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The IMF Will Wing it for Greece, Just Like They Did for Citigroup Print
Wednesday, 02 November 2011 04:42

The Washington Post is concerned that the referendum in Greece on the austerity plans will make it difficult for the IMF to approve the next tranche of a loan that will be needed for Greece to make a set of debt payments in December. It told readers:

"Papandreou’s announcement could put the IMF in a difficult position. The agency is due to approve the latest disbursement of money to Greece under an earlier loan agreement. But IMF rules allow such disbursements only under programs that are on track."

This certainly will not be a problem for the IMF. Since the beginning of the financial crisis all sorts of rules have been suspended in all sorts of different contexts. For example, when the crisis was at its peak in September of 2008 the FDIC suspended mark to market accounting, allowing banks to keep mortgages on their books at full value even when it was almost certain that they would take large losses on them. Citigroup was given guarantees on $300 billion in assets by the Fed and Treasury at a point where it was not even clear what assets were being guaranteed (i.e. they could after the fact put bad assets into the pool).

If the IMF wants to support Greek debt, which it probably will since a default would likely lead to major bank defaults, then it will have no problem getting around its rules. There is no legal body to which such a move can be contested.

This piece also neglected an important aspect to the decision to hold a referendum. The referendum will likely lead the troika dictating bailout terms (the IMF, the European Central Bank, and the European Union) to make further concessions. Their current plan implies more than a decade of austerity where Greece will not return to its pre-crisis level of per capita income until after 2020, even if the economy grows in line with projections.

(Since Greece's pension system has been one point of contention in the austerity plans designed by the troika, it is worth noting that IMF economists are often able to retire in their early fifties with six-figure pensions.)

Is Politico Giving Out Stock Tips? It Knows What Markets Want Print
Tuesday, 01 November 2011 07:18

People who have the ability to anticipate market movements can make enormous amounts of money running hedge funds and other investment vehicles. Apparently Politico is among the small group of analysts who know what will move markets.

It told readers that:

"If the committee were to take up changes to Social Security, it could show that Congress is looking for systemic changes to the nation’s finances — something markets and credit rating agencies want to see."

While the credit agencies, who are known for rating subprime mortgage backed securities Aaa, have been explicit in their instructions to Congress, it is not clear how Politico could determine the market's sentiments. In recent months bonds prices have soared and interest rate on 10-year Treasury bonds fell as low as 1.7 percent. Is Politico telling us that the bond markets are unhappy about the current budget situation and that interest rates will fall even lower if Congress cuts Social Security?

If that is the claim, it would be interesting to see Politico provide the evidence that is the basis for this assertion. Alternatively, if this is just intuition on the part of the reporters/editors at Politico, it would be important to disclose this fact as well.

NYT Wins Award for Misleading Headline for Article on G.A.O. Report on A.I.G. Bailout Print
Tuesday, 01 November 2011 05:13

The NYT headline told readers:

"G.A.O. Says New York Fed Didn't Cut Deals on A.I.G."

That should have us all reassured. After all, we don't want our government cutting deals when they bail out huge financial institutions.

Actually, the story says pretty much the opposite. The story tells how the Government Accountability Office (G.A.O.) found that the New York Fed made little effort to try to force banks to make concessions after it took control of A.I.G.

The point is that A.I.G. was effectively bankrupt and unable to pay all of its debts. In such circumstances it would have been reasonable for the New York Fed to insist that the creditors, in this case large banks like Goldman Sachs, accept some losses. These banks should understand that they take risks when dealing with financial institutions that are in questionable financial shape and should suffer some loss when they make a bad bet. However the government bailout of A.I.G. ensured that they suffered no consequences from their mistake. 

David Brooks Complains That He Can't Get Access to Inequality Data Print
Tuesday, 01 November 2011 04:34

Actually he didn't complain about his lack of access to data, but he probably should have given the column he wrote today. Brooks purports to lecture the Occupy Wall Street crew about how they are focused on the wrong inequality.

He tells them that that there are two inequalities in the U.S. On the one hand we have the CEOs, the Goldman Sachs crew, the lobbyists and the other members of the one percent who have done incredibly well in the last three decades. Brooks calls this the "blue inequality" since the really rich crew tends to live in places like New York City and Washington, DC that tend to vote Democratic.

Brooks tells us that this is less of a big deal than the red inequality, which he defines as the gap between college educated workers and those without a college degree. He tells us that this is the more important form of inequality. He tells us that this is a much bigger issue, since it affects so many more people.

This is where Brooks lack of access to data is so important. The wage gap between college grads and non-college grads is really a 90s story and even more an 80s story. In the last decade, workers with only a college degree (i.e. no professional or advanced degree) did not share in the benefits of economic growth. The ratio of the wages of those with just college degrees to those without college degrees has not risen much since the early 90s. 

Wages of non-college educated workers did suffer badly in the 80s due to policies such as the over-valuation of the dollar that made many U.S. manufactured goods uncompetitive internationally, the deliberate increase in unemployment during the Volcker years which threw millions of non-college educated workers out of work, and anti-union measures (e.g. the firing of the PATCO strikers and an anti-union National Labor Relations Board). However since the 90s, the wages of workers with high school degrees have not departed much from the wages of workers with just college degrees, the vast majority of the economy's gains have gone to the top 1 percent. It is too bad that David Brooks apparently does not have access to this data.

Bloomberg Turns Class War Into Generational War Print
Monday, 31 October 2011 15:01

The basic economic facts of the last three decades are smashing down around us like a ton of bricks. The bulk of the gains from economic growth have gone to the richest 10 percent and especially the richest 1 percent. The bottom 90 percent of the population has seen little benefit from three decades in which output per worker hour nearly doubled.

