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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. 

The Cost of the Bailout As Calculated by Allan Sloan Print
Thursday, 21 July 2011 05:49

Allan Sloan had a lengthy piece in the Post business section last week examining the cost of the bailout. He showed that the vast majority of the money was repaid with interest, with Fannie and Freddie being the big exceptions. He followed this up with an explanatory piece today. This analysis is worth a bit of additional explanation.

Sloan did exactly what he said, he did a straight cash-out, cash-in analysis. How much money the government lent to financial institutions and how much it got back. By this measure he is absolutely right, the government made money on the vast majority of its loans.

However, this is a very incomplete analysis. Suppose the government announced a new mortgage program in which it would give every homeowner who meets a minimal standard a mortgage at 1.0 percent interest. Presumably the vast majority of homeowners would repay the loan. In the methodology used by Sloan, the government would make money on this deal.

If the government can make money by making low cost mortgages available, why shouldn't it do this? Well, this move would actually carry an enormous cost to the government and the economy. The government typically borrows at interest rates well above 1.0 percent. The gap between the interest rate that the government pays on its borrowing and the 1.0 percent it gets back on the mortgage loans is a direct cost to the Treasury.

Even more important are the costs to the economy. By making a vast amount of capital available to homeowners at very low cost, the government is diverting capital from other uses. (This is less of an issue in a period in which we have 9.2 percent unemployment and vast amounts of excess capacity.) This means that money that might have been used developing new software, better medical technology, or cleaner forms of energy production will instead go into home construction because the government is allowing people to borrow money so cheaply. 

In fact, the government can cause this diversion of money without even lending at a below-market rate. Suppose it just guaranteed all mortgages at 100 percent value. This would have the same effect on the economy as lending to homeowners at below-market rates since it would divert capital from other uses into housing.

This is what happened with the bailouts. The government lent money at interest rates that were far below market levels and also provided guarantees so that private lenders would make loans at much lower rates than would otherwise have been the case. We don't know the exact financial situation of the banks in the immediate aftermath of the crisis, but there can be little doubt that Bank of America and Citigroup would have quickly gone under if left to the mercies of the market. The same is true of Goldman Sachs and Morgan Stanley who were the victims of a classic bank-run that was only stopped when the Fed let them become commercial banks, granting them its protection as well as that of the FDIC.

Left to the market, the shareholders of these companies would have been wiped out, their executives put out on the street and their creditors forced to take substantial haircuts. Instead, the bailouts kept them in business and allowed them to return to their pre-crash profitability.

While this was arguably a desirable policy for the economy as a whole, there is no reason that the Fed and Treasury could not have extracted a much larger price for rescuing these institutions. It could have put an end permanently to the multi-million dollar Wall Street compensation packages. It could have required that the too-big-to-fail banks commit themselves to breaking up once the markets stabilized. It could have wiped out shareholders.

Instead, the bailouts made a vast amount of capital available to Wall Street at a time when capital was scare and therefore valuable. In this sense the bailouts were a enormous gift from average people to some of the richest people in the country, even if the money did not flow directly through the Treasury.

Why Can't the Post Use Percentages in Discussing Proposed Cuts to the Military? Print
Thursday, 21 July 2011 05:34

In a relatively lengthy article discussing potential cuts to the military budget, the Post never once told readers what baseline projected spending is, nor what the cuts would be as a share of baseline spending. The Post told readers that the military had prepared for cuts of $400 billion over the next 12 years, but now it seems possible that the cuts could be as large as $800 billion.

Wow! Those are really big numbers. And no responsible newspaper would ever print them without giving its readers some context, since virtually none of them will have any ability to assign meaning to these numbers.

The baseline budget shows that the government will spend approximately $9.5 trillion on the military. (This does not count veterans benefits and some other costs associated with maintaining the Defense Department.) The $400 billion in cuts would imply a reduction in the budget of a bit more than 4 percent. If the cuts reach $800 billion then the cuts would be a bit over 8 percent of the budget.

By comparison, the Gang of Six have proposed a reduction in the cost of living adjustment for Social Security that will reduce average benefits by close to 6 percent. The largest cuts would hit the oldest beneficiaries with beneficiaries in their 90s seeing benefit reductions of close to 9.0 percent. 

NYT Warns That Debt Ceiling Crisis May Boost Net Exports and Increase Growth Print
Thursday, 21 July 2011 04:57

Of course they did not know that this was their warning. The NYT told readers that:

"Deterioration of investor confidence in the United States could also hurt the value of the dollar, according to William H. Gross, co-chief investment officer of Pimco, a bond fund based in California. Mr. Gross said he believed that the dollar would become weaker because of the country’s inability to deal with its rising deficit. Instead, he favors currencies in China, Canada, Brazil and Mexico."

While Mr. Gross, as a major actor in financial markets, may not want a lower dollar, the vast majority of people in the country should. A high dollar makes our exports more expensive to people in other countries, meaning that they will buy less of them. Raising the value of the dollar is like imposing a tariff on our exports.

