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The Impact of Cuts to the Military Budget Print
Thursday, 01 September 2011 05:00

The Post reported on a speech that General David Petraeus gave at the ceremony marking his retirement from the military. It noted that he warned against excessive cuts in the military. The piece notes that cuts in the range of $400 billion to $1 trillion over the next decade have been suggested by President Obama and members of Congress.

It would have been helpful to put these numbers in context for readers. The current projections show a baseline where the government will spend just under $8 trillion on the military over the next decade. This is approximately 4 percent of GDP and 17.0 percent of the total budget. (This does not count many military related expenditures like veterans benefits.)

If the larger $1 trillion sum was deducted from projected spending, the country would still be spending roughly 3.5 percent of GDP on the military. By contrast, it was spending just 3.0 percent in 2000. At the time, spending was projected to fall relative to the size of the economy. This means that even with the larger cuts mentioned in the article the country would still be spending far more on the military than was envisioned before the September 11th attacks.  

Spain Had Budget Surpluses Prior to the Recession Print
Wednesday, 31 August 2011 04:54

In an article on plans by the Spanish government to pass a constitutional amendment requiring a balanced budget, the Post told readers that:

"annual deficits spiked during the recession."

This statement implies that the country was already running deficits before the recession. In fact, Spain had budget surpluses in the three years prior to the downturn.

Spain's problems have nothing to do with excessive government spending or budget deficits, they stem from the collapse of a huge housing bubble that the European Central Bank (ECB) was too incompetent to notice and/or take steps to rein in. The same ECB officials responsible for this disaster are now dictating terms to the countries that face deficit problems as a result of the collapse of speculative bubbles across Europe and the rest of the world.

The Post and Iowa Assistant Attorney General Patrick Madigan Mislead Readers on Bank Settlement (see addendum) Print
Wednesday, 31 August 2011 04:40

The Post ran an article on efforts to reach a settlement between 50 states suing banks over their mortgage issuance and foreclosure practices. The piece is about dissension among the plaintiffs, most notably New York Attorney General Eric Schneiderman, who is insisting on a stronger settlement that will address a wide range of abuses by the banks.

The piece is told primarily from the standpoint of those pushing for a quick settlement. Without comment it presents the clearly inaccurate assertion from Mr. Madigan in reference to Schneiderman's efforts to pursue a broader range of issues that:

"We don’t want to stop them from doing their investigation, and even if we wanted to, we couldn’t,  ... All states are sovereign.”

This is completely untrue. If there is a settlement, to which New York State is a party, that includes a list of abuses that the banks practiced in prior years, then New York State would be prohibited from taking further action on these issues. It is inconceivable that Mr. Madigan does not know this, so he was deliberately misrepresenting issues in his comment to the Post. The Post's reporters and editors should understand this basic fact as well.


[Addendum: Mr. Madigan notified me that his comment to the Post was in the context of saying that New York state could not be forced to be a party to a settlement that it felt was inappropriate. In this sense, it is true that Iowa's attorney general and the other attorney generals could not prevent NY from taking action on its own. He also said that the attorney generals have focused only on issues related to the servicing mortgages and not other potential legal problems stemming from issuance and securitization of mortgages.]

Post Tells Readers that Super Committee Staff Pick Raises Fears of Spending Cutbacks, Deeper Downturn Print
Wednesday, 31 August 2011 04:25

Actually, the Post (a.k.a. Fox on 15th Street) would never be concerned about such things. However, the first paragraph of an article on the appointment of a staff director to the Super Committee told readers the selection of Mark Prater was:

"buoying hopes that the panel would produce a plan to tame borrowing."

The way that borrowing is "tamed" is either by raising taxes or cutting spending. With prospect for tax increases limited given the current make-up of Congress, most of the story here is likely to be spending cuts. This prospect no doubt buoys the hopes of the Post, as it routinely uses both its editorial and news pages to tell us, but the prospect of cuts to programs like Social Security and Medicare are probably not as encouraging to the rest of the population.

With Detroit Leading the American League Central Division, the Republicans Are Now Demanding Budget Cuts to Pay for Disaster Relief Print
Wednesday, 31 August 2011 03:42

This true statement would have been much better than the sentence in an NYT article on whether disaster relief funding should be offset by other budget cuts that told readers:

"But with the federal debt now more than $14 trillion, the dialogue has shifted on Capitol Hill, and Republicans are under pressure to hold firm on spending."

It's not clear that the size of the debt is in any way requiring Republicans to "hold firm" on spending, apart from their own efforts to press the issue. The economic reality is that the debt is posing no problem whatsoever for the government in its efforts to borrow. Long-term interest rates are at the lowest level since the Great Depression.

Furthermore, the economy is in desperate need of additional stimulus. It would have also been reasonable to point out that the Republican efforts to cut other spending at a time when the economy is already suffering from 9.1 percent unemployment.

COMMERCIAL ANNOUNCEMENT -- "The End of Loser Liberalism: Making Markets Progressive" is now available Print
Monday, 29 August 2011 14:41

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[Addendum: In reponse to some questions posted, we do not store contributor's information. And, the Bichon on the cover is one of my three dogs. The others are an adorable doberman and a lab shepherd mix. All three are shelter dogs.]

Have the Double-Dippers Been Dipping Too Much? Print
Monday, 29 August 2011 07:46

The Commerce Department just released data showing that real consumption spending rose by 0.5 percent in July. This makes it highly unlikely that growth will turn negative in the current quarter. Consumption is 70 percent of GDP and this figure implies a 6.0 percent annual growth rate.

