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Front Page Post Editorial Tells Readers that Dems Would Face Better Prospects With 11 Percent Unemployment Print
Saturday, 04 September 2010 05:21

Most political experts believe that a strong economy favors incumbents, but the Post told readers the opposite in a front page piece that urged Democrats to embrace deficit reduction. The piece noted comments from several Democratic senatorial candidates urging budget cuts, then told readers:

"The new push for austerity could prove too little, too late for Democrats, who fear losing their majorities in both chambers of Congress. In dozens of House and Senate races, incumbent Democrats are struggling in polls, leading political analysts to raise the serious prospect of Republican takeovers in the House and even the Senate."

Of course the deficits that the country is now running are sustaining the economy. If the deficits were lower, then output would be lower and unemployment would be higher. The Congressional Budget Office (CBO) recently estimated that the stimulus has reduced the unemployment rate by between 0.7 and 1.8 percentage points.

The CBO estimates imply that if the Democrats had been earlier in their push for fiscal austerity and not pushed through the stimulus, then the current unemployment rate would be between 10.3 percent and 11.4 percent. This Post piece asserts that this situation would have improved their electoral prospects in November, although it cites no one who backs up this position.

The editorial, which is not labeled as such, includes several other unsupported assertions. At one point it told readers that government spending is out of control, commenting that "Democrats vow to bring spending under control," which of course is only possible if spending is already out of control.

It also implies that the Democrats have spent recklessly commenting about their "conversion to fiscal restraint" and the difficulty of convincing voters that they are serious. Of course the only budget surpluses in the last 40 years were run with Democrats in the White House, and the largest structural deficits were run under Republican administrations, so it is a bit bizarre that the article would imply that Democrats need to convert to "fiscal restraint."

The article also told readers the country's fiscal health is in danger and that the changes need to restore it are unpopular:

"Some fiscal hawks are skeptical that either party is willing to make the unpopular decisions necessary to restore the country to fiscal health."

The financial markets do not believe that the country's fiscal health is in danger, otherwise they would not make long term loans to the government at interest rates below 3.0 percent. It is also not clear that the steps needed to ensure that long-term budget deficits do not become a problem are unpopular.

While one source cited in the story (Robert Bixby, the director of the Concord Coalition) wants to cut Social Security, Medicare and Medicaid, it is only necessary to fix the U.S. health care system to ensure stable budgets into the indefinite future. If the United States paid the same per person health care costs as people in any other wealthy country we would face huge long-term budget surpluses rather than deficits.

The piece should have also pointed out Colorado Senator Michael Bennet's error when he asserted that we are borrowing from China because of our budget deficit. The United States is borrowing from China because of its trade deficit, which is in turn the result of an over-valued dollar. This is an embarrassing gaffe from a senator.

It is also worth noting that this editorial did not once mention the unemployment rate. This is remarkable for a piece discussing the Democrats' election prospects.

 

 

 
Immigration, Social Security and Logic at the Washington Post Print
Friday, 03 September 2010 05:37

The Post has an oped by Edward Schumacher touting the benefits that undocumented workers have provided for the Social Security system. Many pay taxes without ever collecting benefits.

While his numbers don't seem quite right (he claims that annual payouts would exceed tax revenue over the years 2011-2015 without the $12 billion estimated net contribution from undocumented workers, the trustees report shows taxes exceeded benefits by more than $15 billion in the years 2012-2014), the more important problem is with his logic.

Presumably the point of immigration reform measures would be to normalize the employment situation of immigrants so that the workers who are here are on the books, both paying required taxes and receiving the benefits to which they are entitled, like Social Security. If immigrants get the benefits to which they are entitled, then it will make the finances of Social Security somewhat worse.

In reality this is a trivial issue for the program, which is fully solvent for the next 29 years according to the Congressional Budget Office. An increase in the payroll tax of 0.16 percentage points would fully offset the cost of the payment of benefits to undocumented workers. However, it seems bizarre to advocate that immigrants be brought into the country to pay taxes to a program from which they get no benefit, as Mr. Schumacher seems to be doing.

