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David Brooks' Apocalypse Print
Friday, 12 November 2010 05:35
"Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come.

It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain"

I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT. No one expects that people will be reading this stuff 1500 years from now.

Anyhow, let's take a closer look at Mr. Brook's apocalypse. The U.S. will be spending $1 trillion a year just to the pay the interest on the national debt." Pretty scary, huh?

Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?

Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020 [thanks Jeff]. This means that Mr. Brooks scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.

But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)

If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.

If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.

This doesn't leave much for Mr. Brook's apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.

This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn't even have to wait for 2020 to talk about this picture.

 

 
Trade Imbalances: More Economics 101 for Business Reporters Print
Friday, 12 November 2010 05:10

The discussion of the trade imbalances continues to be muddled even beyond the failure to realize that changes in relative currency prices are the main mechanism for adjustment in a system of floating exchange rates. Many news articles and columns have lumped together Germany and China as troublemakers due to their large trade surpluses. This is wrong.

The principle here is very simple. China is an extremely fast growing country where the return on capital is very high. Germany is a relatively slow growing country, where the return on capital is much lower. In standard trade models, capital is supposed to flow from countries where the return is low to countries where the return is high.

The implication of this simple point is that we should expect relatively wealthy slow growing countries like Germany to have trade surpluses. Their capital could in principle be better used in fast-growing developing countries. This would imply a trade surplus.

By contrast, it would be expected that a fast-growing country like China would be an importer of capital. This is due to the fact that capital gets a much higher return in China than in wealthy countries. This would correspond to a trade deficit, not a trade surplus.

The fact that China and many other developing countries are running trade surpluses does not mean that they have done something wrong. The real problem in this story has been the system of international finance designed primarily by the I.M.F. and therefore the United States. This system has not allowed developing countries to feel comfortable in accumulating foreign debt, forcing them to build up reserves to avoid being subjected to dictates from the I.M.F.. But, reporters should recognize what economic theory says about the current world trade imbalances.

 

 
NYT: Making Up Numbers to Push Trade Agreements Print
Thursday, 11 November 2010 20:56

The New York Times seems to be following in the footsteps of the Washington Post in terms of making up nutty numbers to promote trade deals. The NYT told readers that if Japan did not join in a pan-Asian trade agreement it would "eliminate eight million jobs."

According to the OECD, employment in Japan is just over 62 million. This means that the estimates in the NYT imply that not taking part in this trade agreement would cost Japan a number of jobs approximately equal to 13 percent of its current employment the equivalent of roughly 18 million jobs in the United States. Given that Japan already trades with these countries and this deal would simply expand trade, it is implausible that the agreement would increase its employment by even one-tenth this amount. 


 
The Falling Dollar and Developing country Exports Print
Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed's new round of quantitative easing will:

"harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive."

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.

 
Erskine Bowles, Morgan Stanley, and the Deficit Commission Print
Thursday, 11 November 2010 05:08

The deficit report put out by the commission's co-chairs, Alan Simpson and Erskine Bowles, had one striking omission. It does not include plans for a Wall Street speculation tax or any other tax on the financial industry.

This omission is striking because the co-chairs made a big point of saying that they looked everywhere to save money and/or raise revenue. As Senator Simpson said: "We have harpooned every whale in the ocean - and some minnows." Wall Street is one whale that appears to have dodged the harpoon.

This omission is made more striking by the fact that at least one member of the commission, Andy Stern, has long been an advocate of such taxes. Presumably he raised this issue in the commission meetings and the co-chairs chose to ignore him.

The co-chairs apparently also chose to ignore the I.M.F. Noting the waste and extraordinary economic rents in the sector, the I.M.F. has explicitly recommended a substantial increase in taxes on the financial industry. It is even more striking that the co-chairs apparently never considered a speculation tax since Wall Street's reckless greed is at the center of the current economic crisis.

In this context, it is worth noting that one of the co-chairs, Erskine Bowles, is literally on Wall Street's payroll. He earned $335,000 last year for his role as a member of Morgan Stanley's (one of the bailed out banks) board of directors. Morgan Stanley would likely see a large hit to its profits from a financial speculation tax.

