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The Hamilton Project: A Taxpayer Funded Policy Shop? Print
Thursday, 22 April 2010 05:23
The Washington Post reported on the restart of the Hamilton Project, a policy-oriented research project that is financed in large part by Robert Rubin. Mr. Rubin made $110 million in his decade as a top Citigroup executive. During his tenure Citigroup went from one of the largest and most profitable financial companies in the world to the edge of bankruptcy. It was only saved from bankruptcy in the fall of 2008 by tens of billions of taxpayer dollars and hundreds of billions of dollars of government guarantees. It would have been worth noting the questionable source of the project's funding in this piece. If a similar project had been launched by a coalition of labor unions, there is no doubt that the source of the funding would have been clearly noted in the piece.
 
John Paulson: Hero of the Housing Bubble Print
Thursday, 22 April 2010 04:57

Okay, I don't know Paulson's exact role in the Goldman deal. If he helped to deliberately mislead investors about his own role, pretending to be long on a deal that he was actually betting against, then the SEC should hang him. But there was nothing at all wrong or anti-social about betting against the housing market near the peak of the bubble, as Tina Brown implied on this Morning Edition segment.

By that point, house prices had grown hugely out of line with the fundamentals of the housing market. This priced them out of the reach of millions of middle income people. The temporary run-up in prices also led tens of millions of homeowners to spend based on bubble wealth that would disappear when prices returned to more normal levels.

Betting against the bubble was not "ghoulish," as Tina Brown asserts, it was a public service. It was helping to return house prices to more normal levels. Of course this was not Paulson's motive, but it was a side effect of his bet.

 
Million, Billion, What's the Difference? Print
Thursday, 22 April 2010 04:53
To Toyota, it would be a big difference. The NYT told readers that: "Toyota also agreed to pay a $16.4 billion fine, one of the heaviest fines imposed on a car manufacturer in the United States, for concealing information related to the recall." The actual fine was $16.4 million. This is equal to approximately 0.1 percent of Toyota's profits in a normal year.
 
The Fed Hands $47.4 Billion to the Treasury: If Only the Deficit Hawks Knew Print
Thursday, 22 April 2010 04:04

The NYT reports on the Fed handing $47.4 billion in profits to the Treasury. This event should have gotten more attention. The $47.4 billion in profits from the Fed affects the budget in the same way that raising $47.4 billion from taxes or saving $47.4 billion with spending cuts would affect the budget. However, the Fed neither raised taxes nor cut spending. It printed money.

The reason why this is important is that the Fed is now printing large amounts of money and can print more to support the government's deficit during this downturn. The government does not need to raise taxes or cut spending to pay for programs like unemployment benefits or aid to state to and local education. It can simply print money.

While in principle there is a limit to its ability to print money, that would only come after the economy was back near full employment and further increases in demand threatened to cause inflation. However, the economy is nowhere near this point today. Vincent Reinhart, an economist at the American Enterprise Institute, is quoted in the article as saying: "If it [the Fed] tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation."

A tenfold increase in the Fed's balance sheet would raise it by more than $20 trillion. As Reinhart's quote implies, there is no reason to fear moderate increases in the Fed's balance sheet -- say by another $1-2 trillion over the next few years. It is important to note that the portion of the debt financed by the Fed printing money imposes no burden on future generations. The interest paid on this debt goes to the Fed, which in turn is refunded to taxpayers, just like the $47.4 billion noted in this article.

The Peter Peterson/Robert Rubin deficit hawk gang is deceiving the public on this issue by implying that the deficits run up to support the economy through this downturn will burden our children. In fact, insofar as the spending provides their parents with jobs and income, it directly helps our children. Insofar as it goes to support education or maintain and improve the infrastructure, it will also help our children.

The idea that today's deficits are hurting our children is simply not true. Anyone who says otherwise should read this article as many times as necessary until they understand why.

 
The Washington Post Deep Sixes Financial Transactions Taxes Print
Wednesday, 21 April 2010 15:50

In an article that discussed an IMF report on new taxes on the financial industry the Washington Post referred to a "financial activities Tax" (FAT) proposed by the IMF and said that: "The IMF's proposed fees would raise more money than the other options under debate, with an emphasis on discouraging the type of risk-taking that caused the recent crisis."

This is not true, a financial transactions tax (FTT), like the ones put forward in recent bills by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio, could raise more than $100 billion a year. This is considerably more money than the amount that would be raised by the FAT at the levels suggested by the IMF.

Remarkably, this article contains no mention of the FTT even though one of the main purposes of the IMF report was to assess its merits. The IMF unambiguously concluded that an FTT was an administratively feasible tax, directly contradicting one of the main objections put forward by many officials in the Obama administration and other opponents of the tax. Although the IMF report indicated its preference for the FAT, its assessment of the FTT's feasibility undermines one of the main arguments against the tax. This fact should have been noted in the article.