A higher dollar also reduces the cost of imports relative to domestically produced goods. A higher dollar is comparable to subsidizing imports, leading consumers to buy imports instead of domestically produced goods.

This means that if Mr. Gross is correct, then most workers should be rooting for a continuation of the standoff on the debt ceiling. The drop in the value of the dollar would result in an increase in net exports, thereby providing a powerful boost to the economy and potentially creating millions of jobs.

While this is 100 percent standard economics that most students would be taught in an intro econ class, most economics reporting is so bad that very few people understand how much of a stake they have in a lower valued dollar. There are few policies that more directly transfer income from the middle and bottom of the income distribution to the top than an over-valued dollar, yet the implications of the value of the dollar is virtually never discussed in economics reporting.

This article also reports on the price of credit default swaps on U.S. Treasury bonds as a measure of the risk that investors assign to the risk that the U.S. government will default on its debt. This is not accurate. A credit default swap (CDS) effectively involves two bets. First the bet that the U.S. government will default on its debt. Second, it is also a bet that the financial institution issuing the CDS will survive after the U.S. government has defaulted on its debt.

Since the latter bet has a low probability, since U.S. debt is the basis for the world financial system, the price of CDS bears little relationship to the risk that investors assign to the U.S. actually defaulting. It is most likely a bet on the future direction of the price of CDS, sort of like the high price paid for a really awful painting by a great artist. No one really wants the painting, but it is still possible to make money off holding it, if one gets the timing right. 

President Obama and the Gang of Six Want to Cut Social Security and Medicare, but Readers of the NYT Probably Wouldn't Notice Print
Wednesday, 20 July 2011 20:28

It is understandable that politicians would use euphemisms to conceal the true nature of their actions. But what serious newspaper would use the same euphemisms? Newspapers are not supposed to be assisting politicians in their deceptions, they are supposed to be informing readers.

Apparently this fact is not understood at the NYT. In an article on President Obama's redoubled effort to push the budget program of the gang of six, the NYT referred to "cost-saving changes to entitlement programs." How many of the NYT's readers would understand that this statement means CUTS TO SOCIAL SECURITY, MEDICARE AND MEDICAID?

Of course this is EXACTLY what this phrase means. The politicians who are pushing cuts to these programs know that such cuts are incredibly unpopular. This is why they try to use obscure and convoluted language to describe their plans. The job of a newspaper is get beyond these efforts and to clearly explain to readers what is at issue. 

The cut that Gang of Six proposed to Social Security would reduce benefits by roughly 6 percent to new retirees. They want further cuts to workers who retire in future years. The cuts to Medicare are likely to be even larger, although they have not been spelled out in any detail. The cuts in Medicaid could result in millions of people losing health care coverage.

Casey Mulligan Says There Are Jobs for Those Who Really Want Them Print
Wednesday, 20 July 2011 13:27

The NYT featured another Casey Mulligan episode of There Is No Unemployment this morning. Mulligan's argument is that if we look at employment rates for the older population we see that they have actually risen in the downturn even as employment for people ages 25-55 plummeted. Mulligan interprets this as evidence that highly motivated older workers are able to find jobs, and if younger workers were equally motivated they would find jobs too.

This is an interesting story. The rise employment rates of older workers is a striking story in this downturn and one that I and others have often noted. However, there are other possible interpretations. Older workers almost by definition will have more experience than their younger counterparts. Employers tend to fire less experienced workers with less job tenure first. (Just as they tend to fire less-educated workers first.) This could lead to the pattern of lower employment rates among younger workers that we are seeing without having any direct relationship to the commitment of workers to the labor force.

There is a simple way to try to test this story. We can look at patterns in wage growth since the downturn. If Mulligan's story is right then we might expect to see the wages of older workers rise less rapidly than for younger workers. (These are nominal wages.) The idea is that the desperate older workers are willing to take big pay cuts to keep or get a job, while the young whipersnappers would rather lounge around on the couch watching TV.

The chart below shows the change in median weekly earnings between 2007 and the average of last four quarters (2010:3-2011:2) for men and women between the ages of 25-54, 55-64, and over age 65.


(Click for Larger Image)
Source: Bureau of Labor Statistics.

As can be seen, median weekly earnings rose slightly more rapidly for both men and women in the 55-64 age cohort than in the 25-54 group. They rose much more rapidly for over the 65 age group. There is not much evidence here of older workers who are desperately looking for jobs and willing to make whatever sacrifice is necessary. In other words, this is consistent with the demand side story where employers dump their younger workers first while holding on to older workers, so there are no jobs for the under 55 set.

It is the same story as with more highly educated workers. College educated workers saw less of a fall in employment than less-educated workers. However, this does not mean that less-educated workers could find jobs if they really want them, nor that there are even jobs for every college-educated worker who wants them.

