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Budget Deficits and Trade Deficits: NYT Reporters Do Not Understand National Income Accounting Print
Thursday, 04 November 2010 07:11

The NYT seems very concerned that the dollar will fall if the budget deficit is not reduced. Usually economists believe that a large budget deficit will increase the value of the dollar. The logic is that higher budget deficits are believed to cause higher interest rates, which makes holding bonds and other dollar denominated assets more attractive. This is how a budget deficit can cause a trade deficit.

The mechanics of this process are somewhat dubious in that there is very little relationship between budget deficits and trade deficits. (In 2000, when the country was running a huge budget surplus, we also had a large and rapidly growing trade deficit.) However, there is a relevant accounting identity which is always true. The trade surplus is equal net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.

This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

A drop in the value of the dollar is the main mechanism for adjusting the trade deficit. This decline is exactly what would be expected in a system of floating exchange rates. However, the people who are concerned about the decline in the dollar, and also want the U.S. government to reduce its budget deficit, must want to see the level of output in the United States to fall and its unemployment rate to rise. That is the only plausible way that the accounting identities can be kept in balance.

The NYT should have pointed out to readers that the people concerned about the decline in the value of the budget deficit lowering the value of the dollar apparently want to see an increase in the unemployment rate in the United States.

This article also includes inappropriate adjectives, like "huge" before "budget deficit" and "expensive" before "entitlement programs." Such adjectives should be left to the opinion page. This would be a more accurate and shorter article without them.

 
Why Does the NYT Think That Politicians Are Philosophers? Print
Thursday, 04 November 2010 05:24

It would seem pretty obvious that politicians respond to the concerns of interest groups. A successful politician manages to garner the support of enough powerful interest groups to get the money and votes to put himself or herself in office. They don't have to pass tests in political philosophy.

Therefore it is peculiar that a NYT article would refer to the "the core philosophical disagreements" between Republicans and Democrats. It is not clear what this means since there is little evidence that either side is guided by philosophy rather than political expediency. Philosophy does not win elections.

 
Doesn't Representative Ryan Know that Firing Workers Slows the Economy? Print
Thursday, 04 November 2010 05:15

That would have been a reasonable question for the Post to ask him after he said:

"We should not allow any tax increases, period, because it's going to slow the economy down ...If you want to get this deficit down, you need two things: economic growth and spending cuts."

While tax increases in a depressed economy so would firing government workers or other forms of spending cuts. Both actions take money out of people's pockets at a time when the economy desperately needs demand.

Representative Ryan should know this fact, but the quote printed by the Post implies that he doesn't. Since Mr. Ryan is in line to be head of the House Budget Committee this is the sort of gaffe that should draw huge attention. It is about five orders of magnitude more important than the sort of comments (e.g. then Senator Obama's reference to "bitter" working class whites in the campaign) that tend to draw attention in the media.

 
Peter Orszag and the Drive to Cut Social Security Print
Thursday, 04 November 2010 04:02

Peter Orszag, President Obama's former budget director, seems determined to cut Social Security. Like most people involved in this quest he is prepared to leave the facts behind and is quick to resort to name calling.

He begins his column by telling readers:

"The budget deficit figured prominently in much of the discussion surrounding yesterday’s election."

This is partly true since the media tend to prominently feature the views of people who discuss the budget deficit in all contexts, but it is absolutely false insofar as the implication is that the deficit was an important factor in the Democrats' defeat. All the polls show that high unemployment was the major factor in the Democrats' loss; the deficit was at most a minor issue. 

Orszag goes on to tell readers that progressives should be happy to see Social Security reform on the agenda since:

"the key issue progressives had been concerned about — individual accounts within Social Security — has been definitively won in their favor (for now)."

It might have been helpful if Orszag had used names, since I don't know any progressives who have this as their "key issue." The progressives who are most visible on this issue have been concerned about a Social Security benefit that is already small by international standards being made still smaller.

This issue of accounts divides progressives, since many support some form of government managed saving accounts as a supplement to Social Security. If Social Security is cut and, as a separate matter accounts are established to supplement Social Security income, it is logically identical to an outcome in which a portion of Social Security is explicitly replaced by private accounts. It is not clear whether Orszag is simply confused here or is deliberately trying to mislead readers.

The next item on Orszag's list of reasons for early cuts is:

"acting now would allow changes to take effect more gradually, cushioning the blow."

It is important to understand this argument, since it is unlikely that many who do understand it would endorse it. Given the 75-year planning horizon, if we cut benefits for people who are retiring in the near future, then we will have to raise taxes and/or cut benefits less for people who are working/retiring in later years. In other words, if we squeeze some money out of the current cohort of near retirees, we will have to get less money out of people in 2050 and 2060.

Is this a good idea? Well, we know that the vast majority of near retirees will have almost nothing other than Social Security to support themselves in retirement. The reason is that the people who always talk about budget deficits were too ignorant of the economy to recognize the dangers of an $8 trillion housing bubble. Since these people were controlling economic policy, middle class workers saw much of the wealth they had accumulated as home equity or in their 401(k) disappear. In other words, the deficit hawks who want "changes to take effect more gradually" want to kick again the people whose wealth was destroyed due to the incredible economic mismanagement of these deficit hawks.

