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The NYT Does He Said She Said on the Shape of the Earth and Income Inequality Print
Monday, 12 December 2011 22:32

The NYT doesn't know it, but the income of the rich rises and falls with the stock market because [top secret: they own lots of stock.] Sorry, but this piece on the decline in the relative income share of the top 1 percent is beyond silly. We know the income of those at the top drops in relative terms every time the market takes a dip.

Of course the stock market took a plunge in 2009, therefore we knew, even before we got the data, that their share of total income would fall. This is why it is very silly for the NYT to be interviewing people about whether there is now a reversal of the upward redistribution of income over the last three decades.

As they say in some parts, it's the stock market stupid. Don't waste readers time pretending it is anything else.

[Addendum: Larry Mishel picked up on this point and graphed capital gains income for the top 1 percent against the S&P 500.]

Robert Samuelson Does Some Serious Fed Apologetics Print
Monday, 12 December 2011 05:52

The Federal Reserve Board is a perverse animal. While ostensibly a public institution, the banking industry has the extraordinary privilege of being able to pick 5 of the 12 members of its most important governing body, the Open Market Committee (FOMC). The banks also get to have 7 other representatives sit in on the FOMC's secret meetings. Given this structure, it is not surprising that people who do not believe that the banks necessarily place the interest of the general public first are suspicious of the Fed.

Robert Samuelson is nonetheless outraged that anyone could question the neutrality of this institution. He attacks a piece by Bloomberg News that called attention to the Fed's secret lending during the financial crisis as "slander." Samuelson argues that the loans were not secret, the Fed disclosed the amounts being lent under the programs, just not the identities of the borrowers. He argues that it was necessary not to disclose the identity of the borrowers in order to avoid the risk of creating runs on troubled borrowers.

Samuelson neglected to mention that the Fed refused to release the identities of the institutions receiving the loans available even after the fact. The names of these institutions were only made public as a result of a bill sponsored by Ron Paul and Alan Grayson for auditing the Fed. A version of this legislation was eventually included as an amendment to the Dodd-Frank bill. A successful lawsuit by Bloomberg also led to the release of additional data on Fed loans. In other words, the Fed tried very hard to keep the identity of its borrowers secret even long after the release of the identity of borrowers could have had any impact on their financial situation.

The point of the Bloomberg analysis in question is that making money available to banks during a liquidity crisis involves a substantial subsidy. The banks that have access to the Fed's lending are advantaged over institutions that do not have access. This allows them to profit off public money when they lend it out. 

It may be desirable to allow this profit in the context of a financial crisis, since it would be harmful to the economy to see a financial collapse, but there is no reason that the public should not expect some quid pro quo in exchange for the profits it gave to the banks. The Bloomberg analysis is intended to give the public an estimate of the size of the subsidy it gave to the banks, and in particular the nation's largest banks, through the Fed's lending windows. It was an extremely valuable public service. 


The Washington Post Tells Readers that a Climate Deal with no Binding Caps is Catching Up With Reality Print
Monday, 12 December 2011 05:43

That's right, if you thought there was some urgency to do something about climate change the Post is now telling you the opposite. It told readers that the agreement that came out of the Durban talks, which includes no binding commitments:

"shows that the byzantine negotiations which have steered global policymaking on climate for two decades are now catching up with reality."

The agreement does propose a plan that will eventually impose limits on emissions by fast growing developing countries, most importantly India and China, however these restrictions are not included in this agreement.

Also, there is no clear commitment that rich countries would pay poorer countries for the cost of restricting their emissions. This would almost certainly be a part of any reality based agreement since the rich countries are asking poor countries to incur large costs to address a problem created by the rich countries.

President Obama Wants Credit for Avoiding a Great Depression: Where Is the Ridicule? Print
Monday, 12 December 2011 05:32

In its top of the hour news segment NPR reported that President Obama hoped that voters would give him credit for avoiding a second Great Depression. If this is an accurate representation of what President Obama said then it should have devoted a segment to economists ridiculing the president for trying to set an unbelievably low bar for measuring the success of his economic policy.

