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The Falling Dollar, Not the Falling Economy, Reduced the 80s Trade Deficit Print
Tuesday, 05 October 2010 14:36

What do conservatives have against reality? That is undoubtedly the question that readers of David Leonhardt's Economix blogpost on the revaluation of China's currency will be asking. Leonhardt turned the post over to Derek Scissors of the Heritage Foundation.

Mr. Scissors argues that the rise in the value of the Japanese yen in the 80s had little to do with the decline in the U.S. trade deficit with Japan. Scissors argued that the trade deficit just shifted to China. He claims that the main reason that the deficit fell in the 80s was the slowdown in growth and the onset of the recession.

There is a small problem with that argument. The trade deficit dropped while the economy was still growing rapidly. It fell from a peak of 3.1 percent of GDP in the 2nd quarter of 1987 to less than 2.0 percent of GDP in the 2nd quarter of 1988, as shown in the graph below. This quarter was sandwiched between two quarters of growth above 5.0 percent. The deficit declined further to less than 1.4 percent of GDP by the 3rd quarter of 1989, when the economy grew 3.2 percent. 

quarterly-gdp

 

In short, the recession cannot explain the decline in the size of the trade deficit because the deficit declined while the economy was still growing rapidly. The more obvious explanation is the decline in the value of the dollar that was negotiated at the Plaza Accords in 1986. This is yet another example of the facts being biased against conservatives.

 
The Man Who Sank the Economy Warns of Deficits Print
Tuesday, 05 October 2010 07:06

That would be Ben Bernanke, who by his own claim brought us to the edge of a second Great Depression. The Post told readers that Bernanke:

"has aimed to use the weight of his words to try to give more momentum to efforts to reduce the budget deficit in the medium to long term."

It would have been reasonable to note the irony that a person who failed so miserably at his job -- causing tens of millions to be unemployed or underemployed, and also causing deficits to soar -- would lecture Congress and the public about deficits.

 
If AIG Sells Off Assets and Hands the Cash to the Government, How Would Its Share Price Not be Affected? Print
Monday, 04 October 2010 21:18

That's what readers of Andrew Ross Sorkin's column on AIG are all asking, but arithmetic and Mr. Sorkin are rarely found in the same room. Of course the real story of AIG and the other bailouts is that the government used its credit to keep the company, and more importantly its creditors and top executives in business.

Sorkin apparently assumes his readers do not understand that below market loans and guarantees have enormous value. Of course if the government had made the same commitments to the owner of a corner hot-dog stand as it did to AIG, this person would be as rich as Bill Gates right now. Mr. Sorkin could then write a column about how the loans and guarantees didn't cost the government anything (since the hot-dog stand owner had repaid them), but NYT readers know better.

 
Can the Good People of Wisconsin Afford 2.8-4.0 cents a Week for High Speed Rail? Print
Monday, 04 October 2010 20:35

According to the New York Times, Scott Walker, the Republican candidate for governor is worried that they can't. Of course, the NYT did not make the issue quite this clear to readers.

It told readers that Mr. Walker is worried that subsidies to high speed rail could cost Wisconsin $7-$10 million a year. It would be necessary to divide by Wisconsin's population of 5.6 million to realize that an expenditure of 2.8-4.0 cents a week is a high item on the Republican gubernatorial candidate's list of concerns.

(Thanks C. Mike for catching my initial error.)

 
Imports from China, Numbers Please Print
Sunday, 03 October 2010 20:59

The NYT discussed the issues involved in currency pricing and trade protection with reference to China and other countries. The article raised concerns that growing protectionism could hurt economic growth, but it never noted that most highly educated professionals already benefit from extensive protectionism. The inequality resulting from their protection is one of the key factors motivating protectionist sentiments in the United States.

It also raises the prospect that a higher valued yuan would seriously damage China's economy. It would have been helpful to note the importance of China's exports to the U.S. to its economy. China's good exports to the U.S. are approximately equal to 6 percent of its GDP. Even a sharp rise in the yuan is unlikely to reduce its exports by more than one-third (2 percent of GDP) over a 2-year period. This is currently equal to less than 3 months of growth in China.

It is also worth noting that China's exports to the United States fell by 17.4 percent from the third quarter of 2008 to the third quarter of 2009. China was able to offset the loss of export demand from the United States and elsewhere with a massive stimulus package. As a result, its economy grew by more than 9.0 percent in 2009.

 
The Cost of the TARP: One More Time Print
Sunday, 03 October 2010 15:07

Since some folks are determined to spread nonsense about the TARP, I suppose it's necessary for those of us not on Wall Street's payroll to keep trotting out the truth. The basic points of the TARP backers are:

1) it didn't cost us anything;

2) it was necessary; and

3) Dodd-Frank ensures that it will never happen again.

 

Claim 1 is just absolute nonsense. We gave the banks trillions of dollars worth of loans and loan guarantees through the TARP, the Fed and the FDIC at way below market rates at the time. It is true that most of this money was paid back, so the government got back what it lent, but that does not mean there was no cost to the taxpayer.

Without TARP and the other government bailout programs, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, and many other large banks would have gone bankrupt. Their top executives would be unemployed today and their shareholders would have lost hundreds of billions of dollars in wealth, as would their creditors.