It would have been appropriate for the reporters covering the report to ask about a financial speculation tax. It would also be appropriate to explore the connection between Mr. Bowles role as a Morgan Stanley director and the absence of any financial taxes in this far-reaching report.

 
Econ 101 for Washington Post Reporters Print
Wednesday, 10 November 2010 05:44

One would hope that reporters who cover economic issues for the Washington Post know a little economics. Unfortunately, this does not seem to be the case. Therefore, BTP will provide a free economics tutorial for the Post's economic reporters.

The Post told readers today that:

"world leaders share the overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values."

The whole piece in fact shows the opposite. In a system of floating exchange rates the mechanism for correcting trade imbalances is a change in currency values. Countries with trade surpluses are supposed to see the value of their currency rise. Countries with trade deficits are supposed to see the value of their currency fall.

When a country's currency falls in value, imports become more expensive meaning that they will import less. Its exports become cheaper for people in other countries, causing foreigners to buy more of their exports. This will reduce its trade deficit. The opposite holds for a country's whose currency rises in value.

This is really simple. If you want to see trade imbalances corrected, then you want to see the value of the currency fall for countries with large deficits like the United States. This is just like if you want the school fire put out, you want the firefighters to spray water on it.

On the other hand, if you don't want the firefighters to use water, then you really don't want the fire extinguished. In the same vein, all the officials cited in this article who complain about the decline in the value of the dollar obviously do not want the trade imbalances corrected. It is that simple, at least for folks who learned intro econ.

There is another interesting sidebar for the economically literate. The article tells us:

"Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation."

This is a non sequitur. If the dollar falls in value, then imports from the United States will be cheaper for developing countries. This will lower inflation, other things equal. In addition, reduced exports from these countries will also reduce domestic demand and employment, which will also put downward pressure on inflation. If developing countries actually make the claims attributed to them in this article then the news is that their officials have no better grasp of economics than a Washington Post reporter.

 
Big Hype About Big Government at the Washington Post Print
Wednesday, 10 November 2010 04:37

If Ruth Marcus did not exist someone would have to invent her. She is the living embodiment of an ill-informed Washington pundit who desperately wants to meld the world to fit her preconceptions. (Okay, her colleagues at the Post, Fred Hiatt and David Broder give her stiff competition.) 

Anyhow, the theme today is that Obama failed to recognize that his shellacking was from too much big government. First, it is important to recognize that there is a large body of research that shows that President Obama's shellacking was overwhelmingly the result of 9.6 percent unemployment, coupled with the fact that the Democrats held many marginal districts as a result of their gains in the last two elections. Models that incorporate only these variables predict most of the Democratic losses last week.

In other words, if President Obama could not do more to bring the unemployment rate down, then he should have expected his shellacking. Those opposed to more stimulus (like the Post crew) in effect wanted to see the Dems trounced since it was an entirely predictable outcome of the policy.

But, let's get to the big government story. Ms. Marcus tells us that the public is upset about big government interventions in the economy, like President Obama's health care plan and cap and trade. 

Let's consider each of these in turn. Has the public seen President Obama's health care plan? That doesn't seem likely, since very few of the provisions have been implemented thus far. What the public knows of the health care plan is what the media has reported. This has included stories of "death panels," government takeover of the health care industry, and massive cuts in Medicare.

These charges have the common characteristic of not being true. (I will acknowledge that the cuts in Medicare are a real possibility, but please note that this would mean smaller government, not bigger government.) Polls bear out the fact the public is extremely ill-informed about the health care plan. We can blame media outlets like the Washington Post for this failure. (This is the principle, strongly endorsed by the Post, that if the students don't learn, then it is the teacher's fault.) 

So, how is over-reaching and excessive government intervention the problem if the public doesn't really have a clue about the health care reform? Basically, the Republicans made things up and they stuck in the minds of millions of voters. That is the story.

