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National Public Radio Insults the Washington Policy Community Print
Friday, 05 August 2011 03:03

National Public Radio showed either its ignorance of the policy community in Washington or its bias in supporting Peter Peterson's efforts to cut Social Security and Medicare in a news story on the deficit and taxes. It described Maya MacGuineas, the head of the Committee for a Responsible Federal Budget, as:

"about as close to an independent voice on tax policy as you'll find in the nation's capital."

While Ms. MacGuineas has been critical of both political parties, this is true of many of the people working on budget policy in Washington. It is remarkable if NPR is somehow unaware of this fact. 

Ms. MacGuineas has consistently taken positions that are consistent with those supported by Peter Peterson (whose foundation supports her work). Her organization has not shown in interest in proposals that focus on reducing the deficit by taxes on Wall Street speculation or reforming the U.S. health care system, the primary driver of the long-term deficit.

NPR's comment is inaccurate and misleading to listeners, as well as insult to dozens of people doing policy work on budget issues in Washington. 

 
The Military Is Projected to Spend $7.8 Trillion Over the Next Decade Print
Thursday, 04 August 2011 04:56

The Washington Post is trying to win yet another Pulitzer for bad reporting. Today's entry is a page 4 story discussing the impact of potential cuts to the military budget. The Post told readers that the Pentagon could face $600 billion in cuts over the next decade.

That is supposed to sound really really big. But is it? It would have been helpful if the Post had bothered to tell readers the baseline level of spending. The Congressional Budget Office baseline is $7.8 trillion over the decade, putting the proposed cuts at a bit under 8 percent of projected spending.

Another useful benchmark is the pre-2001 level of spending. If spending were the same as a share of GDP as the pre 9-11 level, we would spend approximately $5.4 trillion on the military over the next decade.

 
The European Central Bank: The Main Cause of the Debt Crisis Print
Thursday, 04 August 2011 04:43

The Post forgot to mention the role of the European Central Bank (ECB) in worsening the European debt crisis. The original crisis stemmed from the failure of the ECB to notice and respond to the huge housing bubbles that were driving the economies of countries like Spain and Ireland.Instead, it allowed these bubbles to grow to sizes where their collapse would inevitably sink the economy.

However, the ECB has compounded this damage by its limited response the downturn. It never pushed its overnight money rate below 1.0 percent, in contrast to the zero rate at the Fed. It also was more cautious in it quantitative easing policy and now is actually raising rates, ostensibly because it fears inflation.

Higher interest rates will worsen the debt situation for two reasons. First, it will tend to put upward pressure on the interest rates that countries must pay on their debt. Second, it will slow growth. Slower growth will mean reduced tax revenues for debt burdened countries and higher payments for unemployment insurance and other benefits.

Anyone reporting on the course of the debt crisis of the Euro zone countries has to give the ECB a starring role.

 
Erskine Bowles Gets $350,000 a Year from Morgan Stanley Print
Thursday, 04 August 2011 04:26

For some reason the media never find room to mention the fact that Erskine Bowles is a director of Wall Street investment bank Morgan Stanley (an otherwise bankrupt beneficiary of the bailout). Bowles was a co-chair of President Obama's deficit commission and is now apparently one of the people whose name is being mentioned as a possible successor to Timothy Geithner if he were to resign as Treasury Secretary.

If Bowles was getting $350,000 a year from the United Auto Workers it seems likely that it would be mentioned in news reports. It's not clear why the media do not think his ties to a major Wall Street bank are relevant.

 
How Supply Affects Employment in a Downturn: Another Exchange With Casey Mulligan Print
Wednesday, 03 August 2011 09:04

Casey Mulligan seems to believe that because some groups (i.e. older workers) can increase their employment in a downturn, that the problem is one of supply and not demand. As I noted in my past exchange, a recession does not mean that some demographic groups will not be preferred to others. In the downturn there has been an increase in employment for college grads also.

