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The Mysterious Drop in the Saving Rate Print
Saturday, 29 October 2011 08:36

The NYT told readers that the saving rate has fallen sharply in recent months, registering just 3.6 percent in September, down from rates of more than 5.0 percent earlier in the year. (In the pre-bubble era, the saving rate averaged more than 8.0 percent.)

The main reason for this decline was likely erratic income data. There are often erratic movements in these numbers that cannot be explained by actual developments in the economy. In the four months from January to May, a period in which the GDP data show the economy was barely growing, wage earnings reportedly increased at a 3.9 percent annual rate. By contrast, in the four months from May to September the data show that wage earnings rose at just a 0.4 percent annual rate even though the economy grew at a 2.5 percent rate in the third quarter.

This sort of sharp slowdown in wage earnings is not plausible in an economy where growth was actually accelerating. It is more likely that wages were understated in September and indeed the whole third quarter, which means that income growth would be stronger and that the savings rate would be higher.

It is also worth noting that some of the story here reflects the timing of car purchases. Car sales were depressed in the second quarter because of shortages related to the earthquake/tsunami in Japan. The third quarter sales were strong as manufacturers had big sales incentives to make up for lost ground.

Sham Shareholder Elections Do Not Reveal Views on CEO Pay Print
Friday, 28 October 2011 07:26

The Soviet Union regularly held elections for office in which the Communist Party would win well over 99 percent of the vote. No serious person would have concluded that the Soviet leadership enjoyed the overwhelming support of its people. The elections were a joke, with no opposition allowed to participate or even to publicly criticize the government.

In the same vein, shareholder votes on CEO compensation should not impress anyone as a serious expression of shareholder sentiment. The votes that are cast are non-binding. It is also very difficult to anyone to organize among shareholders. There is very little incentive to devote the time and resources to do serious organizing for a vote that is non-binding. The vast majority of shareholders do not even bother to vote.

This is why it is seriously misleading of the Huffington Post to tell readers in an article headline:

"CEOs compensated correctly, vast majority of shareholders say."

It is possible that most shareholders do approve of compensation packages that often hand failed CEOs tens of millions of dollars, just as it is possible that most people in the Soviet Union actually did support their leaders. However, in both cases, the rigged elections cannot be taken as evidence to support the position.

 [Thanks to James Pilant for the tip.]

Washington Post Gets Even Shriller About the Deficit! Print
Friday, 28 October 2011 07:02

"The budget deficit is coming and it's going to eat your children!" I'm sure it will not be long before we see this line in a Washington Post news story.

In an otherwise reasonable editorial urging that the dollar bill be replaced by a coin to cut down on printing costs, the Post referred to "the country’s financial emergency." Yes, that would be the crisis that has driven the interest rate on 10-year Treasury bonds to 2.4 percent.

The Washington Post and much of the rest of the media are doing their best to scare people about budget deficits, but the facts are stubbornly refusing to cooperate. The country does face an emergency. It is tens of millions of people suffering from unemployment or underemployment. This is the direct result of the fact that the people running the economy were too inept to notice an $8 trillion housing bubble before it burst and too incompetent to respond adequately after it burst. The obsessive distraction with budget deficits is a big part of both stories.

NPR Misleads Its Listeners by Implying That it Knows What Republicans Think Print
Friday, 28 October 2011 05:18

Reporters should know that politicians do not always say what they think. That is why good reporters never claim to know what a politician actually thinks, they only know what they say and do.

NPR badly misled its listeners this morning when political correspondant Mara Liasson said that Republicans see taxes on the wealthy as penalizing "job creators" [sorry, no link yet]. Actually, Ms. Liasson does not know how Republicans see these taxes, nor is it plausible that all of them see taxes the same way.

The correct way for a reporter to discuss this issue is to say that Republicans "say" that taxes on the wealthy are penalizing job creators. The party has clearly decided that this is a clever way to defend their position, Liasson and NPR have no way of knowing whether Republicans actually adhere to this view. They should not pretend otherwise. 

The NYT Touts the Fact That GDP Data Show the World Did Not End Print
Thursday, 27 October 2011 22:07

There was no reason why people who know economics would have expected a double dip recession, absent a meltdown in the euro zone. Unfortunately, policy debate tends to be dominated by people who don't fall into this category, hence the discussion of a double dip.

The unfortunate result of a debate dominated by ignorance is that a terrible 3rd quarter GDP growth number is touted as better than expected. As the NYT tells us in its headline:

"U.S. Economy Picks Up Pace, Averting a Stall."

At the economy's 3rd quarter growth rate it will take us an infinite number of years to get back to normal levels of unemployment. There was no reason to expect the economy to stall, just like there is no reason to expect heavily armed Martians to take over earth tomorrow. There is no reason that anyone should be happy about the 3rd quarter growth data, it is awful. The fact that some economic "experts" expected worse just speaks to the state of economics.

E.J. Dionne Understands Zero Economics Print
Thursday, 27 October 2011 05:21

There is a caricature of political debate that the right has invented whereby conservatives claim to be supporters of free markets whereas progressives want government regulation. This was always utter nonsense, but it should be especially apparent that it is utter nonsense today.

