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20 Percent Drops in GDP: Economists New Definition of Success Print
Tuesday, 25 May 2010 15:56

Back when I learned economics, companies were supposed to make profits and economies were supposed to grow. That doesn't seem to be the case anymore. We have "saavy" businessmen like Goldman Sachs CEO Lloyd Blankfein who took his company to the edge of bankruptcy only to be rescued by bailouts from the Fed and Treasury. Most of the crew of Wall Street multi-millionaires would be on the unemployment line today without the big helping hand from the Nanny State.

In the same vein, the NYT is now citing research from Deutsche Bank reporting : "that euro-area countries 'can learn some valuable lessons from the Baltics’ experience over recent quarters.' Those countries survived drastic budget consolidation without devaluing their currencies."

The article then continues to quote the Deutsche Bank experts: "Restoration of competitiveness and weighty fiscal consolidation in the absence of currency adjustment is difficult but doable ... as long as politicians and the general public are willing to accept some up-front pain in return to longer term gains.”

Just to give a clearer idea of what the Deutsche Bank crew is talking about, the IMF projects that GDP in each of the Baltic countries will drop by close to 20 percent from its 2007 levels. In the United States this would be equivalent to losing $3 trillion in annual output. By 2014, the last year for the projections, GDP is expected to be 7.1 percent lower than its 2007 level in Lithuania, 9.1 percent lower in Estonia, and 14.5 percent lower in Latvia. Unemployment in these countries is more than 15 percent in Estonia and Lithuania and more than 20 percent.

It is nice to see that German bankers applaud this pain. Needless to say, it is unlikely that many bankers will ever have the pleasure of making similar sacrifices for the long-term good of their own countries. Of course, it is not clear how long the Baltic countries will have to endure this pain before GDP is back on a healthy growth path and the unemployment rate is at a more normal level. The IMF tends to be overly optimistic in evaluating the prospects of the countries adopting policies it favors.

It would have been worth explicitly discussing the alternative strategy that some countries may wish to pursue -- devaluation and debt restructuring. Argentina pursued this path at the end of the 2001. While the IMF and virtually all economic authorities insisted that this path would lead to disaster, the economy only contracted for six more months. It then turned around and grew robustly for the next six years until it followed the world economy into recession. At its pre-recession peak in 2008 Argentina's economy was more than one-third larger than it had been in 1998 when its crisis first sent GDP downward.

While the bankers may be more inspired by the tales of sacrifice by the Baltic peoples, many non-bankers may find the Argentine experience more interesting. Responsible reporting should note both options.

 
The NYT Did Not Hear About the Housing Bubble in the UK, Blames Health Care for Problems Print
Tuesday, 25 May 2010 04:52

At its peak in 2006, the median house price in the United Kingdom was 10 percent higher than the median price in the United States, even though its per capita income is more than 10 percent lower. This bubble was driving the economy in the UK in the same way that it was driving the economy in the U.S.. The collapse of this bubble led to the recession in the UK and its financial crisis in the fall of 2008.

The bubble was completely absent from the NYT's discussion of the UK's current economic problems. Instead, it attributed fiscal profligacy for the UK's problems. In particular, it focused on the UK's public health care system, which it tells readers: "soared to 9 percent of G.D.P. from 3 percent."It also described the public health care system as " elephantine."

It was many decades ago when health care costs in the UK were just 3.0 percent of GDP. Health care costs in the UK have increased in GDP like as in all other wealthy countries. When the Labor government took office in the mid-90s, health care costs in the UK were close to 6.0 percent of GDP.

With the increase in spending, the UK is still spending only a bit more than half as much as the United States, which spends 17 percent of GDP on health care. When adjusted for the difference in per capita income, the US still spends more than twice as much per person on health care as the UK. It therefore seems somwhat bizarre to describe the UK system as elephantine, especially when life expetancy is longer in the UK than the US.

It is also worth noting that the build up of a large debt burden during the housing crash recesssion is the result of the policy decision by the Bank of England not to simply buy and hold the debt issued to finance the deficits currently needed to support the economy. If the Bank of England followed this strategy, then the debt burden would not increase as a result of the downturn.

The Bank of England created this crisis by failing to take steps to rein in the UK's housing bubble. It now appears to be compounding the crisis by failing to use appropriate monetary policy.

 

 
The NYT Notices Provision of Health Care Bill It Previously Opted to Ignore Print
Monday, 24 May 2010 23:32

I'm back -- thanks for all the nice wishes.From my occasional glimpses at the newspapers the last week and a half I see that I have a lot of work to do.