Of course consumption is not really growing that fast, more likely it is increasing at near a 2.0 percent annual rate, but maybe this number will shut up the arithmetic challenged economists who keep talking about a double-dip recession.

The economy's problem is pathetically slow growth. We should be seeing growth of 5-7 percent as the economy rebounds from the worst downturn of the post-war period. Instead, we will be lucky if growth just keep pace with the growth of the labor force, preventing unemployment rate from rising further.

The implication is that tens of millions of people will remain unemployed or underemployed because of the Wall Street sleazes and the incompetent economists who could not see an $8 trillion housing bubble and still don't know a damn thing about the economy. It's a crime that they still have their jobs.

The Canadian Oil Pipeline: Good for 2 Days Worth of Jobs Print
Monday, 29 August 2011 04:32

Robert Samuelson urged President Obama to support the building of an oil pipeline to Canada which would facilitate the import of oil from Canadian oil sands. One of his arguments is that:

"TransCanada, the pipeline’s sponsor, says the project should result in 20,000 construction and manufacturing jobs. Most would be American, because 80 percent of the 1,661-mile pipeline would be in the United States."

If the pipeline's sponsor's job estimate is taken at face value, it implies that the pipeline would create 16,000 jobs in the United States. This would be less than 2 days of job creation at the late 90s' pace of 3 million a year.

Samuelson also trivializes the impact that this oil would have on greenhouse gas emissions, telling readers that:

"When all these “life cycle” emissions — from recovery to combustion — are compared, oil sands’ disadvantage shrinks dramatically. Various studies put it between 5 and 23 percent."

If we use the mid-point of Samuelson's studies, it implies that this Canadian oil would increase greenhouse gas emissions by 14 percent over the use of other types of oil.

The Post Still Gets It Wrong on Consumption and the Housing Bubble Print
Monday, 29 August 2011 03:54

Students in introductory economics classes learn about the housing wealth effect. The basic story is that consumption depends in part on housing wealth. The size of the effect is usually estimated at between 5 to 7 percent, meaning that for every additional dollar of housing wealth annual consumption will increase by between 5-7 cents.

This effect was very important during the years of the housing bubble. The $8 trillion of housing bubble wealth led to a consumption boom that pushed the savings rate to near zero. With the loss of most of this wealth, it was 100 percent predictable that consumption would fall.

This is why it is surprising that the Washington Post had a front page article complaining about weak consumption and the possibility that pessimistic consumers may throw the country back into a recession. While consumers are undoubtedly pessimistic, consumption is actually somewhat higher than would be expected given the loss of wealth. The savings rate is still hovering just above 5 percent, by contrast its post-war average was over 8 percent until it began to be depressed by the stock and housing bubbles in the 90s and 00s.


Source: Bureau of Economic Analysis.

Savings have fallen first and foremost because most of the $8 trillion in housing bubble wealth that was driving consumption has disappeared since the collapse of the bubble. Consumer sentiment, especially about future conditions, is a very poor predictor of consumption. The most obvious explanation for the weakening of consumption in the second quarter was the surge in oil prices which reduced real incomes. With oil prices falling again in the last two months, most economists expect somewhat of an upturn in consumption in the second half of 2011.

It is also important to note that the article is fundamentally confused about debt and its relation to consumption. Consumer debt is an asset for someone else. To a large extent, the debt of consumers is wealth to other consumers. For example, most mortgage debt sits in mortgage backed securities. These securities are owned by institutional investors (e.g. pension funds, university and foundation endowments) and individuals, either directly or through retirement accounts. The debt only affects consumption insofar as the debtor has a greater propensity to consume out of wealth than the creditor. This explains how consumption can still be unusually high, even though the debt to income levels remain unusually high.

Unless another asset bubble again propels consumption by pusing the savings rate to extraordinarily low levels, the factor that will eventually have to lift the economy is an improving trade balance. This is not a matter of speculation, it is an accounting identity. That means it has to be true.

The Post might give better reporting on these issues if it did not rely exclusively on economists who were unable to see the housing bubble.

Does America Need Manufacturing? What Does Mr. Arithmetic Tell Us? Print
Sunday, 28 August 2011 14:36

The NYT devoted a major Sunday magazine piece to this question. It never raised the most fundamental question, if we buy all our manufactured goods from someone else, how are we going to pay for them?

Our goods deficit is currently running at annual rate of around $800 billion or 5.3 percent of GDP. We have a surplus on services of around $170 billion a year, less than 1.2 percent of GDP. If we lost all our manufacturing, then the deficit on goods would increase by about $1.2 trillion to more than 13 percent of GDP.

What services do we think that we will export to make up this gap? We are rapidly losing ground in many areas. For example in software and computer services we are already a big net importer from India. It is hard to see how this gets reversed any time soon. We do earn a lot of patent licensing fees, but these fees will always be vulnerable to a tide of free trade sentiment. Besides, it is very hard to imagine them rising beyond a couple of percent of GDP as a maximum.

One of our biggest surplus areas is tourism. This raises the prospect that the anti-manufacturing crowd thinks that we are too sophisticated to work in factories, but not to clean toilets and make beds. There is nothing wrong with latter (I have done it as a summer job), but it's not what most folks would consider upscale employment.

The bottom line is that unless we think someone is going to hand us trillions of dollars worth of manufactured goods for nothing indefinitely, then there is zero doubt that America needs manufacturing. It also needs people writing on economic issues who know arithmetic.

[Thanks to Hapa for catching the typo.]

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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.