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Why Is Europe Less Concerned About U.S. Default Than Asia? Print
Monday, 25 July 2011 04:31

Could it be hidden anti-Americanism from those snotty French? The reason for asking is that Europe's markets were largely flat as NPR was telling listeners that Asia's markets were down sharply on concerns over default. If there is genuine concern among international investors over the likelihood of default, then we should be expecting to see similar reactions among investors in Europe and Asia. If Asian markets fell while European markets remain nearly flat, it would imply that something other than concerns about U.S. default was depressing Asian markets.

Addendum: The Post had the same story, although this was likely written before the opening of European markets.

 
Credit Default Swaps Do Not Insure U.S. Debt Print
Sunday, 24 July 2011 21:21

Suppose an insurer in New York sold insurance against a nuclear bomb being dropped on the city. Is this insurance against nuclear war?

As a practical matter, only a fool would think that this covered his financial bases. If there were actually a nuclear bomb dropped on New York, this New York based insurer would almost certainly be destroyed along with whatever it had insured.

This is the same deal as with credit default swaps on U.S. debt. If it turns out that the United States defaults on its debt (meaning a true default,  where bonds are not paid, not a technical default where there is a brief delay in payment), then it is very questionable whether any financial institution issuing the CDS will be around to pay it off. That is the case not only with U.S.-based financial institutions. Even banks in Europe and Asia would be badly shaken by a default on U.S. debt.

Therefore the NYT is misleading its readers in a chart accompanying this article that presents the price of CDS on U.S. debt as a measure of the price of buying insurance against default. Since this is not real insurance, this can more accurately be viewed as the price of a bet on some sort of default event that could allow someone to get into court with a claim. If a holder of CDS can get through the door on arguing for a claim, the issuer may pay them to just go away.  

 
Steny Hoyer Is Hearing Voices Print
Saturday, 23 July 2011 15:14

That's what the NYT told readers today. It quoted House Minority Whip Steny Hoyer as saying:

"The markets have made clear that a short-term extension is not sufficient and would result in very serious consequences." Actually the markets make their sentiments known through movements in interest rates. And these movements show no evidence whatsoever that the markets would be concerned about a short-term extension of the debt ceiling.

If Mr. Hoyer thinks that the "markets have made clear" that a short-term extension would be unacceptable then he must have some other channel through which he gets information from markets. Reporters should investigate how Mr. Hoyer thinks he comes to know the markets' sentiments.

 
The Post Takes a Strong Stand on the Budget in Front Page Editorial Print
Saturday, 23 July 2011 07:13

In a front page editorial, the Washington Post warned about the "nation's runaway debt," which is projected to rise to near its 1946 level by 2021. At that point the debt will still be less than half as large relative to GDP as Japan's is today. Japan can still sell long-term debt in private financial markets at interest rates of less than 1.5 percent, but the Post obviously feels strongly about this point.

The editorial also insisted the issues that separate President Obama and the Republicans are philosophical in nature telling readers that:

"the speaker concluded that the philosophical gulf between Republicans and the White House could not be bridged."

The view that the differences are philosophical in nature is rather peculiar since none of the main actors in this dispute -- President Obama, Speaker Boehner, Senate Majority Leader Harry Reid or House Minority Leader Nancy Pelosi -- are known for their philosophical writing. All of them got into their positions as a result of being effective politicians. They managed to gain the support of powerful interest groups and used this to achieve high political positions. It is not clear why the Post thinks that they are philosophers.

The Post also referred to "significant changes" to Medicare and Social Security, when it meant cuts. "Changes" is a euphemism that politicians like to use to hide the fact that they want to cut these popular programs. Serious newspapers try to convey information to readers, not assist politicians in concealing their agenda.

The editorial also inaccurately referred to Social Security as one of the "biggest drivers of future borrowing." This is not true. Under the law, Social Security can only spend the money that is in its trust fund and not a penny more. This means that the government can never borrow to pay Social Security benefits, all of the benefits must be paid from revenue raised through designated Social Security taxes or the interest and principle on past tax revenue.

 
Bad Economics at Economix Print
Friday, 22 July 2011 08:13

Princeton economist Uwe Reinhardt gets his economics mixed up in his piece today. He follows Michael Spence and Sandile Hlatshwayo in touting the virtues of the non-tradable sector of the economy at the expense of the tradable sector. However, there is nothing that is inherently non-tradable, it depends on the institutional structure we put in place.

We can make it easy for people in the United States to get our health care from more efficient providers overseas. The same applies to legal work and accounting and all the other areas that supposedly have high value-added and high paying jobs. This is important because Reinhadt is 180 degrees wrong when he describes it as "a problem for the United States" that middle income countries like China, Brazil, and India appear posed to move up the value chain and provide competition for many of these high-paying jobs.

In fact, economists would recognize that the United States can have enormous gains from having these services provided by much lower-paid workers in developing countries, just as the United States as a whole gained by having manufactured goods supplied by lower paid manufacturing workers in the developing world. It is the exact same argument; the only difference is that the beneficiaries of the new path for globalization will be those at the middle and bottom of the wage distribution, not those at the top.

