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NPR Pushes Its Deficit Agenda With Full Force Print
Friday, 18 November 2011 05:15

Morning Edition had a piece warning us that the markets will be hard hit if the supercommittee doesn't reach a deal (sorry, no link yet). It attributed the decline in the stock market in the period around the debt ceiling battle to fears about default, even though bond prices actually rose in this period. Bonds are the asset on which the U.S. government might theoretically default.

So in NPR land, when investors increasingly fear a default on U.S. government bonds, they bid up the price of bonds. However, fears that government bonds will default makes investors less willing to hold stock.

This makes sense as something to say if your agenda is to force Congress to cut programs like Social Security and Medicare. If you're looking for a more coherent explanation, the markets were responding to the prospects of a meltdown of the euro. This raises the prospect of a post-Lehman type freeze up of the financial system. That would be very bad news for the stock market and is the most obvious explanation for movements in the financial markets.

John Cassidy Still Has Not Heard About the Housing Bubble Print
Friday, 18 November 2011 05:04

John Cassidy, the long-time economics writer for the New Yorker, apparently still has not gotten word about the housing bubble: you know, that $8 trillion run-up in house prices that collapsed and caused the financial crisis and the downturn. In a piece telling readers that President Obama has done about as good as could have been expected, he commented:

"And bailing out underwater homeowners on the scale necessary to raise house prices would have been a huge logistical and political challenge."

Of course there was no reason to expect or want house prices to rise. The bubble has largely deflated. Why on earth would we try to re-inflate a housing bubble as a matter of policy? Do we want the stock of Pets.com and other bankrupt loon tune companies to again sell for billions?

It was both inevitable and good that house prices corrected from their bubble peaks. The unforgivably policy mistake was to allow the bubble to grow so large in the first place and to be so unprepared to provide some support (e.g. Right to Rent and serious countercyclical policy) for the victims of this incompetence.

[Thanks to Keane Bhatt.]

George Will Says the 1990 Budget deal Caused the Recession That Started Four Months Earlier Print
Thursday, 17 November 2011 09:19

George Will gave a seriously inaccurate accounting of history in his Washington Post column today. He told readers:

"Sensible people who remember the last grand budget bargain will be dry-eyed about not having another now. Although only 21 of the 242 Republicans in the House and eight of 47 Republicans in the Senate were on Capitol Hill in 1990, everyone there should remember the results of that year’s budget agreement, wherein President George H.W. Bush jettisoned his “no new taxes” pledge: Taxes increased. So did spending. And the deficit. Economic growth decreased."

That's not quite right. The economy actually slid into recession in June of 1990. The budget deal wasn't made until October of 1990. It would take a really really bad deal to slow growth four months before it had been made.

Will also includes a chart that shows projected spending growth with and without a sequester. The point is to imply that there will be large growth in spending regardless even if money is sequestered.

Economists would ordinarily adjust for inflation, which is projected to be around 30 percent in total over the next decade. Perhaps the Post still pays Will the same amount it did in 2001, but wages in general typically rise at least in step with inflation.

Economists would also typically adjust for growth in the economy. If the economy is 30 percent larger (which is the projection), then we would expect to spend roughly 30 percent more, after adjusting for inflation, educating our kids, maintaining and improving our infrastructure, and on other public needs. Apparently, Mr. Will believes that a huge country like the United States does not need to spend any more on education than a small poor country like Haiti. Otherwise he would discuss these sums as shares of GDP, as would any serious analyst.

Unauthorized Copies Are Not "Pirated" Just Because Microsoft Says It Print
Thursday, 17 November 2011 08:18

Someone has to tell the Post that things do not become true just because Microsoft or some other major corporation assert them. This problem pervades an article on efforts by the entertainment industry to force Internet companies to help them police their copyrights.

The article refers to the material in question as being pirated. This is in fact in dispute. In many cases, for example countries where the specific material involved is not protected by national copyright law, it is wrong to claim that the material is "pirated." It is simply unauthorized. The Post should have used this term throughout the piece, since it has certainly has no reason whatsoever to believe that all the material in question will in fact have been posted in violation of copyright.

It would have been helpful to include some economic analysis in this piece. It tells readers that the industry groups claim that they are losing $135 billion a year due to the circulation of unauthorized copies of their work. If this is true, under standard economic assumptions, the loss to consumers from enforcing copyrights would likely be several times larger.

It is also striking that the Post did not use the dichotomy of big government versus the market that it so often throws into its news articles. In this case, we are discussing a law that involves really big government, since it will impose major sanctions on companies that don't in effect act as agents of the government in policing what people post on the web.

Will Cutting Social Security and Medicare Help Congressional Approval Ratings? Print
Thursday, 17 November 2011 08:06

In an article noting that some Republican members of the supercommittee are willing to raise taxes, the Washington Post told readers that Republicans might be willing to make concessions on taxes because they are:

"Party leaders wary of Congress’s dismal approval ratings are loath to appear incapable of deficit reduction."

The packages that have been talked about in the media include cuts to Social Security and Medicare, both of which are likely to be highly unpopular. It is not clear that members of Congress who are concerned about their approval ratings would go this route. However there is little doubt that the Washington Post (in both its editorial and news sections) will warmly praise members of Congress for reaching an agreement as will other major news outlets. 

The NYT Gets the Story Wrong on College Grads Returning Home Print
Thursday, 17 November 2011 06:09

The NYT had an interesting piece discussing the large number of college graduates who have moved back home with their parents because they have been unable to find jobs. While this is an important economic and social trend, some of the numbers are clearly not right.

