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Is the Business Press Prohibited from Talking About Falling Imports as a Cause of Growth? Print
Saturday, 29 January 2011 11:10

Politicians routinely say things that are not true to push their trade agreements. For example, they call them "free trade" agreements (everyone likes freedom) even though they do little to free trade in highly paid professional services (e.g. doctors' and lawyers' services) and actually increase protection in some areas like copyrights and patents.

They also say silly things about exports creating jobs, without pointing out that it is net exports (exports minus imports). If any politician was actually stupid enough to believe that exports by themselves create jobs then he would be advocating imports of hundreds of billions of dollars of goods from Mexico and Canada and then re-exporting them to create jobs. Even the people who hold high elected office don't believe anything that crazy.

Unfortunately the media largely cooperate with the politicians' efforts to push trade deals. Hence they refer to them as "free trade" deals and they rarely point out that anyone talking about job creation from exports, rather than net exports, is being misleading. 

The media seemed to be in the trade agreement promotion mode in its reporting on the 4th quarter GDP report. The second most important factor (after consumption) in the 3.2 percent growth rate reported for the quarter was a 13.6 percent drop in imports. The domestic production that replaced these imports added 2.4 percentage points to growth for the quarter. This fact seemed to go virtually unmentioned in the reporting on the GDP report, as though the media did not want to put the idea in people's heads that lower imports means higher growth.

As a practical matter the fall in imports was almost certainly associated with the slower pace of inventory accumulation reported for the quarter. It is likely that inventory accumulation will rise to a more normal rate in the first quarter of 2011. This will be a boost to growth, however the corresponding jump in imports will be a largely offsetting subtraction.

Can We Take Away Alan Greenspan's Pension? Print
Saturday, 29 January 2011 08:42

Joe Nocera gets most of the story right in his discussion of the Financial Crisis Inquiry's Commission's (FCIC) report today. There was gross negligence, greed, and outright fraud, but none of this would have lead to catastrophic consequences if we didn't have a housing bubble. (For that matter, having a housing bubble driven economy virtually guaranteed catastrophic consequences, even without the financial abuses. Spain, which had a well-regulated banking system and no financial crisis, keeps reminding us of this fact, with its 20.6 percent unemployment. The commission was off on the wrong foot from the outset in looking at the "financial crisis." The real crisis is an economic crisis caused by the collapse of an asset bubble which had been the engine of growth in the economy.)

Nocera blames the mass delusion that house prices could rise endlessly with no foundation in the fundamentals of the housing market. This is absolutely right, but there is a key point missing. We have regulators, most importantly central bankers like Alan Greenspan and Ben Bernanke, who are not supposed to succumb to mass delusions. They are supposed to make their assessments of the economy based on a measured analysis not the hysterical rantings of the deluded masses.

Using simple economic analysis and the arithmetic we all learned in 3rd grade it was possible to recognize the housing bubble as early as 2002. It was also possible to know that the bursting of the bubble would be bad news for the economy and that the news would get worse as the bubble grew larger.

The Fed had enormous power with which to shoot at the bubble. First, Greenspan and Bernanke could have used the resources of the Fed to document the evidence for the existence of the bubble and highlight the consequences of its bursting. Note that this is not about mumbling "irrational exuberance." The idea is to have the Fed's research staff put out paper after paper showing that house prices were hugely out of line with their historic levels with no plausible explanation in the fundamentals. This research could have been highlighted in Congressional testimony and other public appearances by Greenspan and other top Fed officials.

The second step involves the Fed's regulatory power. The deterioration of lending standards and outright fraud in issuing mortgages that is documented in the FCIC report was knowable to regulators at the time. (I knew about it because people from around the country were telling me about abuses by their friends/relatives in the mortgage industry. And, I have no regulatory authority.) The Fed could have used its regulatory authority to crack down on the banks that were issuing fraudulent mortgages and to prod the SEC to go after the investment banks that were securitizing them.

Finally, if steps one and two did not work, the Fed could have raised interest rates. Greenspan has always been dismissive of the idea that higher interest rates could have popped the bubble, noting that long-term rates stayed low in 2005 and 2006 even as short-term rates rose by several percentage points. This is again a silly cop out.

Suppose that Greenspan started a round of rate increases with the explicit target of popping the housing bubble. For example, suppose he announced the first half point rise in the federal funds rate and said that he would continue to raise interest rates until the real value of the Case-Shiller 20 City index fell below its 2000 level. This likely would have gotten the attention of financial markets and had some impact on house prices.

Instead Alan Greenspan, with Ben Bernanke at his side, did nothing. In fact, at several points he seemed to foster the bubble by dismissing the concerns of those who raised questions about the run-up in house prices.

There is a real problem of incentives here. Greenspan and Bernanke would have gotten serious heat from the financial industry if they had done the right thing and shot at the bubble. After all Angelo Mozillo, Robert Rubin, and many other rich and powerful types were getting very rich. On the other hand, they seem to have suffered zero consequence from doing nothing, even when their failure to act had absolutely disastrous consequences.

