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Bowles and Simpson Violate Commission Charter and the Washington Post Covers Up Print
Wednesday, 01 December 2010 05:23

The Washington Post, which long ago abandoned rules of journalistic objectivity in pushing its agenda for cutting Social Security and Medicare, today covered up the plans by deficit commission's co-chairs to violate the commission's charter. The Post reported that the commission expects to delay voting on a plan until December 3. This means that the commission will miss the December 1 deadline for a final report specified in both its by-laws and its charter.

If the Post were not so committed to Bowles and Simpson's agenda then it would have called readers attention to the fact that they are violating the rules under which the commission was established. Of course, if it were following standard journalistic practices, the Post would have pointed out that the deficit increased not because of out of control spending, as the co-chairs have repeatedly claimed, but primarily due to the downturn caused by the collapse of the housing bubble.

It also would have pointed out that the huge long-term projected deficits are entirely attributable to the broken health care system. If the United States paid the same amount per person for health care as countries with longer life expectancies we would be facing huge budget surpluses, not deficits. However, because it editorial position dominates its news section, almost no readers of the Post would know this simple and important fact.

 
Economic Theory Predicts that We Would Not Have Very Good Economists Print
Tuesday, 30 November 2010 06:51

Suppose that school teachers could keep teaching and get regular promotions year after year no matter how badly they performed in the classroom. Suppose also that there was no incentive to teach well. Economic theory predicts that we would get a large number of unmotivated mediocre teachers.

Okay, suppose that the people who design economic policy never need to worry about getting fired no matter how badly their policies turn out. They continue to hold their jobs and get regular promotions. Under such circumstances we should expect that we would get mediocre economists.

This simple fact should have been included in an interesting WSJ discussion of efforts to promote new directions in economics. If there is no incentive to get things rights, then economists should expect that economic policy will be largely done by people who are not competent.

 
TARP Celebrations: Round 657 Print
Tuesday, 30 November 2010 05:52

A new report from the Congressional Budget Office prompted another round of celebrations in the media over how little the program cost taxpayers. In fact, the program kept the major Wall Street banks in business preserving trillions of dollars in paper wealth for stockholders, bondholders, and top executives at these institutions.

The situation can be compared to one in which the government prints up a trillion dollars and hands it to the Wall Street gang. Since the money was just printed, it does not require any tax revenue. Nonetheless, this transfer will be a burden on all non-Wall Street types in future years, since the Wall Street crew will have a claim on society's resources that they would not otherwise have.

In the case of the TARP and related Fed and FDIC programs, the government made trillions of dollars in loans and loan guarantees available to the banks at far below market rates. This allowed them to survive in a situation where they would have gone under if the market had been left to work its magic. The fact that Goldman Sachs, Citigroup, Morgan Stanley and the rest still exist and its top executives are hugely wealthy is a direct result of the taxpayers' generosity.

 
Protectionism Leads to Corruption #4567 Print
Tuesday, 30 November 2010 05:46

Nearly all economists speak derisively of tariff barriers that raise the price of imported goods above their marginal cost. In addition to the inefficiency this causes, tariff protection also invites corruption as the protected industries try to maximize the value of the rents they receive.

The identical logic applies to patent protection, except patents can raise the price of goods by tens or hundreds of times the competitive market price, not the 15-30 percent that would be more typical of tariff protection. It would be useful if this point was made in the context of an article reporting on how a drug company had ghost authored a textbook for two medical researchers.

 
Labor Shortages in China Are an Argument Against Raising the Yuan? Print
Tuesday, 30 November 2010 05:34

In the NYT they are. In a world where we have 9.6 percent unemployment and the deficit is problem #1, anything is possible.

The NYT reported on evidence of serious labor shortages in export centers and then told readers today:

"China can point to the labor shortage in the export hubs as one reason not to let the renminbi’s value rise, since companies are already grappling with the possibility that higher wages could make their goods less competitive. A significant currency appreciation could help cause a wave of business failures and bankruptcies, Chinese officials say."

Okay, black is white, night is day. This makes zero sense. China would have a good case against raising the value of the currency if the opposite were the case. If it had high unemployment so that reducing its exports could create serious deprivation and social unrest, then it would have a good argument against raising the value of its currency, but low unemployment?

If high labor costs push a firm out of business then this is because it uses its labor less efficiently than other firms. This is known as "capitalism." Firms that cannot compete are supposed to go out of business. Furthermore, in the context of a tight labor market, the bankruptcy does not even hurt workers, since the employees of a bankrupt firm just go over to one of the other firms that are desperate for workers.

The evidence in this article should support the case of those who believe that China should raise the value of its currency. That case should have been made to readers.

 
President Obama Proposes Reducing Private Sector Employment by 7000 in 2011 and 18,000 in 2012 Print
Monday, 29 November 2010 23:44

Using the economic analysis that his advisers relied upon in designing the stimulus package, this would be the projected effect of President Obama's proposal to freeze the pay of federal employees. According the NYT, this will reduce the amount of money that federal employees have to spend by $2 billion in 2011 and by $5 billion in 2012.

Following the multipliers in the Romer-Bernstein paper released by the Obama transition team, we can assume that roughly half of this money would be re-spent. This means that consumption would fall by $1 billion in 2011 and $2.5 billion in 2012. The Romer-Bernstein analysis assumed that an increase in GDP of 1 percent would lead to an increase in employment of 1 million. In this case, GDP will be about 0.007 percent lower in 2011 and about 0.018 percent lower in 2012, implying drops in private sector employment in these years of 7,000 and 18,000 jobs, respectively. The NYT should have noted the impact that the Obama administration's economic team expects to result from this proposed pay freeze.