By contrast, the Social Security projections show that workers and retirees will on average be about 40 percent richer in 2040 than they are today and about 70 percent richer by 2060. Why exactly is it important to cut benefits from retirees in 2015 or 2020 who will have very little income, so that their far richer children and grandchildren end up with an income 50 years from now that is only 69 percent higher net of taxes rather than say 70 percent? Orszag obviously feels this redistribution from the relatively wealthy to the relatively poor is important, but he certainly doesn't explain why.  

Orszag concludes by referring to "the left's strident opposition to any serious discussion of Social Security reform." So, the people who disagree with Orszag are "strident." The name-calling might be more warranted if Orszag had a better argument.

 

 
Turning Economic Problems Into Fiscal Problems: Washington Post Repeats David Brooks' Freudian Slip Print
Wednesday, 03 November 2010 05:12

Bring out the scientists, we have uncovered evidence that Freudian slips are contagious. BTP readers will recall NYT columnist David Brooks' wonderful Freudian slip from last week in which he noted that President Obama took office in the middle of a "fiscal crisis." Of course, Brooks meant to say "financial crisis," although in his columns he has certainly helped build up the notion that the country faces a fiscal crisis.

Today, the Washington Post committed a similar mistake. In an article headlined "economic concerns overshadow all others," the Post told readers that:

"But one issue is on their minds like no other this year: the economy. Nearly 40 percent of voters in a recent Washington Post poll rated the nation's fiscal situation as their top concern in the days leading to the election, a far higher proportion than those concerned about immigration, health care, Afghanistan, taxes, the deficit or dysfunction in Washington. (emphasis added)"

There is no doubt that the Post meant to say "economic situation" as indicated by the inclusion of the deficit as an issue that mattered less. The Post has worked tirelessly in the last two years to hype concerns about the deficit in both its opinion and news pages. It constantly raises the concern and rarely provides readers with any context that would allow them to meaningfully assess the size and nature of the problem.

In this case, we get to see the obsession in plain view. Both the reporter and the copy-editor somehow could not recognize this obviously wrong assertion.

 
Why Is Thomas Friedman Afraid of Getting Lower Cost High Tech and Financial Services from India and China? Print
Wednesday, 03 November 2010 04:20

His latest column tells us that he had:

" a scary thought .... What if — for all the hype about China, India and globalization — they’re actually underhyped? What if these sleeping giants are just finishing a 20-year process of getting the basic technological and educational infrastructure in place to become innovation hubs and that we haven’t seen anything yet?"

It's difficult to know what in this story Friedman finds scary. The piece raises the prospect of these countries providing better and lower cost financial and technical services than those we currently receive from Wall Street and Silicon Valley.

It is not clear what Friedman's problem is with getting lower cost services. This is the way trade is supposed to benefit economies. Of course, those who work on Wall Street and in Silicon Valley will be hurt, just as steel and auto workers have been hurt by low-cost competition, but the vast majority of the country does not work on Wall Street or in Silicon Valley. 

If there is a point to Friedman's piece, it is very difficult to understand what it could be.

 

 
Post Misses Uptick in Consumer Spending Print
Tuesday, 02 November 2010 05:08
In an article that reported on the Commerce Department's release of consumption data from September, the Washington Post told readers that: "consumer spending was stuck in the doldrums." Actually, the report showed a very high rate of spending relative to income. The saving rate fell from 5.6 percent in August to 5.3 percent in September. Historically the saving rate has averaged more than 8.0 percent, so consumers are currently spending at a high level relative to their income.
 
The NYT Invents Economic Necessities for European Political Parties Print
Tuesday, 02 November 2010 04:57

Many prominent economists, including many with Nobel prizes, believe that Europe's economy, like the world economy, is desperately in need of more demand. Fortunately, the NYT is there to set them right.

It told readers today that social democratic parties in Europe must come to grips with the "necessity" of givebacks by workers. It would be great if the NYT could lay out its economic theory more fully so that those of us less expert in economics could understand how less demand in the current economy will spur growth and employment.

This new economic theory will make exciting reading if the NYT would share it with readers.

 
Deficit Commission Plots to Overhaul Social Security Behind Voters' Backs Print
Tuesday, 02 November 2010 04:44

That is what the NYT reported today, although it used somewhat different language. It told readers that:

"The group, which has a Dec. 1 deadline for recommending how to reduce the annual deficits swelling the federal debt, purposely has done little to date beyond five public hearings, and it has decided nothing lest any decisions leak and blow up in the flammable mix of a campaign year with control of Congress in the balance."

In a democracy, the purpose of elections is supposed to be to have voters determine issues like the future of Social Security and Medicare. According to this article, the members of this commission conspired to keep these issues outside of the election debate.

The article also tells readers that the co-chairs of the commission apparently misled the public in their prior statements. Both former Senator Alan Simpson and Erskine Bowles had given assurances that benefits would not be cut for current Social Security beneficiaries. According to this article, the commission is now considering changing the annual cost of living adjustment formula in a way that would reduce benefits. This reversal of a public commitment by the co-chairs should have been the main topic of a major news article.

 
Should NPR's Funding Be Cut? Print
Tuesday, 02 November 2010 04:37
That's a question that anyone who doesn't work on Wall Street may want to ask after hearing a segment on WAMU's "Power Breakfast" in which the anchor told listeners that failing to cut Social Security and Medicare may be "fiddling why Rome burns."
 
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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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