The lesson here for future central bankers is to keep the financial industry happy and everything will be fine. If that is the case, then we should expect more irresponsible behavior from the industry and possibly more bubbles. The problem is that the cops are on their payroll.

It is not too late -- we could still fire Bernanke and take away Alan Greenspan's pension. Unfortunately, the financial industry is not about to let that happen nor is the business media likely to even let these options be discussed in polite circles.

NYT Abandons Distinction Between News and Editorials to Bash Japan Print
Friday, 28 January 2011 17:43

"As this fading economic superpower rapidly grays, it desperately needs to increase productivity and unleash the entrepreneurial energies of its shrinking number of younger people. But Japan seems to be doing just the opposite. This has contributed to weak growth and mounting pension obligations, major reasons Standard & Poor’s downgraded Japan’s sovereign debt rating on Thursday."

This is the sort of paragraph that one would expect to find in an editorial, not a news article. After all, is this a known fact that Japan "desperately" needs to increase productivity? More productivity is generally good, but the article presents no evidence of its desperation. (Standard & Poor's is famous for giving triple A ratings to hundreds of billions of dollars worth of junk mortgage-backed securities. Based on its track record, the credit ratings agency judgement is worth less than that of a hopeless street drunk.) Furthermore, the evidence in the article actually suggests the direct opposite -- it appears that Japan has surplus labor -- the point of the article is that there are no jobs for young people. 

In other words, if the anecdotes presented in the article are in fact typical, then it seems that Japan has a great surplus of labor. That means that it absolutely does not desperately need to increase productivity nor does it suffer from an aging population. It is of course wasteful to not use any one's talents, but this has absolutely nothing to do with the aging of the population as the article asserts.

The more obvious problem is the lack of demand in the economy. This could be remedied by more government spending. While this may cause the stumbling drunk bond raters at Standard & Poor's to downgrade Japan's debt further, more spending could boost the economy under the economic theory that people work for money. The fact that Japan is not approaching any real limits (as opposed to the drunken delusions of bond raters) is evidenced by the deflation that is noted in the article.

Countries that are reaching the limit of their ability to finance debt suffer inflation, not deflation. In other words, there is every reason to believe that Japan could just spend a large sum of money creating or subsidizing jobs for its young. Its central bank can simply buy and hold the bonds used to finance this spending.  

In this respect, some of the complaints against Japan just seem to be invented. For example, at one point the piece asserts that:

"While many nations have aging populations, Japan’s demographic crisis is truly dire, with forecasts showing that 40 percent of the population will be 65 and over by 2055. Some of the consequences have been long foreseen, like deflation: as more Japanese retire and live off their savings, they spend less, further depressing Japan’s anemic levels of domestic consumption."

Actually, this is 180 degrees at odds with what economists generally predict. The elderly in general have low savings rates, as they spend down the wealth that they have accumulated over their working lifetime. With a smaller share of the population working, the general concern is that consumption is too large a share of GDP. This could lead to inflation, not deflation.

The article also includes the assertion that:

"Calculations show that a child born today can expect to receive up to $1.2 million less in pensions, health care and other government spending over the course of his life than someone retired today; in the national pension system alone, this gap reaches into the hundreds of thousands of dollars."

There is no source cited for these "calculations." Readers may question these calculations since they imply that the difference between current benefits and future benefits will be almost three times as large as the $417,000 combined Social Security and Medicare benefits that middle-income workers in the United States can expect to receive. Since Japan is a somewhat poorer country than the United States, it seems implausible that it can pay out so much more in benefits to its population.

What If Unemployment Claims Jumped and Nobody Noticed? Print
Friday, 28 January 2011 08:08
Then you're probably reading the NYT or Washington Post. Weekly claims jumped to 454,000 last week, well above the average of the last two months, which had been around 420,000. This is an erratic number and it could have been due to weather-related factors, but this is still a data point worth some attention.
The IMF, Which Missed the $8 Trillion Housing Bubble, Warns About the Deficit Print
Friday, 28 January 2011 07:56

The Washington Post ran an article highlighting warnings about the budget deficit from the International Monetary Fund (IMF). It would have been helpful to inform readers that the IMF completely missed the $8 trillion housing bubble, the collapse of which collapsed the U.S. economy, leading to the worst downturn since the Great Depression.

This background would be helpful to readers in assessing the importance of the IMF's warnings.

Senator Kent Conrad Advocates Default on the National Debt Print
Friday, 28 January 2011 06:39

This would have been an appropriate headline for an AP article which included a quote from North Dakota Senator Kent Conrad implying that it would be reasonable to default on the government bonds held by the Social Security trust fund:

"I've received the lash from those who say, 'Well, you shouldn't have to cut Social Security because there are trillions of dollars of assets.' It is true there are trillions of dollars of assets. It is true that they're backed by the full faith and credit of the United States. It is also true that the only way those bonds get redeemed is out of the current income of the United States."

This assertion is true of all government bonds, however Mr. Conrad is clearly suggesting that it would for some reason be appropriate not to honor the bonds held by the Social Security trust fund. It is unusual for a prominent senator to suggest defaulting on the national debt. This fact should have been the central focus of the article.

