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Are Reporters Allowed to Talk About Mexico's Economy In the Washington Post? Print
Thursday, 28 June 2012 04:44

That is what readers of a piece on middle class support for the PRI in upcoming elections must be asking. While the piece does make a reference to the "sluggish economy," but provides no details.

In fact, Mexico's economic poor economic performance stands out in Latin America. It's per capita growth since 2000 has been less than half of the average for Latin America as a whole. While the rest of the region has seen a sharp uptick in growth after two decades of near stagnation, Mexico has not shared in this prosperity, seeing per capita GDP growth of just 0.9 percent a year. There has been almost no reduction in poverty over this period.

The Washington Post has had a difficult time acknowledging Mexico's economic failures. It had been an enthusiastic backer of NAFTA and insists that it has been a great success in spite of the evidence. It even told readers back in 2007 that Mexico's GDP had quadrupled over the period from 1987 to 2007. (The actual increase was 83 percent.)

Consumer Confidence: Expectations Are Meaningless Print
Tuesday, 26 June 2012 23:16

The consumer confidence index is a measure that gets way more attention than it deserves. It is has two components, a current conditions index and a futures expectations index.

While the current condition index tends to be a good measure of consumer spending, it has little predictive power. In other words, if the June reading is high, then June will probably be a good month, but it doesn't tell us much about July and August.

On the other hand, the future expectations index is erratic and provides almost no information about spending in the present or future. That is why when the consumer confidence index falls, as it did yesterday, and the fall was driven by the expectations index, it is best ignored.

Maybe Spain's Banking System Isn't a Model Print
Tuesday, 26 June 2012 22:46

The NYT has a good piece on how two of Spain's top banking regulators went on to top positions at the IMF. They were hailed for their success in designing a regulatory structure in Spain that was widely praised for having designed a system that survived the 2008 financial crisis.  

As it turns out, the Spanish regulatory system was not especially successful. The country had an enormous housing bubble and it was inevitable that when it burst, the banking system would face the sort of problems it is now seeing. As of the fall of 2008, banks had not yet recognized the enormous losses they had already incurred on their housing debt.

This should be a good lesson to ignorant experts everywhere: bubbles mean regulation failed. Countries with bubbles still waiting burst (e.g. Canada, U.K. and Australia) have a good financial crisis in their future. Get out some marshmallows to roast at the meltdown.

[Addendum: My reason for saying that the U.K., Canada, and Australia have housing bubbles is that house prices have gotten hugely out of line with rents. There have been large increases in the former over the last 10-15 years, while the latter have only modestly outpaced inflation. This will end very badly and the central bankers in these countries should be fired for not recognizing this fact.

On Spain and regulation, my point is that sound prudential regulation will not prevent bubbles. (I am taking the assessment of others that these systems were well-regulated. This is the responsibility of the central bankers. They are being unbelievably negligent to let these bubbles continue to grow. At the very least, everyone in a policymaking position should lose their pensions.]

Home Prices Are Not Low Print
Tuesday, 26 June 2012 00:03

A Washington Post article on the relatively good new home sales data reported for May made a case that the housing market is rebounding (it is). At one point it told readers that "home prices are low."

This is not true. Home prices are roughly back to their long-term trend. They are low relative to their levels of the housing bubble years (1996-2007), but not compared to the prior hundred years of U.S. history.

Ezekiel Emanuel's Plan to Share the Wealth: Go After the Social Security of School Teachers and Firefighters Print
Sunday, 24 June 2012 20:03

I'm not kidding. We have boys and girls on Wall Street making tens or even hundreds of millions of dollars at banks that enjoy taxpayer subsidies through "too big to fail" insurance. But Ezekiel Emanuel's "share the wealth" NYT blogpost tells us how we can tap the Social Security and Medicare benefits of people who earned $70,000 a year during their working lifetime to make the poor better off. 

