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A Budget Proposal From A Commission Without a Single Member That Saw the $8 Trillion Housing Bubble That Wrecked the Economy Print
Wednesday, 17 November 2010 06:20
Yes, that would be the Rivlin-Domenici commission. In elite Washington circles ignorance is a credential.
Industrial Production: The Story is the Rise In Manufacturing Print
Wednesday, 17 November 2010 06:07
The Post told readers that industrial production was unchanged in October. This is true, but that is the result of a 3.4 percent plunge in the output of utilities, which is primarily a function of the weather. Manufacturing output increased by 0.5 percent in October and a reported decline of 0.2 percent in September was revised to a gain of 0.1 percent.
Ireland: A Textbook Example of the Dangers of Balanced Budgets and Fiscal Responsibility Print
Wednesday, 17 November 2010 05:53

Ireland is in the headlines these days as its government struggles with insolvency. Remarkably, none of the news stories remember to point out that Ireland was a model of fiscal responsibility in the years leading up to its current disaster. Not only did it balance its budget, Ireland ran large budget surpluses in the 5 years preceding its collapse in 2008. Its peak surplus in 2006 was 2.9 percent of GDP, the equivalent of a surplus of roughly $420 billion in the United States.

Like the deficit hawks in the United States, Ireland's political leaders ignored the country's massive housing bubble, the collapse of which sank its economy. It is interesting to note that, while Ireland's background to the deficit crisis is generally ignored, news reports on Greece's financial difficulties routinely referred to its large budget deficits in the years leading up to the crisis.

Economic Growth and Budget Deficits Print
Wednesday, 17 November 2010 05:28

David Leonhardt has a good piece pointing out the simple fact that more rapid economic growth will substantially reduce the budget deficit. However he overlooks an important part of the story.

More rapid growth makes the country richer. In his hypothesized growth speed-up, the country grows 0.5 percentage points more rapidly on average over the next two decades. If this happened, then people would be roughly 10 percent better off on average in 2030 than under current projections. 

If people are wealthier, then the cost of sustaining the government would be less of a burden. For example, in this fast growth scenario if we had a tax increase equal to 1 percentage point of GDP in 2030 (a large tax increase), it would still leave people with roughly 9.0 percent more after-tax income than in the baseline scenario even without a tax increase.

In other words, if before tax income grows more rapidly, then after-tax income can increase rapidly even if a somewhat greater portion is diverted to the government in tax revenue. Since the deficit is often put as a generational issue, if workers 20 years from now enjoy much higher after-tax incomes than workers today (which they will in every plausible scenario), it is difficult to understand why anyone today should be troubled if workers in future decades will pay a higher tax rate.

NYT Misrepresents Trade Pacts Print
Wednesday, 17 November 2010 05:11

The NYT referred to the trade pacts with South Korea, Panama and Colombia as "free-trade" agreements. Of course this is inaccurate. They do not free all trade, most notable trade in highly paid professional services like physicians and lawyers' services. These areas are highly protected by conscious policy. The deals also increase protection in some areas, most notably for patents and copyrights.

Trade pacts have been unpopular with much of the country because they have been designed to place manufacturing workers in direct competition with low-paid workers in the developing working, thereby driving down their wages. By contrast, they have largely left in place the protection from such competition enjoyed by the highest paid workers. As a result, they have contributed to the growth of income inequality in the last three decades.

Warren Buffet Boasts About the Billions the Government Gave Him Through TARP Print
Wednesday, 17 November 2010 05:01

Warren Buffet has a thank you note in the NYT. He certainly owes a big thanks to the taxpayers, after all he put a $10 billion bet on Goldman Sachs at the peak of the crisis. Without our help, he would have lost his whole bet.

Of course the issue is not as he presents it here. The question was not whether or not the government did something to keep the financial system functioning. The question was whether the rescue would save investors like Buffet, who were knowingly taken big risks with their money, the highly paid executives of the major banks, and preserve the speculative culture of Wall Street. 