I'll start with a cheap shot. The NYT just noticed that the pay or play provision in the health care bill makes no sense. The issue here is the extent to which larger employers will be obligated to pick up a portion of their workers' health care costs. The final bill included a provision that subjected employers of more than 50 workers to penalties if employees' health care costs exceeded a certain percent of family income.

The problem with this sort of penalty structure is that employers do not have control over workers family income and in general should not even know it. This sets up an absurd penalty structure where employers do not have the knowledge they need to act to avoid the penalty -- it's sort of like enforcing speed limits that randomly change and are never posted.

The problem with the NYT coverage is its description of this problem as: "a little-noticed provision of the law." Yes, it is true the provision got relatively little attention, but the NYT played a big role in this. Had the NYT opted to pick up on a problem that some people were trying to call attention to, notably Robert Reichsauer, the President of the Urban Insititute and also the former director of CBO (also CEPR), then maybe this ill-conceived penalty never would have made it into the final law.

 

 

 

 
I'm on the Road Print
Friday, 14 May 2010 04:24
I'm on vacation until Tuesday, May 25th. Remember, don't believe anything you read in the paper until then and while I'm gone, take a look at the CEPR Blog for some good reads on economics and policy analysis.
 
Congress Gets It Right on Credit Rating Agencies Print
Friday, 14 May 2010 04:17

Thanks to Senator Al Franken it appears the Senate took the obvious step to end the conflict of interest associated with issuers paying the credit rating agencies for rating their new issues. The Franken amendment to the financial reform bill requires the Securities and Exchange Commission (SEC) to assign the raters. This would mean that the rating agency has no reason to bend its rating to curry the favor of the issuer, since the issuer does not control whether they get hired in the future.

The Post reported on this amendment and then gave the rating agencies complaint, that this will remove the rating agencies incentive to improve their ratings. This is not true. As my friend Peter Eckstein has pointed out, it would be very easy for the SEC to keep a record of the accuracy of ratings (scoring upgrades and downgrades) and then assign business in proportion to the agencies' relative track record. This will ensure that the agencies have incentive to improve their rating systems.

 
More on Argentina's Devaluation and Default Print
Thursday, 13 May 2010 13:57

My colleagues at CEPR, Mark Weisbrot and David Rosnick gave me grief for saying that Argentina's economy shrank in the year following its default. Actually, Argentina's economy shrank in the first quarter of 2002, the quarter immediately following the December default, and then began growing robustly. It continued to have robust growth for 5 more years until it got caught up in the world recession. If we were having an honest debate over Greece, then everyone would be talking about Argentina's remarkable turnaround. Instead, we have experts telling us that the economy shrank 20 percent following the default.

 

 

 

 
The Deficit Problem Is Not “We, the People,” It is “You, the Incompetent Elite” Print
Wednesday, 12 May 2010 04:29
New York Times columnist David Leonhardt told readers today that the problem of the debt is “we, the people.” Is that so?

Was it we the people who were too dumb to see an $8 trillion housing bubble and recognize that its collapse would wreck the economy? No, that was the job of the great Maestro Alan Greenspan and his sidekick Ben Bernanke, the brilliant scholar of the Great Depression. It was also the job of all the economists who do research and opine to the public on the macroeconomy. Virtually all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time.

Our deficit today is due to the collapse of this bubble. There is no dispute about this. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).

Is our huge deficit a problem today? Not if you think people should have jobs. Private sector demand has plunged because of the collapse of the bubble. If the public sector does not fill the demand gap with deficit spending, then we have less demand and fewer jobs. That’s worth saying a few hundred thousand times since the deficit hawks have filled the airwaves and cyberspace with so much nonsense.

People who want smaller deficits want fewer jobs – that is the way the economy works right now. There is no plausible story through which cutting demand from the public sector will generate more jobs in the private sector.

How about those scary long-term deficit stories? It’s all health care; it’s all health care. Those who know arithmetic know this.

The deficit hawks tell us we can’t fix our health care system. What they actually mean is that they don’t want to confront the powerful interest groups that cause the United States to pay two or three times as much per person – with no obvious benefit – as people in other wealthy countries. It is easy to devise mechanisms that will get our costs more in line with other countries (e.g. this or this).

Because such measures threaten the incomes of powerful interest groups the politicians won’t push them. And, because they have not been endorsed by enough elite economists (you know, the folks that couldn’t $8 trillion housing bubble) elite journalists will not talk about them either. Instead, they will blame ordinary workers for thinking that they should be able to get a decent retirement and have the same sort of health care coverage as people in every other wealthy country.
 