Thanks to their access to below market credit in their time of need, courtesy of the taxpayer bailouts, the Wall Street executives are still pocketing tens of millions a year and the banks are again making record profits. Had the market been allowed to work its magic, this wealth and income would have been available for the rest of society. The financial sector will continue to be a drain on the rest of the economy because the government saved it from the consequences of its own recklessness.

 

Claim 2 implies that the economy would have collapsed absent the TARP. It assumes an absurd counter-factual: that the government and the Fed would have allowed the banks to collapse and then done nothing in response to boost the economy. Of course that would have been a catastrophe, but it is simply a lie to claim that our options were either doing TARP or never doing anything.

There is no reason that we could not have let the banks go down in the cesspool of junk loans that they had fostered and then flooded the system with liquidity after the fact to boost the economy. This is the serious alternative scenario -- not the permanent do nothing scenario that TARP proponents have created.

 

Claim 3 ignores the fact that we have bigger too-big-to-fail banks than we did before the crisis. Most of the largest banks are larger today than they were before the crisis because we allowed a series of major mergers (e.g. J.P. Morgan Chase with Bear Stearns and Bank of America with Merrill Lynch) as a result of the crisis. It is very unlikely that the future regulators will be any more willing to tolerate the collapse of these giants than was the 2008 crew.

Resolution authority may give the regulators more flexibility in a crisis in the future than they had in the 2008 crisis, but the big problem was that they wanted the creditors paid off, not that they didn't. For example, the Treasury Department/Fed made good on 100 percent of AIG's debts, instead of trying to impose haircuts on its creditors. There is no reason to expect regulators to act any differently in future crises.

In short, the TARP opponents are absolutely right. TARP was an unnecessary giveaway to the Wall Street crew that was responsible for the financial crisis.

 
$4 Million Doesn't Go As Far as It Used To Print
Sunday, 03 October 2010 09:25

The Post had a good article on how TANF, the main federal welfare program, has not expanded significantly in the wake of the downturn, even as the need has increased enormously. At one point the article tells readers that:

"Despite urging from the Obama administration and welfare directors around the country, lawmakers decided not to extend the emergency welfare money, which gave states more than $4 million, in part to subsidize wages to help people go to work."

Actually, the law would have provided more than $4 billion, not $4 million. However, it would have been helpful to express these sums relative to the size of the federal budget so that readers would know how large they are. The $4 million figure would be equal to 0.00011 percent of federal spending. The $4 billion number is equal to 0.11 percent of federal spending.

 
Dana Milbank Has Problems With Big Numbers Print
Sunday, 03 October 2010 08:17

That was what he told Post readers in his column. He talked about President Obama's deficit commission as "the last hope for gaining control of government spending," telling readers that:

"The problem is so big as to seem insurmountable: $13 trillion of debt, now equivalent to 60 percent of gross domestic product. In 10 years, that is projected to increase to 90 percent of GDP, at which time we'll be making $1 trillion a year in interest payments." 

People with more familiarity with numbers would note that the country has had larger debt to GDP ratios in times past. They would also point out that that the $1 trillion in interest payments is less than 5 percent of projected GDP in ten years. The government faced the same interest burden in the early 90s.

Furthermore, unless the Fed acts irresponsibly (a big if, it did allow the $8 trillion housing bubble that wrecked the economy), it will own much of the government's debt. In this case, the interest will be paid to the Fed, which in turns will rebate it to the Treasury leaving no net interest burden. Currently the Fed is rebating an amount equal to almost 40 percent of the interest paid by the Treasury. Reporters at most newspapers would be expected to understand this relationship.

It is also not clear what Milbank thinks is out of control about government spending (maybe he sees flying saucers also). Government spending has mostly increased to support the economy in response to the worst downturn since the Great Depression. His column suggests that he may be unaware of this downturn.

 

 

 
Malaysia Is Twice as Rich as the NYT Says Print
Saturday, 02 October 2010 11:18

It is really simple to use purchasing power parity measures of GDP. This makes it hard to understand why the NYT and other papers use exchange rate measures. The exchange rate measures are essentially meaningless, whereas the purchasing power parity provide some basis for assessing living standards.

The NYT told readers that per capita income in Malaysia is about $7,000. According to the CIA Factbook Malaysia's per capita income is $14,900.

 
Washington Post Calls Spendthrift Consumers "Skittish" Print
Saturday, 02 October 2010 07:50

The Washington Post headlined an article on the release of data August consumer spending: "with consumers skittish, hopes muted for holiday sales." The article goes on to describe weak consumer sales, which are explained by pessimistic attitudes about the economy.

In fact, consumer sales are actually quite strong given the level of income. As the article notes, the saving rate for August was 5.8 percent. This is considerably below the average for the 50s, 60s, 70s, and 80s. In each of these decades the savings rate was considerably above 8.0 percent.

The saving rate began to drop toward the end of the 80s and into the 90s as a result of the wealth effect generated by the stock market bubble. It fell to zero as a result of the wealth effect from the housing bubble. Now that most of this bubble wealth has disappeared, it would be expected that the savings rate would return to its normal level or possibly even rise above it, as households attempt to make up for lost wealth. This is especially likely given that the huge cohort of baby boomers is approaching retirement with virtually no wealth and there is widespread talk of cutting their Social Security benefits.

It is remarkable that the Washington Post could not find any economists familiar with the wealth effect on consumption. It is one of the most basic relationships in economics.

 
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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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