" ads against U.S. trade policy that the Post criticized reflect the fact that this policy has had the effect of redistributing income upward over the last three decades. These deals have been quite explicitly designed to put manufacturing workers in direct competition with low-paid workers in the developing world.

At the same time, these deals have done little or nothing to remove the barriers that make it difficult for students in Mexico, China, or India from training to work as doctors, lawyers, or other highly paid professionals in the United States. There would be enormous potential gains to consumers and the economy by bringing down the cost of medical care, legal services and other services provided by these workers.

This would be a trade policy that would promote both efficiency and equality, but you won't read about it in the Washington Post.

 
News Flash!!!! A Falling Currency Is How Trade Deficits Adjust! Print
Saturday, 06 November 2010 15:46

Okay, let's wash away the ungodly stupidity. Doesn't anyone take intro econ anymore? Here's the test question and no one gets to write on currency or trade policy until they get it right.

If a country has a large trade deficit in a system of floating exchange rates how does it move to balance? Yes, that's right, its currency falls in value. That's the whole story, everything else is secondary.

So, the United States has a large and growing trade deficit. Do you want the trade deficit to fall? If so, then you want the dollar to decline in value. The value of the dollar determines the cost of U.S. exports to other countries and the cost of imports for people in the United States. The former is high now and the latter is cheap. That is why we have a trade deficit.

We shouldn't have to read any more pieces like this one in the NYT. Make these folks learn a little basic economics.

 

 
Interest Payment Are Not Profits Print
Saturday, 06 November 2010 11:42
Come on folks, the government did not make "a profit of $1.1 billion in the third quarter on its huge bailout of the mortgage finance giants Fannie Mae and Freddie Mac," as the NYT told us this morning. This money was the interest paid on the money that the government lent to the mortgage giants to keep them solvent. The government is still almost $140 billion in the hole on this deal, as is noted later in the piece.
 
The Need for New Antibiotics: Can We Talk About Alternatives to Patents, Please? Print
Saturday, 06 November 2010 08:54

Does the pharmaceutical industry prevent the media from discussing alternatives to the patent system for financing drug research? That would seem to be the case, since an NYT article on the failure of the industry to pursue the development of new antibiotics never once mentioned alternatives to relying on the current patent system.

It does not plan to offer government subsidies in addition to patent monopolies or proposals to make these monopolies even longer, but never considers the possibility that the research would simply be financed directly through public funds with all the findings placed in the public domain. Is there just a mental blockage here or is something else going on? 

 
How Many Jobs Does it Take to Hold the Unemployment Rate Constant? Print
Saturday, 06 November 2010 08:08

This one should not be all that hard but the papers have numbers all over the place. Let's turn to our old friend, arithmetic, to shed some light on the topic. The Congressional Budget Office tells us that the labor force is growing at the rate of 0.7 percent a year. The current size of the labor force is 153.9 million. This implies that we need about 1.1 million jobs a year to keep even with the growth of the labor force. (The number would be a bit less if the 6 percent share of self-employed in the labor force held constant.) That translates into a bit over 90,000 a month.

The 151,000 jobs reported for October is about 60,000 more than is needed to keep the unemployment rate from raising. At this pace it would reduce the pool of unemployed workers by 720,000 over the course of a year. With a gap of about 10 million jobs at present, this rate of job growth would fill the gap in around 14 years.

In order to fill this gap in a reasonable period of time, say 3 years, we would need job growth of 370,000 a month. This would bring the economy back to normal levels of unemployment by late 2013, six years after the onset of the recession.

 

 
Tell the Post: Representative Cantor Cannot Acknowledge Something That is Not True Print
Saturday, 06 November 2010 07:53

In pushing its editorial line that Social Security and Medicare must be cut the Post told readers in a news story that:

"Cantor acknowledged that any effort to solve the nation's budget problems 'is going to have to deal with entitlements' - big, popular programs such as Social Security and Medicare (emphasis added)."

A real newspaper would have used a term like "asserted" or "claimed." Of course it is not necessary to deal with programs like Medicare and Social Security to fix the country's projected long-term budget problems as can be easily shown. It is necessary to fix the country's health care system. If per person health care costs in the United States were comparable to costs in other wealthy countries then our budget problems would be easily manageable.

 
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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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