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Reign of Confusion at the NYT Print
Sunday, 07 August 2011 19:22

The NYT told readers that a second recession could be even worse than the first. The reason is that people will have less of a cushion going in and that we are supposedly out of policy tools to get us out. There is some serious confusion here that is worth addressing.

First, it is true that most families have little left in reserve to deal with another layoff, so the NYT is absolutely right that a second downturn would really whack people that are already hurting. But there are two important points to make on this.

First, precisely because the economy is still badly depressed in many ways it is much less likely that we will see a recession. Remember a recession means two quarters of negative growth. To have negative growth there have to be sectors of the economy that are shrinking. Typically this would be construction and car purchases.

As it stands, construction (both residential and non-residential) are seriously depressed. It is difficult to imagine that either sector could fall much more than it already has. This means any negative impact that they have on the economy will be very limited. The auto sector is also still well-below pre-recession levels of sales. If it were to dip by another 10-15 percent (a very large dip), it would not have that much impact on the economy.

Consumption more generally is growing, albeit slowly. This is 70 percent of output, and even modest growth in consumption is likely to keep the economy growing. The government sector is shrinking, but only at around a 2 percent annual rate. So, we have to offset a sector that is about 20 percent of GDP shrinking at a 2 percent rate to stay in positive territory.

That is a pretty low bar. I think the double-dip crowd has not done their homework.

The second point is that a double-dip is not the sort of game-changing event that many seem to think. If we have a prolonged period of weak growth, that means rising unemployment and increased suffering. There is no magic to going negative. If we had 2 quarters where the economy shrank by 0.3 percent and followed by a year of 7 percent growth, this would be a great deal.

By contrast, we may be looking at 2 years or more where the growth could be in the range of 2.0 percent or even less. When we have 9.1 percent unemployment, this is an outrage. If we get people applauding because at least we are not seeing a double dip, then we have to calmly escort these ignorant beings to somewhere far away from economic policy discussions. They clearly do not have a clue and need to try a different line of work.

Finally, it is 100 percent nonsense to say that the government is out of policy options. We can do more stimulus. The financial markets are yelling at the government at the top of their lungs saying "borrow more money." That's what 2.6 percent interest rate on 10-year Treasury bonds means. There are balanced-budget worshipping politicians who say that the government can't do anything, but this is not true and the NYT has no business repeating it.

The Fed could also do more. For some reason the article does not mention policies that Ben Bernanke has himself suggested: targeting a long-term interest rate (e.g. a 1.0 percent 5-year Treasury rate) or a higher rate of inflation (e.g. 3-4 percent). The former was mentioned by Bernanke at his Jackson Hole speech last summer; the latter in a paper that he wrote while still a professor at Princeton. Both could help to boost demand and create jobs.

The government could also try to create jobs by taking steps to lower the value of the dollar. The Chinese government has been making threats that it will stop buying up U.S. government debt if we don't take their advice. The Obama administration could ask what they most want and then do the exact opposite. If the Chinese government stops buying U.S. assets then the dollar will fall against the yuan. This is equivalent to imposing a tariff on Chinese imports and giving a subsidy to U.S. exports. In other words, it should lead to a burst in net exports which will lift the economy and create jobs.

Finally, the government could promote work sharing. Every month employers lay off or fire 2 million workers. If the government gave incentives so that employers were persuaded to shorten hours rather dump employees, and this reduced this figure by 10 percent, it would be equivalent to creating another 200,000 jobs per month.

In short, there is much that the government can do to create jobs. It is understandable that incumbent politicians would want to push the "nothing we can do line" to justify their own failings, however news outlets have no business passing along these excuses which are not true.  

 
Fun With Thomas Friedman Print
Sunday, 07 August 2011 08:37

Thomas Friedman tells us today that we have "win together or lose together." That's a really cute line.

Folks who look at the National Income and Product Accounts know that corporate profits are at a record high share of national income. And within corporate profits, the financial sector is at a record high. Given that we have 25 million people unemployed, underemployed or who have given up looking for work altogether, that doesn't seem like much togetherness. 

We could increase togetherness with a modest financial speculation tax like the 0.25 percent tax that the UK imposes on each side of stock trades. A similar tax applied to trades of stocks, bonds, options, futures, and other derivative instruments can easily raise more than $100 billion a year. That would help to bring down the deficit that so concerns Mr. Friedman and his friends.

