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China Threatens to Raise the Value of the Yuan Print
Thursday, 14 July 2011 04:39

Yes, the United States has officially been asking (demanding?, begging?) China to raise the value of its currency against the dollar. Yet, the media continually threaten the country with the story that China may sour on the U.S. and stop buying U.S. debt if we don't get our budget deficit down.

However, if China stopped buying U.S. debt it would lead to a rise of the yuan against the dollar. This is exactly what the Obama administration has ostensibly been asking them to do.

In other words, China has no leverage in this picture. Their implicit threat is to do exactly what we supposedly want them to do. So why is the media trying to scare us?

 
Kristof Perpetuates the Clinton Budget Myth Print
Thursday, 14 July 2011 04:26

Nicholas Kristof is mostly on the mark in his column this morning, but he does repeat the Clinton fiscal responsibility balanced the budget myth. This is not true.

An examination of the Congressional Budget Office's (CBO) projections from the 1990s shows that in 1996 CBO still projected a deficit of 2.7 percent of GDP for fiscal year 2000. Instead, we had a surplus of 2.4 percent of GDP, a shift of 5.1 percentage points of GDP (@$750 billion in today's economy).

This shift did not come about from tax increases or spending cuts. CBO estimates that the tax and spending changes between 1996 and 2000 added $10 billion to the year 2000 deficit. The shift was entirely attributable to faster than expected economic growth and especially the decision by Federal Reserve Board chairman to allow the unemployment rate to fall to 4.0 percent.

CBO had projected an unemployment rate of 6.0 percent for 2000. This was the conventional estimate of the NAIRU (non-accelerating inflation rate of unemployment) at the time. It was only because Greenspan ignored this nearly universally held view in the economics profession (and the Clinton appointees to the Fed) that the economy was able to grow enough to get the unemployment rate down to 4.0 percent and to bring the budget from deficit to surplus.

This is an important piece of history that is routinely buried.

 
Post Does a Nice Job on Social Security and the Debt Ceiling Print
Thursday, 14 July 2011 04:12
Glenn Kessler, the Post's Fact Checker, did a nice job trying to pin down the law on whether Social Security benefits can still be paid once we have hit the debt ceiling. This is a tough one because payment of benefits would draw down the trust fund, which is part of the $14.3 trillion debt, dollar for dollar. This means that they would not add to the debt and push the government over the ceiling. Still, it is not entirely clear that the payments would be kosher.
 
It's Supposed to be Funny, but Do We Really Need to Bring China Into the Debt Ceiling Clown Show? Print
Wednesday, 13 July 2011 16:25

That's what folks should be asking Jon Stewart. The United States as a country owes China money because it has a trade deficit. The trade deficit means that United States would be borrowing from China even if it had a balanced budget, as for example was the case in 1999 and 2000. The fact that China happens to hold a lot of Treasury bonds simply is the result of what U.S. assets they choose to hold. They could, and do, also buy private bonds, stock and other assets.

Of course the trade deficit is high due to the over-valued dollar. This in turn is partly the result of the fact that China and other countries have a policy of keeping the dollar high by buying up assets like U.S. Treasury bonds.

All of this may be way too much depth for a comedy show, but how about leaving China out of the story? We have a lot of China bashers in this country. There are reasons to object to many of China's policies (I certainly do), but do we need to throw China into the picture gratuitously? After all, John Boehner, Eric Cantor, and Barack Obama would seem to provide plenty of comedic material.

 
The All-Knowing Washington Post Tells Readers What the Budget Deal Will Include Print
Wednesday, 13 July 2011 15:46

We no longer have to wait to see how the battle over the debt ceiling will turn out, the Washington Post already told us:

"No matter what the outlines are for a final agreement to lift the debt ceiling, the deal will include cuts to some of the nation’s major entitlement programs: Medicare, Medicaid and Social Security."

There you have it, right there in the first sentence of a Washington Post article.

This piece also told readers in the context of a discussion of lowering the Social Security cost of living adjustment:

"experts have long argued that the formula [the current consumer price index] overstates inflation because it does not take into account changes in consumer behavior in response to rising prices."

While some experts have argued this point, other experts have noted that research from the Bureau of Labor Statistics (BLS) showing that consumption patterns among the elderly are substantially different from the consumption patterns of the rest of the population. These experts have suggested that if the concern is making the cost of living adjustment more accurate (as opposed to just cutting it), Congress could just instruct BLS to construct a cost of living index that was based on the consumption patterns of Social Security beneficiaries.

