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The Washington Post Says Bill Gates Is Broke Print
Thursday, 19 August 2010 04:46

Actually, they made this assertion about the United States and the United Kingdom, which makes considerably less sense than saying Bill Gates is broke. There is no evidence that either country is coming up against any sort of spending limit. The bond markets are willing to lend both governments at very low interest rates and there is certainly no shortage of people who are willing to accept the currency of the two countries.

Since it has no basis in fact, the Post's assertion that these countries are broke is presumably an expression of its unhappiness with how these governments spend their money. This is the sort of sentiment that newspapers are supposed to leave for the opinion pages.

 
Post Missed the Seasonal Factor in Industrial Output Print
Wednesday, 18 August 2010 06:57

The Federal Reserve Board reported a big uptick in industrial production in July. A large part of the increase was attributable to the fact that the Detroit auto manufacturers did not shut down in July for model changes as they ordinarily do. This led to a reported 8.8 percent rise in auto output for the month since the seasonal adjustments assume that this shutdown takes place. This virtually guarantees a large decline in output for August and is not by itself an indication of improvement in the auto industry.

The Post missed this fact and touted the upturn in auto production.

 
Does Thomas Friedman Have to Talk to "Senior Economic Policy Makers" to Get So Many Things Wrong? Print
Wednesday, 18 August 2010 04:04

Thomas Friedman begins his piece today by telling readers that: "over the past few weeks I’ve had a chance to speak with senior economic policy makers in America and Germany." This might lead readers to believe that he is about to share some great insights that would only be possible for someone with special access to these senior economic policy makers.

Readers with this expectation will be seriously disappointed. There is nothing here that is more insightful than what can be found on the Washington Post's editorial pages on an average workday. Friedman rehashes the usual cliches, with the usual lack of thought. In doing so, he gets both the story of the recent past and the present seriously wrong.

Starting with the past, he badly misrepresents the prior business cycle:

"we’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines."

The main problem facing the U.S. economy of the last decade was a lack of demand. This was in large part due to the fact that China lent to us. China's lending was its policy of propping up the value of the dollar in order to maintain its export market in the United States. (At the start of the decade, the Clinton administration had also tried to promote an over-valued dollar.) The over-valued U.S. dollar made imports from China and other countries very cheap in the United States and made our exports expensive in other countries. This led to a large and growing trade deficit over most of the business cycle. The trade deficit replaced domestic demand, preventing the economy from approaching normal levels of employment (even with the boost from the housing bubble) until just before the crash.

There is no reason whatsoever to believe that China's decision to prop up the dollar was in any way affected by the Bush tax cuts. In other words, neither the Bush tax cuts nor the growth in entitlements had anything to do with our borrowing from China. The issue was China's decision to lend and thereby prop up the dollar. Given the weakness of demand through most of the decade, these expenses could have been easily filled by domestic production without borrowing from abroad.

Friedman does no better when he shifts the discussion from the past to the present. He refers to businesses' reluctance to hire as the result of "unusual uncertainty," a phrase attributed to Federal Reserve Board Chairman Ben Bernanke. Of course there is no reluctance to hire, there is simply a lack of demand for labor. A reluctance to hire would be reflected in an increasing number of hours per worker, as employers sought to meet their demand for labor by working the existing workforce more hours.

This is not happening. There is a modest uptick in hours from the low point of the downturn, but the increase in hours per worker is certainly no more rapid than in other recessions and the average workweek is still far shorter in just about every sector than it was before the downturn.

Later he tells readers:

"America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever."

This is a great story -- social networking is soaring, IPads are everywhere -- does Friedman have any evidence whatsoever that this development has increased the demand for educated workers and reduced the demand for less educated workers? If so, this would be the place in his column to present the evidence. Otherwise, readers might think that the 4.7 percent unemployment rate for college grads (nearly triple the pre-recession level), coupled with a decline in their real wages over the decade, implies a reduced demand for the labor of highly educated workers as well as less educated workers.