Representative Ryan Can't Tell the Difference Between Greece and the United States: Where Is the Ridicule? Print
Wednesday, 26 January 2011 05:41

During the presidential primaries, then Senator Obama gave a talk at fundraiser in which he referred to people in small town Pennsylvania as "bitter." The media highlighted this "gaffe" and made it a major theme over the next few weeks of the campaign. In other words, it was big news that Obama had said something that the media viewed as inappropriate.

Last night, in the official Republican response to President Obama's state of the union address, Representative Paul Ryan suggested that the United States could be like Greece if it did not change its current budget path. This comparison was either dishonest or reflected an extraordinary degree of economic ignorance.

Briefly, there are three big reasons that the United States is very different from Greece:

1) The United States has its own currency -- this means that we can always buy our own debt. That could lead to inflation, but insolvency is not an issue. So the story of no one being willing to buy U.S. bonds is not even a theoretical possibility. Of course the people who actually have their money on the line are very willing to buy U.S. bonds, demanding an interest rate of just 3.4 percent on 10-year Treasury bonds.

2) The United States collect taxes. The OECD puts tax evasion in Greece on the order of 35 percent. This of course encourages corruption in all aspects of Greek government. If the rich rip off the government by not paying the taxes they owe, why shouldn't everyone else try to rip it off too?

3) The United States has a huge diversified economy. If you want to find an economic illiterate, look for someone who warns that the dollar will plummet in value if we don't get our debt under control. If our dollar plummets in value (e.g. 2 dollars = 1 euro, 3 yuan = 1 dollar), the U.S. would suddenly be hyper-competitive. We would buy nothing from the countries who rely on the U.S. market. And our exports would be wiping out competitors around the world. For this reason, China, Germany, Japan and everyone else would make sure that the dollar did not just plummet. This would not be the case with Greece if it did have its own currency.

This is why we give politicians who compare the U.S. to Greece a nice lollipop and balloon and pat them gently on their little head. And if they are important politicians, we give them a big helping of ridicule.
Social Security and Medicare: A Teachable Moment for Robert Samuelson? Print
Thursday, 27 January 2011 21:53

Washington Post columnist Robert Samuelson told readers that this is a teachable moment when it comes to Social Security and Medicare. Let's see if he is right.

In his column he takes issue with the idea that people pay for their Social Security and Medicare benefits:

"Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study."

However if we look at this Urban Institute we study that this man will have paid $290,000 for his Social Security benefits. According to the study, he will only get $256,000 back. In other words, he will have paid $34,000 more in taxes than he will get back in benefits. (This calculation assumes that the taxes earn an interest rate that is 2 percentage points above the inflation rate.) So, contrary to what Samuelson implies, the Urban Institute study shows that this middle income person will have more than paid for the Social Security benefits that he is scheduled to receive under current law.

The study does find that this man will get back more in Medicare benefits than what he paid. It estimates the value of his Medicare benefits at $161,000 for which he will have paid $55,000 in taxes. However, the idea that this person is getting some big giveaway from the government is a bit misleading. People in the United States pay more than twice as much per person for their health care as people in Canada, Germany, and other wealthy countries. This means that the money is not really going to the beneficiary, it is going to the pharmaceutical industry, high-priced medical specialists, and other sources of waste in the U.S. health care system.

If our health care costs were in law with those in other countries (all of which enjoy longer life expectancies), then Medicare benefits and taxes would be more nearly in line. More generally, if per person health care costs were in line with costs in the rest of the world, then the United States would be looking at huge budget surpluses, not deficits. This is the reason that honest budget analysts and commentators focus on fixing the health care system, not Social Security and Medicare.

Ross Douthat is Upset that No One Wants to Cut Social Security and Medicare Print
Wednesday, 26 January 2011 05:27

Every budget expert knows that Social Security is fully funded through the year 2037 with no changes whatsoever. Even if nothing is ever done the program will always pay close to 80 percent of scheduled benefits. It also, under the law, cannot contribute to the deficit since it cannot spend more money than is in the trust fund.

Medicare costs are projected to rise more rapidly, but this is due to rising private sector health care costs, not the inefficiency of Medicare. This means that containing Medicare costs and preventing a soaring deficit involves fixing the health care system, not gutting Social Security and Medicare.

While these simple facts are known by every budget expert, that doesn't keep the pundits from insisting that President Obama and other politicians support cuts to Social Security and Medicare. Hence we get Ross Douthat whining that no one seems to be listening to him in today's NYYT.

Umm, Congressional Districts Are Roughly the Same Size Print
Tuesday, 25 January 2011 05:27

The New York Times told readers that: "The median Democratic Congressional district now has a population 11 times as large as the median Republican Congressional district, according to an analysis by Transportation Weekly, a trade publication that focuses on federal transportation spending."

This is not right. Congressional districts are required to have roughly the same population under the constitution. There cannot be perfect equality since districts cannot cross state lines but the most populous district does not have even twice the population of the least populated district. The idea that the median Democratic district has 11 times the population of the median Republican district is absurd on its face.


[Addendum: the NYT corrected this article -- ratio referred to population densities, not population.

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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.