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The Post Has Not Heard of the European Central Bank Print
Wednesday, 06 June 2012 04:52

This is what readers of a WAPO piece discussing the crisis in Spain must have concluded. The piece noted the financial problems facing Spain's banks and government, and told readers:

"Only Germany has pockets deep enough to push down countries’ borrowing costs, guarantee fearful depositors’ investments and kick-start listless economies."

This is not true. The European Central Bank (ECB), like the Federal Reserve Board, has essentially limitless ability to support banks in Spain and elsewhere. Such support would be essentially costless to Germany and the rest of Europe.

While the ECB could act at any time to explicitly or implicitly guarantee the debt of countries like Spain and Italy, which would immediately lower their interest rates to a sustainable level, it has chosen not to go this route. That fact should have been highlighted in a piece like this one.

Educating Thomas Friedman on the Economy Print
Wednesday, 06 June 2012 04:08

It's a tough job, but someone's got to do it. Today, Thomas Friedman tells us about the squandered opportunities around the world.

Someone else can straighten him out on China and the Arab world (the U.S. government's fondness for hereditary monarchies and autocratic regimes clearly is part of this story), but I'll pick up Europe and the United States. In the case of the former, Friedman joins German Chancellor Angela Merkel in lecturing the peripheral countries on their failure to take advantage of low interest rates in the last decade to modernize their economies.

While there is considerable truth to the complaint about the failure to modernize their economies, there is an important piece missing in the chain of causation here. The housing bubbles in Spain and Ireland and the excessive spending in Greece were financed by banks in the core countries, most notably Germany.

While these banks were happy to finance endless construction projects in Spain, it is not clear that they would have been willing to also put up money to support improved education or modernized infrastructure. The decision of banks in Germany to finance certain paths of development and not others helped push the peripheral countries to follow those paths. In short, the governments in the peripheral countries deserve considerable blame, but the banks in the core countries were essential enablers who pushed them down this path.

In the case of the United States, Friedman complains that:

"in the 1990s we enjoyed a peace dividend, a dot-com dividend and a low-oil-price dividend, which combined to sharply reduce the federal deficit. But 9/11, two wars accompanied by tax cuts, not tax increases, a Medicare prescription drug plan and a necessary bailout to prevent a potential depression put us more in debt than ever."



David Brooks on Debt: Can Someone Buy the Man an Intro Textbook? Print
Tuesday, 05 June 2012 04:41

David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today's column:

"Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent."

He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!

Okay, let's try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?

Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.

Brooks may have some magical view of the world where jobs grow up magically in the private sector when the government reduces spending, but in the real world we need a chain of causation. Can anyone tell a story where firms will be motivated to increase spending and hiring when demand drops further due to government cutbacks? There aren't many business owners who see their demand plummet and then go, "hey, great time to expand."

In the real world, the government's spending is employing our kids' parents. This will improve their educational outcomes and life prospects, making the future richer, not poorer. The benefits for the future are even greater when government money is spent on forms of investment like infrastructure, education, and research and development.

Those who are troubled by the borrowing from China and other foreign countries need to start yelling about the over-valuation of the dollar and shut up about the budget deficit. The United States borrows from foreigners because of the trade deficit -- not the budget deficit. The trade deficit is in turn determined primarily by the value of the dollar. If borrowing from China or anyone else is upsetting, then you should want to see the dollar fall to make U.S. goods more competitive internationally. The budget deficit has very little to do with this story.

Just to circle back to Brooks' psychological explanation for borrowing, if NYT columnists were expected to have any clue on the topics on which they write, then Brooks would be familiar with the wealth effect. This means that people consume based in part on their wealth.

In the 90s, people consumed based on the wealth that was created by the stock market bubble. This required no change in people's psychology -- they always spent based on the wealth they had in the stock market. They just never had so much wealth as when price to earnings ratios soared from their trend level of around 15 to 1, to more than 30 to 1 at their bubble peaks.

The same story applied to the housing bubble in the last decade. Homeowners always spent based on their housing wealth. However they never had as much housing wealth as when the bubble drove prices by 70 percent above their trend level.

If Brooks knew a bit of economics, he could have spared his readers from the 750 words of misinformation in this column. We would have more live trees and fewer confused NYT readers. 


btw, Brooks deserves special abuse for this assertion:

"Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls."

Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it's still silly. Countries that have had high debt to GDP ratios are largely in this category because of a weak economy. Think of Japan with a debt to GDP ratio that is now well over 200 percent. This was not due to fiscal excesses. This was the result of the collapse of its massive stock and housing bubbles in 1990.

A similar story can be told for most of the highly indebted countries. The causation went from slow growth to high debt. Brooks is just repeating a story from the one percent to rationalize the refusal by the government to take action to create jobs.

Why Does Fred Hiatt Say That Democrats Are Opposed to Giving Less Money to Drug Companies and Overpaid Medical Specialists? Print
Monday, 04 June 2012 05:03

For some reason Fred Hiatt thinks (or at least says) that Democrats are opposed to cutting the excessive payments that our health care system makes to many providers. In yet another column bemoaning the budget deficit, Hiatt told readers:

"Revenue will have to go up, and the rising arc of health care and pension spending will have to be bent down. Democrats hate the latter, Republicans hate the former, and voters don’t like either."