It's amazing how much effort the Washington gang goes through to nail workers who earned slightly more than the average, while doing its best to ignore the millionaires and the billionaires who have been the big winners in the economy over the last three decades.

Pearlstein Gets Europe Half Right Print
Sunday, 24 June 2012 13:58

Steven Pearlstein gets half of the story of the euro zone right: it will take renewed spending supported by euro-wide bonds to end the crisis. But that is only half. To restore the competitiveness of the peripheral countries, Germany and other core countries will have to see higher inflation.

We are not going to see prices actually fall in Spain and Italy. This means that if output in these countries is going to become competitive again in a reasonable period of time we will need to see inflation in the 3-4 percent range (possibly higher) in Germany and other core countries.

In keeping with this target, the European Central Bank should be the issuer or guarantor of the bonds. This should help to bring about the higher rate of inflation that is needed to restore balance between the euro zone regions.

Serious People Do Not Use Wealth of People Under Age 35 as a Measure of Their Well-Being Print
Friday, 22 June 2012 22:35

There is a well-funded effort in this country to try to distract the public's attention from the massive upward redistribution of income over the last three decades by trying to claim that the issue is one of generational conflict rather than class conflict. Billionaire investment banker Peter Peterson is the most well-known funder of this effort, having kicked in a billion dollars of his own money for the cause.

However, he is far from the only generational warrior. The Washington Post has often gone into near hysterics screaming about retirees living on their $1,100 a month Social Security benefits and getting most of their health care paid for through Medicare. And, there is no shortage of politicians in Washington who like to think themselves brave because they will cut these benefits for seniors while protecting the income and wealth of the richest people in the country.

David Leonhardt flirted with this disreputable group in a column that focused on the gap between the old and the young. While much of the piece is devoted to political attitudes, it delves into utter nonsense in trying to contrast a "wealthy" group of seniors with a poor group of young people.

Leonhardt picks up on a study done by the Pew Research Center to tell readers:

"The wealth gap between households headed by someone over 65 and those headed by someone under 35 is wider than at any point since the Federal Reserve Board began keeping consistent data in 1989."

That makes you think those oldsters are doing real well, right?

Well, if we look at the Pew study we see that the median household over age 65 has $170,500. Just so everyone understands how rich these people are, that number counts all of their assets. This is every penny they have in a retirement account, bank account, the value of their car and the equity in their home. The median price of a home in the United States is now about $180,000. This means that if the typical retiree took everything they own to pay down their mortgage, they would still owe $10,000. The only thing that they would have left to survive is that generous $1,100 a month Social Security check.

It is also important to note (which this Pew study did not) that the percentage of seniors with defined benefit pension plans (which are not counted in this number) has plummeted. Without factoring in the drop in DB pensions, it is not possible to make a serious comparison of the wealth of seniors over this period.

As an aside, how many people in this debate in Washington make less than $170,000 in a year? Yet, somehow seniors who will have this sum to survive on for the rest of their lives are rich? And by the way, half have less than this.

The wealth of the young is also a silly measure. Young people never have much wealth -- in the good old days they had $11,500 according to Pew. (That would be less than two week's pay for deficit hawk and Morgan Stanley director Erskine Bowles.)  A recent graduate of Harvard Business school may still be paying off her debt at age 35. However no one in their right mind would worry about the financial well-being of a Harvard MBA.

Young people are not doing well right now, but the relevant measure here is their employment and wages. Because our economy is run by people too incompetent to have noticed an $8 trillion housing bubble, many young people are suffering. But this is a story of Wall Street greed, corruption, and incompetence. It has nothing to do with the Social Security and Medicare received by the elderly.

Leonhardt should be ashamed for falling for this tripe.

Are Military Contractors Buying Articles in the Post Now? Print
Friday, 22 June 2012 16:14

Readers of an article that highlighted a study by the National Association of Manufacturers warning of the loss of nearly 1 million jobs due to cuts in military spending are undoubtedly asking this question. They no doubt remember a plan cooked up by the paper's publisher, Katherine Weymouth, to sell lobbyists access to its reporters at dinners at her house. This article essentially lent the paper's authority to a completely misleading study.

