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Credit Rating Agencies That Rated Subprime Junk as Investment Grade Warn U.S. Over Downgrade Print
Thursday, 13 January 2011 08:00

This would have been an appropriate headline for an article about warnings from S&P and Moody's that they might downgrade U.S. debt. These credit agencies rated hundreds of billions of dollars worth of mortgage backed securities that were backed largely by subprime and Alt-A loans as investment grade. Of course they were paid large amounts of money by investment banks for these ratings.

It would be appropriate to provide readers with background information so that they can better assess these sorts of warnings. It also is worth noting that Japan's debt was downgraded by S&P back in 2001 and in 1998 by Moody's. The interest rate on Japan's 10-year Treasury bonds is currently a bit over 1.0 percent. Clearly the downgrading by these credit rating agencies have not had much effect on Japan's ability to borrow.

 
Be Thankful that Illinois Already Had an Income Tax Print
Thursday, 13 January 2011 06:10

Otherwise the NYT would have told readers that the legislature had supported an infinite percentage increase in the state income tax. Telling readers that Illinois increased its income tax by 66 percent provides little information to most readers, since they are not likely to know Illinois's current tax rate. (This does appear lower down in the article for those who read far enough.) Furthermore, "66 percent" invites confusion with 66 percentage points, which would be a devastating tax increase.

As it stands, the increase in the tax rate was 2 percentage points, from 3 percent to 5 percent. It would have been more informative to readers if this information was provided at the top of the article.

 
Paul Krugman on the Euro Crisis Print
Thursday, 13 January 2011 05:43

Paul Krugman does a very good job laying out the issues behind the euro zone crisis in his NYT Magazine piece. There are two additional points that would have been worth noting.

First, there are powerful forces who are working hard to prevent the partial or full Argentinification (partial default or a departure from the euro) of any euro zone country. After all, it does mean that banks and other creditors don't get back all of their money. They will lie, cheat, and steal to try to prevent such a route from even being considered. We know this because of the efforts of the international financial community to punish Argentina when it went the route of Argentinification back in 2002.

The IMF did everything it could to strangle Argentina (it was known internally as the "A" word) including the publication of consistently over-pessimistic growth projections in order to undermine confidence in its economy. Given that many of the same people who were shooting at Argentina in 2002 are still around in positions of responsibility today, it is reasonable to believe that any country that tried to follow the same path would face similar efforts at economic sabotage.

The other important point is that the "revived Europeanism" route that Krugman outlines would essentially be costless right now to the core countries who would ostensibly be financing it. This is the route that would have the European Union and/or European Central Bank provide the funding necessary to get Ireland, Greece, Spain and other peripheral countries through the crisis. 

This route would be largely costless because Europe, like the United States, has huge amounts of excess capacity and idle resources. The ECB could essentially finance the transfers by buying bonds (i.e. printing money) just as the Fed can (and to some extent is) finance the U.S. deficit by buying bonds. While printing money at other times would raise the risk of inflation, this is not the case in the middle of a steep downturn like the current one. Of course a modest increase in the rate of inflation (e.g. 3-4 percent) would be desirable in any case since it would lower real interest rates and reduce real debt burdens.

In the longer term, when the economy does recover, the ECB or the Fed could raise reserve requirements to ensure that the reserves placed into the system in a period of economic crisis do not lead to excessive inflation. This scenario would allow Germany, France and other core countries to bail out Europe's periphery without any burden on their own taxpayers.

 
Steven Pearlstein Needs an Economics Lesson Print
Wednesday, 12 January 2011 06:48

Individuals are generally risk-averse. This is why they buy items like life insurance and health insurance. On average, people pay more for these protections than they get in benefits. This means that they fear bad outcomes (e.g. early death or severe illness) and that they are willing to forgo income to protect against this situation.

The fact that individuals are risk averse explains why state and local governments can benefit by offering workers defined benefit pensions. Since governments generally do not go out of business, they can provide pensions that smooth out fluctuations in the market. This is of great value to individual workers, who do not want to take the risk that the stock market will be down at the point when they retire.

Therefore, state and local governments can offer workers defined benefit pensions that impose little risk, if properly managed. Since the guarantee is of considerable value to workers, it means that these governments will have to pay workers somewhat less than would otherwise be the case. Therefore a defined benefit pension should save state and local governments money. 

Washington Post columnist Steven Pearlstein has apparently never learned this basic economics lesson, hence his diatribe in the paper today.

 
Third Way's Views Are Right Wing, Not Moderate Print
Wednesday, 12 January 2011 06:42
The Washington Post described the group Third Way as "moderate." In fact, the group advocates many positions, such as cutting Social Security and Medicare, that put them well to the right of the bulk of the U.S. public. The group may want to characterize its views as centrist, but this is not accurate.
 