Friedman's proposed fix also seems a bit wide of the mark. He insists:

"There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers $40 an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. There is no other way."

We better hope there is another way. A wage of $40 an hour would put a worker well over the 90th percentile on the wage distribution. Even if we double the number of jobs in this pay range -- an incredible accomplishment -- what happens to the other 80 percent of the workforce?

Friedman then warns us of the challenge from Europe by getting Germany's past and present wrong:

"Keeping up with Germany won’t be easy. A decade ago Germany was the 'sick man of Europe.' No more. The Germans pulled together. Labor gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidized firms to keep skilled workers on the job in the downturn."

Germany clearly has done some changes that benefited its economy, like work sharing, and some that haven't, but its past as the "sick man of Europe" is an invention of Friedman or his highly placed sources. Germany always ran a trade surplus. That is the most basic measure of a country's competitiveness: foreigners are buying its goods. Germany's unemployment rate in 2000 averaged 7.5 percent, not hugely different than its current 7.0 percent rate.

The story here is that Friedman seems to have completely missed the basics of the current economic crisis in spite of his weeks of conversing with senior economic policy makers. The current crisis is due to a lack of demand pure and simple. If we generate demand either through more expansionary Fed monetary policy, greater fiscal stimulus, or increased exports due to a falling dollar, there is no reason to believe that the economy will not return to high levels of employment. Certainly Friedman has presented no evidence that increased demand will not generate increased employment as it always has.

The longer term debt problem is overwhelmingly a health care story. Apparently Mr. Friedman's sources don't have access to documents like the Medicare trustees report, which imply that U.S. health care costs will be controlled and there will be no serious long-term deficit problem. This may prove wrong, but it seems that it would have at least been worth noting in his column. Of course, if we have not fixed our health care system, we can always achieve huge saving by relying on the more efficient health care systems in other countries.

If Friedman's intention was to scare us, he succeeded. After all, if senior economic policy makers in the U.S. and Germany are as badly misinformed as Friedman implies, then we can expect some very bad times ahead.

 

 

 


 

 
The Wall Street Journal Raided My Bank Account Print
Tuesday, 17 August 2010 06:21

Yep, I paid for the paper this morning. Okay, most people would not call that "raiding." But where on earth does the WSJ get off saying that the government has been "raiding" Social Security for decades? Was this article a paid political advertisement? (It reads that way.)

Of course, it makes as much sense to say that WSJ raided my bank account as to say the government raided Social Security. (Perhaps more, I thought I was buying a newspaper.) There was absolutely nothing improper done with Social Security money. It was used to buy government bonds. Readers of a business paper like the WSJ may have thought that its reporters understood how U.S. government bonds work.

The Social Security trust fund will redeem the bonds when they are needed to pay benefits, just as private citizens and corporations often buy bonds and then sell them off when they need the money for some other purpose. In the meantime, the government used the money it borrowed for other purposes. That is the way government bonds and other bonds work. It is also exactly how the law was been written, and it has been followed.

It also would have been helpful to point out that there is no obvious problem with the deficit and debt levels discussed in the article. The text seems to have been written by a hyperventilating reporter, when the numbers should raise about as much concern as a 4-2 baseball score.

The economy of course does face a crisis. The collapse of the housing bubble has left 15 million people unemployed and is costing us $1.5 trillion a year in lost output. Remarkably, these basic facts are largely absent from the article as the WSJ seeks to get readers and voters to focus on the deficit and its goal of cutting programs like Social Security and Medicare.

 

 
Denmark Is Not Having Trouble Paying for Its Welfare State Print
Tuesday, 17 August 2010 04:51

Contrary to what the NYT apparently wanted readers to believe when it told them: "But sustaining a benevolent nanny state is proving to be challenging even for the notably generous Danes."

Actually, Denmark's debt to GDP ratio is just over 40 percent, roughly one-third less than the United States. Its deficit for the year will be around 3 percent of GDP, approximately one-third of the size of the U.S. deficit. Denmark has also consistently been running large trade surpluses, building up claims against foreigners in contrast to the United States, which has been running large trade deficits.