Few mainstream conservatives supported letting the market put Wall Street out of business when the collapse of the speculative bubble in the housing market made most major banks insolvent in the fall of 2008. At the moment, Europe's leaders are meeting nearly around the clock to devise a plan that will have the effect of saving the big European banks from their bad investments in sovereign debt.

There are almost no major figures in politics who are actually opposed to government regulation. In fact, it is not even clear what that means. Do they want to get rid of deposit insurance for banks, or patent and copyright protection? The real issue is whether the government is going to structure markets in ways that have the effect of pushing income upwards, which has been the situation for most of the last three decades or whether it will design policies that benefit the vast majority of the population. This is the 1 percent versus the 99 percent question.

It is hugely advantageous to conservatives, who want the government to advance the interests of the 1 percent, to have their position framed as a pro-market position. It is far more politically palatable to be seen supporting a free market than to be supporting policies that are intended to aid a small elite at the expense of the bulk of the population.

It is therefore understandable that conservatives would embrace the market versus intervention framing of the debate between conservatives and progressives. It is much harder to understand why someone who is left of center, like WAPO columnist E.J. Dionne would embrace the same framing.

[Dionne's framing is a textbook example of loser liberalism.]

The Post Uses the Double Dip Story to Diminish Expectations Print
Thursday, 27 October 2011 05:04

The headline of a Washington Post article used the term "optimism" in reference to a prediction of 2.5 percent growth for the third quarter. It is very difficult to view 2.5 percent growth as much less than disastrous. At this rate the economy is growing just fast enough to keep pace with the growth of labor force.

That means we are making zero progress in reducing the unemployment rate. If the economy continues to grow at a 2.5 percent pace, the unemployment rate will remain around 9 percent indefinitely with tens of millions of people unemployed, underemployed or out of the labor force altogether. These people are seeing their lives needlessly ruined because the well-paid people who manage the economy are not competent at their jobs.

The only context in which this growth can be seen as positive is compared with the alternative of a double-dip recession. The Post and other media outlets unfortunately helped promote the view that the economy was at a serious risk of a double dip based on the misreading of a limited number of economic reports over the summer.

While a collapse of the euro or some other crisis could certainly throw the economy into a second recession, it is not a plausible scenario on the economy's current path. Recessions require a major sector of the economy to actually shrink. In the past, this has always been the housing and car sectors. Since both are already very depressed, it is implausible that they could turn sharply negative. While the government sector is shrinking, its rate of decline is in the neighborhood of 1 percent annually. This is a drag on growth, but nearly enough to push the economy into a recession.

The Washington Post Imposes Its Own Agenda on the Supercommittee Print
Thursday, 27 October 2011 04:45
The Washington Post told readers that the supercommittee had an "original goal of at least $1.2 trillion in savings through 2021." Actually, its goal was specified in terms of deficit reduction which can come in the form of either higher revenue or reduced spending. The term "savings" implies spending cuts. That may be the Post's agenda, but it is not the one that Congress gave to the supercommittee.
Robert Samuelson Complains About the Paint Job on the Titanic: Yet Another Deficit Whine Print
Wednesday, 26 October 2011 19:48

It is really incredible how much ink that Robert Samuelson and his colleagues on the Post's opinion and news pages can devote to the budget deficit at a time when 26 million people are unemployed, underemployed or out of work altogether. In a column on Monday Samuelson told us of his "fantasy":

"Retired presidents Bill Clinton and George W. Bush would tour the country together and apologize. They would apologize for not tackling Social Security and Medicare when they had the chance."

What a fantasy! Here we are sitting in the middle of the wreckage of the housing bubble and we are supposed to be upset at Presidents Clinton and Bush for not cutting Social Security and Medicare.

The bubble economy of course had its origins in the Clinton years. His team applauded the rise of stock prices to ever more irrational levels, somehow thinking that ever greater distortions in the stock market were evidence of a successful economy. In addition, Clinton's Treasury Secretary Robert Rubin was the main promoter of the high dollar policy. This was the origins of the country's huge trade deficit, which is the largest remaining imbalance in the U.S. economy. Clinton also pushed the financial deregulation that helped open the door for the financial crisis of 2008.

President Bush certainly has no better record. The housing bubble grew to ever more dangerous levels right in front of his face. All he could do was celebrate the rise in homeownership as a success in his quest for an "ownership society."

The collapse of these bubbles is projected to cost the country $8.3 trillion. This is more than $27,000 for every man, woman, and child in the country. It might be reasonable to think that our former presidents owed us some sort of apology for leading us into this disaster. But not in Robert Samuelson's world.

In Samuelson's world they should be apologizing that the retirees, who saw their housing wealth decimated by the collapse of the bubble, are living on $1,200 monthly Social Security checks instead of $1,100 monthly checks. And, they should be apologizing that these retirees don't have to pay more money for their health care.

That's really some fantasy that Robert Samuelson has there.

A Bit of Confusion on Consumption Print
Wednesday, 26 October 2011 07:17

I'm not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.

While part of the story sounds very good -- reverse the upward redistribution from wages to profits -- some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.

In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn't change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.

Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S.-owned companies. I understand how this helps the shareholders in these companies, but I can't see what this does for the rest of us.

The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.

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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.