Describing cap and trade or related measures to limit greenhouse gas emissions (GHG) as big government intervention is also peculiar. Are the zoning restrictions that prevent me from building a slaughterhouse across the street from Bill Gates' house "big government?" I suspect that most people would say no. The issue here is of protecting property rights and making people accountable for externalities.

The externalities from GHG are destroying property and causing millions of people to die from such things as floods in Bangladesh and Pakistan and droughts in Sub-Saharan Africa. We can call rules designed to prevent this harm "big government," but that is just name-calling. In reality, this is just about limiting externalities in the same way as zoning ordinances do. But hey, that wouldn't fit the Post's story.

 

 
The NYT Times Has Problems With Arithmetic, Economics and Editorializing Print
Tuesday, 09 November 2010 21:42

In introductory economics students learn that in a system of floating exchange rates (like the one we have), trade deficits and surpluses are eliminated through changes in the exchange rate. That is the point of the float. This means that if a country has a trade deficit, like the United States, then we should expect its currency to fall.

This means that when countries that complain about the U.S. trade deficit complain about the decline in the value of the dollar, as the NYT claims is the case with Germany, China, and Brazil, these countries are saying that they don't understand economics. In this case, the news is that major economic powers are being governed by people who don't know economics.

This would be like countries promoting their exports and then complaining that foreigners were buying up their output. If these countries want the United States to reduce its trade deficit then they want the dollar to fall. There is no other plausible mechanism to reduce a trade deficit. In the article the drop in the dollar is described as the "easy way out." It should also have been described as the "only way out."

The article also notes complaints from other countries that the low interest rates resulting from the Fed policies may lead to bubbles in their economies. Insofar as this is true, these countries are in fact complaining about their own poor economic management. Low interest rates, like low food and energy prices, should promote growth, not impede it. If countries consider low interest rates harmful to growth, it suggests that they have a poorly structured economy.

This article also refers to the United States' "addiction to debt." This sort of bizarre criticism (it is not supported by anything) belongs on the opinion pages, not in a news article.

 
The Case for Defunding NPR: Promoting Scare Stories on Social Security Print
Tuesday, 09 November 2010 05:55

Would a prominent public figure be allowed on NPR to defame a major U.S. corporation without challenge? For example, could a cabinet official assert that Microsoft is the main cause of global warming, with no evidence whatsoever to support this position, and not have anyone point out that this charge lacks merit? My guess is no.

Which raises the question of why Colorado Senator Michael Bennet was allowed to tell listeners on Morning Edition that if something is not done soon there will be no Social Security benefits for people his age (45). There are no, as in zero, nada, none, projections from any source that show Social Security will not be able to pay Mr. Bennet and his age cohort larger benefits (adjusted for inflation) than what retirees are receiving today.

That's right, you can look at projections from the Congressional Budget Office, from the Social Security trustees and any number of private sources and every last one shows that in any remotely plausible scenario Social Security will be paying benefits that are higher than what current retirees receive long after Senator Bennet passes into history.

This means that either Mr. Bennet is clueless about the financial status of the country's most important social program or he deliberately misled listeners. This issue would have been pursued by a serious news organization, instead of just passing along Mr. Bennet's falsehood unquestioningly to unsuspecting listeners.

 
Which Way Is Up: Complete Nonsense on Economics and the Dollar in the NYT Print
Tuesday, 09 November 2010 05:46

Don't turn up the heat, it's too cold! That seems to be the message from the rest of the world about the decline in the dollar that might result from the latest round of quantitative easing QE by the Fed.

The NYT told readers that:

"The Fed’s action, by lowering American interest rates, can also cause money to flood into other countries as investors seekhigher [sic] returns — which can threaten to overheat those countries’ economies."

Okay, here we have a statement from the NYT that QE is bad because it will lower interest rates in other countries and cause their economies to grow more rapidly. But, elsewhere we are told that the problem with QE is that it will lower the dollar which will make U.S. goods more competitive internationally. This will reduce the exports of developing countries and slow their growth.

So, other countries are mad about QE because it can both cause their economy to overheat and also because it will slow growth. Let's see, QE will make these countries both grow too fast and too slow. Now that's a really bad policy.

 
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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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