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Rewriting the History of the Stimulus Print
Tuesday, 19 July 2011 07:05

Ezra Klein recounted the record of President Obama's stimulus with the help of two of his top economic advisers at the time, Larry Summers and Christine Romer. Romer commented that she failed to recognize that they would only have one shot at stimulus, therefore they had to get as much as possible in their first package.

While this turned out to be true, a main reason was the way the Obama administration sold the stimulus. They used a set of economic projections that were hugely overly-optimistic. Their baseline had the unemployment rate just reaching 9.0 percent in the absence of stimulus.

The fact that the projections were overly optimistic was already quite evident at the point the stimulus was signed in late February. In addition, both Romer and Summers knew that the package they got was grossly inadequate even for the economic path they had projected.

However rather than trying to lay out a path in which more stimulus was possible, President Obama began touting the "green shoots of recovery" and talking about the need to deal with the deficit. It was President Obama's course, presumably carried through on the advice of his Keynesian advisers, that made any further stimulus impossible.

The Non-Existent Fiscal Commission Report Reappears in a Washington Post Column Print
Tuesday, 19 July 2011 05:20
The Post obviously finds it hard to get good help. That must be why it had to use a column by a person, Norman Ornstein, who didn't know that the Simpson-Bowles commission never issued a report. Ornstein is referring to the report of the co-chairs, Bowles and Simpson. This report never got the support from the necessary majority of the commission. This is an example of the sort of skills mis-match that economists refer to as "structural unemployment," where workers do not have the skills necessary for the jobs that are available.
Can Someone Explain to the NYT the Difference Between Counterfeits and Unauthorized Copies? Print
Tuesday, 19 July 2011 05:00

This is really getting painful. The NYT has an article reporting that many Chinese consumers were outraged when they discovered that the expensive DaVinci furniture they had purchased was actually produced at "a ramshackle factory in southern China."

It then tells readers:

"Maybe more significant, the scandal indicates that even in China — where consumers have long been willing to turn a blind eye to pirated DVDs and Gucci knockoffs — there are boundaries that no counterfeiter should breach. Not if the fakes are priced as high as the real thing."

There is a very simple point here that the paper is missing. When people buy unauthorized copies that sell for a fraction of the brand version, they know that they are not getting the brand version. The deal if beneficial to both the seller and the buyer. This is why it is very difficult for the government to crack down on sales of unauthorized copies of merchandise. Both parties to the deal are happy with it.

On the other hand, a counterfeit involves deceiving the buyer, as seems to be the case with the sale of DaVinci furniture. People thought that they were getting something that they did not in fact get. In this case, the consumer is an ally, since the consumer has been ripped by the counterfeiter.

The distinction between sales of unauthorized copies and counterfeiting is very clear and very fundamental. The NYT should be able to get it right.

Do an Increasing Number of Greeks Really Regard Workers Getting $2,000 a Month as a "Special Caste?" Print
Tuesday, 19 July 2011 04:52

That's what the NYT tells us. It has a piece this morning on the union representing the workers at Greece's public electric utility. At one point it reports that:

"an increasing number of Greeks regard the power company workers in particular as an overpaid, overprotected caste. According to Mr. Fotopoulos, Genop’s 21,000 members are paid an average net salary of $1,980 a month and its 35,000 retirees an average net pension of $2,122 a month — much higher than the Greek average."

The monthly pay for caste members would be less than an hour's pay for high earners in the financial sector. It would be quite interesting if Greek politics had gotten to the point where most people had more resentment toward workers earning $1,980 in a month than the people who earn this amount in an hour.

The NYT Misrepresents Public Attitudes Toward Social Security and Medicare Print
Tuesday, 19 July 2011 04:41

The NYT seriously misrepresented public attitudes toward Social Security and Medicare. It referred to Social Security and Medicare as:

"entitlement programs that represent core values to many liberal voters."

Actually polls routinely show that overwhelming majorities of voters across the political spectrum support Social Security and Medicare. It is not just liberals who care about this program. This is why politicians who want to cut these programs need cover from their political opponents. If they just said they wanted to cut Social Security and Medicare, they would quickly be voted out of office.

Brooks Left Himself Off the List of Budget Deal Villains Print
Tuesday, 19 July 2011 04:19

Surely it was an oversight. In his column today, David Brooks lists all the various groups on the Republican side who made it difficult, if not impossible, to work out a deal with President Obama for large cuts to Social Security, Medicare, and other government programs. For some reason he forgot to include people like himself, ostensible moderates who routinely mislead the public about the budget.

As every budget expert knows, the large budget deficits we currently face are not the result of out of control spending, but rather the downturn caused by the collapse of the housing bubble. If the deficit were smaller right now, we would be seeing lower output and higher unemployment. Nonetheless, Brooks has been happy to contribute to the notion that spending and deficits are out of control.

Every budget expert also knows that the long-term story of exploding deficits is first and foremost a story of runaway private sector health care costs. The problem is not "entitlements." If we paid the same amount per person for our health care as people in other wealthy countries then we would be looking at budget surpluses in the long-term, not deficits. However, Brooks would rather blame entitlements in his columns, helping to convince readers that the problem is demographics.