Fox on 15th Imagines a Deficit Commission Report That Does Not Exist Print
Wednesday, 20 July 2011 04:52

As its drive to cut Social Security and Medicare builds steam, the Post is throwing reality to the wind. It again refers to the deficit commission report in its lead editorial. This should not be a tough one -- the report did not have the support of the necessary majority to be approved by the commission. It therefore should be referred to as the report of the co-chairs, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.

The editorial also praises the plan by the Senate's "gang of six" to change the annual cost of living adjustment for Social Security to the chained CPI. The Post calls this a more "accurate" measure of inflation. Actually, the Post does not know whether the chained CPI is a more accurate measure of the rate of inflation experienced by the elderly. An experimental elderly index constructed by the Bureau of Labor Statistics (BLS) shows a somewhat higher rate of inflation than the current measure.

If the Post is interested in accuracy, it can call for the BLS to construct a full elderly index. As it stands, we do know that the chained index will show a lower measured rate of inflation, leading to an average cut in Social Security benefits of close to 6 percent.

Intro Econ for WAPO: Foreign Holdings of U.S. Debt Depend on the Trade Deficit, not the Budget Deficit Print
Wednesday, 20 July 2011 04:21

Many deficit hawks are anxious to exploit nationalistic sentiments and even resort to crude xenophobia to push their agenda of cutting Social Security and Medicare. The starring role in this story goes to the foreign holdings (especially Chinese) of U.S. government debt. The Post did its part by having a chart showing the growth of foreign holdings of "our mountain of debt."

Those who are actually concerned about foreign holdings of U.S. government debt should know that it depends on the trade deficit, not the budget deficit. The trade deficit provides foreigners with the dollars that they use to buy U.S. assets, including government debt. If the United States had large budget deficits, but balanced trade, then foreigners would only be able to buy more government bonds if they sold other U.S. assets, such as the stock and bonds of private companies. Conversely, if the country had a large trade deficit, but a balanced budget, then foreigners would be able to increase their holdings of government bonds by using the dollars they acquired to buy bonds previously issued, or newly issued bonds that replace expiring issues.

This is all simple econ 101. It means that the jingoistic budget hawks are yapping about the wrong deficit. The recipe for correcting the trade deficit (more econ 101) is lowering the value of the dollar against other currencies. This makes our exports cheaper for people living in other countries, causing them to buy more. It makes imports more expensive for people living in the United States, leading them to buy less.

Of course a lower dollar also has important distributional implications. It will have the effect of increasing the relative wages of workers in industries that are subjected to international competition, most importantly manufacturing. It will reduce the relative wages who are largely protected from international competition like doctors, lawyers, and congressional staffers. These distributional implications might explain why the media rarely discusses the over-valued dollar and its impact on the trade deficit and the economy.

Thomas Friedman Thinks That the Greeks Have to Work Less Print
Wednesday, 20 July 2011 03:29

This is what Thomas Friedman said in his column this morning, even if he didn't know it. Friedman told readers that:

"Germans are now telling Greeks: 'We’ll loan you more money, provided that you behave like Germans in how you save, how many hours a week you work, how long a vacation you take ...'"

If we look to the OECD data, we see that the average number of hours in a work year for Germans in 2008 (the most recent data available) was 1430. This compares to 2120 hours a year for the average Greek worker. This means that if Germans want the Greeks to be more like Germans in the number of hours a week they work and the length of their vacations, then they want the Greeks to work less, not more.

The NYT Gets It Wrong on the Deficit Commission, Again Print
Tuesday, 19 July 2011 19:55

The prospect of cutting Social Security benefits for seniors and giving more money to the very wealthy seems to have excited reporters so much that they just can't get anything straight. The NYT again told readers that President Obama's fiscal commission produced a deficit reduction plan. This is not true. The deficit commission did not have the votes necessary to produce a plan. The plan referred to in this article was the plan of the co-directors, former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.

The article also assists President Obama in misrepresenting public opinion about the cuts proposed by the Senate Gang of Six plan. It comments:

"Seeking to sum up the current state of affairs, Mr. Obama said, 'We have a Democratic president and administration that is prepared to sign a tough package that includes both spending cuts and modifications to Social Security, Medicaid and Medicare that would strengthen those systems' and provide for new tax revenues. And, he added, 'we now have a bipartisan group of senators' and a majority of the American people who agree."

President Obama was not in any obvious way "seeking to sum up the current state of affairs." He was misrepresenting the state of affairs, presumably to advance his agenda. There are no public opinion polls that show the majority of the American people support the cuts to Social Security and Medicare in the Gang of Six plan. In fact, there are no polls that show even a majority of Republicans support such cuts. Presumably President Obama is aware of polling data on these issues. 

It also would have been helpful to remind readers that President Obama means "cuts" when he refers to "modifications" to Social Security. Some readers may not have read the Gang of Six plan closely enough to realize that it proposes to cut Social Security benefits by an average of close to 6 percent.

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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.