Friedman gives his usual tirade about people in the United States overconsuming. The problem in this story is that people would not have been overconsuming if the housing bubble wealth was real. At its peak, the housing bubble created more than $8 trillion in housing equity compared to a situation where house prices had just followed their long-term trend. People consumed based on this wealth, exactly as economic theory predicted.

This would have been an entirely rational decision if they were able to keep their bubble equity, but of course they were not. The problem was not that people were being spendthrifts, the problem was that the people in charge of running the economy allowed an $8 trillion bubble to grow that had predictably disastrous consequences.

The blame here lies not with the average homeowner, who acted rationally with the information available. The blame lies with the people who managed the economy, like Alan Greenspan, Ben Bernanke, and Hank Paulson, and the people who opine on economic issues in major news outlets. If these people were competent, they would have been shooting at the bubble with everything they had before it reached such dangerous levels.

Friedman also turns to Harvard economist Ken Rogoff for suggestions for hastening the recovery. For some reason he missed one of his favorites. Rogoff suggested that the Fed deliberately run a high rate of inflation (e.g. 6 percent) for a couple of years. This would have the effect of reducing the real value of people's debts, making it possible for them to spend more money.

It also is worth noting that the U.S. cannot return to normal levels of employment without "overspending" unless we get the trade deficit down. This can only happen if the dollar falls substantially against other currencies. Thomas Friedman should know this.

 
The Difference Between Fox on 15th Street (a.k.a. The Washington Post) and a Real Newspaper Print
Saturday, 06 August 2011 22:21

The Post featured a lengthy front page piece on the Republican debt ceiling strategy. Early in the article, it told readers that:

"Democrats called the GOP irresponsible for gambling with the economy and the nation’s flawless credit. Republicans countered that an epic clash over the debt limit was inevitable, given the outcome of the election and widespread anger with runaway government spending."

There was no "runaway government spending." The bulk of the increase in spending was for transfer payments like unemployment insurance and food stamps that always rise during a downturn. They rose more in this downturn than in most because it was steeper. A real newspaper would have put the words "runaway government spending" in quotation marks rather than implying that it was something that actually existed in the world.

Somewhat later, the article tells readers that:

"smaller government and lower taxes, not explosive federal spending, would be their [the "young gun" Republicans] route to growth and prosperity."

No one was advocating "explosive federal spending." This means that a real newspaper would have put these words also in quotation marks.

This is how you can tell the difference between the Washington Post and a real newspaper.

 
Washington Post Redoubles the Effort to Gut Social Security and Medicare Print
Sunday, 07 August 2011 07:14

The Washington Post is going full speed ahead in its quest to gut Social Security and Medicare. Its lead editorial told readers that:

"what seems to have sent markets panicking last week is a dawning sense that capitalist democracies may have made more promises than their economies are capable of fulfilling — without significant growth-generating structural reforms."

Cool, how did the Post determine this one? I would have guessed that markets were rattled by the fact that the ECB is run by incompetents who understand almost nothing about economics. They are raising interest rates at a time when there is massive underemployment in the euro zone countries and no real risk of inflation. This will slow growth throughout the region and raise the interest rates that the heavily indebted countries must pay on their debt. That would seem the most immediate cause of crisis. If the markets just became aware of some new set of promises, the Post neglected to report what these might be.

Of course those who care about future growth in the U.S. are probably not happy about a budget deal that locks in a path of declining government spending when there is no obvious source of private sector demand to replace it. This is 180 degrees at odds with the Post's assertion -- the problem is that the government is not making enough promises, not that it is making too many.

The Post then gives us this beautiful line:

"The next time someone tells you that this predicament is all the fault of a) Wall Street b) President Obama c) the Republicans or d) China, respond with this number: 138 percent. That is the ratio of U.S. household debt to disposable income as of 2007."

The Post's editors are so cute when they try do arithmetic. (I remember an editorial praising NAFTA in which it claimed that Mexico's GDP had quadrupled between 1988 and 2007. The actual growth was 82 percent. The Post never corrected this one. Hey, math is hard!) Let's think about this 138 percent for a moment.

The Post largely missed it, but the country had an $8 trillion housing bubble in the last decade. It had a $10 trillion stock bubble in the 90s. According to standard ecoonomics (the stuff people learn in intros), people consume based on their wealth. Most people had no reason not to believe that the bubble wealth was real. They certainly would have no reason not to believe it was real if they relied on the Washington Post for their news, which never mentioned the bubble.