The first Great Depression was the result of a decade of inadequate policy responses. The massive spending associated with World War II that eventually got us out of the Great Depression could have been undertaken a decade sooner, if there had been political will.

There was nothing about the financial crisis at the beginning of President Obama's term that could have condemned the country to decade of double-digit unemployment. This only could have happened if Congress failed to respond adequately to a financial collapse.

Budget Numbers Without Meaning Print
Monday, 12 December 2011 05:15

It is unlikely that many NYT had any idea of the meaning of the numbers in an article on various budget issues, such as adjusting the Alternative Minimum Tax for inflation and increasing doctors' payment under Medicare. None of them are put in any context, for example expressing them as a share of the budget. In many cases, it is not even clear how many years spending would be affected by the measure.

This is a classic Washington fraternity type piece. The article reports on these numbers in a way that satisfies the standards of the Washington fraternity of budget wonks, but means almost nothing to anyone outside this tiny group. Even the well-educated readers of the NYT are likely to gain no information from reading this piece.

Is Associated Press Working for the Fracking Industry? Print
Sunday, 11 December 2011 12:40

That's what millions of readers are asking after seeing a piece that asserted:

"The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region."

Actually, the industry has created relatively few jobs in Pennsylvania and many of the jobs that it has created have gone to out-of-staters, providing little benefit to the people in the regions where fracking is taking place. News stories should not include unsourced assertions like this one in the AP piece. The article should have sourced the claim and made an effort to evaluate its accuracy if it came from someone with ties to the industry.

Maybe Merkel and the ECB Want to Weaken Labor Print
Sunday, 11 December 2011 08:49

If someone has a gun and is shooting it repeatedly at another person, we might infer that the shooter wants to kill this person. In this vein, how could it never occur to analysts that the purpose of Chancellor Merkel and the ECB's policy of austerity across Europe is to permanently weaken the power of labor across the continent?

It is hardly a secret that workers can be forced to make concessions on wages and benefits in periods of high unemployment. The power of workers will be further undermined if government supports like pensions and employment protection legislation are also removed. All of this is well-known and widely understood.

Therefore it is remarkable that the class implications of the Merkel-ECB policies never get mentioned in a NYT piece examining the contrasting approaches of Merkel and President Obama to the euro zone crisis. In fact the piece explicitly sends readers in the opposite direction, saying it is "a battle of ideas" in a quote from Almut Möller, a European Union expert at the German Council on Foreign Relations.

In fact the most obvious basis for the difference in the views between President Obama and the Merkel-ECB view is standard Keynesian story that it is in the interest of any individual business owner to have other businesses pay their workers more money. This creates more demand for her products.

In this context, President Obama would be very happy to see a prosperous Europe which would provide a stronger market for U.S. exports right now. However, Chancellor Merkel and the ECB seem more focused on keeping down their own labor costs.

Thomas Friedman Is Flat: More Nonsense on Economics In the NYT Print
Saturday, 10 December 2011 23:57

The NYT continues its policy of affirmative action for people ignorant of the world by allowing Thomas Friedman to write two columns a week on whatever he chooses. Today he talks about the job crisis.

He does get some things right in pointing out that we have a huge shortage of jobs. He also notes the growing crisis posed by long-term unemployment in which millions of people are losing their connections to the labor market and risk being permanently unemployed.

However he strikes out in his dismissal of manufacturing as a source of jobs and calling for more high tech centers like Austin, Silicon Valley and Raleigh-Durham. When the dollar falls to a sustainable level it will have an enormous impact in improving the competitiveness of U.S. manufacturing. We stand to gain more than 4 million manufacturing jobs once we get the dollar down to a sustainable level.

To take this a step further, if we followed the German model (of which Friedman often speaks fondly) we would create another 3 million jobs in manufacturing by shortening the average length of the work year. The seven million new manufacturing jobs that would be added due to a more competitive dollar and shorter workyear is only a bit over 4 percent of the work force, but it is still a far larger number than those employed in Austin, Silicon Valley and Raleigh-Durham.

