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Anti-Deficit Republicans Usually Don't Say That Deficits Are Blocking Private Investment Print
Saturday, 25 September 2010 07:43

The Post told readers that Republicans who complain about a bloated federal work force have the view that:
"new hires under Obama and the premium are helping to drive the deficit and discourage private investment that could boost the economy." 

Actually, they don't usually say this since the claim is so obviously at odds with reality. With interest rates at 60 year lows, it is very hard to say how the deficit would be discouraging investment -- as opposed to encouraging it by increasing demand. The argument against deficits usually involves name calling and hand waving. There is no obvious logic to it at this point and the Post is misleading readers by implying that there is.

 
Washington Post Routinely Misleads on Debt Burdens Print
Friday, 24 September 2010 05:31

The Washington Post, which is losing circulation rapidly, routinely misleads its readers about the burden of the national debt. First, it rarely puts debt and deficit numbers in any context. Telling readers that the debt will grow by $4 trillion over the next decade due to tax cuts is a meaningless statement to nearly all of its readers, who have no idea how large $4 trillion is. It would be a very simple matter to tell readers that this sum is approximately 2.3 percent of projected GDP over this period.

It also would be important to point out that debt accrued in a period of high unemployment, like the present, does not have to impose any current or future burden on the public since it can be fully financed by the Fed. If the Fed buys and holds the bonds used to finance the debt then the money paid by the government in interest would be refunded by the Fed every year creating no net interest burden for the government. Currently the Fed is refunding $77 billion a year to the government, more than one-third of the interest paid out by the government.

 
The Problems of Avandia: Another Example of Failed Big Government Print
Friday, 24 September 2010 05:18

The NYT had a front page article on the decision by regulators in the United States and Europe to restrict access to Avandia, a major drug for treating diabetes. The reason for the restriction was a new study that linked the drug to tens of thousands of heart attacks.

This assessment was based on an independent analysis of data from GlaxoSmithKline, the manufacturer of the drug. GlaxoSmithKline did not do (or report) this analysis itself even though it had the data. The patent monopoly on Avandia granted by the government gave GlaxoSmithKline a strong incentive not to find the potential dangers of its drug. This failure of big government should have been noted in this article. (There are more efficient alternatives to patent monopolies for supporting prescription drug research.) 

 
Another Ill-Informed Front Page Washington Post Editorial on Social Security Print
Friday, 24 September 2010 04:57

The Washington Post ran another front page editorial calling for cuts to Social Security. The context was a discussion of the Republicans' "Pledge to America." The editorial complained that the plan did not include any concrete ways to deal with Social Security.

It then suggested that three ways that the Republicans should look to put the system into long-term balance: "raising the Social Security retirement age, changing the cost-of-living formula, offering personal or private accounts." The first two measures are ones that are strongly supported by the Post editorial board (hence their appearance in this front page editorial), but strongly opposed by the vast majority of the public.

Insofar as it is necessary to address a funding gap (projections from the Congressional Budget Office show the program is fully solvent for the next 29 years with no changes whatsoever), polls show that the public overwhelmingly favors raising the cap on income subject to the payroll tax. Currently, high income workers only pay the Social Security tax on their first $106,000 in wages. Polls also show that the public much prefers even an increase in the tax rate itself to the cuts pushed by the Post editorial board.

It is also worth noting that offering private accounts is not a route toward improving the program's finances. Private accounts worsen the finances of Social Security by pulling money out of the system. This would be like a family facing budget problems deciding to buy a new car to help the situation. Private accounts may be an effective way to get fee income to Wall Street banks, but they do not help the finances of Social Security.