This means that because of the bubbles, people spent a huge amount relative to their incomes. At the peak of the stock bubble the saving rate had fallen from a post-war average of 8 percent of disposable income to just 2 percent. At the peak of the housing bubble it fell to zero.

This is the reason that we have the 138 percent debt to income number that the Post is advertising. We had a bubble that was partially inflated by Wall Street greed and fraud and allowed to grow unchecked by incompetents like Alan Greenspan, Ben Bernanke, and Hank Paulson. So we can talk about Wall Street blame and 138 percent in the same sentence. Isn't arithmetic fun?

Now let's give the Post's editors a quick economics lesson. They obviously think people should be consuming more now. Is that really a good thing? If we check the saving rate it is now around 5 percent, still below the post-war average. How low does the Post think it should go, 3 percent, 2 percent? Since the Post is intent on gutting Medicare and Social Security, how do they expect people to support themselves in their old age if they save at much lower rates than the parents and grandparents, who were not generally wealthy in retirement even with an average saving rate of 8 percent? 

The real imbalance in the U.S. economy at present is not that people are consuming too little. The biggest imbalance is the trade deficit. If the U.S. runs a trade deficit, then it must have negative national savings. That is an accounting identity, there is no way around it. That means that we must either have the large budget deficits that the Post hates or we must have the overconsumption that the Post hates.

If we want people to save more and to have the government stop running large deficits, then we must get the trade deficit down. And, the only way to get the trade deficit down is to get the value of the dollar down. Unfortunately in Washington Post land this is also a bad thing. (One of the bad events that it wants readers to fear is a flight from the dollar.) 

So, the answers in the world are very clear. In the short term we will need the government to provide a boost to the economy. In the longer term, we will need to get the dollar down so that our trade is closer to balance. Unfortunately the Post cannot see this because it has serious problems with logic and arithmetic.

[To prove this point, the Post editorial tells us:

"Even China seems near exhaustion of a growth model based on an overvalued currency and inefficient, state-determined investment."

Umm, its economy is still growing around 9 percent a year. More importantly, China's currency is undervalued, not overvalued. Math is sooooo hard!]

 
The NYT Misrepresents China's Options and Accounting Identities Print
Saturday, 06 August 2011 08:07

The NYT told readers that:

"Beijing has few options other than to continue to purchase United States Treasury bonds, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, is being devalued."

Both parts of this statement are wrong. Beijing has the option to stop buying dollars from its exporters. The reason that the government accumulates dollars and other foreign currencies is that it buys the currency from the companies who are exporting to the United States and other countries.

It has the option not to buy the currency. This would force the exporters to sell their dollars in international currency markets which would lower the value of the dollar. The lower valued dollar would help to correct the trade imbalance between the United States and the rest of the world. This is the adjustment process that is supposed to take place in a system of flexible exchange rates.

The second part of the statement, that "Chinese officials are clearly concerned that China’s substantial holdings of American debt ... is being devalued," is almost certainly wrong because Chinese officials should know with absolute certainty that it will be devalued. The only plausible route through which the trade deficit in the United States will be brought into balance is through a large reduction in the value of the dollar. Everyone who has taken an intro econ class knows this, so presumably China's top economic officials understand this fact. They presumably have made the judgement that maintaining their export market in the United States is worth the expected loss on their dollar holdings.

Finally, as a matter of accounting identities, the existence of the large U.S. trade deficit means that it will be a net international borrower. In other words, the headline of this article that "China Tells U.S. It Must 'Cure Addiction to Debt'" is absurd. China's decision to prop up the dollar against the yuan is the main cause of the trade deficit that makes the U.S. a net borrower. In other words, it is China's own actions that lead to the U.S. borrowing that it is complaining about.

 
Credit Rating Agency that Rated Subprime MBS Investment Grade, Downgrades U.S. Print
Saturday, 06 August 2011 07:58

This would have been an appropriate heading for this article on S&P's decision to downgrade U.S. government debt. S&P gave investment grade rating to hundreds of billions of dollars of mortgage backed securities. They received tens of millions of dollars from the investment banks for these ratings.