There is nothing inconsistent with the idea that demand is a constraint on employment yet some individuals may be able to beat out others for the jobs that are available, either because they have more experience in the case of older workers or they have better skills in the case of college educated workers. This is very different from saying that if only all our workers had these advantages (being more experienced or college educated) that we would not have a problem of unemployment.

In fact, even among these groups unemployment has risen substantially in the downturn. If we snapped our fingers and suddenly our whole workforce had the experience of the over 55 population or the skills of a college graduate then we would see many more experienced and college educated workers unemployed. I don't see anything in Mulligan's story suggesting otherwise.

(As another example, Mulligan shows us that employment has increased in Texas. Is this a surprise? There has been a huge increase in oil and gas prices that has both increased demand in these industries and led to a substantial increase in the money flowing into the state for royalties. Also, Texas did not have as large a housing bubble as states like Nevada and California. Therefore, it suffered much less damage when the bubble burst.)

Finally, Mulligan insists that us Keynesian types have no evidence that lack of demand explains the downturn. Actually, there are a number of macroeconomic models that have been built up over the years based on evidence of firm and individual behavior. These do support the view that the downturn is attributable to a lack of demand. Also, there was a study (Feyrer and Sacerdote, 2011 and my comment) of the state by state effects of the stimulus that found multipliers that were very much consistent with the ones predicted by these macroeconomic models. So, we have the standard Keynesian theory, which is largely embedded in macroeconomic models based on years of data collection, that is now supported by a careful analysis of the impact of the stimulus.

That seems pretty good in the evidence department, what does Professor Mulligan have?

 

 
News For the NYT: You Don't Know Anyone's Reason for Acting Print
Wednesday, 03 August 2011 08:29

Politicians don't always tell the truth. Most school kids know this, but apparently the NYT believes otherwise. That explains why it tells us that:

"the reason that many conservative Republicans refused to vote for the [debt] agreement" was that the debt to GDP ratio would still rise even with the proposed cuts. Actually, this is what many conservative Republicans said. That is how it should be reported, as in "many conservative Republicans said ......"

The NYT also said that this is the reason the bond rating agencies are considering a downgrade of U.S. debt. Again, a newspaper reports this as "this is the reason that the bond rating agencies have given ..."

The bond rating agencies do not have a great deal of credibility at the moment, having rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade, and getting paid tens of millions of dollars in the process. No one can accept their claims at face value, especially since it is not even clear how they think the U.S. could ever default on its debt. (The debt is owed in dollars. The U.S. prints dollars. How could we be unable to pay our debt, apart from deliberate non-payment through failing to raise the debt ceiling?)

The piece also wrongly asserts that Social Security contributes to the debt. This is not true. Under the law, Social Security can only spend the money in its trust fund and not a penny more. If it runs short of money then payments would not be made. This is a very serious error that the NYT should not make. (It is clear that the article is referring to the on-budget budget, since it reports that CBO projects that the debt to GDP ratio will exceed 100 percent of GDP in 2021. This is only true if we look at the on-budget budget and add in the debt held by the Social Security trust fund.)

It would also have been useful if the article found at least one source who was not a deficit hawk. There are no shortages of economists, policy analysts and elected officials who fall into this category.

 

 
The Washington Post Confuses the Stock and Bond Market Print
Wednesday, 03 August 2011 03:50

No one expects sophisticated economic thinking from the Washington Post (a.k.a. Fox on 15th Street), but they really surprised readers with an article on the debt ceiling where they took the fall in the stock market as evidence that investors did not have confidence in the debt deal. After making assertions that investors believe the deal did not go far enough in cutting the deficit, the Post told readers:

"The lack of enthusiasm among investors for the deal was reflected in the U.S. markets. Stocks on Tuesday had their worst day in nearly a year, wiping out the gains made so far in 2011."

The most obvious explanation for the fall in the stock market would be a series of weak economic reports. If the issue is confidence in the ability of the U.S. government to pay its debt than the relevant market would be the bond market. Interest rates on U.S. debt fell on Tuesday hitting extraordinarily low levels, suggesting that investors have no concern whatsoever about the ability of the U.S. government to repay its debt.

