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China is Suffering from Both Labor Shortages and Surpluses (of the same type of labor) Print
Sunday, 12 December 2010 21:16

Yep, that's when you know when your economy is really in trouble. The NYT told readers today that China is suffering from inflation:

"Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year.

"That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation."

One might think a good remedy for this situation would be to raise the value of China's currency, which would reduce exports and the demand for labor in export industries. This would alleviate the labor shortage and the upward pressure it places on wages and thereby inflation.

But, "Beijing contends that raising the value of its currency would hurt coastal factories that operate on thin profit margins, forcing them to lay off millions of workers."

Okay, so Beijing is worried that measures to alleviate the labor shortage that it is concerned about will lead to layoffs of workers. There is either something being seriously misreported in this news story or China's leadership has less understanding of economics than the leaders in the United States.

 
Dana Milbank Celebrates Misleading Obama Administration Statements to Push its Tax Deal Print
Sunday, 12 December 2010 08:16

Dana Milbank is really excited as he tells readers in the first sentence of his column:

"For the first time in my adult lifetime, I am really proud of President Obama."

Wow, and why is Mr. Milbank so excited? Has President Obama stood up to the Wall Street banks, the health insurance industry, the pharmaceutical companies, or the oil industry? Well, not exactly, Milbank tells us that: "I'm proud that he has finally stood firm against the likes of Peter DeFazio."

For those who don't know of him, Peter DeFazio is a 12 term Congressman from Oregon. He has never held a leadership position in the party and has not played an important role in designing any major piece of legislation. (In other words, he does not have much power.) He has also backed President Obama on all the key items in his legislative agenda.  

But, Mr. DeFazio has criticized President Obama's tax deal with the Republicans. This got President Obama angry and he told DeFazio and his types to get lost. That passes for being tough at the Washington Post.

Milbank is also impressed that:

"That display [telling the liberals to get lost] was coupled with some hardball politics (Larry Summers's warning that rejecting the package would return the economy to recession)."

That's really cool. Larry Summers told the liberals that if this deal does not got through that the economy would go into a recession. How tough can you get?

Does Larry Summers have a model that shows the economy will fall back into recession without this deal? This certainly is not the forecast that the administration is using in its budget modeling. This modeling projects 4.3 percent as the growth rate for 2011. This modeling assumes the continuation of the Bush tax cuts, a continuation of UI benefits, and a couple of other items that would not happen if the Obama-Republican package and no subsequent language is approved. However, there are no (as in zero, nada, not any) models that show the items assumed in the President's budget projections, which may not happen absent this deal, boosting the growth rate by 4.3 percentage points relative to a situation without these items.

This means that when Larry Summers was playing hardball and telling Congressional Democrats that failure to the pass the compromise would lead to a recession he was saying something that is not true. Outside of polite Washington circles this is known as a "lie." (It is also worth noting that Larry Summers has a proven track record of being wrong about almost every major macroeconomic development in the last 15 years, the stock bubble, the housing bubble, the over-valued dollar, and financial deregulation.)

Apparently, at the Post, saying things that are not true to advance a political agenda is something to be applauded.

 

[Addendum and apology to readers. I foolishly accepted Milbank's characterization of Summers' remarks rather than reading the remarks myself.

Summers did not say that rejection of the budget deal would throw the economy back into recession as Milbank claimed. Summers said that rejection of the deal would increase the risk of recession. This claim is true, since the deal would be a net stimulus to the economy if enacted. If the economy does not get this stimulus, then it would be weaker and therefore at greater risk of recession. So, Summers statement is true; it is Milbank's inaccurate representation of his position that would be a lie.]

 

 

 
President Obama Gets Leading Proponent of Social Security Privatization and Bubble Economy to Tout Budget Deal Print
Saturday, 11 December 2010 09:18

That could have been the lead of a front page Washington Post news story reporting on a press conference in which former President Bill Clinton touted the budget deal that President Obama negotiated with the Republicans. Remarkably, President Clinton's record on these issues was never mentioned in the article.

As many former aides have acknowledged, President Clinton had been considering a variety of options for partially privatizing Social Security in the beginning of 1998 when the Lewinsky scandal exploded. With his presidency in jeopardy, Clinton had to rely on his core constituencies -- labor, the African American community, women's organizations -- all groups that would have been infuriated by an effort to privatize Social Security. As a result, Clinton was forced to abandon this effort.