It would have also been worth asking what S&P thinks it means by this downgrade. U.S. government debt is payable in dollars. The U.S. government issues dollars. What does it mean that S&P thinks that at some point the government will not have the dollars needed to pay interest and principle and its outstanding debt. Does S&P think the U.S. government will forget how to print dollars?

If that is not what the downgrade means then it would be helpful to explain what it does mean. Readers of this article would likely be confused since there is no obvious meaning that could be attached to this downgrade.

 
Trichet Did Allow the Housing Bubbles to Grow Unchecked Print
Friday, 05 August 2011 20:27

The NYT did a pseudo-retrospective on Jean-Claude Trichet as he approaches the end of his 8-year tenture as head of the European Central Bank. Remarkably, the piece never once mentions the fact that he allowed housing bubbles to grow unchecked in Spain, Ireland and elsewhere in the euro zone. These bubbles created huge imbalances that could not be easily corrected, as we are seeing now.

It was 100 percent predictable that these bubbles would burst and lead to a severe downturn. It is hard to imagine a more serious mistake by a central bank president. This is like a school bus driver coming to the job drunk, driving into oncoming traffic, and getting all the students killed.

It would have been worth mentioning a mistake of such magnitude in this article.

 
Steven Pearlstein Says There is Little We Can Do About Unemployment Print
Friday, 05 August 2011 19:44

Pearlstein says it's really too bad but there is just not much the government can do to get the economy back on track:

"we shouldn’t kid ourselves about how much government can do. Only markets can right-size companies and industries, find the market-clearing price for houses and shopping centers or bring wages in line with global competitive realities. Only markets can wring the speculative premium out of the price of stocks and commodities. And only markets can move workers from where they live to where they are needed, and create a match between the skills workers offer and the skills that companies require."

Of course Pearlstein provides zero evidence for any of these assertions, because Fox on 15th Street is not a newspaper that cares about evidence. For example, the wages in the U.S. that are most out of line with "global competitive realities" are the wages of people like Steve Pearlstein, professionals who get paid way more than their counterparts in other wealthy countries. These imbalances can persist because these professionals have the power to sustain barriers that largely protect them from international competition unlike people like steelworkers and auto workers who have been deliberately subjected to international competition.

If there was a serious problem of mismatch between skills and jobs, as Pearlstein asserts, then we should be able to identify sectors of the economy where there are large numbers of job openings, wages are rising rapidly, and average hours are increasing. No such sector exists. In other words, this skills mismatch exists only in Pearlstein's head and in the pages of the Washington Post.

If we needed any further proof about how unseriously Pearlstein and the Post take his column we have this comment:

"To spur private investment in equipment and research, the government could immediately allow companies of all sizes to deduct 100 percent of such expenses made in the next three years, rather than “depreciating” them over many years. That incentive to invest now will increase the deficit in the short run but have little or no impact on the long-term deficit."

President Obama and Congress agreed on a full expensing provision as part of last year's tax deal. In other words, we already did this. Oh well.

The reality is that there is much that we can do to get the unemployed back to work, but Pearlstein and the Post are willing to say things that are not true to dissaude others from acting.

 
German Exports Are Slowing Print
Friday, 05 August 2011 05:34

This one is almost too painful to write about. The Post tells us that:

"Even some of the recent bright spots in the global economy are starting to dull. German economic growth, for example, appears to be slowing. Germany exports heavily to the European nations that are experiencing a debt crisis."

Is there anything in the world that was more predictable? Why on earth didn't the people making policy at the ECB see this?

 
David Wessell Is Seriously Wrong, There Is Much More That the Fed Could Do Print
Friday, 05 August 2011 05:18

David Wessel, the Wall Street Journal's economics editor, badly misled NPR listeners this morning when he told them that there is little that the Fed could do to boost the economy. This is not true.

The Fed could do another round of quantitative easing, although this is likely to have a limited impact. It could also target a long-term interest rate, for example putting a 1.0 percent interest rate target on 5-year Treasury bonds.

Alternatively, the Fed could pursue a path that Bernanke himself had advocated for Japan when he was still a Princeton professor. It could target a higher rate of inflation, for example 4 percent. This would have the effect of reducing real interest rates. It would also lower the debt burden of homeowners, which could allow them to spend more money.

This policy has also been advocated by Paul Krugman and Olivier Blanchard, the chief economist at the IMF. It would be amazing if Wessel was unaware of this policy proposal.

 
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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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