The article also reports on the Republicans calls for a "full accounting" of Social Security, Medicare, and Medicaid. It would have been appropriate to point out that there is already a very full accounting of these programs. The trustees of both Social Security and Medicare issue lengthy accounts of the programs' finances each year. (They do refuse to disclose the documents that provide the basis for these projections. However, the Republicans did not imply that they would make these public.) The Congressional Budget Office does regular analyses of all three programs. The Government Accountability Office also periodically evaluates specific issues connected with these programs on request from members of Congress as does the Congressional Research Service. In addition, the Centers for Medicare and Medicaid Research does extensive analysis of Medicare and Medicaid, along with other government health care programs.

In this context, the Republican call for a "full accounting" would appear to be a quest for a pointless government bureaucracy that would duplicate work already being done. A serious news article would have called attention to the Republicans' push for needless bureaucracy.

 
The Way Government Bonds Work: Lessons for Matt Bai Print
Thursday, 23 September 2010 07:35

Reporters for the NYT who write on economic policy issues should know the way government bonds work. However, that is apparently not the case with Matt Bai. In defending an earlier article in which he referred to the bonds held by the trust fund as "iou's," Bai responded to a reader's question:

"The principle to which you’re referring is that the government guaranteed all of this Social Security surplus money (which it spent) with Treasury Bills. The reality is that redeeming that trillions of dollars in debt would require issuing trillions more in debt."

Bai's statement is of course true, but that is the case with all government debt. For example, suppose Mr. Bai decided to buy $100,000 of 30-year Treasury bonds. If he did this the government would turn around and spend the money that Bai had lent it. Bai seems to think there is something sinister in this story, but in fact that is usually what happens when a government or company issues bonds: it spends the money.

Thirty years from now, in 2040, Bai will go to cash in his bonds. When he does this, the government will be forced to borrow another $100,000.

This is the same story as the bonds held by Social Security. It is really very, very simple. The government will have to redeem these bonds just like any other bonds. Now, Mr. Bai apparently wants the government to default on the bonds held by Social Security. It could do this just like it could default on any of the bonds it has issued.

The people who would not get the Social Security benefits that they had paid for certainly would have good cause to be very angry if this happened, since it is a policy that is difficult to justify. Of course they may advocate that the country default on its other bonds, which might be appropriate if the country really is in such bad fiscal shape that it can't meet its obligations to its retirees.

As a practical matter, Bai is badly confused about the nature of the country's debt burden. The debt that the country is now accumulating because of the downturn need not pose any long-term fiscal burden since the Fed can just hold the bonds and repay the interest to the government.

The longer-term projections showing a serious deficit problem are all driven by projections of exploding health care costs. If we don't fix our health care system then we will face serious economic problems, one of which will be the budget deficit. However, as all economists know, the real problem is with the health care system.

 
Democratic Leadership Refuses to Rule Out Cuts to Social Security Print
Thursday, 23 September 2010 06:20

That fact would have been featured prominently in a good article reporting on the Republicans' "Pledge to America" and the response from the Democratic leadership in Congress. Instead, the Post reported without comment a statement from Speaker Pelosi's office that criticized Republicans for wanting to:

"turn Social Security from a guaranteed benefit into a guaranteed gamble."

This is a bizarre statement, since the Republican plan does not propose privatizing Social Security. The immediate threat facing Social Security are the plans to cut benefits and raise the retirement age, which are being considered by President Obama's deficit commission. Both the Republican and Democratic co-chairs of the commission have indicated support for this route.

It would have been worth pointing out that Speaker Pelosi's statement addressed a policy that is not currently on the agenda, while ignoring one that is. It would be comparable to coming out against the invasion of Brazil in the fall of 2002 when the country was debating the invasion of Iraq.

It is probably worth noting that the Post strongly supports cuts to Social Security.

 
Addressing U.S.-China Currency Values the Way President Bush Did Print
Thursday, 23 September 2010 05:12

There was virtually no decline in the real value of the dollar against the Chinese yuan during President Bush's presidency. This fact is an important point to mention in a Post article that told readers:

"The Obama administration, like the Bush administration before it, has preferred to address the currency issue through diplomatic channels."

