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The Fed Reduces the Deficits Print
Tuesday, 11 January 2011 05:52

The NYT reported on the Federal Reserve Board's payment of $78.4 billion to the Treasury in 2010. The Fed earned this money on the mortgage-backed securities and government bonds that it bought to boost the economy. The payment is equal to almost 40 percent of the net interest paid out by the federal government last year.

The government's budget projections show the Fed's payments to the Treasury shrinking drastically over the next decade. However, it is worth noting this is a policy choice.

The Federal Reserve could buy and hold more debt in the year ahead, thereby alleviating the interest burden on future budgets created by the deficits needed to boost the economy out of recession. To limit the potential inflationary impact of the additional reserves placed in the system the Fed could raise the reserve requirements banks. If the country was having an honest debate on the long-term deficit, in which everything is "on the table," then this would be one of the items on the policy agenda. It is worth noting that banks would not want to see their reserve requirements raised.

 
The Tax Cut Stimulus That Isn't: The Washington Post's Failed Analysis Print
Monday, 10 January 2011 07:37

A front page Washington Post article assessed the amount of stimulus that would likely be coming from the 2 percentage point cut in the payroll tax. While the article did note that many low-income workers will actually be paying more in tax in 2011 than 2010, because of the expiration of the $400 Making Work Pay tax credit, it failed to note the more important point for this discussion, that most workers will see little change in their tax liability.

For example, a worker with the median annual earnings (@ $31,000) would receive a tax cut of $620 as a result of the reduction in the payroll tax. Since they are losing the $400 Making Work Pay tax credit, their net tax cut would be $220 over the course of the year. This is the amount of additional income that could provide a potential stimulus to the economy, not the full $620.

The article failed to make this correction, for example reporting projections of the tax cut's impact from Mark Zandi at Moody's Analytics that did not incorporate the impact of the ending of the Making Work Pay tax credit. The Zandi projections show the boost to the economy compared to a situation in which there was no tax cut at all, not the incremental boost associated with the difference between the payroll tax cut and the Making Work Pay tax credit.

The piece also inaccurately depicted the current 5.3 percent savings rate. It noted that this savings rate is well above the near zero rate that existed at the peak of the housing bubble, however it did not mention that the current saving rate is still well below the post-war average of 8 percent. Given that the current rate is still lower than normal, and that many near retirees have just seen much of their wealth disappear with the collapse of the housing bubble, it is more reasonable to expect that the saving rate will go up than down.

 
Consumers Are Spending Faster Than Normal Print
Sunday, 09 January 2011 10:26
The NYT had another piece suggesting that pessimism about the economy is preventing consumers from spending more. Actually, the current 5.5 percent saving rate is well below the post-war average, which is close to 8.0 percent. With tens of millions of baby boomers approaching retirement with almost no wealth, and many of the politicians in Washington planning to cut back Social Security and Medicare, it would be reasonable to expect the saving rate to rise rather than fall, meaning that consumption will weaken in the future.
 
The NYT Disagrees with Economists: Claims There are Too Many Lawyers Print
Sunday, 09 January 2011 08:07

Most of the thousands of economists gathered this weekend at the annual convention of the American Economics Association in Denver would probably agree with MIT economist David Autor, that the big problem facing the U.S. labor market is that our workforce is not being adequately educated. Autor claims that most of the new jobs that are being created are at the top and the bottom of the skills level. His recipe is to have more people go to college and earn advance degrees.

By contrast, the NYT devoted a lengthy article to tell readers about the dismal job market facing young lawyers. It reports that many recent graduates of law schools that are below the top tier can only find very low paying legal jobs, if they find any within the professional at all.

It is worth noting that if Autor is right, then the NYT has seriously misrepresented the state of the legal market. Alternatively, the economy could simply be suffering from a situation in which there are too few jobs in total. This would mean that the fundamental problem is not the skills of the workforce but rather the skills of the people designing economic policy.

 
QE2 Will Lower the Value of the Dollar Print
Sunday, 09 January 2011 08:00
The NYT reported that conservatives criticize the Fed's new round of quantitative easing (QE2) for, "printing money, financing the federal deficit and devaluing the dollar." The devaluing of the dollar is in fact one of the main goals of QE2, not an unfortunate outcome as the piece later notes. One of the ways in which QE2 would boost the economy is by making U.S. goods more competitive internationally by lowering the value of the dollar.
 
USA Today Says Nations are Jealous of U.S. Traffic Jams and Crowded Parks Print
Friday, 07 January 2011 16:10

That is effectively what a USA Today article implied when it told readers that:

"U.S. [population] growth is the envy of most developed nations."

The article implied that countries with stagnant or declining populations will experience economic hardship as a result. In fact, the impact of productivity growth in raising living standards is an order of magnitude greater than whatever drag demographics, in the form of rising dependency ratios, might be in slowing the growth of living standards. Furthermore, lower populations may directly improve living standards by reducing congestion and pollution and increasing the ratio of capital to labor. This is especially likely to be the case in the densely populated countries of Europe and Japan.