That's what TARP was about. Mr. Buffet has very good grounds to be thankful that the rescue was structured to make preserving the wealth of the wealthy the top priority. The 25 million unemployed and underemployed people may feel differently.

Budget Arithmetic: Can NPR Reporters Learn It? Print
Tuesday, 16 November 2010 19:54

That's the question that listeners to All Things Considered must be asking after hearing Mara Liasson tell them:

"If you sit down with the numbers and look at what the government actually does and how it pays for it, it's obvious that there is no simple solution."

Actually, anyone who bothered to sit down and look at the numbers would see that there was not a big deficit problem by any realistic measure until the housing bubble collapsed. If NPR could find a reporter who could read a simple chart (to paraphrase Senator Simpson in one of his famous e-mails) they would quickly recognize that the debt to GDP ratio rose only modestly over the last business cycle, even with the huge increase in defense spending associated with the wars in Iraq and Afghanistan.

The real run-up in the deficits and the debt began in 2008. That's right folks, it was the collapse of the housing bubble (which NPR never talked about) that led to the big deficits. While NPR is telling its listeners that the deficits are a problem, the deficits are giving people jobs. If we either cut spending or raised taxes we would be pulling money out of the economy and throwing people out of work.

In this sense, people who want lower deficits in the current slump want more people to lose their jobs. This is the same as people who want fish to live out of water effectively want them to die. It is possible that people who push for lower deficits do not know that this would mean throwing people out of work, just like it is possible that some people don't know that fish cannot live out of water, but neither group of people should be working as a reporter for a serious news outlet.

The longer term deficit is also very simple. It is a problem of exploding health care costs. We currently spend more than twice as much per person for health care as the average for the countries that enjoy longer life expectancies than the United States. The long-term budget projections assume that this ratio will rise to three or four to one. If the United States spends four times as much per person on its health care as Germany, Canada and everyone else, then it will face enormous economic problems. One of these problems is a serious budget deficit, since more than half of health care in the United States is paid by the government.

However, honest people would talk about the problem of health care costs, since nothing about the situation is helped if the government saves money by just cutting back its spending without fixing the system. In that case we would just be left with a situation in which tens or perhaps hundreds of millions of people could not afford decent health care.

So contrary to what NPR told its listeners, there is a very simple solution: fix health care.

David Brooks: Math is Hard, Just Give Money to Rich People Print
Tuesday, 16 November 2010 05:40

David Brooks complains that liberals used rigorous economic models.

"The economic approach embraced by the most prominent liberals over the past few years is mostly mechanical. The economy is treated like a big machine; the people in it like rational, utility maximizing cogs. The performance of the economic machine can be predicted with quantitative macroeconomic models.

These models can be used to make highly specific projections. If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs.

Everything is rigorous. Everything is science."

Brooks contrasts this approach with the moralizing and whining of conservatives:

"Conservatives, who are usually stereotyped as narrow-eyed business-school types, have gone all Oprah-esque in trying to argue against these liberals. If the government borrows trillions of dollars, this will increase public anxiety and uncertainty, the conservatives worry."

He then concludes that because the economy is still weak, we should listen to the conservatives and cut spending and taxes.

Actually, the liberal models have performed quite well if Brooks actually bothered to look. The stimulus was projected to create 3.7 million jobs in its original form. The bill actually approved by Congress contained roughly one-third less stimulus, so we should have expected it to create roughly 2.5 million jobs. No one who looked at the models that Brooks is condemning would have thought that this would have been sufficient to restore the economy to normal levels of output and employment in an economy that had lost over 6 million jobs by the time the stimulus kicked in.

Brooks also misrepresents the attitude of liberal economists to the moralistic conservatives who just want to give all our money to rich people. All of their whining has specific implications. For example, when Brooks or some other conservative complains that businesses aren't hiring because of all the uncertainty about taxes and regulation, then the implication is that businesses are finding ways to meet their demand for labor in ways that don't involve permanent hires.