 
Deficit Commission: What Is "Tough" About Doing What Rich and Powerful People Want You to Do? Print
Monday, 29 November 2010 23:00

It's actually pretty easy to do what the rich and powerful people want you do. After all, they are the ones that can give you jobs and money. This is why it is dishonest for reporters to describe the decision by people associated with the several of the deficit commissions to refer to proposals to cut Social Security and Medicare as "tough" decisions.

Given the constellation of power in the United States, these are relatively easy decisions. The really touch decisions would be to confront the doctors' lobbies, the pharmaceutical industry, the health insurance industry and Wall Street. People like the co-chair's of President Obama's commission, Erskine Bowles and former Senator Alan Simpson, lacked the courage for these tough decisions.

 
Fareed Zakaria: More Arithmetic Problems at the Washington Post Print
Monday, 29 November 2010 06:01

Where is Michelle Rhee when we need her? That's what readers of Fareed Zakaria's column on the economy must have been asking.

Mr. Zakaria comments that the stimulus was helpful, but then says that it is not the right medicine to boost the economy. He tells readers:

"In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement."

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

Ironically, one policymaker who seemed to understand this was Barack Obama. Twelve weeks into his presidency he gave a speech at Georgetown University making the case for the long-term rebuilding of the American economy, away from an overreliance on debt and consumption and toward productive investment. Obama should have given 25 versions of that speech by now and relentlessly offered policies that expand on its basic focus on long-term growth."

Okay, Zakaria's wants more investment. That sounds good, but how much more does he think that President Obama's 25 versions of his Georgetown speech would prompt. In 2007, before the recession, investment in equipment and software were slightly less than 8 percent of GDP.

Private sector demand has fallen by close to 9 percent of GDP as a result of the collapse of the bubbles in residential and non-residential real estate. Roughly half of this decline is due to the end of the bubble driven construction booms and the other half is due to the loss of consumption that followed the destruction of close to $8 trillion of housing bubble wealth.

Does Mr. Zakaria really think that investment will double as a share of GDP in an environment where demand has collapsed. Mr. Obama can be a great speaker, but I think this one would exceed even his capabilities.

If only the people who wrote about economic policy for major news outlets had to know 3rd grade arithmetic we could be saved from having to deal with such arguments.

 
Robert Samuelson Wants Ordinary People to Pay for the Mess-ups of the Bankers Print
Monday, 29 November 2010 05:47

This is the general policy being pushed by the Washington Post, various Peter Peterson funded deficit commissions, and of course Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's deficit commission. What is great about Robert Samuelson is that he is comes right and tells readers that he wants ordinary people to suffer for the greed and incompetence of the bankers and the people who design economic policy.

Samuelson says that bailouts in Ireland, Greece, Spain and elsewhere are about:

"persuading ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions."

Of course there is no economic reason whatsoever that ordinary people should be accepting lower pay, higher taxes, and reduced Social Security and pensions. The economies of Europe and the United States are no less productive than they were before the collapse of the housing bubble that the economic policymakers (almost none of whom have been fired) failed to see. In fact, in the United States productivity has risen substantially in the last 3 years.

The reduced output and unemployment stems from lack of demand. This in turn stems from the failure of the same group of economic policymakers to find ways to increase demand sufficiently to make up for the demand lost by the collapse of the bubble. Rather than trying to generate demand, policymakers are doing exactly what Mr. Samuelson said they are doing. They are trying to force ordinary people to endure high unemployment and accept cuts in pay, benefits, and public welfare programs.

And, as Mr. Samuelson says, he hopes that austerity can be accomplished "without [the public] resorting to paralyzing street protests or ineffectual parliamentary coalitions."

 

 

 
Thomas Friedman, the High Priest of Austerity Print
Sunday, 28 November 2010 22:25
Normal 0

Thomas Friedman told Congress to just shut up and reduce the living standards of the vast majority of the population. In his column today Friedman said that Congress should quickly embrace the cuts in Social Security and Medicare proposed by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit commission, and get on with the rest of Friedman’s agenda. Friedman has apparently decided there is no other way to move forward than to force moderate-income retirees to take big cuts in their living standards.

Of course others might point out that there are enormous potential savings to Medicare and Medicaid from allowing beneficiaries access to the more efficient health care systems in other countries. The government and private sector could also saving hundreds of billions of dollars a year from replacing the system of patent support for drug research with more efficient mechanisms.

In addition, the government could easily raise more than $100 billion a year from taxing the excesses in the financial sector, a route even advocated by the International Monetary Fund. This would require the sector most responsible for the economic wreckage the country is now experiencing to pay for the damage.

And, those who know basic economics (forget Friedman here) know that the current deficits pose no burden whatsoever. Deficits run in times of high unemployment do not displace private sector production; they simply utilize resources that would otherwise be idle.

And, there need be no future tax burden associated with the interest on this debt. There is no reason that the Fed can’t simply buy and hold the bonds issued to finance the deficit. This would mean that the interest paid on the bonds would go to the Fed, which would in turn refund it to the Treasury. This means that the interest imposes no net cost to taxpayers.

But Friedman doesn’t have time for thinking about these alternatives to cutting Social Security and Medicare. After all, each of these would involve confronting wealthy and powerful interest groups, Thomas Friedman doesn’t get paid to cause these people trouble.

 Friedman’s line is to tell Congress to shut up and go after those high-living former schoolteachers and factory workers. After all, what business do these people have enjoying a decent standard of living when Thomas Friedman has an agenda to pursue?   

 
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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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