President Clinton also set the economy on a path of bubble-led growth, touting the stock market bubble that drove growth in the late 90s. He also pushed for the financial de-regulation that helped clear the way for the abuses of the housing bubble era. In addition, he also actively promoted the high dollar policy that led to the enormous trade deficit, which was another major imbalance distorting the economy's growth path.

During his campaign, President Obama openly criticized this bubble-led growth path. Competent news reporters would have pointed out the irony that at this moment Obama now appears to be embracing the economic legacy he criticized. They also would have pointed out that Obama is relying on a Democratic president who was actively planning to privatize Social Security, ostensibly to curb fears that his deal could lead to the privatization of Social Security.

 
There Are at Least Two Schools of Thought About How to Stimulate Growth, But Only One Appears in the NYT Print
Friday, 10 December 2010 06:30

The statement about "at least two schools" is a quote in an NYT article from Germany's Foreign Minister Guido Westerwelle. However, one will look in vein in this article for anything other than the view from Mr. Westerwelle that:

"People used to think that it would be the next generation that would some day have to deal with the issue of public debts. ... And now everybody is surprised that it doesn’t take that long, that it hits us now in the shape of the ever increasing price of credits."

One alternative view is that unnecessarily tight monetary policy in the wake of the collapse of housing bubbles across Europe and the United States is forcing unnecessary austerity on Ireland, Spain, and other European countries. Proponents of this position point out that these countries are not suffering from a shortage of labor and capital, but rather a lack of demand.

This means that if the European Central Bank and/or national governments stimulated these economies by creating additional demand, this demand could easily be met without inflation. From this perspective, the imposition of austerity is simply pointless pain. Furthermore, the people who bear the brunt of the suffering are ordinary workers, not the bankers whose greed fueled the bubbles or the incompetent central bankers and other policymakers who allowed the housing bubbles to grow to such dangerous levels.

 
Tell the Post: Politicians Don't Always Say What They Believe Print
Friday, 10 December 2010 06:01

Reporters don't always know what politicians actually believe, they only know what they say. This is why the Post should not have told readers in describing the White House's view of Senator Charles Schumer's effort to block President Obama's tax deal:

"But to the White House, it is Schumer who is acting recklessly by seeking to wage class warfare with just days left on the legislative calendar, risking the health of the economy and the pocketbook of every middle-class household with his threat to carry the fight into next year."

The Post does not know that the White House actually views Schumer's effort as reckless and risking the health of the economy. The Post only knows that some unspecified person in the White House made this assertion.

 
Changes in Tax Codes Versus Changes in the Value of the Dollar: The Arithmetic of Competitiveness Print
Friday, 10 December 2010 05:29

The NYT tells us that cutting corporate taxes is:

"a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness."

Corporate profits are equal to about 16 percent of the value of output in the corporate sector. Businesses pay roughly a third of their profits in taxes, which means that taxes are equal to about 5 percent of the value of output. If taxes were reduced by 20 percent, a very large tax cut, then this would reduce the cost of doing business in the United States by 1 percent relative to foreign countries.

Suppose the dollar falls by 10 percent against other currencies. This would reduce the price of goods produced in the United States by 10 percent relative to goods produced elsewhere in the world, or ten times as much as the boost to competitiveness that businesses would receive from even a very large reduction in tax rates.

It is understandable that businesses would claim that cutting their taxes is important for U.S. competitiveness. People often make false claims in order to enrich themselves. However, newspapers are not supposed to simply accept such claims as being true and present them to their readers this way.

 
TARP Repayment and Legalized Counterfeiting Print
Thursday, 09 December 2010 06:07

The news outlets that insisted Congress approve TARP or the world will end have been anxiously touting the prospect of repayments and possible profits for the taxpayers from one-time basket cases like Citigroup and AIG. It is worth noting that the question of the government showing a profit or loss on its loans to these companies has little to do with whether the bailout was a net benefit to taxpayers.