 
Morning Edition Gets the Story on Investment 100 Percent Wrong Print
Friday, 03 September 2010 05:20
A report on the unemployment situation told listeners that the real problem in the economy is not a lack of demand, but rather inadequate investment. Actually investment in equipment and software has been growing at almost a 20 percent annual rate over the last three quarters. While it might be desirable to see investment grow even more rapidly, demand is a major determinant of investment growth. If the economy grew more rapidly as a result of a spur to consumption, it would almost certainly lead to more rapid growth in investment.
 
Basic Logic for Ben Bernanke Print
Friday, 03 September 2010 05:03

Since reporters feel the need to report nonsense from the Fed chairman without presenting anyone pointing out the obvious, BTP will fill the gap. The NYT reported on Ben Bernanke's testimony before the Financial Crisis Inquiry Commission.

It notes Bernanke's statement that in 2003-2004 it was not clear that the housing market was in a bubble and that by the time it was clear, it was too late for the Fed to do anything without seriously harming the economy. Of course it was clear as early as 2002 that the housing market was in a bubble, but more importantly, Bernanke's claim that the Fed could not act until it was clear is absurd.

The Fed always acts in an uncertain environment. For example, Alan Greenspan raised interest rates in anticipation of inflation on numerous occasions. The logic of this action was that it was worth slowing the economy and raising the unemployment rate rather than risk an increase in the rate of inflation. In effect, this action assumes that the certainty of higher unemployment from raising interest rates is better than the risk of higher inflation.

Had the Fed acted to burst the bubble in 2003-2004, the risk would have been that it temporarily depressed house prices by scaring people about excessive prices and limiting the exotic mortgages that were boosting demand. By contrast, if it had acted correctly in preventing the growth of a dangerous bubble, it would have prevented the worst downturn in 70 years.

Any serious weighing of the benefits and risks of bursting the bubble in 2003-2004 would have surely come down in favor of bursting the bubble. The Fed's decision not to burst the bubble was one of the most disastrous failures of monetary policy in history.

 
House Prices Still Have More to Fall, Deal With It Print
Friday, 03 September 2010 04:35

The NYT has long opposed agricultural price support programs. Ironically it supports house price support programs. It seems to want the Obama administration to take further steps to keep the housing bubble from deflating.

The basic story is that house prices are still 15-20 percent above their trend level. These prices seem relatively affordable given the extraordinarily low interest rates in the market at present. However, if we think that interest rates are a major determinant of price, then we must believe that prices will plummet if interest rates return to a more normal level.

Sound housing policy would accept the fall and focus on helping homeowners facing the loss of their home. It would not try to perpetuate the bubble.

 
David Brooks Is So Cute When He Tries to Do Economics Print
Friday, 03 September 2010 04:06

Economics isn't that hard, but David Brooks seems to have trouble with it. He thinks everything would have been different if President Obama had pushed through a $713 billion stimulus that was centered on cutting the payroll tax, had pushed through an infrastructure bank instead of his pork barrel projects, and had focused on getting an energy bill rather than a health care bill.

There is no way of knowing how the politics would have played out, but in terms of the economics, it is difficult to see how Brooks' stimulus would have left us in a different place than the Obama stimulus. With stimulus, size does matter, and Brooks is basically talking about a stimulus of roughly the same size as the one President Obama got through Congress.

Payroll tax cuts are relatively progressive (the tax is regressive), so a cut has a fairly high multiplier since most of the money will be spent. Mark Zandi estimates the multiplier on these cuts at 1.3. This is better than for most tax cuts, but less than the 1.7 multiplier estimated for food stamps, the 1.6 for unemployment insurance benefits or infrastructure spending and the same as the 1.3 estimated for aid to state and local government. 

