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Beat Up Your Favorite News Reporter, What Would It Mean for the U.S. to be Unable to Pay Its Debt? Print
Tuesday, 02 August 2011 04:33

Okay boys and girls, this stuff about a credit downgrade has gone far enough. We know that all the important people in Washington and on Wall Street are warning us about the possibility that the credit rating agencies will downgrade the U.S. government if we don't reduce the debt to their standards. But what could this possibly mean?

The U.S. debt is denominated in dollars. The government issues dollars. Do Moody's and Standard and Poor's think that there will be some point in the future where the government will not be able to issue dollars?

Let's say this so that even a reporter with an elite news outlet can understand it. Suppose I issue IOUs that are payable in Dean Baker IOUs. What is the likelihood that I will ever default on my IOUs?

That's right, unless I lose the ability to write, the probability is zero. There is a possibility that at some point that Dean Baker IOUs will lose some of their value (i.e. inflation) because I have issued so many of them. However the credit rating agencies are not in the business of making inflation predictions. They certainly don't have any obvious expertise in this area.

Furthermore, if a debt downgrade for the U.S. is simply a forecast for higher inflation, then the debt downgrade must apply to every debt issue denominated in dollars. In other words, if U.S. debt loses 30 percent of its value because of higher than expected inflation, then so will dollar denominated debt issued by General Electric, AT&T, or the government of Israel.

In other words, if the concern really is higher inflation, then the credit rating agencies must be considering downgrading all debt denominated in dollars. But, they have not threatened every issuer of dollar denominated debt with a credit downgrade, so this must not be what they mean.

So, what does the threat of a credit downgrade mean? The reporters should be asking this question and giving us the answer. This is their job.

Did President Obama Want to Give the Kidnappers Hostages? Print
Tuesday, 02 August 2011 03:59

Joe Noccera and Paul Krugman both see President Obama as having been taken for a ride by a Tea Party gang who were prepared to blow up the house if they didn't get their way. This is one possibility, but there is another way to interpret recent events.

President Obama had other options all along the way. As Krugman notes, he could have insisted last December that the debt ceiling was part of the deal to extend the Bush tax cuts. After all, contrary to what his National Economic Adviser seems to think, the Democrats did still control Congress at the time.

In the context of the debt ceiling being hit, he could have taken the 14th amendment route that a substantial number of legal scholars believe to be kosher. It probably passes the laugh test better than the non-war in Libya. He was prepared to challenge Congress for the latter, why not the former?

He could have also tried the stand tough approach. As we know, in the meltdown scenario Wall Street is on the front line. The J.P. Morgan-Goldman Sachs gang would be pretty damn furious at the Republicans if they actually put them out of business. It's very hard to believe that Boehner and company don't buckle in this scenario.

Finally, the whole debate has hugely misrepresented the Tea Party. Poll after poll shows that they are not really against what government does. In fact, they are huge supporters of Social Security and Medicare and other programs that support the middle class. And, after we pull out the military, this is in fact the vast majority of the government.

The Tea Party is against some nonsense notion of massive government waste that does not exist. Like President Reagan, they want to eliminate the Department of Waste, Fraud, and Abuse.

President Obama could have insisted that he would protect the core middle class programs that enjoy support across the political spectrum. And he could have said that the Republicans want to gut them.

Instead, he contributed to the nonsense. He made up a false story about the origins of the deficit, wrongly telling the country that the huge deficit came about from the Bush tax cuts, the cost of the wars, and the Medicare drug benefit. This implied that we had large deficits before the downturn, that large deficits were a chronic problem.

In fact, the numbers are clear as day and it's impossible to believe that President Obama and his advisers do not know them. The large deficits of the past few years came about because of the collapse of the housing bubble, end of story. 

So we can believe that President Obama is just a really bad poker player, as Paul Krugman suggests, or we can believe that he is getting what he wants. I report, you decide.

Does the President's National Economic Adviser Not Know That Democrats Controlled Congress Last December? Print
Monday, 01 August 2011 10:23

He didn't seem to in his comments on CNN this morning. Gene Sperling, the head of President Obama's National Economic Council, explained the failure of President Obama to get a deal on the debt ceiling last December as being a problem of divided government. 

Actually, Democrats fully controlled both houses of Congress by large majorities at that time. It is possible that Republicans may have filibustered a debt ceiling deal in the Senate, but it is just wrong to say that we had divided government.

Reporters may want to ask Mr. Sperling if he was aware of the congressional line-up last December. It is probably more important to the country than getting to the bottom of Representative Weiner's twitter underwear pictures.

The Impact of the Budget Deal for Those Who Don't Carry Around the Budget in Their Pocket Print
Monday, 01 August 2011 04:22

Many readers of the NYT and Post may not have a good sense of how much $2.4 trillion in cuts over the next decade is. Unfortunately, the major news outlets do not consider it their responsibility to tell us.

The government is projected to spend $46 trillion over the next 10 years. This means that the proposed cuts are a bit more than 5 percent of projected spending. However, large categories of the budget are protected. More than $27 trillion of projected spending goes to Social Security, Medicare, Medicaid and interest. If these areas escape largely untouched, the projected cuts would be around 13 percent of the remaining portion of the budget.

In fact, since some other areas of the budget, like unemployment insurance, are also likely to be largely protected, the cuts to the remaining portion of the budget will be even larger.

The government is projected to spend $7.8 trillion on the military over the next decade. If this area is largely protected, then most of the cuts would likely come from the $6.7 trillion of spending on the domestic discretionary portion of the budget. This is the portion that includes spending on infrastructure, education, research, and other areas that are considered investment.