Suppose the government uncovered a counterfeiting operation. Instead of shutting it down, suppose it allowed the counterfeiters to print $1 trillion in counterfeit money and buy up the stock of legitimate companies. The counterfeiters would then give ten percent of this stock, worth $100 billion, to the government and shut down their counterfeiting operations.

By the TARP accounting logic, the taxpayers made $100 billion on this deal. In reality, the counterfeiters were allowed to lay claim to $900 billion of the country's wealth based on their counterfeit currency.

The situation with the TARP is similar. Through the TARP and the much larger Fed lending operations, the Wall Street banks were able to borrow money at far below market interest rates. This allowed them to make substantial profits at the peak of the financial crisis. They are now using the profits made with government funds to repay the government with interest. However, the shareholders, creditors, and top executives of these banks are now far richer than they would be if they had not been given access to public money at below market rates.

To imply that this situation has profited the taxpaying public as a whole because the loans have been repaid is extremely misleading, just as it would be inaccurate to imply that the country had benefited by getting a cut of the counterfeiters' profits. 

 
China's Per Capita GDP is About $7,400 Print
Thursday, 09 December 2010 05:51

This is relevant because the Washington Post printed the assertion from Xie Zhenhua, China's chief negotiator at the climate talks in Cancun Mexico, that China's per capita income is $3,700. According to the CIA Factbook, China's per capita income in 2009 was $6,700 a year and it has grown by more than 10 percent over the last year.

Of course the rest of Mr. Xie's comments are accurate. China is a developing country that still has a per capita income that is less than one sixth that of the United States. It also did not play an important role in creating the problem, unlike the United States and wealthy European countries who have been spewing large amounts of carbon dioxide into the atmosphere for decades.

 
Thomas Friedman Advocates Higher Unemployment Print
Thursday, 09 December 2010 05:11

New York Times columnist Thomas Friedman apparently believes that higher unemployment will make the United States better able to compete with highly educated workers in China and India. This is the logical implication of his argument that the United States should stop accumulating debt.

If the United States reduced its deficit in the current downturn, it would reduce demand in the economy, thereby leading firms and/or governments to lay off more workers. Friedman does not indicate why he believes that higher unemployment will make U.S. workers more competitive internationally.

He seems to think that the government's debt poses a problem. Of course the Federal Reserve Board can simply buy and hold debt incurred in a downturn like the present. In this case the debt creates no interest burden since the interest would be paid to the Fed which then refunds it to the Treasury at the end of the year.

While this practice could lead to inflation in more normal times, this is not an issue at present, when a somewhat higher inflation rate would be desirable in any case. Japan's central bank holds an amount of debt that is close to the size of its GDP ($15 trillion in the case of the United States) and it is still experiencing deflation. The Fed could raise reserve requirements at some future point if inflation threatens to be a problem.

There is no good economic argument for wanting to see a lower deficit at present. Apparently Friedman has some other rationale for wanting a lower deficit.

 
The Washington Post Gives Its Readers a False Lesson to Push Its Deficit Agenda Print
Tuesday, 07 December 2010 16:48

In a news story the Post told readers:

"The fiscal crisis sweeping Europe, in which Ireland and Greece have already needed bailouts and Portugal, Spain, and Italy could come next, offers the United States a brutal lesson. By the time the bond market turns on a country - when investors demand higher interest rates or refuse to roll over debt at any price - policymakers have no good options left.

"When that day arrives, a government has little choice but to slash budgets or raise taxes if it wants to satisfy financial markets. But those actions make an already miserable economic situation worse and tend to be vastly unpopular, costing politicians their jobs. Just ask the Irish, who are in such a cycle now."

Actually this is not a story that the United States should ever face -- contrary to the Post's sanctimonious lesson for its readers. Unlike all the countries on its list, the United States has its own currency. This means that, in a worse case scenario, Congress could have the Fed buy government debt. This could create a problem of inflation, but it would not lead to a crisis of type that the article is describing.

The Post's misrepresentation here would be comparable to telling someone living in a steel high-rise that the fire in the straw house across the street shows what happens when you aren't careful with matches. While fire can also harm a steel high-rise, the nature of the risk is qualitatively different than the risk faced by someone living in a straw house. It is wrong to imply that the two risks are the same, as the Post asserts in this piece.

 
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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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