This means that if we compare David Brooks stimulus with President Obama's stimulus of roughly the same size, we should expect it to have roughly the same impact on the economy. President Obama's stimulus included some items that would be expected to have more impact (UI benefits and food stamps), and some that would have about the same impact (aid to the states and his own payroll tax cut, which was called "Make Work Pay"), and some that would have less impact if we include the alternative minimum tax fix as part of the stimulus.

As a result, if President Obama had done the David Brooks stimulus we should expect the unemployment rate to be around 9.5 percent, rising to 9.8 percent this morning, and headed to above 10.0 percent by the end of the year. I can't answer whether this would have made President Obama more popular than he is now.

 

 
The Washington Post Gets Out the Pom Poms Print
Thursday, 02 September 2010 05:14
Unfortunately, I am serious. It has a news article in today's paper with the headline: "five reasons for economic optimism." Real newspapers don't run pieces like this as news stories.
 
Is the Washington Post a Serious Newspaper? Print
Thursday, 02 September 2010 05:01

The Post seems to be claiming otherwise in an article that begins with the sentence: "will the U.S. government ever default?" The Washington Post editorial section has been near hysterical in its screaming about budget deficits for most of the last decade. In fact, it was so out of bounds in its rants that it found no space in either its news or opinion section for warnings about the $8 trillion housing bubble. Of course the collapse of this bubble led to the worst economic downturn in 70 years -- and sent the deficit soaring.

It is also worth noting that IMF completely missed the housing bubble and failed to warn of the imminent danger that it posed to the United States and other countries. No one at the IMF was fired over this failure and there has been no major restructuring of its staff, so there is little reason to believe that its understanding of economics is any better or its advice more accurate today than it was in the years before the bubble burst.

Of course the basic hypothesis is silly on its face since the United States issues debt in dollars. It can print as many dollars as it needs to pay off its debt. This could create a risk of inflation, but it rules out the possibility of default. Serious economists and reporters understand this simple point.

 
Effectiveness of the Stimulus: Washington Post Has Not Heard of the Congressional Budget Office Print
Thursday, 02 September 2010 04:37

Apparently word of CBO's existence has not made its way to Fox on 15th Street. How else can we explain the Post's failure to mention CBO's analysis of the impact of the stimulus in an article reporting on a speech by Christine Romer, President Obama's departing chief economist?

The article reported Romer's view that the stimulus helped keep the economy from sliding into a depression and that additional stimulus would boost growth. It then tells readers that Republicans oppose additional stimulus and "argue that Democrats have run up record budget deficits without improving the economy."

This is where a serious newspaper would report the assessment of the stimulus by independent analysts, most obviously CBO. In an analysis released last month CBO estimated that the stimulus increased output by between 1.7  percent and 4.5 percent. It also calculated that the stimulus lowered the unemployment rate by between 0.8 and 1.7 percentage points. In other words, the CBO estimates imply that unemployment would be between 10.3 percent and 11.2 percent today without the stimulus. This would have been useful information to provide readers.

 
Who Are You Going to Believe, the IMF or Your Lying Eyes? Print
Wednesday, 01 September 2010 20:39

The NYT reports on a new set of papers from the IMF, one of which warns that many wealthy countries, including the United States, are very close to the limit of their ability to increase their national debt. It is worth noting that this paper's methodology indicated that Japan and Italy were already well above the limit of their ability to take on debt.

The financial markets apparently assess the situation differently than the IMF since both countries are still able to issue long-term debt at very low interest rates. The fact that the methodology is apparently quite wrong in predicting the situations faced by these two countries might suggest that it is not a very useful methodology for guiding U.S. policy.

It is also worth noting that IMF somehow did not see the $8 trillion housing bubble that wrecked the U.S. economy, nor the bubbles in Spain, Ireland, and the U.K. There have been no obvious changes in the IMF's structure that would lead one to believe that it is better at assessing economic prospects today than it was three years ago.

 
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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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