Such an index may show a rate of inflation that is higher or lower than the current index. It would be impossible to know for sure without first doing the research. However, there is no doubt that such an index would be more accurate than the current one for measuring changes in the cost of living of the elderly.

 
The Trade Deficit Jumps While the Politicians Play Debt Ceiling Poker Print
Wednesday, 13 July 2011 15:15

The Commerce Department reported that the trade deficit jumped in May to $50.2 billion from $43.6 billion in April. The monthly data are erratic, but this is definitely bad news. This means that growth in the U.S. economy is likely to be very weak in the second quarter. (Measured in constant dollars, the deficit increased by $3.9 billion.) It does not look like trade is about to become a major driver of growth and jobs.

This is also bad news for fans of income accounting. If we have a trade deficit, then national savings must be negative. That means either or both negative private savings or negative public savings (e.g. budget deficits). That's the rules -- there is no way around this one.

But this one didn't get much attention in the media. I couldn't find the NYT piece on the deficit. The Post had a piece on the May trade numbers, but it worked hard to get us the good news:

"But rising imports aren’t necessarily bad, because they can indicate the overall direction of demand for goods and services. Some analysts see crude oil, which accounted for more than two-thirds of May’s increase in imports, as a positive read for the economy.

'It indicates demand is stronger,' said Linda Duessel, equity market strategist at Federated Investors in Pittsburgh. 'That’s a good thing here in the U.S.'"

Actually, most of the increase in oil imports came about as the result of higher oil prices, not the need for more oil to fuel the economy. While the volume of oil imports in May was down from its April level, it is more than 9 percent below the average for the first quarter of the year.

 
Italy's Crisis: The ECB Could Just Print the Money Print
Wednesday, 13 July 2011 05:21

It would have been worth reminding readers that the debt crisis in Italy and other euro zone countries is first and foremost a political crisis. The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.

If there is a risk of default it is because the ECB has decided to make an obsession out of its 2 percent inflation target. This shows that numerology can be a very dangerous religion when it is held by central bankers.

 
Let's See, If President Obama Commits To Making Large Cuts in Future Budgets Then He Will Have Lots of Money to Spend in the Future Print
Wednesday, 13 July 2011 05:11
That seems to be Ruth Marcus's argument in her column today. The point is that he needs money for his education and infrastructure agenda, but he will only get this money if he commits to make large cuts, including in areas like education and infrastructure. Okay, no one expects the Washington Post to make much sense, but does anyone have any idea what she is talking about?
 
Republicans Claim That They View Restrictions on Light Bulbs as an Excess of Big Government, NPR Doesn't Have a Clue What They Believe Print
Wednesday, 13 July 2011 04:54

Politicians sometimes say things that they don't believe. Reporters really should know this. That is why NPR seriously misinformed listeners when it told them that Republicans oppose regulations on incandescent light bulbs intended to reduce energy use because they believe it is an excess of big government.

This is their claimed motivation. They may be opposing this regulation for entirely different reasons. For example, they may not care at all about the future of the planet, they may have gotten campaign contributions from companies who will see their profits reduced by these regulations or they may just want to oppose anything that President Obama supports. However the main point is that NPR does not know the motives of these politicians and it should not imply that it does.

 
Morning Edition Spreads Nonsense on Investment and Innovation Print
Wednesday, 13 July 2011 04:15

Morning Edition spread a bit of nonsense this morning in a segment on innovation. It told listeners that firms are not investing much right now, which it attributed to uncertainty. It's not clear what metric it is using, but investment in equipment and software as a share of GDP is almost back to its pre-recession peak. Given that many sectors on the economy are still operating far below full capacity, this is a fairly high level of investment.

equip_and_software_11894_image001

Source: Bureau of Economic Analysis.

The segment also included the unsupported assertion that Americans used to be the most innovative people in the world, but this is no longer true. It does not give its measure of innovation. The United States trailed most other wealthy countries in productivity growth in the years prior to 1995. Since then, productivity growth has been somewhat more rapid in the U.S. than in other countries, but this reverses the pattern identified in the story. Other countries have more small businesses and self-employed people relative to the size of their workforce, at least in part because they have national health insurance. (Entrepreneurs know that they will still have health care even if their business fails.) It is not clear what measure produces the pattern of innovation described in the segment.

 
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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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