 
Spain Is Not Too Big to Save Print
Friday, 07 January 2011 07:32

The Planet Money segment of Morning Edition wrongly told listeners on Friday that Spain might be too big to save, implying that the country is too large for the European Central Bank (ECB) to cover its debts. This is not true.

The ECB, with the approval of the European Union, could easily cover the debts of Spain and any other country for the simple reason, to take Ben Bernanke's line, that it has a printing press. It is possible that the ECB will opt not to save Spain, either because of concerns about inflation or simply out of a desire to teach Spain a lesson (i.e. it was stupid to join the euro) but this would be a choice. Spain could be saved if the euro zone countries want to save it.

It is also worth noting that Spain may well be better off if it is not saved. Its unemployment rate is currently over 20 percent. The austerity being demanded by the euro zone countries will prevent the unemployment rate from declining any time soon. By contrast, if Spain were to default on its debt and leave the euro it would be immediately be free to take steps to boost growth and employment. This could lead to a sharp turnaround and a rapid move back toward full employment.

This is exactly what happened in Argentina. It had a sharp 6-month plunge after its December 2001 default, but then had 7 years of solid growth until the world economic crisis in 2008 brought Argentina's economy to a near standstill.

 
David Brooks Was Traumatized by the Health Care Bill Print
Friday, 07 January 2011 01:12

Yes, David Brooks devotes a column to the health care bill in which he refers to the "trauma of the past two years." Wow, things must have been bad at the NYT's oped pages. Did Mr. Brooks have nightmares about death panels?

Mr. Brooks' trauma may explain why the column is so out of touch with reality. Brooks warns that:

"The number of people in those exchanges could thus skyrocket, especially as startup companies undermine their competitors with uninsured employees and lower costs."

What does Brooks think he is saying here? As it stands, start-ups already do not have any obligation to pay for their workers' health care. Furthermore, the absolute orthodoxy in economics (i.e. you are an idiot if you don't accept it) is that health care payments come out of wages, so the savings to employers from not providing health care should simply end up as higher wages, so how will the start-ups benefit in this picture?

More importantly, if President Obama's health care plan allows start-ups to be much more competitive domestically, won't they also be much more competitive internationally? And, this is a big problem?

Maybe the NYT should let Mr. Brooks go on leave until he recovers from his trauma.

 
State Financing Crisis: Big News, the Stock Market Fell in 2008 Print
Thursday, 06 January 2011 11:37

Both the New York Times and the Washington Post decided to make major news stories out of a new Census report on state finances for fiscal 2009. Both papers highlighted a reported 30 percent decline in revenue for the year.

While this might sound like a terrifying plunge, the bulk of this reported decline in revenue was attributable to the loss in value of investments held by the states, most importantly stock held by their pension funds. The fact that the stock market fell in the 2009 fiscal year (June 30, 2008 to June 30, 2009 in almost all states) is not exactly news. The S&P 500 fell by 27.9 percent from the end of June, 2008 to the end of June, 2009. 

Furthermore, it would have been worth pointing out that this plunge has been largely reversed. The S&P rose 12 percent during the states' 2010 fiscal year and its most recent close has brought the market almost back to its June 2008 level. In other words, the plunge in revenue that is the highlight of these articles has already been almost completely reversed by the subsequent rise in the stock market.

This does not mean that the states do not still face serious funding shortfalls. Revenue has been hard hit by the recession and stocks still have not provided the return that was anticipated, meaning that pensions do face shortfalls. However, it would have been helpful to readers to point out that the plunge in investment values has been been reversed rather than to highlight this plunge as a major cause for concern.

Hat tip to Gary Burtless.

 
Gene Sperling Thinks Asset Bubbles Are Cool Print
Thursday, 06 January 2011 06:26

I will depart from my policy of not commenting on articles where I am mentioned to clarify the issues (to me) surrounding Gene Sperling's selection as a President Obama's national economic advisor. The primary issue is not that Sperling got $900,000 from Goldman Sachs for part-time work, although that does look bad. The primary issue is that Sperling thought, and may still think, that the policies that laid the basis for the economic collapse were just fine.

Sperling saw nothing wrong with the stock market bubble that laid the basis for the 2001 recession. The economy did not begin to create jobs again until two and a half years after the beginning of this recession and even then it was only due to the growth of the housing bubble. Gene Sperling also saw nothing wrong with the growth of that bubble. Gene Sperling also saw nothing wrong with the financial deregulation of the Clinton years which, by the way, helped make Goldman Sachs lots of money. And, he saw nothing wrong with the over-valued dollar which gave the United States an enormous trade deficit. This trade deficit undermined the bargaining power of manufacturing workers and helped to redistribute income upward.

In short, Sperling has a horrible track record of supporting policies that were bad for the country and good for Wall Street. This track record is far more important than his $900,000 consulting fee in providing my basis for objecting to Sperling's appointment. It is remarkable that it was not mentioned in this article.

 
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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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