Peter Peterson Wants to Cut Social Security Print
Tuesday, 11 May 2010 14:32

That could have been the title of this CNNMoney.com piece that touted the idea of "fixing" Social Security. The peice begins by quoting Robert Bixby, the director of the Concord Coalition, an organization that was founded by Peter Peterson and is still partially funded by him. Mr. Bixby described fixing Social Security as "low-hanging fruit" when it comes to deficit reduction.

The piece then went on to Mr. Peterson himself:

"While a Social Security fix would cure only a small part of the country's long-term fiscal shortfall, it could pay big dividends in terms of the U.S. standing internationally, deficit hawks say. 'It would be a confidence builder with our foreign lenders,' said Pete Peterson at a recent fiscal summit organized by his foundation, the Peter G. Peterson Foundation.

That could lessen the risk of a big rise in interest rates and buy the country more time to handle other debt-related issues, such as tax and budget reform and further changes in Medicare."

Mr. Peterson's ability to assess what builds confidence with foreign investors or anyone else is somewhat questionable. He managed to somehow completely overlook an $8 trillion housing bubble, the collapse of which gave us the worst downturn in 70 years.

Mr. Peterson's logic is also somewhat confused. If foreign investors lose confidence in the United States then the value of the dollar would fall relative to other currencies. This will make U.S. exports cheaper to foreigners and make foreign imports more expensive to people in the United States. The result would be that we would export more and import less. This improvement in the trade balance would increase employment and reduce the deficit. If the reporter has spoken to someone other than Mr. Peterson and his employees, she may have caught Mr. Peterson's mistaken logic and pointed it out to readers.

The rest of the piece is devoted to misrepresenting Social Security's financial situation. It notes that the program is projected to pay out more in benefits than it takes in as SS taxes this year. It then tells readers:

"When the system takes in less than it has promised to pay out, the government will need to make up the difference by paying back the surplus revenue that has been paid into Social Security over the years, but which Uncle Sam spent on other things."

This is true in the same way that if Mr. Peterson spends the interest from government bonds that he owns or cashs in bonds that hit their expiration date -- rather than reinvesting the money in government bonds --  the government will need to make up the difference by paying back the money that Mr. Peterson has lent over the years, but which Uncle Sam spent on other things.

In other words, the article is implying that there is something sinister about a normal business practice. The Social Security trust fund bought government bonds with its surplus, just like private pension funds do, as well as wealthy individuals. Under the law, this money will be paid back to Social Security  -- that is what governments do with their debts -- they pay them back -- unless they default.

 

 
The Post Wants Germany to Consume More as Part of Austerity Print
Tuesday, 11 May 2010 12:15

That's right, the Post wants the Germans to let out their belts. Its editorial board probably doesn't realize this (they think that Mexico' GDP quadrupled since NAFTA was passed -- the actual growth was about 80 percent), but the statement: "the European Union's more successful economies, especially Germany, must retool to depend less on exports for growth," means that these countries should consume more.

As an accounting identity the trade surplus is equal to the the excess of national savings over national investment. As a practical matter, it is very difficult to change rates of investment. This means that the Post's complaint about Germany's trade surplus is a complaint about excessive savings and insufficient consumption. So, this sounds like the Post wants Germany to make its generous welfare state even more generous. It would be good if the Post's editors could learn a little economics so that they could at least figure out what they are sternly lecturing people to do.

 
Another Front Page Editorial on Deficits at the Post Print
Tuesday, 11 May 2010 04:38

The Washington Post (a.k.a. Fox on 15th Street) is getting ever more aggressive in pushing its anti-welfare state agenda. A front page news article on the Greek financial crisis told readers that: "And though economists and other analysts generally agreed that the program was necessary to prevent a full-blown financial crisis, they also agreed that it won't work unless European governments follow through on promises to bring down their large deficits and restructure their economies to become more competitive."

It then added: "'We can't finance our social model anymore -- with 1 percent structural growth we can't play a role in the world,' European Council President Herman Van Rompuy said Monday in remarks at the World Economic Forum in Brussels, just hours after European Union finance ministers approved the new program."

In fact, there is nothing resembling the consensus about the failure of Europe's social model that this editorial implies. Unlike the United States, Europe as a whole has generally run balance of trade surpluses, suggesting that the European economies are more competitive than the U.S. economy. It is also worth noting that the welfare states in the countries facing crises right now (Greece, Portugal, Spain, and Ireland) rank among the weaker ones in Europe. The relatively healthy economies of France, Germany, the Netherlands, and the Scandanavian countries all have much stronger welfare states.

It's also worth noting how Europe and the world got into this crisis. The problems originated in letting housing bubbles grow unchecked and creating enormous economic imbalances. Apparently, news of the housing bubble still has not reached the Post.

 
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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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