 

 

 
Kent Conrad Calls for Throwing Millions of People Out of Work Print
Wednesday, 21 April 2010 05:08

That would have been an appropriate title for an article describing North Dakota Senator Kent Conrad's plan for sharp cuts in the budget deficit over the next four years. Conrad's plan would reduce the projected 2015 deficit by approximately 1.6 percentage points of GDP more than President Obama's budget. Since most projections still show the economy to be well below full employment levels of output by this year, the cuts in spending and higher taxes in Senator Conrad's plan will reduce the level of output. If we assume an average multiplier of 1, then output will be 1.6 percent lower in 2015 than would otherwise be the case. If employment falls by the same amount, then Senator Conrad's plan would throw roughly 2.3 million people out of work.

It is worth noting that our children will pay a substantial cost under Senator Conrad's deficit reduction scheme. He proposes especially large cuts for the Pell Grant program that helps children from moderate income families pay for college.

At one point, the article describes President Obama's plan to extend President Bush's tax cut for middle-income families and other tax measures as "expensive tax breaks." The more normal description in news stories is "tax breaks."

 
Dana Milbank's Optimistic Forecasts Print
Wednesday, 21 April 2010 05:01

Washington Post columnist Dana Milbank told readers that: "by the time President Obama faces reelection in 2012, there should be, as there was in 1984 and 1996, a beautiful sunrise on the horizon: Three years of solid economic growth, unemployment down to about 7 percent."

That's really good to hear. Unfortunately, almost no economists agree with Mr. Milbank. The consensus forecast is for extremely slow growth over the next two years. The Congressional Budget Office projects that the unemployment rate will still be close to 8.0 percent -- a level higher than the peak in the prior two recessions -- by 2012.

 
Can They Calculate Real GDP at BusinessWeek? Print
Wednesday, 21 April 2010 04:40

It doesn't seem they can. They told readers that Colombia's GDP has doubled since President Uribe took office in 2002. That's not what the IMF says. According to the IMF, the increase has been just over 40 percent during this period. That's respectable growth, but it sure is not a doubling of GDP.

Calculating real GDP is a recurring problem at top media outlets. In December of 2007, in order to argue that the case that NAFTA had been a great success, a Washington Post editorial told readers that Mexico's GDP had quadrupled between 1988 and 2007. In reality, the increase had been just 84 percent. While a huge "nevermind" would have been in order, the Post lacked the integrity to print a correction and own up to this mistake.

 

[Addendum: BusinessWeek has corrected its mistake. We're still waiting on the Post.]

 

 
Owning Versus Renting: Right Topic, Wrong Math Print
Wednesday, 21 April 2010 04:22

David Leonhardt devoted his column today to an analysis of the relative merits of owning versus renting. It is useful question to raise, since many policy types have pushed homeownership in situations where it was virtually certain to lead to bad outcomes. (Did anyone lose their job for getting moderate income families to buy homes at the peak of the bubble, 2004-2007?)

While this is the right question, Leonhardt's math is off. He assumes a 20 to 1 price to rent ratio leaves a rough balance between owning and renting. In fact, the ratio would be closer to 15 to 1, it's long-term average.

The arithmetic is straightforward. The average real interest rate on mortgages is somewhat over 4.0 percent. Property taxes average 1.0 percent, as do the combination of maintenance costs and insurance. This brings average real annual costs to 6.0 percent of the sale price. Then there are turnover costs (realtor fees and various closing costs) that average roughly 10 percent of the sale price on a round-trip basis. The median period of homeownership is 7 years, which gives a cost of 1.4 percent a year, raising the total to 7.4 percent.

Even if the mortgage tax deduction knocks this down by a percentage point, this still leaves annual costs at 6.4 percent of sale price -- much closer to 15 to 1 ratio than Leonhardt's 20 to 1 ratio.  (A full percentage point tax benefit would be very high -- the actual tax benefit will be based on the difference between tax deductions including mortgage interest and the standard deduction. This will in the vast majority of cases be far less than the full mortgage interest deduction, since the overwhelming majority of homeowners would take the standard deduction if they were not owners.)

 

 

 
Neanderthal Protectionists on Wall Street Print
Wednesday, 21 April 2010 04:14

NPR had a piece on regulating derivatives this morning in which it presented the industry view that effective regulation will cause the industry to move offshore. The show should have brought on an economist to denounce this protectionist view and the harm that it implies for the economy.

There is no more reason for people in the United States to be concerned about buying derivatives abroad than we are about buying shoes and clothes from abroad. If other countries choose to attract trade in derivatives with a more poorly regulated financial system -- implicitly having their taxpayers assume the risk of a meltdown (e.g. Iceland) -- then there is no reason that we should not simply buy our derivatives from these countries and concentrate our production on areas in which we enjoy a comparative advantage. NPR should have included the economist's position in this segment.

 

 

 
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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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