For example, it cites Mark Zandi as saying that the average new household adds $145,000 in output to the economy. The median household income is approximately $50,000. Most new households have incomes that are well below the median, since they are typically young people living alone. Even if the expenses associated with forming a household cause them to spend beyond their income, it would take an enormous burst of spending and a huge multiplier to get to $145,000. (Remember, this only counts the spending associated with moving into a new apartment or house, not spending on food, transportation, or health care that is largely independent of living in a separate household.) 

The article also cites Zandi as estimating the pent-up demand for new households at 1.1 million which he puts as roughly equal to the number of vacant units for rent or sale. The Census Bureau reports that there are 7.2 million vacant units for sale or rent, with another 7.2 million vacant units being held off the market for a variety of reasons.

The NYT Disappears the Housing Bubble Print
Thursday, 17 November 2011 05:49

Way back in 2008 much of the world sank into recession because housing bubbles in the United States, the UK, Ireland, Spain and elsewhere began to deflate. This ended a boom in construction and caused consumption to plunge as the housing wealth that provided its foundation vanished.

Unfortunately, memories at the NYT are apparently weak. It told readers today:

"To the roster of pain inflicted by the European debt crisis, add this: rising and persistent joblessness among young Britons."

Of course, the European debt crisis is very much secondary in this story. The proximate cause of the high unemployment in the UK is the decision of the government to impose a harsh austerity package involving cuts in spending and higher taxes. This was a decision by the government, it was not in any way a necessary result of the UK's debt burden as the article implies. Financial markets were willing to lend the UK money at very low interest rates.

Also, the cause of the "debt crisis" was the economic collapse that followed the bursting of the housing bubble. Most of the countries now facing serious problems paying their debt had modest budget deficits or even surpluses in the years prior to the collapse of the bubble.

The NYT also appears to be suffering from the millions/billions confusion that is also afflicting NPR. It told readers:

"Reducing youth unemployment by one percentage point could save £2 million, or $3.2 million, by avoiding youth crime, according to research by the Center for Economic Performance, a research concern at the London School of Economics and Political Science."

Presumably the numbers in this research were billions, not millions. If in fact they were millions, the results were too trivial to bother writing up.

Tell NPR: Solyndra's Loan Was $528 MILLION, not Billion Print
Thursday, 17 November 2011 05:01
In its top of the hour news segment Morning Edition mentioned congressional hearings where Secretary of Energy Steven Chu would testify about the loan guarantees for Solyndra, the now bankrupt solar energy firm. The segment said that the guarantees were for $528 billion. In fact, the guarantees were for $528 million. It makes a difference.
Robert Samuelson Never Heard of the European Central Bank Print
Wednesday, 16 November 2011 07:53

Who can blame him, after all it is hard to get news when you're buried away in the middle of Washington, DC. Samuelson claims that Europe can't bail itself out. He calls on the IMF to come to the rescue -- at the cost of dismantling Europe's welfare state.

Of course there is nothing wrong with Europe's welfare state, as everyone who bothers to look at the data knows. In fact the troubled countries have the weakest welfare states in Europe. The ones with the strongest welfare states, Denmark, Sweden, the Netherlands, and Germany, are doing relatively well.

It is also the case that Europe has plenty of money to bail itself out, it just needs the European Central Bank (ECB) to backstop the debt of the troubled economies. But the folks at Fox on 15th Street, where the guiding philosophy is that a dollar in a worker's pocket is a dollar that could be in a rich person's pocket, are so committed to destroying the welfare state that they are prepared to pretend that the ECB does not exist.

The point here is that the problems facing the euro zone today are primarily demand side. If someone from Mars landed in the euro zone with 600 billion euros (roughly 6 percent of GDP) and started spending them all over the place, the main effect would be to increase demand and employment. This would raise tax revenue and reduce transfer payments, alleviating the budget problems facing euro zone countries. 

By contrast, the burden of an excessive welfare state is a supply side story. The generosity of benefits discourages people from working, reducing the supply of labor. In addition, the money dished out by governments in benefits creates excess demand, leading to inflation. This story does not at all describe the euro zone countries at present.

Germany's "Success" and Southern Europe's Failure Print
Wednesday, 16 November 2011 05:48

The NYT had a misleading piece contrasting the success of Germany with the difficulties facing the countries of southern Europe. The problem is not just a question of southern European countries emulating Germany, as the article implies. The problem is that Germany has acted to shut off the adjustment mechanisms that would allow southern Europe to accomplish this task

At the moment, southern Europe is not competitive with Germany, which is the cause of its large trade deficits. If these countries were not in the euro, they would simply devalue their currency. However, the euro rules out this option to restoring competitiveness.

The alternative would be to have a lower inflation rate than Germany. However, because the European Central Bank (ECB) has committed to sustaining an inflation rate of just 2.0 percent in the euro zone as a whole, there is very little that the southern countries can gain by having a lower positive inflation rate. Their only route within the euro to regaining competitiveness is to have a period of deflation. This is incredibly costly in terms of high unemployment and lost output. (Latvia is going this route now and has an unemployment rate in the high teens, after earlier hitting 20 percent.)

The German position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts. This is not just a question of southern Europeans being resentful or jealous, Germany is asking for something that is impossible.

The article also likely misled many readers on Germany's growth, telling readers that it grew 0.5 percent in the third quarter. This number is a quarterly growth rate. It is standard in the United States to express growth as an annual rate. Germany's growth in the third quarter was approximately 2.0 percent at an annual rate. 

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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.