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Is the Double Dip Drifting Away? Print
Friday, 21 October 2011 07:12

One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed's manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed's coverage is a relatively narrow slice of the country (mostly eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere.

The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. It doesn't seem that this one received as much attention as the negative reading from last month. It would have been interesting to interview the double-dip forecasters to ask whether they had revised their assessment.

The other important data released yesterday was the weekly unemployment claims number, which again came in just over 400,000. This does not suggest strong growth, but it does suggest some amount of job creation, rather than the job loss we would see in a recession.

None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.

Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn't and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. And the media deserve much of the blame for being suckered.

 

 

 
Do Businesses Consider It Burdensome to Pay the Tax They Owe? Print
Friday, 21 October 2011 04:33

The NYT did some mind reading to better serve its readers telling us that businesses "consider" a law requiring a 3 percent withholding on federal contracts to ensure tax compliance to be "burdensome." The reason for this withholding is that many businesses cheat on their taxes. The government loses tens of billions of dollars a year to businesses who do not pay the income tax they owe.

Some people may be familiar with the requirement for withholding taxes, since they work for a living and employers are obligated under the law to have withholding. This requirement for government contractors is similar, except that it is almost certain to be lower than their actual tax liability.

However, the NYT told readers that businesses consider it burdensome to have to actually pay their taxes. It did not bother to tell readers why this withholding was there in the first place. In fact, the repeal of this provision can be viewed as a shameless pander to small businesses by politicians seeking their support in the next election.

 
The United States Owes China So Much Money Because China Is Keeping Down the Value of Its Currency Print
Thursday, 20 October 2011 07:06

The Washington Post has to find economics reporters and/or editors who know some economics. Then it would not print without comment a statement like:

"'The problem for the U.S. is they owe China so much debt,' he [Shi Yinhong, director of the Center on American Studies at Beijing’s Renmin University] said, referring to the Chinese government’s vast holdings of U.S. Treasury bonds, estimated at about $1.5 trillion."

This statement appears in the context of a discussion of whether the dollar is over-valued against the Chinese yuan. The way that China keeps up the value of the dollar is by buying up U.S. debt. The United States government would owe China exactly zero, if the Chinese government did not decide to buy up U.S. government debt with its dollar earnings instead of just selling them in international currency markets.

This is exactly what advocates of a lower dollar are complaining about. It is absurd for someone to say that the problem is not an over-valued dollar, but rather U.S. debt to China. These are the same problem -- and reporters and editors at major newspapers should know this.

The article also wrongly tells readers:

"China is well known as the home of counterfeit products — from imitation iPads and iPhones to fake software to pirated CDs and DVDs."

Actually, the vast majority of these products are not counterfeits, consumers know that they are not getting the brand name product. The products are unauthorized copies of brand products.

This is an important distinction. Consumers benefit from buying unauthorized copies at lower prices than the brand versions. Consumers are defrauded by counterfeit products. Consumers will assist law enforcement officials in exposing counterfeit operations, they will not help in shutting down sellers of unauthorized products.

If U.S. corporations succeed in excluding the sale of unauthorized copies in China's markets then it will lead to higher prices for Chinese consumers. This will reduce real wages and incomes and slow growth. The Post should have interviewed an economist who could have explained this to readers.

 
Post Invents Longstanding Problem of the Debt Print
Thursday, 20 October 2011 05:22

The Post wrongly implied that the problem of a large national debt has been longstanding. It told readers that the Congressional supercommittee is trying to "break the impasse over taxes that has long blocked aggressive action to tame the national debt."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

The NYT made the same mistake earlier in the week. The budget reporters and editors at these paper should familiarize themselves with the official deficit projections so they do not continue to make this mistake.

 
Spain's Growth Is Worse Than Expected Because It Is Reducing Its Deficit Print
Thursday, 20 October 2011 05:12
The NYT left this important fact out of a discussion of the state of the debt crisis in Europe. It noted that lower than projected growth is likely to cause Spain to miss its deficit target. The predicted result of cuts in government spending and increases in taxes in the middle of a severe downturn is lower growth. (GDP is equal to consumption, investment, government spending, and net exports. If government spending falls in the middle of a severe downturn, there is no obvious mechanism through which one of the other components would grow to fill the gap.) 
 
Social Security Tax Base Depends on Wages, Not Prices Print
Thursday, 20 October 2011 04:59
CNNMoney wrongly told readers that the rise in prices that provided the basis for the 3.6 percent cost of living adjustment for Social Security beneficiaries will also cause 10 million workers to pay more in Social Security taxes. The reason it gave was that this rise in prices would increase the cap on wage income subject to the tax (currently $106,800). Actually, the cap on wage income subject to the tax is determined by the increase in average wages, not the increase in prices.
 
