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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.

 

 
The United States Does Not Leave Drug Prices to the Market Print
Tuesday, 21 September 2010 03:58

The Washington Post told readers that President Obama's health care plan leaves drug prices to the market. This is not true.The plan leaves in place government issued patent monopolies that raise prices by many times above their competitive market price.

At one point the piece notes that the health care plan's closing of the "doughnut hole" for prescription drugs in Medicare would cost the drug companies $32 billion over the next decade. It would have been helpful to inform readers that this is less than 1 percent of projected spending on prescription drugs over this period.

 
There is No Evidence for the "Structural Unemployment" Story Print
Monday, 20 September 2010 04:57

There is an effort by many of the economists who could not see the $8 trillion housing bubble that wrecked the economy to say that there is nothing that we can do about the damage because unemployment is structural, not cyclical. This means that the problem is that workers have the wrong skills for the jobs that are available or are in the wrong location. If this is the case, then the problem is not insufficient demand, the problem is with the workers who are unemployed. (Yes, this is another "blame the workers" story.)

The NYT lent space to Narayana R. Kocherlakota, president of the Minneapolis Fed, to present this argument. Mr. Kocherlakota referred to statistics showing a large number of job openings.

Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels.

It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description.


[Addendum: the original mistakenly said "one opening for every unemployed worker," rather than one opening for every five unemployed workers. Thanks to Tom for catching this.]

 
Robert Samuelson Is Worried About 12,000 Jobs in the Gulf Oil Industry? Print
Monday, 20 September 2010 04:37

Robert Samuelson is apparently very worried about the loss of "up to 12,000" jobs due to President Obama's temporary moratorium on oil drilling in the Gulf. For context, this job loss is less than 0.01 percent of total employment. It is a bit more than a typical day's job growth in the years 1996-2000.

Samuelson is also concerned about President Obama's plan to allow President Bush's tax cut for the wealthy to expire. He cites figures from Mark Zandi, that the wealthiest 2 percent of the population "represent almost a quarter of all consumer spending" (italics in original).

While it is true that the richest 2 percent impose a hugely disproportionate strain on the economy's resources, the relevant issue is their marginal propensity to consume. All studies, including those by Zandi, show that the marginal propensity of the rich to consume is very low. In other words, if we give Bill Gates another $20 million in tax breaks, it is unlikely to affect his consumption to any significant extent. 

Samuelson also points out that many small business owners will be affected by the end of the Bush tax cuts. The vast majority of the small business owners who are affected will see a trivial increase in their tax bill. The Joint Tax Committee of Congress projected that the average tax hit on tax filers with incomes between $200,000 and $500,000 (the vast majority of the affected small businesses) would see an increase in their taxes of just $500. This is unlikely to have much impact on their hiring and growth. It is also worth noting that the higher Clinton era tax rates were in place in the late 90s when the economy was generating more than 8,000 jobs a day.

 
What Does a "Stabilized" Housing Market Mean to the Washington Post? Print
Monday, 20 September 2010 04:29

The Washington Post told readers that this week's reports on home sales are expected to show increases which it describes as "a sign the U.S. real estate market is stabilizing." It's not clear what the Post means by stabilizing.

While the number of homes being sold each month is likely to remain reasonably even in the months ahead, prices are likely to resume their fall. They still have another 15-20 percent to drop in order for the bubble to fully deflate and prices to return to their long-term trend.

It would be helpful if the Post did not rely exclusively on experts who completely missed the $8 trillion housing bubble. During the years the bubble was expanding the Post's main source on the housing market was David Lereah, the chief economist of the National Association of Realtors, and the author of Why the Housing Boom Will Not Bust and How You Can Profit from It.

 
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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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