David Leonhardt Wants China to Become More Protectionist Print
Wednesday, 12 January 2011 06:26
NYT columnist David Leonhardt told readers that:

"For the United States, the No. 1 problem with China’s economy is probably intellectual property theft."

Both parts of this assertion are questionable. First, the notion of "intellectual property theft" only exists relative to specific intellectual property laws. China's laws are not the same as those in the United States, so much of the unauthorized use of creative and intellectual work in China may not be in violation of China's laws and therefore is not "theft."

More importantly, the enforcement of U.S.-type patent and copyright protections would lead to much higher prices for items like prescription drugs, computers, and computer software. This would slow growth in China, meaning its imports from the United States would increase less rapidly than if it did not respect U.S.-type patents and copyrights.

The increased outflow from China of payments for royalties and licensing fees would also tend to depress the value of the yuan compared to where it would otherwise be. This means that Chinese manufactured goods would sell for lower prices relative to U.S. manufactured goods. This would be a bad outcome from the standpoint of U.S. manufacturing workers. 

In short, the failure of China to enforce U.S.-type protections for intellectual property may be a problem for people who would benefit from patent fees and royalties from copyrights, it does not follow that the United States as a whole is harmed by China's free market approach.

It is also worth noting that, unlike the removal of protectionist barriers in China, which could lead to large gains for Chinese consumers, the imposition of stronger intellectual property rules will lead to much higher consumer prices. This is important because consumers would be a potential ally in the removal of import tariffs or quotas. They are likely to be strongly opposed to more rigorous protections of patents and copyrights.

 
Problems With China's Consumer Price Index Print
Wednesday, 12 January 2011 06:10

The NYT reported that China's consumer price index (CPI) understates inflation because it includes an outdated set of goods and services. It is worth noting that this has been a reason that many economists have argued that the CPI in the United States overstates inflation.

The prices of new goods and services tend to fall rapidly in the first year or two that they appear on the market (think of CD players or cell phones). If these sharp price declines are not included in a price index then it is likely to overstate the true rate of inflation.

 
NYT Gets Germany's Unemployment Rate Wrong Print
Wednesday, 12 January 2011 05:57

An NYT piece on Germany's growth for 2010 told readers that the country's unemployment rate is 7.2 percent. This is the rate using the German government's measure. However, this measure includes part-time workers who want full-time employment as being unemployed.

The better measure is the OECD harmonized unemployment rate, which uses largely the same methodology as the Labor Department in the United States. This measure shows Germany's unemployment rate at 6.7 percent.

The article also cites a German economist's projection that the German economy grew 0.6 percent in the 4th quarter compared to 0.7 percent in the third quarter. It would have been helpful to annualize these numbers, since GDP is always reported in the United States as an annualized growth rate. The annualized growth rate based on these numbers would be approximately 2.8 percent in the 3rd quarter and 2.4 percent in the 4th quarter.

 

[Thanks to Seth for the correction -- DB]

 
Global Insights and Moody's Analytics Have Been Overly Optimistic About the Housing Market Print
Wednesday, 12 January 2011 05:42

This fact would have been worth mentioning in a USA Today piece that discussed Core Logic's data showing a sharp price decline in November. The piece included projections from Global Insights and Moody's Analytics that house prices would decline by a further 5.0 percent over the course of 2011.

The most recent data show house prices dropping at a rate of close to 1.0 percent a month. Prices in the bottom third of the housing market are falling at 2 or 3 times this rate in several cities according to the Case-Shiller data. This suggests that the plunge is being driven by the end of the first-time buyers tax credit, since the bottom tier would be the portion of the market most affected by the credit.

It is reasonable to think that the rapid price declines in the bottom tier will be a drag on prices in the middle and top tier, since the sellers of bottom tier homes are buyers of higher end homes. This would imply that price declines are more likely to accelerate in the immediate future rather than slow.

 
The Fed Reduces the Deficits Print
Tuesday, 11 January 2011 05:52

The NYT reported on the Federal Reserve Board's payment of $78.4 billion to the Treasury in 2010. The Fed earned this money on the mortgage-backed securities and government bonds that it bought to boost the economy. The payment is equal to almost 40 percent of the net interest paid out by the federal government last year.

The government's budget projections show the Fed's payments to the Treasury shrinking drastically over the next decade. However, it is worth noting this is a policy choice.

The Federal Reserve could buy and hold more debt in the year ahead, thereby alleviating the interest burden on future budgets created by the deficits needed to boost the economy out of recession. To limit the potential inflationary impact of the additional reserves placed in the system the Fed could raise the reserve requirements banks. If the country was having an honest debate on the long-term deficit, in which everything is "on the table," then this would be one of the items on the policy agenda. It is worth noting that banks would not want to see their reserve requirements raised.

 
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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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