While Democrats and Republicans (the voters, if not the politicians) hate the idea of cutting Social Security, it is not obvious that either group is opposed to eliminating the enormous waste in our health care system. The United States pays more than twice as much per person for its health care than other wealthy countries. If health care costs in the United States were comparable to those in other wealthy countries we would be looking at long-term budget surpluses not deficits. Fixing our health care system would seem an obvious way to go address the projections of large long-term deficits.

Remarkably, Hiatt never mentions that large deficits that the country is currently experiencing are entirely the result of the economic collapse in 2008. Prior to the collapse the country was experiencing modest deficits and was projected to continue to see modest deficits for the foreseeable future.

This column also wrongly refers to a report of the Bowles-Simpson commission. In fact, the commission did not issue a report because no proposal received support of the necessary majority to be approved by the commission. The report to which the column refers is simply the report of the co-chairs, former senator Alan Simpson and former Morgan Stanley director Erskine Bowles.

Why Would the ECB Create Inflation by Printing Money, and Why Would That Be Bad? Print
Monday, 04 June 2012 04:49

In a column noting the bind in which the euro zone countries fund themselves, Robert Samuelson told readers that:

"Softening today’s austerity would require more borrowing. Who would lend? The ECB? Historically, excessive lending by central banks risks high inflation, though many economists discount that now."

Given the massive amounts of excess capacity in the euro zone it is difficult to see how additional lending in the euro zone would lead to inflation. The context in which central bank lending led to inflation has typically been when an economy was near its capacity and a central bank continued to lend to keep interest rates down. That is clearly not the situation today.

Furthermore, the euro zone countries should welcome a modest increase in the rate of inflation. The key problem facing the euro zone is the uncompetitiveness of the peripheral economies. The cost of goods and services produced in Spain and Italy is much higher than the goods and services produced in Germany and the Netherlands.

If the euro survives, this gap has to be closed by having lower inflation in the peripheral countries. That would mean deflation if the inflation rate remains low in the core countries. Deflation is very difficult to bring about and will be very costly for the economies affected.

On the other hand, if inflation rises to 4-5 percent in the core countries, then the peripheral countries can regain competitiveness by keeping their inflation rate in a 1-2 percent range. This would be the most painless solution to the euro crisis. Unfortunately, the European Central Bank seems unable to even conceive of this policy path.

The Post Says Obama's Campaign Staff is Delusional Print
Monday, 04 June 2012 04:34

It told readers that:

"The [recent economic] developments are casting a shadow over the Obama campaign’s hopes that the president will have the wind of a robust economic recovery at his back for his re-election run."

If President Obama's campaign ever had hopes that he would have the "wind of a robust economic recovery at his back" then they are seriously delusional. The best quarter of growth in the last year and a half was just 3.0 percent. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential.

The growth rate of potential GDP is roughly 2.5 percent annually. This means that if the economy sustained a 3.0 percent growth rate, then it would make up the gap between potential output and actual output at the rate of 0.5 percent a year. At this pace it would reach potential GDP in 12 years, or 2024.

That can hardly be called a "robust economic recovery." The growth rate following prior severe recessions ran as high as 7-8 percent. That would be a robust economic recovery.  

NYT Editorializes Against Cuts in Military Spending in News Story Print
Monday, 04 June 2012 04:24

The second paragraph of a NYT news story on the cuts in military spending implied by the budget agreement from last summer told readers:

"On Jan. 2, national security is set to receive a heavy blow if Congress fails to intervene. That is when a 10-year, $600 billion, across-the-board spending cut is to hit the Pentagon, equal to roughly 8 percent of its current budget."

While the size of these cuts is not in dispute, it is far from clear that they would constitute a "heavy blow" to national security. Even if the cuts were fully implemented, the United States would still be spending considerably more as a share of GDP on the military in 2022 than it did in 2000, before the September 11th attacks.

It is also worth noting that there is nothing that happens on January 2 that locks in the scheduled cuts for a decade. If Congress determined in 2017 or 2018, or even some time earlier, that our defense was in jeopardy then it would presumably vote to increase spending to meet the perceived threat.

Germany's Neighbors Were Not More Profligate Print
Sunday, 03 June 2012 11:35

The Washington Post still can't figure out who is on first in the euro crisis. It once again referred to debt-troubled countries as "profligate." Of course, the debt-burdened countries were not especially profligate. Italy's debt to GDP ratio had been falling before the crisis. Ireland and Spain had large budget surpluses. So the issue is not these countries were profligate, the issue is that these countries got hit badly by the collapse of housing bubbles across Europe.

This piece also misrepresents German unemployment, telling readers that it is 6.7 percent. This is the official German rate. This rate includes people who are working part-time as unemployed. The OECD harmonized unemployment rate for Germany, which is calculated using methodology comparable to the U.S. methodology, is 5.6 percent.

I'm Back Print
Sunday, 03 June 2012 11:23

Thanks to everyone for the nice comments. For anyone wondering, I did not use my vacation to hobnob with the one percent. My wife and I had a great time helping to care for dogs at Best Friends Animal Sanctuary. Now, back to work.

I Am Out of Here! (for now) Print
Tuesday, 22 May 2012 03:43
It's vacation time, folks. Beat the Press will be on vacation until Monday, June 4. Until then, don't believe anything you read in the newspaper. 
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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.