The article misleadingly tells readers that, "negotiations won a 20 percent rise in the yuan during President George W. Bush's tenure." Virtually all of this increase was offset by the more rapid inflation rate in the United States, so the real value of the yuan against the dollar -- the relevant variable for trade -- changed little during the Bush years.

 
China's Currency and the Trade Deficit Print
Wednesday, 22 September 2010 01:59

David Leonhardt examines the prospective impact of a rise in China's currency on the U.S. trade deficit with China. He concludes that the impact might be limited for two reasons.

First he argues that much production might be transferred to countries with even lower cost labor, like Vietnam. Second, he notes that much of the value-added of goods that we import from China actually comes from third countries. The items are simply assembled in China. The rise in the value of the yuan would only affect the cost of assembly, not the cost of the other inputs, which may account for most of the value.

While both of these points are valid, there are important qualifications to each. Many other developing countries also peg their currency, either formally or informally, to the dollar. If China were to substantially raise the value of its currency, they would likely follow suit, since they are trying consciously to maintain the same competitive position vis-a-vis China. This was the experience the last time China substantially raised the value of its currency in 2007.

The point about China assembling items that involve inputs from other countries ignores the flip side of this story: there are many goods imported from countries like Japan and Germany that have substantial inputs from China. If the value of the yuan rises relative to the dollar, then these imports would be more expensive in the United States, making people here more likely to buy domestically produced goods. This will help the U.S. trade balance even though it will not be picked up in the trade balance with China.

Finally, the discussion of the relationship of the yen and the dollar is inadequate since it ignores the huge difference in relative inflation rates in the two countries. Since 1990 prices in Japan have fallen by more than 10 percent. They have risen by more than 50 percent in the United States. This means that to keep the trade situation from changing, the yen should have risen by more than 60 percent over this period.

 
Brazil and Argentina: Washington Post Gets Them Backward Print
Tuesday, 21 September 2010 04:19

The Washington Post had an article touting Brazil's recent growth, implying that it is a growing regional powerhouse, at least in part at the expense of its neighbor. Actually, Argentina has been growing considerably more rapidly since 2003, the period discussed in the article.

According to the IMF, growth since 2003 has averaged 6.6 percent annually in Argentina. It has averaged just 4.2 percent in Brazil. It is worth noting that Argentina defaulted on its debt in 2001 and pursued economic policies that were widely condemned by both the IMF and most of the economic policy establishment.

 
How Large a Debt Level Is "Worrisome?" Print
Tuesday, 21 September 2010 04:44

Most newspapers make an effort to separate their news reporting from their editorial pages: not the Washington Post. It routinely uses its news pages to push the economic agenda favored by its editors.

Today it told readers that "the national debt is soaring to worrisome levels." It is not clear why anyone who understands economics would find current debt levels "worrisome." Since the debt is being incurred in a context where the economy has vast amounts of idle resources, current deficits pose no real burden on the economy. If the deficit were smaller, the economy would be smaller and the unemployment rate would be higher.

In contrast to the Washington Post, financial markets do not find the government debt the least bit worrisome. They are willing to buy long-term government debt at interest rates below 3.0 percent.

The debt also need pose no burden in future years. There is no reason why the Federal Reserve Board cannot simply buy and hold the bonds issued to finance the debt. In this situation, the debt accrued in these years will impose no additional future tax burden. The interest on the debt will be paid to the Fed, which will then rebate it to the Treasury.

In ordinary times, this approach would lead to inflation, however this is not a problem in the current situation. In fact, most economists agree that a somewhat higher inflation rate would be desirable at the moment. (The Fed is currently buying large amounts of government debt, although it is expected to resell these bonds at some future point.) If the Fed were to continue to hold the bonds it would eliminate most of the deficit problem discussed in this article.

This article relies on no sources who disagree with the Post's editorial position. In fact, the first "expert" cited is Robert Bixby, the executive director of the Peter Peterson funded Concord Coalition.

 

 
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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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