NYT Does Name Calling on Europe Print
Thursday, 20 October 2011 04:35

An NYT news story told readers that it doesn't like Europe. That is the only thing that readers can conclude from an article that said Europe is "in economic and demographic decline."

While the collapse of the housing bubbles in Europe have impaired growth, just as they have in the United States, and the drive to austerity has further slowed growth, there is no reason to believe that Europe's economy will be condemned to permanent stagnation if it gets competent people at the European Central Bank and other policy positions.

Prior to the downturn, productivity growth in Europe had been little different than in the United States. If Europe can ever get competent economic managers, there is no reason to believe that its growth would not return to this path. Lower population growth (or decline) will actually help Europe since it will increase the ratio of capital to labor and reduce the stress on Europe's infrastructure and natural resources. In other words, the story here is really a failure of the people designing economic policy for Europe, not a failure of Europe.

This fact is reversed in an article that seems to be trying to tell readers that Europe is fundamentally broken. To make this point, it includes the bizarre assertion that:

"Technologically, it is behind the United States, but its pay scales are too high to be an easily competitive exporter."

The United States is running an annual trade deficit of roughly $600 billion, or 4 percent of GDP. By contrast, the European Union's trade is roughly in balance. It is not clear how the NYT has determined that Europe is having trouble competing, but it clearly is not using a market measure.

The article also misleads readers on the importance of China, saying that the EUs GDP is three times the size of China's. In fact, on a purchasing power parity basis, China's GDP is $11.3 trillion, roughly two-third's the size of Europe's.

 
Will the Banks Stop Fracking? Print
Thursday, 20 October 2011 04:24
Good article in the NYT. It discusses the fact that most mortgages may prohibit property owners from signing drilling leases with gas companies without prior approval. The point is that the mortgage holder must be concerned about preserving the value of the property and drilling could reduce it. This could be a case of banks doing what they are supposed to do.
 
Argentina, Planet Money, and Other Planets Print
Wednesday, 19 October 2011 10:56

I see that my earlier blogpost on Planet Money's podcast on Argentina has prompted a defense from both Planet Money and Megan McArdle. Both seem to feel that the piece on Argentina was quite balanced and indicated that there were many positive aspects to Argentina's decision to default.

That was not the story that I heard. The piece I heard began by mentioning Greece's debt crisis and then said (slight paraphrase):

"There is a worst case scenario and that scenario has a name: Argentina."

My guess is that if we can promise the Greek people a policy path that will give them 3 months of sharp downturn, followed by 3 months of stagnation and then 9 and half years in which its economy will grow at an average annual rate of close to 7 percent, they would jump for joy. No one has a path for Greece that looks even half as promising as the route that Argentina has actually followed. So the question is how can Planet Money accurately describe this as a "worst case scenario?"

In fact, even Planet Money's defense of its piece begins by citing this line from the story:

"It has been a tough decade for Argentina."

Of course the data show that it has not been a tough decade for Argentina. It had recovered the ground lost to the recession by 2004. Argentina's economy then enjoyed 4 more years of exceptional growth before the world economic crisis temporarily derailed it in 2009, but it then saw strong growth resume again last year.

There certainly were problems from the default. As McArdle points out, some of Argentina's creditors are still pursuing their claims in various jurisdictions, including the United States. (The creditors' representative here, Robert Shapiro, was featured prominently in the podcast.) This makes it difficult for Argentina to borrow in international capital markets.

The IMF did everything in its power to try to sink the country's economy, including making bogus growth projections. In the three years prior to the default every single IMF growth projection proved overly optimistic. In the three years following default every single IMF growth projection proved overly pessimistic. The probability of this happening by random chance is non-existent.

(Btw, McArdle asked why I began my chart in 1998. The answer was to show the full extent of the downturn preceding the default. Economists usually believe that it is easier to recover from a cyclical downturn than to increase growth from a trend path, so I was trying to show the extent to which the post-default growth was just the recovering from the downturn.)  

But the question is not whether the default caused problems, the question is whether anyone on Planet Earth can describe Argentina as presenting a worst case scenario for Greece as Planet Money clearly did.

 
The NYT Misleads Readers by Implying that Large Budget Deficits Have Been A Longstanding Problem Print
Wednesday, 19 October 2011 05:37

The NYT implied that large budget deficits have been a longstanding problem in an article discussing the progress of the supercommittee working on a deficit plan. It told readers that the committee is trying to find solutions:

"in a matter of weeks, to find fiscal answers that have eluded Congress and the White House for years."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

 
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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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