 
Raising the Medicare Eligibility Age to 67 and Cutting Social Security Benefits by 3 Percent Is Not a Big Deal Print
Friday, 22 July 2011 05:21

That is what the Post effectively told readers in a front page article. It told readers:

"If both sides agree, that measure [a short-term agreement on the debt ceiling] could also include some tax and entitlement changes, such as ending breaks for corporate jets, raising the Medicare eligibility age or changing the measure of inflation used to adjust Social Security benefits. However, the largest tax and entitlement changes are likely to be left until next year."

"Entitlement changes" mean cuts to Social Security and Medicare.

The piece also refers to the "soaring" national debt. Serious newspapers reserve such terms for the opinion pages.

 
Global Warming? Print
Friday, 22 July 2011 05:04

Maybe I've missed it, but I haven't seen any discussions in the context of the current heat wave. Of course there is no direct connection between global warming and any specific weather event, but given that there is a well-documented trend of warming over recent decades, the heat wave might be a good time to have a piece or two on the topic.

Put another way, suppose that there was a terrorist attack against U.S. citizens after a Democratic president had decided to close Guantanamo and end practices that raised civil liberties issues. Does anyone doubt that there would major news articles asking whether the president's actions had opened the door for the attack?

 
The NYT is Wrong: Officials Do Not Say That Medicare Is Not Sustainable In Its Current Form Print
Friday, 22 July 2011 04:49

That is what Republicans say. Officials, like the Medicare Trustees, say that the program faces a modest shortfall over its 75-year planning horizon. The projected shortfall is around 0.3 percent of GDP or less than one-fifth of the amount that we increased annual military spending by since September 11th. The projected Medicare shortfall is down by more than 75 percent from when President Obama took office due to the cost controls put in place in the health care reform bill.

In fact, the Congressional Budget Office (CBO) calculates that the Medicare system in its current form is far more efficient than the privatized system advocated by Republicans. CBO's projections imply that switching to a privatized system would add $34 trillion to the cost of buying Medicare equivalent policies over the program's 75-year planning period.

This piece also reports that Senator Coburn of Oklahoma wants to reduce the annual cost of living adjustment (COLA) to Social Security to make it more accurate. It is worth mentioning that Senator Coburn is not interested in having the Bureau of Labor Statistics construct an index that actually measures the cost of living of the elderly so that it could in fact be made more accurate. He is instead insisting that Social Security COLAs be based on an index that is known to show a lower rate of inflation.

 
David Brooks is Worried that the United States Will Lose Its Control Over Jupiter Print
Friday, 22 July 2011 04:16

I didn't see Jupiter mentioned in the piece, but loopy is loopy, so talking about controlling Jupiter or "the end of American economic supremacy" make just about as much sense.

The immediate reference is "doing nothing could lead to default." If the question is default, that would end the supremacy of the U.S. financial industry. The downturn from a default would be very bad news for all of us, but the end of the supremacy of the U.S. financial industry would likely be good news for the rest of us. This would radically reduce the political power of this sector and their ability to steer the government to serve Wall Street's agenda. We could instead pursue economic policies that serve the rest of the economy with the resources consumed by the financial sector redeployed to more productive uses. It wouldn't be surprising that Brooks would confuse the status of the U.S. financial industry with the status of the U.S. economy, but it is an incredibly embarrassing mistake.

If Brooks meant literally that the supremacy of the U.S. economy is at risk, then he is ignorant of data on international comparisons. In absolute numbers, China is virtually certain to soar past the United States long before the end of the decade. It already is ahead of the U.S. in a wide range of measures (including college graduates with science and engineering degrees), and will soon surpass us in most all measures.

Of course China has four times the population as the U.S., so surpassing the United States is inevitable as the country moves higher into the ranks of middle income countries. We can instead ask about per capita measures, but here supremacy has long been in question. The U.S. does enjoy a higher per capita income than most other wealthy countries, but most of this gap is due to working longer hours, not higher productivity. Furthermore, since we have much greater inequality than anywhere in Europe, typical workers do much better in most European countries than the United States. So here also, the "economic supremacy" in the article seems to largely live in Brooks' head.

In short, Brooks thinks it is important that we cut Social Security and Medicare so that he can maintain his illusions of economic supremacy. I suppose that is kind of cute, but it's not very serious policy.  But no one ever said that Brooks was into serious policy.

 
NPR Warns that Not Raising the Debt Ceiling Will Increase Net Exports and Create Jobs Print
Friday, 22 July 2011 04:07

That was the local news spot at the top of the hour on Morning Edition (WAMU). The anchor said ominously that a failure to raise the debt ceiling would lower the value of the dollar. Of course those who know economics all gave a big cheer at that one and immediately sent a note to their representative in Congress urging default (okay, not those of us who live in DC).

Anyhow, the extent of confusion on the dollar in the media is truly incredible. Do you want our goods to be less competitive in international markets? Then you want a higher valued dollar. It's pretty much that simple. Alright, it's not quite that simple. If you have enough political power so that the government largely protects you from foreign competition (e.g. doctors, lawyers, economists) then you might want a high dollar because this will depress the wages of people who work for you. I suppose the concern for the fall in the dollar tells us about NPR's audience here. 

 
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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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