The article also includes a very confused discussion about the status of the dollar as the world's reserve currency. It gets most of the basic wrong.

First it implies that it would be a bad thing for the United States if the dollar stopped being the world's leading reserve currency. It is difficult to see why this would be the case. The demand for dollars by foreign central banks pushes up the value of the dollar thereby making U.S. goods less competitive in world markets. The high dollar is the cause of the U.S. trade deficit.

A trade deficit also logically implies negative national saving. If we have a trade deficit of 5 percent of GDP (as we did before the collapse in 2008), then we must have negative net national savings. This logically implies (i.e. there is no damn way around it) that we will either have negative public savings (big budget deficits) or negative private savings (households spend their entire income).

For this reason, it is not clear why we would want foreign central banks to buy and hold large amounts of dollars. In fact, a newspaper like the Post, which has been crusading for deficit reduction forever, should be especially anxious to see foreign central banks reduce their holdings of dollars. (This is all the standard economics that business reporters should have learned in their intro econ classes.)

The article also implies that central banks have to hold dollars as reserves because there is no good alternative currency. Actually, the amount that central banks hold in reserves is not a fixed amount. The amount of money that central banks held as reserves soared in the years following the East Asian financial crisis in 1997.

The IMF treatment of the crisis countries was deemed so harsh by the countries in the region and elsewhere in the developing world that they began to accumulate massive amounts of reserves in order to avoid ever having to be in the same situation. Central banks don't need to find an alternative currency to park their reserves. They can just decide that they no longer need to hold so much money as reserves. If this happened, they could unload dollars. This would allow the dollar to fall and bring the trade deficit closer to balance.

 

 
Washington Post Continues Its Crusade for Cutting Social Security and Medicare Print
Wednesday, 03 August 2011 03:25

Fox on 15th Street had another front page editorial calling for cuts in Social Security, Medicare, and Medicaid. It told readers:

"Foreign investors and economic analysts see further action as crucial to restoring the United States’ financial reputation."

Without actually citing any investors or analysts it then added:

"On Tuesday, critics in China and elsewhere warned that the initial debt-reduction package, which would cut about $1 trillion from agency budgets over the next decade, is too modest. And they complained that the last-minute agreement will not tackle the dangers that national health and retirement programs pose to the government’s long-term fiscal health."

It would have been interesting to know who these critics were. The reaction of actual investors in the market was the opposite. Interest rates on U.S. Treasury bonds have been falling for most of the last month and fell again yesterday. The investors who are putting trillions of dollars oon the line apparently have a different assessment of the country's financial situation than the Washington Post.

 
What Does a Downgrade of U.S.Debt Mean? Print
Tuesday, 02 August 2011 21:56

The NYT had a great opportunity to raise this question, but for some reason chose not to. A lengthy piece discussing the possibility and implications of a downgrade never asked the fundamental question, how could the United States ever be unable to pay off its debt?

This a simple but important point. The debt is issued in dollars. That means that the U.S. government is committed to paying it off in dollars. The U.S. government also prints dollars. So does a downgrade mean that Moody's thinks that it is possible that at some point we will forget how to print dollars?

The NYT should have asked this question in the article. We should ask why they didn't.

 
Clinton's Surpluses Were Because the Economy Grew, Not the Other Way Around Print
Tuesday, 02 August 2011 13:05

The sky is up, grass is green, and Clinton got budget surpluses because the economy grew much more rapidly than expected. We know this because the Congressional Budget Office (which passes for God in Washington budget debates) told us in 1996 that the deficit in the year 2000 would be $244 billion or 2.7 percent of GDP ($405 billion in 2011). CBO calculated that the net impact of legislated changes between 1996 and 2000 was to raise the 2000 deficit by $10 billion.

Therefore when Bloomberg tells us that the economy grew at a 4 percent annual rate from 1994 to 2000 as the federal government's budget  moved from deficit to surplus, this is like telling us that the sun rose as the rooster crowed. Yes, the sun did indeed rise, but the rooster's crowing had nothing to do with it.

 
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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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