The basic story here is very simple, when you are in a severe downturn any spending creates jobs. If we spend money on schools and hospitals that creates jobs. If we pay people to dig holes and fill them up again, it creates jobs. And, if we pay people to build weapons for the military it creates jobs.

There is nothing magical about military spending in this story. In fact, research that was not paid for by the National Association of Manufacturers shows that military spending actually creates fewer jobs per dollar than other types of government spending.

When the economy is not in a downturn, then military spending destroys jobs. An analysis done for CEPR by Global insights showed that a long-run increase in military spending of 1 percent of GDP (roughly the amount spent on the war in Iraq in its peak years) would reduce the number of jobs by almost 700,000. The hardest hit sectors would be construction and manufacturing.

If the Post wanted to inform rather than mislead its readers, it could have just run a piece pointing out that cutting government spending at this point in the business cycle will cost jobs. (Raising taxes will also cost jobs, but not by as much, especially if the tax increases target higher income people who would not change their spending much in response to a decline in disposable income.)

In short deficit reduction right now will cost jobs. The politicians in Washington may not understand this fact, but the Post's reporters and editors should.

Reporting on the Housing Market: Do We Need Drug Testing for Economists? Print
Friday, 22 June 2012 05:04

We all know that economists aren't very good when it comes to understanding the economy. This is exactly what economic theory predicts.

When economists completely mess up, for example by missing an $8 trillion housing bubble, they do not risk any sanction, such as being fired. This means that they have little incentive to get things right. If waiters had no incentive to get orders right and bring food to customers quickly, then people would have to wait a long time for their dinners and frequently get the wrong dish. Since economists aren't held to same standard as waiters, we typically get wrong economic analysis.

Thus we had numerous stories telling us about the bad news on existing home sales. That is not what the data show. May sales were down 1.5 percent from April levels, but this is hardly bad news. We had just seen four months of relatively strong sales, which were spurred in part by unusually mild winter weather. (Remember sales typically take place 6-8 weeks after a contract is signed. The homes sold in May were mostly contracted in March and early April.)

If people buy a home in January or February, they will not rush out and buy another one in March and April. In other words, the relatively strong sales through the winter should have led us to expect weaker sales in the spring. The 1.5 percent falloff is relatively mild. If we look back over a longer period, May sales were 9.6 percent above the year-ago level.

Looking further back, May's sales are roughly 30 percent higher than average monthly sales from the mid-90s, before the housing bubble distorted the market beyond recognition. Since population has only risen by a bit more 10 percent over this period, we are actually seeing a very high rate of sales.

Furthermore, May sales indicated a sharp rise in prices. Monthly price data on existing homes sales are always erratic and are typically driven much more by a change in the mix of homes being sold rather than a rise in the price of homes. Nonetheless, this is the third consecutive large monthly rise in the price of existing homes. The median price of a home sold in May was 17.3 percent above its February level and 7.9 percent above its year-ago level. The price increases show up in every region indicating that this is not a story of high-priced regions seeing an increase in sales relative to low-priced regions.

This report should have been seen as very positive news on the housing market. Unfortunately, the economists who missed the bubble still don't seem to know much about the housing market. While house prices are not going to return to their bubble levels (which no one in their right mind should want), they have bottomed out and will likely be rising modestly through the rest of 2012 and beyond. Furthermore, we are seeing higher rates of construction as the backlog of unsold homes has been whittled away in many areas. Housing is now making a positive contribution to the recovery.

Operation Twist Poses the Same Risk of Causing Inflation as Printing Money Print
Thursday, 21 June 2012 04:46
That's basically zero right now (and higher inflation would be good -- reducing the debt of homeowners and lowering real interest rates), but if Operation Twist boosts growth and increases employment then it threatens inflation in the same way as printing money. Someone has to straighten out 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.