Another Front Page Editorial at the Washington Post Print
Monday, 01 August 2011 03:58

The budget deal has them really excited at Fox on 15th. It told readers:

"At several points, Obama and Boehner held out hope they could agree on a far-reaching bipartisan plan to tame the soaring national debt once and for all by raising taxes and cutting health and retirement spending. But House Republicans repeatedly walked away from the bargaining table, refusing to raise taxes. In the end, policymakers were left with a far more modest achievement that does little more than resolve the immediate crisis."

Wow, maybe the Washington Post could share with us the mechanism for taming "the soaring nation debt once and for all." The reason the debt is soaring (serious newspapers reserve such terms for the opinion pages) is that incompetent economists allowed an $8 trillion housing bubble to grow out of control so that when it crashed it wrecked the economy. Does the Post know a mechanism that will require that the Fed and Treasury are staffed by competent people? Its readers would love to hear about it.

Gretchen Morgenson Is Right: Bankers Have No Shame Print
Sunday, 31 July 2011 21:22

Following the collapse of the housing bubble and the resulting financial meltdown, there was widespread agreement that securitzers should be forced to keep "skin in the game," meaning a stake in the mortgages they issued. Dodd-Frank included a requirement to this effect.

While many were arguing for a 10 or even 20 percent stake, the rules that came out from regulators is that they have to keep just 5 percent. Furthermore, the regulators exempted traditional 20-percent-down mortgages that have low risk of the fault. Banks need keep no skin in the game on those.

Naturally the banks are acting like this 5 percent stake will be the end of the world. They are yelling that this will exclude large numbers of people from the market. If bankers could do arithmetic (the evidence suggests otherwise), then they would know that this claim is absurd on its face.

The bank will still be getting a return on the 5 percent stake. They will just get a slightly lower return than if they could sell it. Let's assume that the return on this 5 percent stake is 40 basis points less than if they could sell it. That comes to 2 basis points or 0.02 percentage points for the mortgage as a whole. Is this going to result in large numbers of people being frozen out of the housing market?

Give me a break, this is garbage and Gretchen Morgensen was right to call them on it.

With All the Excitement Around the Pending Debt Ceiling Deal Fox on 15th (a.k.a. the Washington Post) Gives Up All Pretext of Objectivity Print
Sunday, 31 July 2011 16:44

The prospect of cutting Social Security and Medicare benefits really excites the folks who put out the Washington Post. That's why the paper, which completely missed the record share of corporate profits in GDP reported by the Commerce Department on Friday, referred to the desire of Republicans to have a constitutional amendment to "keep future sessions of Congress in line."

A real newspaper would have referred to Republican efforts to keep Congress from spending money. But the Post can't keep its enthusiasm for cuts from dripping all over its reporting. Therefore it just tells readers -- in the news section -- that Congress has been out of line.

The NYT Wrongly Asserts That Economists Want to Cut Social Security Print
Sunday, 31 July 2011 14:06

The NYT is starting to do the same sort of editorializing in news stories for which Fox and the Washington Post are famous. It told readers that President Obama had proposed a change in the Social Security cost of living adjustment formula that would reduce scheduled benefits and then adds that this cut was "long sought by economists."

Umm, which economists? All economists? Not this one, or many others with whom I associate. Is there a poll of economists that provides the basis for this assertion? If so, a cite would be in order.

Actually many people, including economists, have suggested that if the point is to have a cost of living adjustment that accurately reflects the cost of living of Social Security beneficiaries then the Bureau of Labor Statistics (BLS) can construct a full cost of living index for people over the age of 65 (or 62). It already has an experimental elderly index, which shows a higher rate of inflation than the index that is currently used for cost of living adjustments.

Economists, and others, who want to see an accurate cost of living adjustment would advocate having the BLS construct a full cost of living index for the elderly. Economists, and others, who want to see Social Security benefits reduced advocate adopting an index that shows a lower rate of inflation, whether or not this accurately represents the cost of living of Social Security beneficiaries.

Conservative Tea Partiers Oppose Cuts to Social Security and Medicare, not Just Liberal Democrats Print
Sunday, 31 July 2011 13:21

The NYT wrote that President Obama risked alienating liberal Democrats with his willingness to cut Social Security and Medicare. While this is true, he also risks alienating voters across the political spectrum.

Polls consistently show that the vast majority of people in every demographic group, including Tea Party Republicans, are opposed to cuts to these programs. The only people who tend to support cuts to Social Security and Medicare are the Wall Street financial types and the elites who do policy work and report it. This NYT piece wrongly implies that cuts to these programs enjoy support beyond this small group. 

People Don't Move for Jobs When There Are No Jobs Print
Sunday, 31 July 2011 10:04

The Wall Street Journal claimed that a main reason that the economy is growing slowly and not creating jobs is that people are not willing to move because they are often underwater in their homes. The evidence that it presents to support this assertion is dubious.

First, it notes that only 2.9 million people moved for a job in 2009 compared to 4.5 million in 1999. There are two major differences between these years. First, the work force was considerably older in 2009 with most of the baby boomers in their 50s and 60s. These workers are much less likely to move than younger workers.

More importantly, the economy lost 5 million jobs in 2009. It created 3 million jobs in 1999. This means that there were many fewer jobs to move for in 2009 than in 1999.

The best evidence that the sort of housing lock discussed in this article is creating a problem would be to show large sections of the country with rapidly rising wages. Offhand, it would be difficult to identify any significant region where this is the case and the article certainly does not identify one. (It does note an employer in South Dakota who complains about being unable to find workers, but it doesn't report the wages he is offering.)

A recent analysis of the Bureau of Labor Statistics Displaced Workers Survey found no evidence that homeowners in states that had seen sharp declines in house prices were any less likely to move to get a new job than other homeowners. It would be useful if articles like this one based its judgments on data instead of anecdotes.

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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.