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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.

 
Dana Milbank Ridicules People Who Don't Work for Wall Street Print
Tuesday, 02 August 2011 07:07

Dana Milbank, a Washington Post columnist who doubles as a fashion critic, devoted today's column to ridiculing progressive members of Congress who complained about the deal on the debt ceiling. He presents a number of quotes from progressive members of Congress who complained about cuts that may mean that people cannot afford housing, heat, food or medical care.

While these were all very funny, it would be much easier to find ridiculous comments from deficit hawks. For example, Mr. Milbank could fill endless columns with lines from former Senator Alan Simpson, the co-chair of President Obama's deficit commission. Mr. Simpson apparently thinks that we have just discovered the existence of the baby boom cohort as they are on the edge of retirement.

He also could have included comments from David Walker, the former comptroller general at the Government Accountability Office and also former head of Peter Peterson's Foundation. Mr. Walker has repeatedly warned that if we don't get the deficit down, then the dollar could fall against other currencies. This one is really hilarious, because a decline in the dollar against other currencies is actually supposed to be one of the main benefits of lower deficits.

In standard economics the argument is that deficit reduction will reduce the trade deficit by lowering U.S. interest rates, which will make dollar assets less attractive to foreign investors. If they buy fewer dollar assets, then the dollar will fall, improving our trade deficit. Now how funny is that? Our former comptroller general doesn't even know which way is up when it comes to the deficit, his life's obsession.

Milbank also could have made fun of the bond rating agencies threatening to downgrade U.S. government debt. What does this mean? U.S. government debt is denominated in dollars. The U.S. government issues dollars. Do Moody's and Standard and Poors think that the government will lose the ability to issue dollars? In other words, what could they mean with this threat to downgrade U.S. debt?

The credit rating agencies are making a nonsense threat. Now that is really funny.

Milbank could fill many columns making fun of the deficit hawks who are trying to whip up hysteria with nonsense stories about the budget and the economy. Of course the Post, his employer, is at the forefront of this effort. So, Mr. Milbank sticks to making fun of politicians who profess concern for the poor and middle class, and to fashion criticism. 

 
The Post Tells Us It's About "the Size and Role of Government" Print
Tuesday, 02 August 2011 05:26

In a front page news article the Post told readers that the debt ceiling battle was really a battle over "the size and role of government." Is this something their mother told them?

I didn't see anyone in this debate arguing for "big government." If there is anyone in the country who supports big government as a matter of principle, they have a seriously losing electoral position.

In the real world the battle is over specific programs. And, apart from the military, there is overwhelming support for most of what the government spends money on -- Social Security, Medicare, Medicaid, and unemployment benefits -- across the political spectrum. Everyone from liberal Democrats to Tea Party Republicans strongly supports these programs.

In fact, there is only a small minority that really wants to see these programs cut back in a major way. Of course this minority is extremely powerful since it includes much of Wall Street and major news outlets, like the Washington Post.

It helps to advance the agenda of those who want to cut the major social programs to mischaracterize the issue as a debate over the size and role of government. This can create serious divisions among the programs' supporters. However, if the debate is more accurately described as one between people who support social programs and those who oppose them, then the Washington Post's position has much less chance of succeeding.

 
How Does the Post Know That the Debt Is Becoming "Crushing?" Print
Tuesday, 02 August 2011 04:51

Yes, it was just a throw away line. But serious newspapers do not say in front page story that:

"Over the long term, the deal could help free the nation from what is fast becoming a crushing debt."

Lines about a "crushing debt" should appear in quotations or left to the opinion pages. They should not be assertions of fact to readers.

 
Beat Up Your Favorite News Reporter, What Would It Mean for the U.S. to be Unable to Pay Its Debt? Print
Tuesday, 02 August 2011 04:33

Okay boys and girls, this stuff about a credit downgrade has gone far enough. We know that all the important people in Washington and on Wall Street are warning us about the possibility that the credit rating agencies will downgrade the U.S. government if we don't reduce the debt to their standards. But what could this possibly mean?

The U.S. debt is denominated in dollars. The government issues dollars. Do Moody's and Standard and Poor's think that there will be some point in the future where the government will not be able to issue dollars?

Let's say this so that even a reporter with an elite news outlet can understand it. Suppose I issue IOUs that are payable in Dean Baker IOUs. What is the likelihood that I will ever default on my IOUs?

That's right, unless I lose the ability to write, the probability is zero. There is a possibility that at some point that Dean Baker IOUs will lose some of their value (i.e. inflation) because I have issued so many of them. However the credit rating agencies are not in the business of making inflation predictions. They certainly don't have any obvious expertise in this area.

Furthermore, if a debt downgrade for the U.S. is simply a forecast for higher inflation, then the debt downgrade must apply to every debt issue denominated in dollars. In other words, if U.S. debt loses 30 percent of its value because of higher than expected inflation, then so will dollar denominated debt issued by General Electric, AT&T, or the government of Israel.

In other words, if the concern really is higher inflation, then the credit rating agencies must be considering downgrading all debt denominated in dollars. But, they have not threatened every issuer of dollar denominated debt with a credit downgrade, so this must not be what they mean.

So, what does the threat of a credit downgrade mean? The reporters should be asking this question and giving us the answer. This is their job.

 
Did President Obama Want to Give the Kidnappers Hostages? Print
Tuesday, 02 August 2011 03:59

Joe Noccera and Paul Krugman both see President Obama as having been taken for a ride by a Tea Party gang who were prepared to blow up the house if they didn't get their way. This is one possibility, but there is another way to interpret recent events.

President Obama had other options all along the way. As Krugman notes, he could have insisted last December that the debt ceiling was part of the deal to extend the Bush tax cuts. After all, contrary to what his National Economic Adviser seems to think, the Democrats did still control Congress at the time.

In the context of the debt ceiling being hit, he could have taken the 14th amendment route that a substantial number of legal scholars believe to be kosher. It probably passes the laugh test better than the non-war in Libya. He was prepared to challenge Congress for the latter, why not the former?

He could have also tried the stand tough approach. As we know, in the meltdown scenario Wall Street is on the front line. The J.P. Morgan-Goldman Sachs gang would be pretty damn furious at the Republicans if they actually put them out of business. It's very hard to believe that Boehner and company don't buckle in this scenario.

Finally, the whole debate has hugely misrepresented the Tea Party. Poll after poll shows that they are not really against what government does. In fact, they are huge supporters of Social Security and Medicare and other programs that support the middle class. And, after we pull out the military, this is in fact the vast majority of the government.

The Tea Party is against some nonsense notion of massive government waste that does not exist. Like President Reagan, they want to eliminate the Department of Waste, Fraud, and Abuse.

President Obama could have insisted that he would protect the core middle class programs that enjoy support across the political spectrum. And he could have said that the Republicans want to gut them.

Instead, he contributed to the nonsense. He made up a false story about the origins of the deficit, wrongly telling the country that the huge deficit came about from the Bush tax cuts, the cost of the wars, and the Medicare drug benefit. This implied that we had large deficits before the downturn, that large deficits were a chronic problem.

In fact, the numbers are clear as day and it's impossible to believe that President Obama and his advisers do not know them. The large deficits of the past few years came about because of the collapse of the housing bubble, end of story. 

So we can believe that President Obama is just a really bad poker player, as Paul Krugman suggests, or we can believe that he is getting what he wants. I report, you decide.

 
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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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