The obvious mechanisms would be to increase average hours per worker or increase the hiring of temps. Liberal and progressive economists insist on examining the evidence to see whether it supports the whining of the conservatives. In this case (and all others) it doesn't. The increase in hours per worker since the trough last fall has been very modest and average hours are still well below their pre-recession level. Temp employment has rebounded very weakly and is also far below its pre-recession level.

In short, Brooks is not just complaining about the economic models of liberals. He is also complaining that liberals try to examine the logical implications of their whining and look for evidence of these whinings being accurate. Brooks' view is apparently that we just give in to conservatives since this is the only way to get them to stop whining.


Morning Edition Has Determined That the Deficit is a "Great Problem" Print
Tuesday, 16 November 2010 05:20

Listeners might have thought that 9.6 percent unemployment, with 25 million people unemployed, underemployed, or who have given up looking for work altogether was the biggest problem facing the country today. But, NPR knows better.

It concluded a fawning interview with New Hampshire Senator Judd Gregg by referring the deficit as a "great problem." It would have been interesting if they explained to listeners how they arrived at this conclusion.

People who know economics know that current deficits are due to the collapse of the housing bubble. NPR had virtually no time for analysts who warned of this entirely predictable disaster (unlike the endless hours that it devotes to deficits). If deficits were smaller today we would have fewer jobs and higher unemployment. It is not clear why anyone would advocate this outcome.

In the longer term, the large projected deficits are attributable to a projected explosion of health care costs in the United States. Per person costs are projected to rise from a bit more than twice the average of other wealthy countries to 3 or 4 times the average per person cost. If health care costs increase as projected, it will have a devastating impact on the economy. It will also lead to a large budget deficit. If U.S. health care costs were comparable to those in Canada, Germany or other wealthy countries, the United States would be looking at long-term surpluses, not deficits.

A competent interviewer would have asked Senator Gregg why he persists in misrepresenting a health care problem as a budget problem.

Robert Samuelson's Confusion on Real Interest Rates Print
Monday, 15 November 2010 06:02

Robert Samuelson is beating up on Japan in his column today. While its economy has certainly had troubles in the last two decades, the picture is not quite as bleak as he seems to believe. Its rate of productivity growth (the most important measure of economic dynamism) since 1995 has been almost identical to the average for the OECD and within 0.2 percentage points of the rate in the United States. Furthermore, since depreciation is a large and growing share of U.S. output (primarily because computers become obsolete quickly) it is likely that a net measure of output would show Japan and the United States having virtually the same productivity growth over this period. Net productivity is the measure that is relevant for living standards, since you can't eat depreciation.

It is also worth noting that Japan's unemployment rate is just 5.0 percent. It never rose above 6.0 percent over the last two decades.

However Samuelson's biggest error is that he fails to understand the problem that deflation, or more correctly low inflation, poses for Japan's economy. While he rightly ridicules the idea that consumers would delay purchases to buy items of like cars to buy them at a price that is 0.5 percent lower the following year, this is not the main way that low inflation harms the economy. 

In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment. This means that the cost of borrowing is low relative to the return on investment. Because interest rates can't go negative, it is impossible for real interest rates to fall as much as would be desired given the weakness of Japan's economy. It would be ideal if it could keep its nominal rates at their current near zero level, while inflation rose to 3.0 or 4.0 percent.

The other reason why inflation would be desirable is that it would allow homeowners to get out from under their debt burdens. If wages rose 3.0-4.0 percent annually in step with inflation, the burden of a fixed mortgage debt would be eroded through time. Also, if house prices rose in step with inflation, consumers would gain equity in their homes.

However, the problem in both of these cases is that the rate of inflation is too low. The fact that it crosses zero and is negative is of no special importance. The problem is low inflation, not deflation.

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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.