Brooks also fundamentally misrepresents public sentiment. In today's column he tells readers:

"Opinion polls showed that voters are eager to reduce the federal debt, and they want to do it mostly but not entirely through spending cuts."

This is not really true. Opinion polls show that most voters, including most Republicans, do not want to see Social Security and Medicare cut. They also do not want to see many other large areas of spending, like unemployment insurance, or infrastructure spending, cut.

The public has been convinced by people like David Brooks that there are vast amounts of government money being spent on things like John McCain's Woodstock Museum. The polls indicate that they would like to see these items cut. However, all the arguably wasteful spending items in this category only amount to a small fraction of the budget. Eliminating them will not have a notable impact on the deficit.

NYT Runs Confused Editorial on China and U.S. Debt in Its News Section Print
Monday, 18 July 2011 19:27

The NYT decided that it did not like the efforts of the government to sustain demand and used a news story to describe this policy as "America’s own fiscally dubious habits." While one can argue with the NYT's view that it would be better for the United States to have slower growth and higher unemployment than run a deficit, the more fundamental issue is that such comments are usually reserved for editorial pages.

This is not the only peculiar item in this piece. The article tells readers that China is concerned about losing money on its dollar holdings. This is difficult to believe since it is almost inconceivable that China's government did not expect to lose money on these holdings. There are no other buyers who will be willing to hold dollars at the price that China paid and in fact the dollar already has declined substantially since its peak at the start of the last decade.

Presumably China's government did not mind losing money on its dollar holdings, seeing this loss as the necessary price of maintaining its export market in the United States. In effect, China's government was paying people in the United States to buy its stuff.

The article also includes this bizarre paragraph:

"Most of those reserves are held in dollars, and recycled back to the United States through investments in Treasury bonds and other dollar-denominated securities — even stocks. And while some of China’s foreign exchange reserves are plowed into European and Japanese debt, those bond markets are not big or liquid enough to absorb the bulk of China’s ever-larger foreign holdings."

China is under no obligation to accumulate foreign exchange holdings. It can allow Chinese corporations and citizens to simply sell their foreign exchange holdings on international currency markets. China has accumulated foreign exchange holdings only because it made a conscious decision to accumulate these holdings. This is part of its effort to keep down the value of its currency to sustain its exports. 

Robert Samuelson Wants Us to Follow the Example of a Country With 7 Years of Double-Digit Unemployment Print
Monday, 18 July 2011 05:23
Yes, I am serious. In his column today Samuelson holds up Latvia as the model for the United States to follow. The unemployment rate in Latvia is currently close to 20 percent. According to the latest projections from the IMF, it is still projected to be double-digits by 2016, the end of its projection period. Its 2016 GDP is projected to be 1.5 percent below its 2007 level. If this is a model for success, it's interesting to think of what Samuelson would view as a failure.
Tell Larry Summers, We Can Keep Banks Alive With Conditions Print
Monday, 18 July 2011 05:08

Larry Summers wants Post readers to believe that the policy choices are either letting banks fail like Lehman, and setting off a financial earthquake, or keeping them alive through government bailouts. Actually, there is a third option. Governments can keep the banks alive but tell them that their world will end.

The principle here is so simple that even one of the world's top economists should be able to understand it. Insolvent banks are kept alive by government welfare. Just as the government sets all sorts of conditions for getting monthly welfare checks (which average around $500), it can impose conditions on the banks that are on life support. This can mean giving large capital stakes to the government, voluntary haircuts for creditors (voluntary in the sense that they will get next to nothing if it goes bankrupt), and really really big paycuts for bank executives. This means no more multi-million dollar paychecks.

Congress pretended to impose some of these restrictions with the TARP, but everyone except Washington Post reporters knew at the time that the restrictions were a joke. The story as Summers and the Wall Street boys tell it is that we have no choice but to give the financial industry all of our money. This is not true.

Budget Reporting at the Post: Trees Die for Nothing Print
Monday, 18 July 2011 04:49

Pointless death is always tragic. The Post's budget reporting is a great tragedy for trees everywhere. Today it tells readers about plans to consider a balanced budget amendment to the constitution in Congress. It would have been useful to tell readers something about this amendment, which does not just require a balanced budget. It also restricts spending to 18 percent of GDP, requiring a super-majority of both houses of Congress to exceed this level of spending. This implies a reduction in spending of more than 10 percent going forward (compared with its average over the last decade), even as health care costs and the aging of the population are pushing up spending on programs like Medicare, Medicaid, and Social Security. It would have been useful if the Post had pointed this fact out to readers.

Later the article refers to a proposal by Oklahoma Senator Tom Coburn to cut $9 trillion from the deficit over the next decade. It would have been useful to tell readers that this is approximately equal to 20 percent of projected spending or 4.4 percent of projected GDP over the decade. Few readers are able to assess the meaning of $9 trillion over a decade without some context.

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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.