So how does Bloomberg News deal with this situation? It warns us of "generational war." It tells us that Social Security and Medicare benefits for seniors will be pitted against "investment in children, education, infrastructure and other programs."

In this context it is important to remember that it is only possible to pit seniors against children if higher taxes on the wealthy or on Wall Street are ruled out of consideration, as Bloomberg News seems to have done. It is also necessary to rule out major cuts in the defense budget, which Bloomberg News also seems to have done. If military spending were lowered to its pre-September 11th share of GDP, we would save more than $2.5 trillion over the next decade.

To pit the young against the old it is also necessary to rule out large cuts in government payments to the pharmaceutical industry. The government is projected to spend close to $1.5 trillion on prescription drugs in the next decade that would sell for around $150 billion in a free market without government granted patent monopolies. It is also necessary to rule out freer trade in medical services that would allow people in the United States to take advantage of the more efficient health care systems elsewhere in the world. If we paid the same amount per person for our health care as did people in any other wealthy country we would be looking at huge budget surpluses in the long-term, not deficits.

It is also necessary to rule out stimulative measures, like a more expansionary Fed policy and a lower valued dollar that would make U.S. goods more competitive in the world economy. These measures would have the effect of increasing employment, improving income distribution, and also alleviating the budget deficit that the Bloomberg News folks and their selected sources are so worried about.

In other words, if Bloomberg News only allows people into the debate who exclude any other possible option to address the budget shortfall other than cutting programs for the elderly or cutting programs that benefit children (apart from a brief comment from Representative Jan Schakowsky, who suggested taxing the rich) then it is possible to make the current budget situation into a generational war. However, this is political engineering on the part of Bloomberg News, it does not reflect the reality of the situation. And it hides the most obvious conflict in the economy today, the policies that have promoted the massive upward redistribution of the last three decades.

Will a Business With Profits of $1.1 Million Be Devastated by Another $5,000 in Taxes? Print
Monday, 31 October 2011 05:10

Apparently they would be, if we listen to the people interviewed in an NYT piece about the impact of a surtax on incomes above $1 million proposed by President Obama. The NYT interviewed people who own small businesses that occasionally have earnings that would put them over this $1 million cutoff.

It would have been helpful if the article had reminded readers that the tax is a marginal tax so that if a business owner crosses the $1 million threshold they would only pay the tax on the income above the threshold. For businesses that just slip into this category, the additional tax burden would be trivial. It is implausible that it would have a noticeable effect on their business, even though business owners are not likely to be happy about paying the tax.

Robert Samuelson Doesn't Think We Can Cut the Military Budget Print
Monday, 31 October 2011 04:50
Robert Samuelson told Washington Post readers that we cannot have large cuts in the military budget without jeopardizing the country's security. He seems to have forgotten the country spent 3.0 percent of GDP on the military in 2000 and was projected to continue to spend at that level or less. If the country were to return military spending to this level it would save more than $2.6 trillion over the next decade, before counting interest savings.
The Post Pushes More Demographic Fears Print
Monday, 31 October 2011 04:03

The Washington Post seems obsessed with pushing stories that old people will bankrupt the world. It had another front page article today warning that aging populations threaten disaster.

Among the lines in the article we are told that:

"China (1.5) is racing to get rich before it becomes old." [The "1.5" refers to the birth rate per woman.]

It is difficult to see much of a race. China's rate of annual productivity growth has been close to 8 percent over the last three decades. This means that output per worker has increased roughly tenfold over this period. If the ratio of workers to retirees falls from 6 to 1 to 2 to 1 over this period (a much larger decline than we will actually see), and retirees consume 75 percent as much as active workers, this rate of productivity growth would be sufficient to allow the income of both workers and retirees to rise more than eightfold. 

The other presumed demographic crises have the same nature. Even modest rates of productivity growth can easily offset the impact of aging in raising the ratio of older dependents to workers.  With 2 percent annual productivity growth (roughly the rate in the U.S. over the last two decades) output per worker would double over 35 years. If the ratio of workers to retirees fell from 3 to 1 to 2 to 1 over this period, both workers and retirees could enjoy an 80 percent increase in living standards. (This discussion ignores the fact that the ratio of younger dependents [children] to workers has fallen sharply in countries with declining populations. It also ignores ways in which declining population may improve living standards that are not picked up in standard measures of living standards such as less crowded transportation systems and less pollution.)

Is Keynesian Economics Prohibited In NYT Discussions of the ECB? Print
Sunday, 30 October 2011 09:55

The NYT had a discussion of the Mario Draghi and the situation he faces as he prepares to take over as head of the European Central Bank (ECB). The piece does not even mention the argument that the ECB is creating a downward spiral in euro zone economies by requiring deficit reductions, which have the effect of slowing growth, which thereby causes countries to miss deficit targets. It then demands more stringent cuts.

This is the logic that led to a second recession in the United States in 1937. If Draghi maintains the path pursued by his predecessor, then the euro zone economies face a real risk of a second recession and quite possibly the collapse of the euro. It is remarkable that this issue is not addressed in this piece.

Pearlstein on the Economic Policy Institute's 25th Anniversary Print
Sunday, 30 October 2011 09:37
Okay, this is a bit indulgent, but Washington Post columnist Steve Pearlstein did a piece (unfortunately buried in the business section) on the 25th anniversary of the Economic Policy Institute. I and several other CEPRites are EPI alums. The piece is worth reading not just for its praises of EPI but for a bit of recent Washington policy wonk history.
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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.