In addition, those seeing Austin, Silicon Valley and Raleigh-Durham as the future of the United States have not kept up with the present. Just as China and other low-wage countries can undercut the United States in manufacturing goods with their lower wages, so can developing undercut the United States in high tech production with their lower wages. India already has a large and growing trade surplus in software with the United States.

It is difficult to see how this trend will be reversed in the decades ahead, no matter how much we tax ordinary workers to subsidize the centers that Friedman advocates. The arithmetic is straightforward, high tech workers in the United States will not be able to compete with comparable skilled workers in the developing world making one-fifth as much. Furthermore, it is much cheaper to send software programs half way across the world than it is to send cars.

Friedman also wants to cut Social Security and Medicare for retirees as advocated by the co-chairs of President Obama's deficit commission, former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles. This policy will make Wall Street deficit hawks happy, but it is difficult to see how it will help the future strength of the economy.
The Washington Post Just Can't Resist Editorializing About Fiscal Policy in Its News Section Print
Saturday, 10 December 2011 08:56

Fox on 15th yet again did some heavy editorializing in a front page story on the euro zone crisis. It referred to the plan to constrain debt as an effort to create an institutional structure that will "slap automatic penalties on governments that recklessly spend and borrow."

How did the word "recklessly" get into this article and why did it make it past the Post's editors? The point is that if the penalties are automatic, then they will not distinguish between countries that borrow "recklessly" and countries that might end up borrowing for reasons that are not reckless.

For example, a country like Ireland may end up borrowing because it had private banks that engaged in reckless lending and faced collapse. The country then had the choice of seeing its banking system go under or borrowing to rescue its banks. (It is possible that Ireland could have kept its banks operating at lower cost by giving creditors haircuts, but that is a debatable point.)

Alternatively, a country like Spain may end up borrowing because incompetent central bankers allow an enormous housing bubble to grow unchecked. When the bubble bursts it creates a severe recession leading to a huge loss of tax revenue and a massive increase in spending on unemployment benefits and other transfers.

An automatic enforcement mechanism does not distinguish between this sort of borrowing and borrowing that is done for reasons that may be viewed as reckless. That is precisely the point with an automatic mechanism, it is automatic. The Washington Post should be able to hire people who understand this.

Why Is Anyone Asking Why We Don't Have Enough Jobs? Print
Friday, 09 December 2011 17:52

If we see a car that runs into a brick wall at 80 miles an hour, we don't ask why its front end is messed up. In this same vein, why on earth would be looking for a reason for a lack of jobs in an economy that has a gap of close to $1 trillion a year in annual demand?

This is what Robert Atkinson does in a column in the Huffington Post. If we take him at face value, Atkinson is actually confused about the reason that the economy is lacking jobs. He must have missed the housing bubble and its collapse.

See, the housing bubble was directly creating hundreds of billions of dollars of annual demand by spurring record levels of construction. The housing bubble also generated close to $500 billion in annual consumption through the housing wealth effect. The bubble generated more than $8 trillion in additional equity, almost all of which has now disappeared.

After the bubble collapsed, housing fell from more than 6 percent of GDP to less than 2 percent of GDP, a loss in annual demand of more than $600 billion. The loss of housing wealth, coupled with the loss of close to $5 trillion in stock wealth, led to a falloff in annual consumption of close to $500 billion. Lost tax revenue also led to cutbacks in annual government spending at the state and local level of close to $100 billion.

In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.

The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets.

I suppose, in this weak economy, that it is good that people can get jobs looking for solutions to mysteries that do not exist. (Make work jobs can make sense if there is no productive employment available.) But there is no reason that the rest of us should be bothered by solutions for non-existent problems.

[Btw, the fact that the stimulus was too small is not 20/20 hindsight, it is what those of us who know economics said at the time.]

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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.