 
NPR Tells Us That Republicans Believe that Fannie and Freddie Caused the Crash Print
Tuesday, 17 August 2010 04:16

Yes, NPR looked into the eyes and now they know what the Republican leaders believe:

"In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy."

In Journalism 101 reporters are told not to say things that they don't know to be true. And high on the list of things that reporters do not know is what politicians really believe.  

News flash! Politicians sometimes say things that they do not believe to be true. The Republican allegations about Fannie and Freddie would likely be on this list, since they are so obviously not true as one of the sources in this piece points out.

Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage-backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.

It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.

Responsible reporters would simply present the facts here. They would not try to tell us what the politicians really believe, since they really have no idea.  

 

 
How Will Cuts to Social Security Affect Spending By Retirees? Print
Monday, 16 August 2010 04:44
For some reason this question was never raised in a WSJ piece reporting on the expected reduction in spending by baby boomers who will be retiring over the next decade.
 
China Has Long Been the World's Second Largest Economy: NYT Kills Electrons for Nothing Print
Sunday, 15 August 2010 20:15

The NYT is touting the big news. China just passed Japan as the world's second largest economy! This is painful because the piece badly misleads readers about the relative size and importance of China's economy.

Measured by purchasing power parity -- a measure that assigns the same price to goods and services regardless of where they are produced -- China has long been the world's second largest economy and in fact is already more than twice as large as Japan's economy. It is only by using an exchange rate measure of GDP that China's economy ends up being a close rival of Japan.

The exchange rate measure adds up the size of the economy's output in its own currency, then it converts this measure into dollars at the current exchange rate. Of course there is a large arbitrary component of the exchange rate at any point in time. In China's case, the government has a policy of deliberately depressing the value of its currency. Some estimates put the under-valuation at more than 40 percent. If China allowed the value of its currency to rise, then its exchange rate measure of GDP would rise accordingly. In other words, China could have passed Japan in GDP by this measure two years ago if it had allowed its currency to rise by 20 percent against the dollar.

This is why economists generally use the purchasing power parity measure for most purposes. This much better reflects the relative productive capacity of different countries' economies.

 
Everyone Cannot Use Trade Surpluses to Generate Demand Print
Saturday, 14 August 2010 07:48

The NYT has an article touting the success of Germany's economy. It notes that the Germany's strong growth in the second quarter (8.8 percent annual rate) and relatively low current unemployment rate (7.0 percent) support the view of Germany's leadership that austerity was the right path to foster growth.

It would have been worth noting that it is not possible for every country to follow Germany's path of relying on a large trade surplus (someone must have a corresponding deficit). Germany and some number of other nations can create domestic demand through trade surpluses, but this strategy cannot be followed everywhere.

It also would have been helpful if this article reported economic data that would have been meaningful to its readers. For example, GDP is always reported as an annual growth rate, not a quarterly rate. Also, it would have been more useful to present the OECD harmonized unemployment rate for Germany (7.0 percent), which is measured in the same way as the U.S. rate, rather than the German official rate, which counts part-time workers as part of the unemployed.

 
Protectionism Leads to Corruption # 27,453: The Case of Drug Patents, Again Print
Saturday, 14 August 2010 07:30

The NYT tells us that the Feds are investigating drug companies again. It appears that they were making payoffs to foreign doctors to get them to prescribe their drugs.

A brief reference to econ 101 would be helpful here. Economists like it when goods sell for their marginal cost. Trade barriers like tariffs or quotas often raise the price of items by 20-30 percent above their marginal cost. The extra profit created by this gap provides the protected industry with an incentive to engage in corrupt activities like payoffs to politicians to preserve their protection.

Drug patents can raise the price of protected drugs by more than 100 times (10,000 percent) above the free market price. This gives them very large incentives to engage in corrupt activities, so we should not be surprised to find out that they do.

 
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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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